Wednesday, May 30, 2012

Crowdfunding and the JOBS Act...

Last month, a significant piece of legislation passed through gridlocked Washington by a 73-26 Senate vote and a 380-41 House vote, and was then signed by President Obama.  The fact that this even occurred at all is a grossly under-reported story, however what is even more significant about the JOBS Act is how it has brought the spotlight onto the recent phenomenon of "crowdfunding".

Crowdfunding is a process where various individuals scattered over the Internet collectively pool their money together to invest in new enterprises - potentially turning anyone into an angel investor for as little as the price of a Starbucks coffee.  One of the primary goals of the JOBS Act is to make it easier for startups and small businesses to raise funds in this way.

As profiled in Forbes, Tanya Prive of Rock the Post describes it as saying...

Simply, the JOBS Act will make funding more accessible for startups by allowing non-accredited investors to participate in the funding rounds, and this alone, I believe will be the main factor driving the increase in new companies being founded. And with new companies comes the need to hire staff. Without a doubt, this will help the current unemployment rate.

Rory Eakin of CircleUp added...

Currently, less than one percent of U.S. small businesses receive Angel investments. By opening up restrictions around general solicitation and introducing crowdfunding… these investments create up to six jobs per investment.

But this isn't to suggest that the JOBS Act was completely a political no-brainer.  Some skeptics view the Act's deregulation of crowdfunding, which makes it far easier to raise funds from ordinary individuals, as tantamount to what led to the financial crisis of 2008.  Chuck Jaffe of the Wall Street Journal's Marketwatch wrote this scathing headline:  "JOBS Act benefits financial criminals:  Congress declares open season on small investors".

So is it something ripe for abuse that makes it easier to victimize ordinary individuals, or is it empowering those same individuals by enabling them to invest in startups at an early stage where they previously were unable to get in the ground floor?

Perhaps the answer lies in the fact that this bill received a bipartisan filibuster-proof supermajority vote in a Senate where anything getting passed in a major achievement.


Friday, May 18, 2012

Catching Our Breath After the Facebook IPO...

It finally happened.  "Facebook Friday".  Facebook had its initial public offering and shares of its stock will henceforth be publicly traded on the NASDAQ.

Weeks, if not years, of hype led up to this penultimate moment, and now that it's over and done with, let's take a moment and evaluate what just happened.

First of all, after setting the initial share price at $38, by the end of the day the stock rose to only $38.23, a gain of only 0.6%.  So much for launching into the financial stratosphere.

Second, there were technical glitches in the NASDAQ that delayed trading until 11:30am.  This may have unnerved some participants and prompted some selling.  Or not.

Third, only a fraction - 15% - of Facebook's available stock was made available in the IPO.  The remainder is left in private hands.  Mark Zuckerberg himself is expected to retain about 57% of the company, thus remaining in complete control over decision-making.

Fourth, the company has an estimated P/E ratio of 64, plus, according to Bloomberg News, revenue growth is expected to slow for a third straight year.  Normally, these facts would not bode well, but in a dot-com context, c'est la vie.

Fifth, even after this IPO, Facebook's market value is still only about half the size of Google's.  However, the company is now worth more than McDonald's,, Hewlett-Packard, and Cisco, to name only a few.

Sixth, the media was strikingly negative on the IPO leading up to the big day.  Some sample headlines:

  • "Ahead of Facebook I.P.O., a Skeptical Madison Ave" - New York Times
  • "How Facebook Could Trip Up Investors" - Wall Street Journal
  • "Spend Your Money on Google, Not Facebook" -
  • "5 Numbers That Should Scare Facebook Investors" -

What were the causes of this media negativity?  What were its effects?

In the end, there was so much hype that the hype itself became the story.  As for the IPO itself...  meh.


Tuesday, May 01, 2012

Digital Wallet Adoption and the Future of Money...

The Pew Internet and American Life Project has released new research findings on the The Future of Money in a Mobile Age.  Of particular interest is what it has to say about the proliferation of digital wallet systems - like Google Wallet - currently being deployed by numerous actors, although not yet fully embraced by the mainstream public.  Digital wallet systems allow merchants and businesses to accept “on the go” credit card payments from customers using a special card reader that plugs into a smartphone or tablet computer.

In addition to Google, a consortium including Verizon, AT&T, T-Mobile, Visa, American Express, Discover and MasterCard will be piloting a similar NFC-based mobile payment system in mid-2012.  Meanwhile, PayPal and Visa have also announced plans for mobile wallet systems, and many analysts predict that Apple will announce its own virtual wallet service in the near future.

Proponents argue that these “mobile wallet” systems hold a number of advantages over the use of cash and credit cards for payment. They argue that these systems are simpler and more convenient for consumers, since users need only carry a single all-purpose device rather than multiple forms of paper and plastic. And because they are location-aware and can track users’ shopping and purchasing behavior in real time, mobile wallet systems can offer advanced “personal shopper” services (such as recommendations and special deals based on one’s location and past purchasing history) as well as improved loyalty programs and more targeted promotions from vendors (a modern take on the “buy ten get one free” card, but with the card stored digitally in the cloud).

At the same time, critics have pointed towards a number of factors that might limit the widespread adoption of mobile payments. For starters, not everyone will use a smartphone. Other analysts raised questions about whether credit card companies will move away from the current profitable system in the developed world. Other concerns include the potential susceptibility of NFC to hackers, market fragmentation, and lack of interoperability of mobile finance systems due to the many different platforms being developed and implemented, and questions about whether consumers will feel comfortable storing the intimate details of their financial lives in the cloud.

As far as how quickly these technologies will be adopted...

Overall, a majority of these respondents supported the scenario that by 2020 most people will have embraced and fully adopted the use of smart-device swiping for purchases they make, nearly eliminating the need for cash or credit cards. These experts feel that the explosive growth in the use of smartphones and other mobile devices, combined with the convenience, security, and other affordances of mobile payments systems, makes these systems an obvious choice to replace established modes of payment in day-to-day commerce.

At the same time, the expert respondents are divided on how quickly this technology will displace established transaction methods. In elaborating on their predictions, a number of respondents indicated that they expect this process to develop generationally, with younger users jumping to abandon cash and credit cards while their parents and grandparents make the move to mobile payments slowly, if at all.

While digital wallet systems are already offering more than simply on-the-go payment processing - for example, rewards programs and location-based recommendations - it seems to me that the largest obstacle to more rapid mainstream adoption is not privacy concerns, as some have suggested.  Rather, it's just a question of when a tipping point among consumers will be reached.  Like with smart phones before them, once digital wallets start building even modest momentum in the consumer space, expect the floodgates to open and for widespread adoption to happen extremely quickly.