Posts Tagged‘investment’

Labor’s Future Tech Policy Key to Australia’s Silicon Valley.

Starting a company in Australia, especially one that’s in the high tech industry, is much harder than it is in many other places in the world. This used to be due to a lack of supporting infrastructure, what with Australia’s remoteness precluding the required investment, however in more recent times that barrier has begun to melt away. The problem many startups face in Australia is that acquiring funding is extremely problematic as Australia’s risk averse investing style has meant that our large capital reserves aren’t used to invest in such ventures. Previous governments haven’t done much to change this, preferring to support already established businesses, however in his recent budget response Bill Shorten showed vision that few of his contemporaries have in the form of the Labor’s future technology policy.

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At the core of this policy is the Smart Investment Fund, a $500 million allocation that will be used in partnership with venture capital firms and banks to facilitate more investment in early stage startups. I have spoken previously about how something of this nature would be required  in order to kick start a Silicon Valley equivalent here in Australia and the policy that Bill Shorten has proposed lines up with that idea perfectly. Whilst startup investment can never be made risk free making them more attractive, through direct government investment and the partial loan guarantee with banks, will ensure that more of Australia’s capital makes its way into new businesses rather than the traditional investment vehicles.

Of course providing funding for such ideas is only one piece of the puzzle as we’ll need to encourage students to pursue careers in those industries. To this end Labor as put forward a policy to provide numerous scholarships to students who complete degrees in the fields of science, technology, engineering and mathematics (STEM) and then go on to become teachers in their fields. In addition to this Labor is proposing to forgive the HECS/HELP debts of almost 100,000 students studying in this field, something which could provide an incredible leg up for fresh graduates starting their career. Considering that 75% of the fastest growing new jobs are within these fields encouraging students to take up careers is an incredibly smart move and one that the current government should look at adopting.

You might be surprised to hear this but I’m on the fence about coding being added to the national curriculum, mostly because I’m not sure how it’d end up being implemented at the school level. Starting out in coding isn’t the most exciting of adventures and the rote learning approach which many schools use would, I feel, end up with them becoming bored and frustrated rather than energized and intrigued. Of course I’m not a teacher and I’m sure there are many who are more experienced in this field who could design programs that tackled this issue properly. In the end this is something that I’d have to see in action before I could form a solid opinion on it as whilst I’m all for kids being aware of how technology works I also know how quickly they can become bored with such things.

This is what the Australian public needs to see from a party in opposition: clear concise policies that show a valid course of action rather than mud slinging and point wining which have plagued Australian politics for the last 3 terms of government. Whilst these policies might not ever see the light of day it’s good to see that the Labor party is thinking along this direction and hopefully such policies will fuel their campaign come next election. I can only hope that the Liberals take note as whilst any incumbent would loathe to agree with their opposition it’s hard to deny just how solid some of these ideas are.

Think Negative Gearing is to Blame For High House Prices? Think Again.

Before I dig my hooks into the reasons why negative gearing isn’t to blame for high house prices (a seemingly controversial view these days) I will tell you, in the interests of full disclosure, that I’ve been negatively gearing property for the past 5 years or so. Back when we first bought our property I lamented the dearth of good properties that were available in our price range, focusing much of my anger of the property boom that took place mere years before we went into buy. However we found something that we could just afford if we played our cards right, even though it was out in the sticks of Canberra. During that time though I never once blamed the negative gearers for this predicament but the more I talk about it the more it seems my generation blames investors for it when they should really be looking elsewhere.

Negative Gearing Income 2010-11

Depending on what figures you’ve read though I’d find it hard to blame you like the table above (from this ATO document) that has been doing the rounds lately. On the surface it seems pretty hefty with some $7.8 billion in total losses being claimed by investors with negatively geared property. Realistically though the total cost to the government is far less than that as even if everyone was on the top marginal rate (which they aren’t, most are on $80,000 per year or less) the total tax revenue loss is closer to  $3.5 billion. Out of context that sounds like a lot of dosh, especially when this year’s budget came in at a deficit of $18 billion, but it’s like 0.9% of total tax revenue which is significantly dwarfed by other incentives and exemptions. If your first argument is that it costs the government too much then you’re unfortunately in the wrong there, but that’s not the reason I’m writing this article.

