Why Innovation In Payments Is So Rare

I think a lot about payments, even though I haven't worked in the sector for over five years. I just think it's mind-blowingly cool that this abstract concept we call money manages to work, everywhere around the world, in mutually recognizable forms, not with perfect interoperability but damn near close to it on a local level, with universal understanding that it is simultaneously a medium to measure value (a price); a medium to transact (making a purchase); and at a minimally higher level of financial literacy, a value store (an account).

Yet as cool as a concept as money is, retail payments in the US haven't changed all that much since the advent of credit cards. Your options are basically check, card, or cash. I was reading an interview this morning that StrictlyVC did with Todd Chaffee of Institutional Venture Partners, that goes a long way towards explaining why.

How to Handle VC Rejection

"I see an opportunity here, but it wouldn't be an opportunity if everybody saw it."

More Proof that Facebook is a Bubble

(Note: this is largely a summary of Social Media Ad Revenues Will Reach $8.3 Billion by 2015 by Erik Sass at MediaPost)

In a post yesterday, Erik Sass noted that BIA/Kelsey predicted that the Social Media ad spending - a decent proxy for Facebook revenue, as they seem to be earning almost all of it - will quadruple from ~$2Bn/yr to $8.3Bn/yr.  This is a healthy 32% growth rate, "reminiscent of the first surge of Internet advertising in its glory years from 1997-2000 and then again from 2003-2008."

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Facebook, as recently as January, was claiming run rates of $2Bn annually while selling through Goldman Sachs at ~$50Bn EV, or 25x revenue.  That's already quite bubblish, but check this out.  On Monday, the WSJ reported an implied IPO valuation of $100Bn for Facebook assuming a Spring 2012 IPO.  Assuming little cash or debt on the books (i.e. Market Cap approximates EV), and assuming that Facebook gets 100% of social media ad spend, this implies ratio of 12x for 2012 EV to 2015 revenue.  That doesn't give Facebook IPO investors very far (anywhere?) to go over those 3-4 years and get any returns.  That's practically the definition of a bubble - when future success is already baked into current prices - and then some!

A Tale of Two Entrepreneurs, or Why Mark Zuckerberg Deserves More Privacy than Steve Jobs

The usual conversation about privacy in the tech world has been turned upside down recently.  The CEOs of Apple and Facebook have been in the news a lot about privacy recently, but not for the usual reasons.  Although I'm not a big fan of the way they chose to structure it, Mark Zuckerberg and Facebook´s investors certainly have the right to keep their company private for as long as they want and for whatever reasons they want, including Zuckerberg's own privacy.

Steve Jobs on the other hand, is running a public company with a $300Bn+ market cap.  That means that the public absolutely has a right to ask about the possibility that he will be unable to continue to contribute to Apple.  Obviously I am sympathetic to Steve Jobs' medical situation, and I wish him the best and speediest recovery, out of general humanistic empathy as well as a recognition of the loss his passing would represent to the technology ecosystem that I love and live off of.  I am also sympathetic to the general need for privacy, which only grows in times of personal duress.  But the trade-off for going public is surrendering your privacy.  Want your privacy?  Don't go public (see exhibit A, "Mark Zuckerberg.").

Groupon's International Acquisition Strategy and Its Long Term Future

When it comes to acquisitions, Groupon has been most widely questioned for its rejection of Google's $6Bn offer (Facebook, which is five years older, has 2-3x the revenue, and is, well, Facebook, is probably the only VC-backed company to reject a larger offer, in absolute terms, since the dot-com bubble).

Tuesday they announced a trifecta of acquisitions enabling their entrance into India, South Africa, and Israel.  Clearly they wasted no time putting their $950M round to use (of which the firm probably only pocketed ~ $525M - but what's $425M among friends?).  What surprised me most though as someone who apparently was not following the fastest growing company in history closely enough, is that this was not even close to Groupon's first international acquisition and that in fact they've been on an international acquisition tear since last May, just after the last round of gargantuan fundraising.  In fact I'm not sure if Groupon has entered any international markets organically.

