How to use Apps in business

Published on March 7, 2018

Arriving slightly jet-lagged in Argentina, I was warmly welcomed by the representative of the travel agent. I went through my itinerary, about 6,000 km and four flights. So what to do if they were late? Well use WhatsApp of course. The App that I have come to know and love, is just as ubiquitous 10,000km away as it is here. Not the greatest surprise – we know that software can be distributed quickly wherever there is internet and Argentina is very much part of the connected world.

Travelling alone gave me time to reflect on this inter-connectedness – how much easier it is to communicate with almost anyone, almost anywhere and almost anyhow: presentations, videos, texts; why there’s even a voice app on my phone which allows me to, er, telephone people.

Being in Argentina, the land of silver, led me to think about raising capital, as you do. I wondered why the communication tools sometimes get thrown away when private companies raise equity from the public? Public company flotations usually involve a “book-building phase” when the sponsor discusses the investee with investors and reaches some consensus over a price range. And when private equity firms consider investment in growing businesses there will be a discussion over the projected value and the percentage to be acquired by the investor. Granted, some transactions fail because the parties are too far apart, but there is a clear process of communication. But in early-stage financings where there is often no sponsor and valuations are hard to validate because the track record to date is short and often bears no relation to future projections of 10x growth, the price is often fixed, usually by the founders’ view on what % of the company they are prepared to “give away”. I would like to ban the word “give” when it comes to investment (and company sales too where purchasers often grandiosely offer to “give” £x in exchange for a lifetime’s work and a hefty income stream).

Early stage businesses would benefit from listening to those people who point out the risk attached to the business, the alternative returns that investors can get from other assets (including other private companies) and either defer raising finance until the project is better proven or recognise the very high level of risk involved. The founder’s belief in the project isn’t a risk reducing factor, nor is experience really – they are essential pre-conditions to consider the investment. Even for  a new WhatsApp there are a lot of hard yards to travel initially before the business is worth a substantial sum and can expand.

Argentina has been a basket case, suffered much corruption and the tyranny of a fixed exchange rate. But it’s resolved a lot of that and is part of the global community, so much so that it hosts this year’s G20 summit. It seems to have listened and learned, two activities I find most valuable. Why there’s even an App for it: have a look at LearnAmp.

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Why I’m not worried about the FTSE

Published on February 16, 2018

So the FTSE WAS down 10% (NOW 5 OR 6%) in a matter of days? Oh well.

It’s not the response that you might, expect especially from a financially trained person such as me. But I do mean it. I have two reasons for being laid back: it’s a technical adjustment and the prospects for shares remain good.

The technical reason for the decline is, er, good news. The good news – that US job creation is proceeding apace – means that its central bank, the Fed, will probably raise interest rates. If it raises interest rates then not only will a lot of companies’ earnings decrease as they pay more interest, but the Net Present Value of their earnings will be less. The Net Present Value (“NPV”) is the value to-day of money (in this case dividends from these companies) received on the future. It’s the inverse of putting money in the bank deposit account. Money deposited in a bank will grow (just!) by the interest rate paid. Money yet to be received can be equated to that deposited amount’s value in the future (together with its interest) by discounting it back to to-day by the interest rate on the deposit. So the adjustment in share prices is technical, the result of everyone doing these sums and reaching the same answer: an increase of say 0.25% in interest rates will reduce the NPV of future income streams.

But it won’t significantly alter the prospects of these businesses, after all it’s only a small increase in interest rates. What would alter values significantly is larger movements in interest rates and these are extremely unlikely. My reasoning is that we can’t afford it. By that I mean that the level of debt in the world since the financial crash is extremely high, especially in the UK and USA, and an increase in interest rates here would have severe implications. Not only would mortgage holders reduce expenditure but increased interest payments by these Governments would mean a reduction in expenditure on other things. A recession would inevitably ensue.

By holding back on interest rate rises, inflation seems inevitable. While seen for a generation as a spectre to be avoided, it’s now the least worst option, which will reduce the real value of all that debt. It will also increase the value of shares: if costs go up 10% so do sales prices, and therefore profits.