The typical narrative against negative gearing usually tells a story of investors competing against homebuyers (usually first timers), driving up the price because they are more able to afford the property thanks to negative gearing and the higher amount of capital that they have. Whilst I won’t argue that this never happens it fails to take into account the primary driver for upward trending house prices: owner occupiers. Initially this idea sounds ludicrous, since homeowners aren’t taking advantage of negative gearing gains nor are they in the market for new property, but the thing is that the vast majority of capital gains in Australia are held by just such people, to the tune of 84% of the total property market.

In Australia the primary mechanism which drove house prices up, with most of the increase occurring between 1994~2004, was current home owners upgrading their houses. For a current homeowner  especially ones that own their property outright, the cost of upgrading to a larger property is a fraction of what it would cost to buy it outright. However anyone looking to upgrade will also try to extract the maximum amount of value out of their house in order to reduce the resulting loan and thus the cheaper priced houses get pushed up as well. Couple that with the fact that the majority of Australian owner/occupiers move at least once every 15 years and that selling your primary place of residence is exempt from capital gains tax and you have a recipe for house prices going up that’s not predicated on negative gearing’s influence.

Indeed the ABS Household Wealth and Wealth Distribution supports this theory as the average value of an owner occupied property is $531,000 which is drastically higher than the Australian average (which includes all investor properties) at $365,000. Considering that the bulk of the Australian property market is dominated by owner-occupiers (since investors only make up 16% of it) then its hard to see how they could be solely responsible for the dramatic increases that many seem to blame them for. Most will retort that investors are snapping up all the properties that would be first home owners would get which is something I can’t find any evidence for (believe me, I’ve been looking) and the best I could come up with was the distribution of investment property among the 5 sections shown here which would lead you to believe that the investors are normally distributed and not heavily weighted towards the lower end.

The final salvo shot across the negative gearing bow usually comes in the form of it providing no benefit to Australia and only helps to line the pockets of wealthy investors. The counter argument is that negative gearing helps keeps rent costs down as otherwise investors would be forced to pass on the majority of the cost of the mortgage onto renters, something we did see when negative gearing was temporarily removed. Indeed the government actually comes off quite well for this investment as using that revenue to instead build houses would result in a net loss of rentable dwellings which would put an upward pressure on rents.

I completely understand the frustration that aspiring home buyers go through, I went through it myself not too long ago when I was in a position that wasn’t too different from average Australian. But levelling the blame at investors and those who negatively gear their property for the current state of the Australian property market is at best misguided and at worse could lead to policy decisions that will leave Australia, as a whole, worse off. You may believe to the contrary, and if you do I encourage you to express that view in the comments, as the current Australian property market is a product of the Great Australian Dream, not negative gearing.

Why You Shouldn’t Invest In BitCoins.

Much like my stance on Instagram I’ve seemingly been at odds with the BitCoin community ever since I penned my first post on it almost 2 years ago. The angst seems to stem primarily from the fact that I lumped it in with Ponzi schemes thanks to its early adopter favouritism and reliance on outside wealth injection. After the first crash however BitCoins started to show some stability and their intended function started to be their primary use. Indeed the amount of investment in the BitCoin ecosystem has sky-rocketed in the past year or so and this had led to a period of much more mild growth that was far more sustainable than its previous spikes were.

It was for that reason that I held my tongue on the latest round of price volatility as I assumed it was just the market recovering from the shock of the Pirateat40 scheme unravelling. That particular incident had all the makings of another price crash but it was obvious that whilst there was a great deal of value lost it wasn’t enough to make a lasting impression on the economy and it soon recovered back to a healthy percentage of its previous value. The last month however has started to show some worrying trends that hark back to the speculative bubble.

BitCoin Price Chart

If you zoom in on either of those 2 ramps the gradients are frighteningly similar although the price jump is from $15 to $25 rather than $3 to $10. Whilst the value jump might not be as severe as it was before (~66% rather than 300%) it’s still cause for some concern due to the time frame that it has happened in. When the value jumps up this fast it encourages people to keep their BitCoins rather than using them and attracts those who are looking to make a return. This puts even more upward pressure on the price which eventually leads to the kind of value crash that happened back in 2011.

Others would disagree with me however, saying that its actually a great time to invest in BitCoins. The reasons Anzaldi gives for wanting you to invest in BitCoins however don’t make a whole lot of sense as he doesn’t believe this round of growth is unsustainable (and even admits that the only other thing that gives this kind of ROI are all scams) and that the reward halving coupled with the deployment of ASIC chips are what are behind this stratospheric, real growth. The fact of the matter is that neither of these really has any influence over the current market rate for BitCoins, it all comes down to what people are willing to pay for them.