To me this raises some questions:

The Definition of Speculation, Part II (it gets worse)

In my last post I defined speculation as "buying commodities for the capital gain from anticipated increases in their prices rather than for their use," following Kindleberger's Manias, Panics, and Crashes.

According to Hyman Minsky however, speculative is only the middle type of three types of finance: hedge, speculative, and Ponzi.  Minsky, for those unfamiliar, is the late American economist whose genius was unappreciated in his lifetime but has suddenly become quite trendy to quote in relation to the recent economic bubble and crash.


Minsky's three types of finance are defined in reference to debt that the "investor" is assumed to have taken to fund his investments.  In other words, it does not cover self-funding investments.  His model is nonetheless quite useful, as the reality is that most economic activity is funded by debt, be it mortgages, small-business loans, or larger bond floats that are done by major corporations or governments.


Hedge finance, then, is defined as purchasing an investment asset for which the anticipated operating income (rent, dividends, etc.) is sufficient to pay both the interest and principal on the debt incurred to acquire the asset.  Regardless of what happens to the value of the asset, the hedge financier is covered.  He might not make a killing, but he will not go bankrupt; he is "hedged."


Speculative finance is where the anticipated operating income is sufficient only to pay the interest, but not the principal, on the debt incurred to acquire the asset.  The speculative financier can only pay down the principal and avoid bankruptcy by borrowing more money, in the form of new loans or renegotiated terms with the original lender.  He is OK as long as the asset value appreciates and he is able to get new loans, but if the asset value depreciates (as it inevitably does when a bubble bursts), he will have a liquidity crunch and both be forced to sell at a loss and potentially face other consequences of not being able to pay back his loan.


The final type of finance, Ponzi finance, is where the anticipated operating income does not even cover the interest.  The Ponzi financier finds himself falling into ever greater indebtedness as he borrows new money to pay merely the interest on the old, and will find himself in deep trouble as soon as others realize what he is up to, unless he is so lucky that the asset value appreciates fast enough to allow him to sell and pay back all of his creditors.


According to Minsky, when the economy sours, some of the individuals and firms in the hedge category get pushed to the speculative category as their income goes down, while some of the players in the speculative category find themselves in the Ponzi category.  This is precisely what happened in 2008-9 with many of the banks who had liquidity crises as their payments from their CDOs started shrinking as defaults rose.


The original Ponzi, by the way, was not particularly successful at his eponymous scheme, only managing to keep his hustle going for a few months before it crashed.

The Definition of Speculation, as Opposed to Investing (by some really smart economists)

In a book so mind-blowingly insightful that I had to stop marking because the whole page was turning red, I read the most concise, precise, comprehensive, and accurate definition for speculation: "buying commodities for the capital gain from anticipated increases in their prices rather than for their use."

As an example, buying oil or wheat to have fuel or grain is not speculation, but buying them to trade them to someone else after their value rises is.  Note that it is only speculation if the gain on the commodity is a capital one rather than an operating (or ordinary income) one.  In other words, if you are a distributor, retailer, broker, or trader of oil or wheat, you are not speculating.  The precise difference between a capital gain and an ordinary gain on a commodity can be fuzzy in some cases, but in general is quite clear.

Once speculation is defined that way, the next step is to consider the special case where the commodity is a stock. Stock is definitely a commodity: one share of a given class of stock in a given company is completely exchangeable for another share of the same class of stock in the same company. Most other securities are commodities as well.

In the case of a security, a capital gain is the result of income from selling the security at a higher price than paid for it.  Operating income is the dividends or payments from the security during the period that it is held.

This definition might miss a few cases in its simplicity, such as growth stocks that don't pay dividends, but it's pretty much spot on.

The books is Manias, Panics, and Crashes by Charles Kindleberger.  Kindleberger was a professor of economics at MIT for 30 years, and his book is widely cited by other books on market cycles such as Bull! by Maggie Mahar, which is where I read about it.