If interest rates aren’t going to rise, what will central banks do when interest rates need to fall, because there is a recession arising for another reason? Reducing interest rates stimulates an economy that has low levels of demand. If they are already low then it’s very difficult to lower them further; the experiment in Japan with negative interest rates (i.e. if you deposit money you will get less back than you put in) was not especially successful. I’m not surprised. However solid the theory is, it’s just weird. What seems increasingly likely to happen is more QE (quantitative easing) i.e. printing money. This has the same primary effect as lowering interest rates – it makes money cheap because there is more of it rather than it being cheaper to borrow – but has a secondary effect of increasing asset prices such as shares.

So while movements in interest rates and inflation will mean rises and falls in share prices day to day, the fundamentals point to shares being the best place to invest.

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Happy new year

Published on January 26, 2018

The turning of the year is a great time for me. I love to plan what the future might hold for my clients and at New Year I get to hear from others what the year might hold for all of us. I’m not so interested in the Royal Wedding and Births (despite watching Suits from the beginning) but the economic picture does fascinate me.

Those looking at data and trends forecast that global growth will be 3.8%, the same as last year. They point out that this is only the sixth time in the last 30 years when every G20 country has grown and that there has been 10 years of growth in the US, its second longest such period. Continued growth is expected to come from many areas:

  • Big data – companies that invest in creation, transmission, storage, processing, consumption, and monetization of data will capitalise on this capability (so long as we let them and they comply with the General Data Protection Regulation);
  • Automation and robotics, the internet of things, 3D printing, robotics and AI (the latest common acronym) will improve the way things are manufactured and distributed (so long as they can get from Calais to Dover);
  • Smart mobility from Uber to driverless cars and powerful batteries will change the way we move around;
  • Chinese infrastructure, including opening up its physical links to its neighbours and ports (One Belt One Road) will generate trillions of construction activity which will be re-paid from improved transport;
  • Genomics which can already detect cancer in the genes for $400.

Many things to excite those who believe the future is bright (but not necessarily orange).

A longer term view suggests that there will be a market crash and a recession of some sort in 2018 or 2019. UK markets are highly valued – exceeding the rule of 20 which says that the sum of the P/E ratio and the dividend yield should not exceed 20 (it’s about 24). Some trends mapped onto the Dow Jones index since 1890 (sic) suggest the same.

And here at home among the UK SMEs I don’t detect an on-going wave of optimism such as there was in the Noughties. In the Noughties we were engaged in moving our businesses into the next century, going on-line. Everyone did it and everyone benefited. But since then I have observed a lull, confirmed again by commentators, and compared to previous eras when railways and electricity had provided their boost to everyone.

So a rosy background and a dull foreground? What are we to do? I suggest identifying which of these waves you can catch and, like a good surfer, being there ready in the water when it does come. FD Solutions was just a two-man band before the advent of broadband which enabled an FD to be present even when he wasn’t there. Suddenly our business looked like a good idea and we rode the wave. I think our next wave is Big Data and our ability to understand it and help businesses use it will determine our success over the next decade.

All of which ignores the fact that there are two, maybe three, people with large red buttons on their desk willing to disrupt our efforts in the name of a better world for their people (apparently). As, I think, a good FD might do, I have taken out an option against the FTSE dropping 20%, at a cost of 1%. So I have foregone 1% of gains, which are forecast to be above my budget, in order to have the security of a floor on any losses. Markets don’t believe the Index will fall this far, which is why it’s cheap. Overall I expect to be better off than leaving money in the bank. And (through my investments) by being part of the capital invested in these new initiatives I will also play some very small part in making the world a better place. Maybe it will be a happy year?

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Substance or form?

Published on January 17, 2018

So the Cabinet, and the Tory party, has been re-shuffled which means everything will be better right?