Prior to the lead up of the previous crash BitCoins had already experienced some pretty crazy growth, going from prices measured in cents to dollars in the space of a couple months. This immediately led to a flood of people entering the market who were seeking fast returns and had no intention of using BitCoins for their intended purpose. This current round of growth feels eerily familiar to back then and with people seeing rapid growth its highly likely that those same speculators will come back. It’s those speculators that are driving the price of BitCoins up not the factors that Anzaldi claims. If they were the price would have begun this current upward trend back in November (it did go up, but not like this and stablized shortly after) and the introduction of ASICs is far more likely to flood the market with more coins as hardware investors look to recoup some of their investments, rather than holding onto them for the long haul.

This kind of wild volatility isn’t helping BitCoins intended use as an universal currency that was free of any central agency. If this growth spurt leads to a new stable equilibrium then no harm, no foul but it really does look like history repeating itself. I’m hopeful that the market is smart enough to realise this and not get caught up in a buy and hold spree however as they’ve managed to do that in the past. As long as we remember that it’s BitCoin’s worth is derived from its liquidity and not its  value then these kinds of knife edge situations can be avoided.

Why There’s No Silicon Valley Equivalent in Australia.

If you follow the start up scene, care of industry blogs like TechCrunch/GigaOM/VentureBeat/etc, the lack of Australian companies making waves is glaring obvious. It’s not like we haven’t had successes here, indeed you don’t have to look far to find quite a few notables, but there’s no question that we don’t have a technology Mecca where all aspiring entrepreneurs look towards when trying to realise their vision. You could argue that Sydney already fits this bill since that’s where most of the money is but it’s not the place where the innovation is most concentrated as Melbourne as arguably given risen to just as many success stories. This decentralized nature of Australia’s start-up industry presents a significant barrier to many potential businesses and whilst I don’t have a good solution to them the reasons behind it are quite simple.

Reserve bank governor Glenn Stevens gave a speech at the CEDA annual dinner a couple nights ago and hit the nail on the head as to why Australia doesn’t appear to have the same vibrant start-up ecosystem that can be found overseas:

Only 4.8 per cent of start-ups in Sydney and Melbourne successfully become “scaled” (large enough to be sustainable) which is another way of saying that 95.2 per cent fail. In Silicon Valley, the success rate is 8 per cent.

The difference is capital: start-ups in California raise 100 times as much money as Sydney ones in the scale stage, and they raise 4.8 times as much in the earlier stages of discovery, validation and efficiency.

Yet as everyone knows, Australia punches well above its weight in capital formation, thanks to compulsory superannuation and the $1.4 trillion super pool. Why doesn’t any of that money find its way to supporting

Current fiscal policies are quite conducive to long term, low risk, moderate return investments (such as property and bank stocks) and the investment practices of our superannuation funds reflects this. Indeed even at a personal level Australian investors are risk adverse with majority preferring things like property, extra super contributions or term deposits. Partly you could also put some of the blame on Australia’s culture which is more inclined towards property ownership as the ultimate achievement a regular Australian can aspire to, whereas the USA’s is far more entrenched in the entrepreneurial idea.

We then have to ask ourselves that if we’re aspiring to create a Silicon Beach here in Australia what we need to do in order to make that happen.

The report itself details a couple ideas that can be done from a policy perspective, namely making certain company structures and incentive schemes cheaper and easier, however that’s only part of the issue. Ideally you’d also want some policies that make investing in risky start-up companies more attractive than the current alternatives. I don’t think abolishing current legislation like Negative Gearing would help much in this regard but it could potentially be extended to cover off losses made on start-up investments. There are many other options of course (and I’m not saying mine is the perfect one) and I’d definitely be supportive of some investigation into policy frameworks that have been used overseas and their applicability here in Australia.

There’s also the possibility of the government intervening with additional funding in order to get start-ups past the validation phase in order to increase the hit rate for the venture capital industry. I’ve talked a bit about this previously, focusing on using the NBN as a launchpad for Australia’s Silicon Beach, and really the NBN should be the catalyst which drives Australia’s start up industry forward. There’s already specific industry funds being set up, like the one that just came through for Australian game developers, but the creation of a more general fund to help start up validate their ideas would be far more effective in boosting the high tech innovation industry. It would be much harder to design and manage for sure, but no one ever said trying to replicate Silicon Valley’s success would be easy.