Well it’s a bit new, and the smiles of the appointees always give the impression of a shiny and bright future. And impressions matter don’t they? Until I worked for “Danny” at BDO as an articled clerk in the Eighties, I didn’t really worry about impressions, (away from the dance floor where my white jeans and platform shoes should have done the trick…). I found his sharp suits and BIG tie knot, in the days when we all had big tie knots, irrelevant, away from the dance floor – when it came to presenting accounts all I was interested in was the numbers. Danny persuaded me that while correct numbers are good, well presented numbers are even better. His argument was based on McDonalds (another trend of the time): would you eat it if it wasn’t so nicely pictured above the counter, and presented in a sharp box with fries in a red pouch? I saw his point (it was the red pouch that finally swayed me) and thereafter I always thought about how my work looked. Not everyone is as comfortable with numbers as accountants – one successful entrepreneur refers to the day in the month dealing with financials as “misery day”. So anything that can be done to sugar the pill is likely to be beneficial, to the messenger as well as the recipient.

Nowadays at FD Solutions we have applied science to our methods of presentation, using principles imparted by Jon Moon in his book Clarity and Impact, to aid comprehension. We use words in tables rather than bullet points, and use the sizes and spacing guidelines he imparted to us, so that there is every chance that what we say will be comprehended.

But form is not the only thing that matters. Is McDonalds appealing just because it’s well presented? I think that form matters as much as an hors d’oeuvre – it gives a taste of what’s to come but it’s not the main course, which actually sustains us. The problem arises when we’re offered four or five meals a day i.e. the amount of information that we are offered for consumption exceeds our appetite. We could stick to three meals but we are often tempted to just eat the hors d’oeuvres – all five of them.

Before the internet we didn’t have quite the same level of information overload – we stuck to our chosen sources of information – a newspaper or two, a radio station – and stayed ignorant of the rest. As we sampled the delights of the other sources we may have widened our horizons but have we become better informed? Is the substance of another news channel as good as its appearance?

I think that we are slowly coming to realise that disintermediation is not always helpful – our ability to access news from a plethora of sources without it being curated may not fulfil our need for substantial reliable information. Whatever it looks like, its source is still important: McDonalds have made many changes to their food over the years in recognition of the fact that their sources are more important than their sauces.  And a good FD is usually a good intermediary between you and your numbers – seeing things in your financial information of which you weren’t aware.

Where our politicians are coming from, their core aims and beliefs, are more important than the slogans and fixes that they may cook up during their time in office and good journalists will elicit this, maybe over a three course lunch.

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WE wish you a Merry Christmas

Published on December 20, 2017

OK, nearly time to down tools (weapons?) – the season of peace and goodwill is upon us. A sense of community descends as we gather in family groups, religious buildings, or just the pub, and look inward rather than outward. And greetings come from US.

At the Hay Winter Festival, Tim Smit (founder of the Eden project and now involved in similar schemes in China) observed that while we have been used to being told what to do by THEM, the inter-connectedness of people (and soon of things) could witness the end of THEY. There has been a quiet revolution in companies for over 10 years, whereby information has been de-centralised so that WE can make decisions without checking with THEM. And this is starting to happen in Government. I won’t say that it’s an underlying cause of Brexit – it’s Christmas so we need at least 12 days off that subject – but if we have good data at our fingertips then we have at least a fighting chance of “taking back control” at every level of society.

Data of course is only an enabler. Nothing happens unless we make it so. In that context there is a village in the Yorkshire Dales, Hawes, which recently added the petrol station to its community assets, which include the Wensleydale Creamery, the Post Office and the police station. It was their desire to maintain their community that drove them (pardon the pun. Think of it as an early Christmas cracker), and they are a guiding light in this respect (sorry, make that two).

Two thousand years after spotting the first guiding light, Inns are still full and people are still being taxed based on where they live, even if it’s sort of in an offshore haven. So change may take a while yet. But if we get better at organising our lives, and governments realise that they won’t be elected by telling, nor even asking , but by enabling, then we will indeed be led by Wise Men. And shepherds will be able to carry on washing their socks, even during the day time (so long as the rest of the community allow it).

Season’s greetings to you all. I look forward to sharing my thoughts with you in 2018.