For what its worth I believe the government is working hard towards realising this lofty goal (thanks to some conversations I’ve had with people in the know on these kinds of things) and as long as they draw heavily on the current start-up and innovation industry in Australia I believe we will be able to achieve it. It’s going to be very hard to break the risk adverse mindset of the Australian public but that’s something that time and gentle pushes in the right direction, something perfectly suited to legislative changes. How that should all be done is left as an exercise to the reader (who I hope is someone in parliament).

Finding The Ideal BitCoin Exchange Rate.

BitCoins are a hybrid of two currency models, namely the current world standard of fiat currency (I.E. BitCoins only have value because other people will accept them in exchange for goods and services) and the traditional gold standard due to the availability being limited. Combined with the other properties such as transaction anonymity (within reason), no central system regulating transactions and worldwide reach BitCoins have all the features it needs to be a great vehicle for the transfer of wealth. Long time readers will know that there are some issues that plague the BitCoin ecosystem, mostly due to its relatively low transaction volume and misclassification as an investment vehicle by some, but these are things that can be solved with time and more investments.

One thing that always gets to me though is any time that BitCoins start to trend upward nearly every news outlet looking for a story will herald it as a second coming of BitCoin after the devastation wrought by the speculative bubble last year. I’ve made the case several times over that an increase in price is no indication of health within the BitCoin economy and in fact any sharp uptick in price is actually quite hurtful as it signals that BitCoins are better left unspent as it makes no sense to spend them when simply waiting will give you a discount. This hoarding mentality is what led to the speculative bubble last year as supply dried up and prices went through the roof. It didn’t last long however and the price came crashing back down to reality (and then some).

 I don’t discount that all growth within the BitCoin economy is a bad thing however, just the volatility. Indeed there was a good period of 6 months this year when BitCoin’s price was relatively stable and that’s what it needs to be in order for commerce to take the currency seriously. Taking this idea further there has to be a price equilibrium where the exchange rate is truly representative of all the wealth contained with BitCoins and this is the point where the market should aim towards. Figuring out that particular price isn’t easy though and I can only really give a semi-education guess as an answer.

The longest time that BitCoin spent in relative stability was around the $5 mark from around May this year. Since then there have been another 1.2 million BitCoins added into circulation, an approximate 13% increase. In a completely stable exchange this would have put a downward pressure on the exchange rate which would have decreased the real value by a similar percentage. To keep the value “ideal” then, I.E. the real purchasing power the same, the exchange rate should go up by that rate instead giving us a new price of $5.65.

Of course this completely ignores the amount of potential wealth that could be contained within the BitCoin economy. A country’s currency is usually a reflection of the health of its underlying economy and BitCoin is no exception to this but we don’t have other metrics like GDP in which to get a good idea for how much wealth is backing it. Transactions volumes, exchange rates and total coins in circulation are only rough metrics and we’ve seen in the past how these things aren’t great indicators for the health of BitCoin.

Realistically the best exchange rate for BitCoins will be the one that it ultimately settles on once transaction volumes ramp up again and the investor market segment starts to become more and more irrelevant. Whether this is above or below the current rate is really anyone’s guess however we should still abstain from saying that the rising price of a BitCoin is a sign of market health as it’s simply not. Whilst the price rise is no where near as rapid as it was last year it’s still light years ahead of any other currency on the planet and as history has shown that kind of growth just isn’t sustainable. The next 6 months will be very telling for the BitCoin economy as we’ll see if this growth levels out into a new stable equilibrium or if it’s just the beginning of another speculative bubble.

Building Australia’s Silicon Valley (or The NBN Gambit).

It may come as a surprise to you to find out that Australia is a predominately service base industry. Whilst it’s hard to argue that we’ve enjoyed the benefits of the current mining boom Australia’s GDP is still predominately derived from our service industry, to the tune of 69% (pg. 134). Still the current prosperity and insulation from global economic crises that Australia has received from the growing mining sector won’t last forever and now is the time for us to start looking towards the future so we can ensure future economic prosperity. I strongly believe that we’ve already undertaken the first steps towards achieving this with the implementation of the National Broadband Network.

Australia as it stands today suffers from an incredible amount of skill drain to other countries. Well over half of the Australian residents who leave Australia for over a year or permanently were skilled workers and whilst the trend has gone down in recent times (thanks wholly to Australia’s isolation from the global economic turmoil) that hasn’t stemmed the flow of talent leaving our shores. For the high technology sectors at least there is the potential to recreate the hot bed of innovation that led to the creation of Silicon Valley on the back of the NBN. This would not only stem the brain drain overseas but would produce large and sustainable gains to the Australian economy.

Right now the public view of the NBN varies wildly. Businesses by and large have no idea what benefits it can bring them, public opinion is mixed (although Senator Conroy says differently) and even the federal government seems at a loss to what it could mean for Australia’s future, doling out cash to local governments in the hope they’ll be able to sell it for them. To combat this the government should instead provide incentives and seed capital to high-tech start ups who are looking to leverage Australia’s upcoming ubiquitous high speed Internet infrastructure, in essence building an Australian Silicon Valley.

Doing this requires co-ordination with entrepreneurial communities, venture capitalists and the willing hand of the government. They could easily make investment in these kinds of companies more desirable by extending tax breaks that are currently enjoyed by other asset classes to investment in NBN based high-tech start ups. This would also make Australian based startups incredibly attractive for overseas investors, pumping even more money into the Australian economy. As the sector grows there would also be an increasing amount of ancillary jobs available, ones that accompany any form of corporation.

Australia would then become a very desirable location for both established and aspiring businesses looking to expand into the Asia-Pacific region. It also works in the reverse, giving Asia-Pacific businesses (and nations) a more local launch pad into the western business world. Establishing Australia as a high tech hub between our strong local ties and western allies abroad would provide a massive economic boost to Australia, one to rival that of the current mining boom.

Of course it’s not like this hasn’t been tried before in Australia, indeed many have tried to recreate the success of the valley with little results. Indeed I believe this is due to a lack of co-operation between the key players, namely the government, entrepreneurs and investors. The NBN represents a great opportunity for the government to leverage the industry not only to ensure Australia’s future economic prosperity but also to establish Australia as a leader in technology. I believe that the government should be the ones to take the first steps towards fostering such an environment in Australia as once the industry knows they have the support they’ll be far more willing to invest their time in creating it.

Not leveraging the NBN in such a way would leave the NBN as a simple infrastructure service, woefully underutilised given the capabilities that it could unlock. Make no mistake the NBN puts Australia almost at the top in terms of ubiquitous, high speed Internet access and that makes a lot of services that are currently infeasible to develop attractive targets for investigation. Indeed since the same level of broadband access is almost guaranteed throughout the country it is highly likely that benefits will stretch far past the borders of the CBD, even as far as regional centres.

As someone who’s group up on and made his career in technology it’s my fervent hope that the Australian government recognizes the potential the NBN has and uses that for the betterment of Australia. As a nation we’re well positioned to leverage our investment in infrastructure to provide economic benefits that will far exceed its initial cost. Creating a Silicon Valley of the Asia-Pacific region would elevate Australia’s tech industry to rival those throughout the rest of the world and would have massive benefits far beyond Australia’s borders.

Cars: Cognitive Dissonance Engines.

You’d have to be a keen reader to pick up on my obsession with cars. I haven’t posted about it much, heck the only post I could dredge up was this one from my trip to the USA last year, but I’ve been something of a car nut for the better part of 15 years. You can put this down to my rural upbringing where we had big plot of land that my parents let me drive around on. It started with motorbikes, seeing me own no less than 3 different ones before I was legally allowed to do so. Then thanks to a father who wanted something different to drive rather than his Morris Minor came into posssesion of not 1, but 2 Datsun 120Ys one of which (after he salvaged for all the good parts) became mine.

My brother and I then became obsessed with making the most we could out of our new found toy. Whilst we had a rather vast backyard in which to indulge in our various driving exploits most of it was cut off from us by a giant forest of eucalyptus trees. Undeterred we spent the better part of our summer holidays clearing a path through the forest so we could get to the wide open paddock in the back. We got there eventually and what followed was weeks of driving the car around our makeshift track, thoroughly enjoying the small bit of freedom that we had created for ourselves. I even managed to secure an upgrade to a Datsun 200B when a family friend no longer needed it, giving my brother and I both our own cars with which to tool around in.

You’d think then that once I had a decent job that a good chunk of my pay check would’ve been sunk into buying some kind of slick sports car. That was somewhat true as my first real car, a 1988 Honda Prelude, had nearly double its purchase price sunk into it in the form of body kits, stereo systems and all sorts of modifications. It was a workhorse of a car having nearly 400,000KMs on the clock before I retired it out to my parents farm. It even still runs fine, just that it needs about $4,000 worth of work done on it before it’ll be fully road worthy again. Since then I’ve been sharing the little Hyundai Getz that my wife bought a long time ago, not being able to bring myself to buy another one.