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Don’t forget the Wars Mr Davis – both of them

Published on December 4, 2017

I’ve referred previously to Brendan Simms’ History of Europe when trying to understand Brexit: the UK has always been on the edge of Europe and hasn’t been In or Out since sea travel enabled the creation of Empires from 1492 onwards. But our position isn’t the crux of his thesis, which looks at the evolution of Germany from a collection of states in the Holy Roman Empire to a unified force by 1871, and the reaction of other Powers to its coalescence. The clearest reaction was in the Treaty of Versailles, signed in 1919, which removed part of Germany’s productive capacity (the Saarland) while at the same time demanding it pay reparations for the cost of the war amounting to £284bn in to-day’s money.

The treaty started out with good intent, directed by Woodrow Wilson and informed by experts who aimed for free trade, national self-determination and a Parliament in the form of the League of Nations. But national self-interest altered it substantially, and chief among those was France. As John Maynard Keynes, in The Economic Consequences of the Peace put it:

“So far as possible, therefore, it was the policy of France to set the clock back and undo what, since 1870, the progress of Germany had accomplished. By loss of territory and other measures her population was to be curtailed; but chiefly the economic system, upon which she depended for her new strength, the vast fabric built upon iron, coal, and transport must be destroyed.”

We all know how the sense of injustice engendered by this agreement was used by Hitler, even after it had been suspended. I wonder if history is, at least in part, about to repeat itself?

We don’t know the details, nor have the principles been set out yet,of the amount that we will pay the EU when we leave. But what must be achieved is fairness. Or else we may be reading something like this (in “A History of the World Trade Wars?):

“So far as possible, therefore, it was the policy of France to set the clock back and undo what, since 1973, the progress of Britain had accomplished. By loss of membership and other measures her reputation as a global power was to be curtailed; but chiefly the economic system, upon which she depended for her renewed strength, the vast fabric built upon financial services, media, technology and innovation must be destroyed.”

Seems clear from Blighty, but the problem is that Georges Clemenceau lost power for failing to be strong enough in these negotiations. As we enter Advent I wonder if Germany, or a coalition of smaller powers, will follow the guiding light to the stable of fairness and witness the nativity of a hopeful new world order?

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Dear Chancellor

Published on November 21, 2017

Dear Chancellor,

I know that you’re in a difficult position, one in which many FDs would empathise: borrowing is high; problems, especially social care/health and housing, need solving; and tax rises (cost cutting to an FD) aren’t popular.

If you think that you can “kick the can down the road” by borrowing more, then good luck. Markets will correct in the next year or two and conventional economics dictate that interest rates should fall. Unless they have risen by then this won’t be a cure, as Japan’s experience demonstrates. And if they rise the cost to the Exchequer will start to pinch other budgets.

If you think that the Government’s fortunes will be decided by Brexit and nothing can be done until it’s clear, then I suggest you hand over the reins to someone with more vision.

If, as I hope, you espouse the virtues of every politician – to want to make a positive difference – then would you consider the following changes to Council tax and Residential housing gains?

At present there is a 25% reduction in Council Tax for people who either live on their own or live in a house where they are the only adult. On the face of it, it seems fair that people who live alone are helped. But with an acute housing shortage is it still a good idea to incentivise people to occupy houses that are too big for them. I’m told that 30% of houses are in this category so if the subsidy was removed completely then Councils would benefit by 10% (30% of a 33% increase), which may not be enough to fund an increase in social care but it would be a significant contribution. People could choose to continue to enjoy single occupancy but would be paying for the privilege. Some would choose to downsize, thereby not expanding the housing stock but expanding its occupancy rate. The exemption for those with children would remain and the exemption could be retained for lower bands.