The reasoning behind that is quite simple: cars are depreciating assets. The old adage of a car losing a third of its value after you drive it off the lot explains this well as cars drastically reduce their value in just a few short years. Ever since my financial coming of age back in 2007 (the time when I first realized this) I’ve always looked at cars with a kind of strained appreciation. I love them for their technology, beauty and the thrill you get from driving them but the discomfort I get from the thought of losing that much value so quickly just doesn’t sit right with me. To that end I’ve kind of reserved myself to be an avid spectator, always looking but never touching.

That hasn’t been easy, especially when the limitations of a single car come into play. It hasn’t been that much of a big deal really, just scheduling conflicts that lead to either myself or my wife having to waste a couple hours here or there, but it’s enough to send me down the dark path of potentially purchasing a car again. Of course I have exacting requirements (that’s the only way to satiate the fiscal conservative in me) and that’s made finding that right car inexorably difficult. My lust for technology doesn’t help either and that’s made the search for something that I might actually end up purchasing quite difficult.

There is the notable geek lust short circuit exception¹ however and there’s one car that’s managed to trigger it: the Tesla Model S. I’ll be honest I started off hating it as the first couple design iterations were just hideous, especially compared to the striking design of the Tesla Roadster. The current design however is just stunning and combined with all the technology and gadgetry under the hood (did I mention that it’s fully electric?) I find myself not asking if I’ll buy one, but when. I’m glad that these kinds of decisions don’t happen too often as that would be rather disastrous for my current financial planning.

Since the Model S won’t be available here for some time my mind of course drifts to what I could purchase as a practical car now. It seems my criteria for what I’d consider practical now is quite rigid: all wheel drive, wagon body and preferably something in the 4 cylinder range with a turbo on it. It covers all the bases of my current needs (infrequent camping, carting stuff around and my inner hoon) but the cars that suit this are thin on the ground. Indeed the only options for this are decade old models of things like the Subaru Forester or Outback, with no one else really competing. Indeed the section that those cars used to serve has been usurped by the SUV market, swelling all of their current generation to ludicrous sizes that I just have no requirement for. The V6 variant of the Volkswagen Passat Wagon is getting pretty close though and the amount of gadgets in there are enough to make buying one sound half reasonable.

As you can see my relationship with cars is a complicated one, layered with cognitive dissonance stemming from my competing goals for financial freedom and simple wunderlust. I know that I’ll eventually have to cave in once the Getz starts getting a little long in the tooth but until then I’ll probably just settle for my usual longing glances and enthusiastic conversations with my work mates.

Maybe its time for me to get another rent-a-racer, you know to keep the car enthusiast in me at bay 😉

¹Should a piece of technology represent something so novel, advanced or just plain cool (for lack of a better term) my financial conservative switches off completely. The most recent purchase to trigger this was the Samsung Galaxy S2 and I feel not one hint of buyer’s remorse.

On Single Founder Startups.

I’m a very firm believer in the adage of “either put up or shut up”. I often talk with people about their ideas for things and how much better they’d be than what’s currently available. My usual retort is that should then go ahead and try to do that (usually not facetiously) otherwise they should just stop talking about since an idea without action doesn’t do anyone any good. Of course I’m not one to let people say the same thing to me so the vast majority of ideas that I have for a product that I talk about have usually undergone at least some preliminary work to make sure the idea is viable, just so that I don’t feel like I’m talking out my ass.

The problem I’ve often found though is that it’s easy for me to get excited about an idea that I’ve had but it’s 100 times more difficult to get someone else excited about the same idea. I can hear you saying now “well if it was a good idea anyone would be excited about it” but the problem is that since pursuing such ideas is inherently risky people tend to err on the side of caution instead of wanting to get involved. The second you start mentioning dollar figures (whether costs or potential revenues) it gets even worse as people have seen enough seemingly rock solid business go down in recent years to be wary of anyone coming to them with some outrageous idea.

If I’m honest I’m really just generalizing my own personal experiences here and depending on who you are and where you grew up the experience could be quite different. Canberra, and the majority of Australia for that matter, are a risk adverse lot tending towards proven ideas rather than new risky new ventures. This is especially true with the majority of investment in Australia with many choosing the “safe bet” of property rather than investing in new ventures. Thus for any of us wanting to lash out on our own we’re more or less isolated in a community of risk adverse people, and that makes developing a new idea inexorably hard.

I found this a lot when working on many of my previous ideas. Sure there were many times when I’d discuss an idea and its potential with people and receive amazing feedback, but should I ask more than to try it when I finally released and I’d be met with non-committal responses. There’s also not much of a start up scene here in Canberra either since 90% of the people employed here are public servants or working directly for the government. Sure I could probably travel a bit to get involved in say Sydney or Melbourne however the only time I currently have to spare is spent on working on my product, and the potential to find (and convince) someone else to work with me on my ideas seems small enough as to be a waste of my time pursuing it.

Thus for my first couple ideas (and application to Y-Combinator) I decided to go it alone as a single founder. Now the odds are really stacked against you if you go this route, both for start up accelerators like Y-Combinator and the real business world. Many people liken it to raising a child, sure you can do it yourself but its a much greater burden to bear and you’ll need to put in so much more effort to achieve the same results. For someone like me who’s in an environment that’s not conducive to pursuing new ideas sometimes the only option you have is to go it alone, lest you never go at it at all. Of course the simple solution here would be to then put myself in a more conducive environment, which I am looking to do within the next year.

This all being for my 2 most recent projects I have been able to find people who are interested in the idea that I came up with and have been willing to work with me on them. I think I can attribute my success in this regard to finding an area of common interest that we could then expand upon, each of us being able to have meaningful input that will sculpt the end product. I’ll admit it’s a lot easier when you’ve got someone to lean on, even if they’re not technical as that back and forth helps solidify your idea, keeping your eye squarely fixed on the end goal. I’m hopeful that these ideas will turn out a lot better than my last couple ventures, not least of which I’ll hopefully be able to credit to sharing the load with someone.

 

BitCoin’s Saviour: The Bursting Bubble.

My opinion hasn’t changed much in the month since I wrote my first post on how I think BitCoin is a pyramid scheme, ultimately destined to unravel unceremoniously when all the speculative investors decide to pull the plug and cash out of the BitCoin market. Still the discussion that that post spawned was quite enlightening, forcing me to clarify many points both in my own head and here on my blog. Since then there’s been a deluge of other blogs and press chiming in with similar opinions about BitCoin and how its intended purpose is far from its reality. There’s been enough noise about BitCoin’s issues that last week saw the first major dip in the exchange rate, and it hasn’t been smooth sailing since.

The image above is the historic trading price for BitCoins to USD on the biggest BitCoin exchange Mt.Gox. The BitCoin “Black Friday” can be seen as the first dip following the massive peak at around $30. Since that day BitCoin has been shedding value constantly with the latest bid offers hovering around the $18 mark. This is not the kind of volatility you see in something you’d class as a currency where single percentage changes are cause for concern and usually government intervention. In the space of a week BitCoin has shed almost half of its peak value which in any sane market would have seen suspension of trade to prevent a fire sale of the asset. The market isn’t showing any signs of recovering either as the market depth report from Mt.Gox shows:

There’s a very large discrepancy between the majority of seller’s idea of how much BitCoin is worth and what the market is willing to pay for it. The vast majority of sellers are looking to cash out at the mid-twenties range when the highest buy offer doesn’t even break the $20 mark. Any rational actor in this sort of market would be looking to get out before the market wipes out all of their value completely and for what its worth I believe the main speculators have probably already withdrawn from the market which is what triggered the initial dip in price. Liquidity in the BitCoin market is fast drying up and that will only serve to drive the price back to (or even below) its initial stable equilibrium.

On the surface this would appear to be the beginning of the end for BitCoin since confidence in the currency is rapidly disappearing with all the accumulated wealth that’s being lost to the diving market. However whilst many who were hoping to make their riches with a nascent currency might be finding themselves short changed the diving price of BitCoins means that those who were working against the currencies intentions, I.E. those who were using it as a speculative investment vehicle, are more likely to leave the market alone now that it’s been pumped and dumped. Once the price retreats back to more stable levels BitCoin could then start functioning as it is supposed to, as a vehicle for wealth that has no central authority regulating it.

It’s not going to be an easy road for BitCoin and its adopters though as confidence in the currency has been dashed with even some of its earliest supporters withdrawing from it. Mining will then no longer be a profit driven enterprise, instead run by those who support the idea and large companies like Mt.Gox who run exchanges. Once the idea that BitCoin’s value would ever be increasing has dissipated we may finally see a point where BitCoins are primarily used as a vehicle for value transfer and not speculative investment. It will probably be another month or two before we reach a new stable equilibrium in the BitCoin market but after that I might finally stop harping on about it being an elaborate (though probably unintentional) scheme.