Or how about this? Residential housing gains have been considered sacrosanct but I have mentioned it in my blogs; G.O.D. ( Gus O’Donnell) mentioned it as a market distortion last year, and now the newspapers refer to it – “economists say that this exemption isn’t good for the economy” since it incentivises investment in the least productive assets. So how about this as a tentative first step? Gains are calculated from a base day (say 1st January 2018) and divided by at least two. This gain is allocated to each owner of the house. So if there are the expected two owners or more the tax is zero. But if there’s only one, then half the gain is taxable. Such gains would only accrue from the time that the house became solely occupied and there are no other adults: so children could stay in their home and share the gain when they turn 18. Those that choose to stay in large houses whose increase in value will help with their care costs will pay some tax to assist those that don’t or can’t.

I’m sure that there will be some howls of protest at the prospect of paying more tax. But it seems to me that these changes would only tax the luxury of living in a house larger than you need, which is essentially investing. My second suggestion would also remove the anomaly that two unmarried people “living apart together” can make capital gains on two houses whereas two married people living together have to pay an excess on a second home.

What say you Philip? Are you following your leader’s policy of helping the J.A.M.s or will you stick to the jammy ones?

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N.O.A.H. 2.0?

Published on November 10, 2017

Theresa May seems to me to be a modern day Noah. Examine the parallels: after 10 generations (43 years), before the citizens had had a chance to work out how to make the world (EU) work properly God (the electorate) decided to press Control Alt Delete and inundated the world with a storm. The biblical version is somewhat larger than Brexit’s teacup sized version but you get my drift?

And NOAH seems an apposite name because where righteous leaders called to rescue flocks from disaster are concerned there is No Obvious Alternative Here. Brexit is the biggest logistical exercise outside war – as complex now as building an ark was then – and a bit of a thankless task. “You only saved us. I wanted to go to live on the slopes of Mt Ararat (sunny parts across The Channel) not sit here watching the storm”.

But there the parallel ends. Noah navigated through the storm and came safely to rest on the aforementioned Mount. I fear that the eventual resting place of HMS Brexit will be less hospitable, albeit perfectly habitable. Examining the debris of our voyage to the brave new world many, most of us, probably all, will find that there is something to complain about in the eventual deal. I would be amazed if there wasn’t, because tough negotiations (and while we still know little of the substance of Brexit it’s certainly that) end up with the most amount of pain being borne by both parties that it is possible for them to bear.

So while Noah lived for another 350 years, I think that Theresa May’s fate will be tied to a deal which has something for everyone and something for everyone to hate. It’s said that our negative emotions are 9 times more powerful than positive so it’s 9-1 on that she will depart soon after. And it’s at least 9-1 against anyone stepping up to the plate before then because

  1. I believe that all the candidates have made this assessment and
  2. There is no obvious alternative. In 1940 both Churchill and Lord Halifax were realistic contenders for the challenges of PM. Right now I think we are faced with fantasists (Boris, JC) and pragmatists: there’s plenty of talk about practicalities and budgeting but I haven’t heard a cogent vision of a way forward since, er Blair?!

Perhaps we need a higher power to anoint a charismatic leader (Miliband snr? Clegg?), who can build his or her own ark (political party) which we could hop over to and sail away? But right now there is





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Funny Money?

Published on October 26, 2017

While the Tory party conference was, ahem, in full flow, I heard a debate among political commentators observing the current political landscape. Their conclusion was that fewer and fewer people don’t feel that they have a stake in the capitalist system. This disillusionment is driving support to the socialist dream of Jeremy Corbyn in which wealth is distributed fairly (from the few to the many). Those appearing most attracted to this vision are young people who haven’t experienced the turmoil of the 1970s. We were youths once; we knew it all back then and didn’t need history as a guide. I always saw Robin Hood’s antics as necessitated more by the absence of Good King Richard than Bad King John. Only latterly did I form the view that there have always been bad people in some positions of power for a long time. But it also doesn’t follow that everyone in power is a bad person –as we all learned at school, the converse is not true.

Can we acknowledge that the people at the top don’t pass a goodness test to get there? Rather they are the ones others look toward. It’s not unusual for difficult meetings in corporations to end with no conclusion other than “Let’s see what Steve/Bill/Larry says” and the arrival of the CEO produces a resolution.

Some leaders are there because they had the idea. Without the determination of Edison, Dyson and Ellison we wouldn’t have the items we can’t live without. And what do they do it for?

The love of doing it; and funny money.

I think that entrepreneurs are motivated to a greater or lesser extent by

  • The need to prove themselves (to someone who said they’d never make it);
  • A desire to make a difference; and
  • To give something to the world that will benefit it.

They have to spend money to prove that it works, and get pieces of paper (shares) which won’t even buy a loaf of bread when they’re issued. When they succeed, they get plaudits, shares worth a lot of real money, and a list of obligations – to employees, investors, tax men, the environment…

I think we would all be better off if these shares were what people instinctively, intuitively understood as “a stake in capitalism”. But, as you can see, they are derided, until they become objects of envy. The vast majority, I believe, prefer the so called certainty of owning a house, (complete with its vast mortgage) to having shares in the company in which they work, which are earned for good service and will be worth something provided that market and product are well managed. Bricks and mortar are seen as a safe store of value, and even preferable to a savings scheme which owns shares in quoted companies even though their value is the result of a market starved of supply.

What I think we’re missing is the risk inherent in the price of all assets. While an individual share is riskier than an individual house, a parcel of shares – say a bit of the largest 350 companies – actually isn’t. Although shares sometimes go down in value, over time they increase inexorably as wealth is created, whereas houses, the least productive assets would grow in line with inflation were the market freer.

The 50% of young people who are students resent the borrowings they incur to get a degree, which could itself be seen as a stake in society, and the Tory conference included a pledge to reform the system. I wonder if the reforms could incorporate an award of some shares, maybe dependent on length of course and class of degree? Maybe a special class of share in the University with some rights to income from its research and development would give these hard-working people (it was different in my day) a tangible financial stake in the system? Sound like funny money? Maybe as funny as shares in a bag less vacuum cleaner? Leadership can be a thankless task in the beginning.

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Unconscious slavery

Published on October 12, 2017

Albeit I may appear somewhat behind the times, I applaud Theresa May’s stand against slavery. It shouldn’t exist anywhere, least of all in the developed world where there is more than enough wealth to pay minimum wages and living wages.

So it is with only a bit of tongue in cheek that I draw your attention to my attempted enslavement by Facebook. Living on the Welsh borders as I do I have been visiting slightly less fashionable places – a stately home where I purchased some rare flowers – and Baskerville Hall a hotel just outside Hay on Wye. Baskerville Hall clams to be the inspiration for Sir Arthur Conan Doyle’s novel and remains frozen in time more or less since then. But the staff are friendly and helpful and the food is tasty and plentiful.

All of which I could tell Facebook, which contacted me more or less on arrival and told me that they didn’t have any information about it and wondered if I could give them some.

For free.

Now this isn’t slavery because I have a choice. But it’s work below the minimum wage. Even if I charged minimum wage for five minutes work I would be due 60p.

But maybe that’s not fair, considering that I get to use Facebook for free? But is the deal a fair one? As of the time of writing, the value of Facebook’s shares, the difference between its costs and revenues over time, is $475bn based on profits of nearly $4bn from 2bn active monthly users. So if it paid each of us $2 a year for our undercover investigative work, it would be loss making. And if it charged us $2 a year to be members it would double its profits.

Tricky issues these charges for services given and received aren’t they? I wonder what it was like in the Stone Age before money was invented and goods and services were bartered? Odd isn’t it that our technology has brought us full circle in this respect? It was the idea that the marginal cost of providing some software over the internet is so small, and the cost of collecting these sums would eat up some if not all of it, which started the trend of businesses giving things away. But now consumers are giving services away for free too. It is our choice but is it a conscious choice and should it continue? Perhaps you’d like to consider the following?

  • The marginal cost, the cost of making one more of something, is not the only thing that makes up its cost.
  • The cost of making and receiving micro payments has also reduced, and will surely fall further.
  • Is Facebook actually free? Is it worth my investment of time, screens, broadband?

How about we get ourselves back out of the Stone Ages and actually price these things up?

PS You haven’t been charged for this blog. Or any of them.

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