This still doesn’t detract from the concentration of wealth for early adopters in the BitCoin ecosystem but once their incentive to hoard currency has vanished then the impact of their vast BitCoin stashes means a whole lot less than it did during the speculative price explosion. This will encourage them to put those BitCoins into circulation adding much needed liquidity to the market and hopefully restoring some more faith in the system. Time will tell if this works out however as with market volumes so low on the BitCoin exchanges price manipulation is bound to happen from time to time and realistically can only be solved by having wider adoption. I’m still not convinced that BitCoin is a safe place for any of my wealth currently but once its recovered from this rapidly bursting bubble I may revisit it, should the want arise.

 

Microsoft Buys Skype: Solving Some of Their Mobile Woes.

Microsoft has a few ways it goes about building out a presence in a market. The first, and the most rare, is that the develop a product in house from scratch to compete directly in a market that’s currently booming. The most recent examples of these sorts of products are the Xbox and the Zune both wholly developed by Microsoft to compete in the gaming and portable music player industries respectively. The second way they establish themselves in a market is to buy out either the top competitor or one of the more successful competitors as they did for things like Softricity who were the leaders in application virtualization software. Lastly sometimes they’ll say they’re getting into a market but will never make any serious attempt to do so just to kill off any potential competition, which they attempted to do back when the iPad was still a rumor and they announced the Courier tablet which failed to materialize.

Whatever strategy they adopt to establish themselves in a chosen market there’s always one common theme to their approach: throw money at the problem until it becomes successful. Now this isn’t a strategy that every company can adopt (realistically only a minority can) but Microsoft is usually so flush with cash that they can afford years of losses without it posing any sort of risk to their core business. Most notably they did this for a good 7 years with the Xbox division before it managed to turn a profit, sinking billions of dollars into the product before it actually made them any sort of money. They also continue to do it for products like the Zune which continues to languish behind Apple’s iPod but that’s still got a couple years before it reaches the 7 year mark that the Xbox did, but there’s really little hope for that product.

Their latest endeavor which is seemingly flush with cash is their Windows Phone 7 product. Whilst the sales of the devices haven’t been that stellar they’ve still managed to take a small percentage of the smart phone market. Their partnership with Nokia sets the scene for them to become a potential juggernaut in this sector but they’ve got a long uphill battle ahead of them and the gamble isn’t a sure thing for either side. Microsoft now appears to be looking to strengthen their WP7 offering even further by shelling out a cool $8.5 billion dollars for everyone’s favorite communications app, Skype:

The deal is doneMicrosoft is buying Skypefor $8.5 billion in cash in its first sizeable acquisition since August 2008, when the Redmond software giant spent $486 million onGreenfield Online.

In fact, this is Microsoft’s biggest financial bet to date in terms of M&A, trumping its $6 billion+ purchase of aQuantive, which dates back to May 2007, in size.

The purchase price includes the assumption of Skype’s debt.

The agreement has been approved by the boards of directors of both Microsoft and Skype.

Whilst the acquisition is not solely dedicated to the WP7 product line it’s still the one that has the most to gain from it. WP7 doesn’t currently support any form of video calling like Apple’s FaceTime or Google’s Video Chat does and Skype could provide a good chunk of the underlying infrastructure, saving Microsoft a lot of work. Skype’s vision of being available everywhere lines up quite well with Microsoft’s three screens idea and I’m sure they’ll be looking to leverage Skype’s vast network to push their cloud products further. Still one has to wonder if the $8.5 billion price tag they paid for Skype is worth it, considering its Microsoft’s biggest acquisition to date.

When I first heard of the news that Microsoft had bought Skype my first reaction was that this was a maneuver to deny Facebook the chance at getting it. There were rumors of Facebook testing the waters of an acquisition for a while but it seems that in the end the only serious bidders were Microsoft and Google. It then becomes clear that Microsoft simply did not want the Skype network in the hands of one of its largest competitors and Facebook was probably not that interested in the first place, especially if Microsoft (who owns 1.6% of Facebook) was going to pony up the cash for them anyway. Google might not have been completely serious about their offer anyway since they already have most of what Skype has to offer and might have just been making sure Microsoft spent more than it had to (hey they’ve done it before).

It will be interesting to see how Microsoft leverages this investment, especially with its current product lines that have direct synergies with Skype. They’ve certainly been doing all they can to make sure their mobile sector succeeds and if Gartner is to be believed then we’re less than 4 years away from them becoming the dominant platform. I’m not so sure about that idea but I do know that Microsoft does have the resources to throw at this problem until they become big in this sector, and the Skype acquisition is a testament to that fact.