Category: Fintech

Fiserv & First Data: Acquire in the Absence of Innovation

Fiserv & First Data: Acquire in the Absence of Innovation

Today’s announcement that Fiserv plans to acquire First Data in a $22 billion all stock deal continues the string of payments-related deals. More importantly it stresses what many know – that the incumbent payment companies are not innovation factories. Acquire in the absence of innovation – although I believe all companies should have an active M&A engine that is operated as a line of business.

Fiserv, First Data, Fidelity Info Services, Jack Henry, Bottomline Technologies and others are getting squeezed from below by innovative fintech upstarts such as Square, Stripe and Venmo (PayPal) while getting clobbered from above by Amazon, Apple, Google and Samsung and their respective payment operations.

The venture capital community ought to think extra hard about how their payments portfolio companies are going to differentiate in the fluid payments landscape.

Private equity needs to take a hard look at the incumbents to determine whether they have the chops to be relevant otherwise deal exits will be difficult. In other words, with the payments incumbents you run the risk of catching a falling knife. Thus, it makes sense for incumbent vendors to prop each other up in the meantime. Strategic-to-strategic deals ought to be the norm for the foreseeable future.

The 3 RPA Flavors

The 3 RPA Flavors

We recently published an article: “Multi-Tenant Machine Learning at Scale”. Think of this RPA (“Robotic Process Automation”) post as a follow-up piece as told with pictures. Our perspective is primarily through the lens of an investor as to how we would value each of the three RPA business models. You may access a PDF version of the slides used in this note HERE. Should you wish to receive a copy of our full RPA tools company list (22 companies), contact us at: info@ceorater.com

TEK2day.com CEORater.com

Our recent RPA-centric CEORater Podcast – episode 247. “Not All RPA Is Valued Equally”

SS&C Technologies: Multi-Tenant Machine Learning at Scale

SS&C Technologies: Multi-Tenant Machine Learning at Scale

For the past few years I’ve poked around the machine learning (“ML”) and artificial intelligence (“AI”) space. I advised Boston-based DataRobot back in 2014 when they started to build their machine learning platform. I’ve thought about how we at CEORater may leverage ML to score CEOs and companies. Typically when we read about ML and AI it’s from the perspective of a pure-play vendor who markets and licenses its platform across multiple industries for a variety of use cases. Often the use cases we read about are focused on “power users” – people who have a PhD in Statistics or some similar quantitative background.

Recently I had the opportunity to demo SS&C’s (tkr: SSNC), new back-office, middle-office platform (“Singularity“) which has machine-learning, artificial intelligence and robotic process automation (“RPA”) at its core. This was my first opportunity to observe a fintech platform that was built from the ground-up to fully-leverage ML, AI and RPA.

From a background perspective, Asset Management firms of all flavors (small, mid-sized and large, traditional, hedge funds, private equity etc.), Fund Administrators and Insurers use a variety of SS&C products and services to value assets (equity and fixed income securities, derivatives, bank loans, private placements and real assets to name a few asset classes)/ strike an NAV, settle trades and report on asset holdings. The company’s Singularity initiative will replace siloed products with a common ML-based core layer that will have modular AI and RPA services that sit on top.

Multi-tenant machine learning is a significant competitive differentiator. Some readers pride themselves on identifying businesses that have a competitive “moat”. For non-investors a “moat” is a source of sustainable competitive differentiation. Challengers who wish to compete against companies with established moats best be prepared to completely shift the paradigm and render the moat obsolete. You’re simply not going to spend your way around, over or through a moat. Brute force won’t work. If any company ever had a moat, SS&C has one in the world of portfolio accounting systems.

SS&C’s moat is about to get significantly wider and deeper as Singularity is rolled out. This is in no small part due to the multi-tenant machine learning layer. This means that as Customer X has an experience that requires a “learning”, the benefit of that learning is enjoyed not only by Customer X but also by the other customers on the platform. This multi-tenant element to Singularity’s machine learning layer is a powerful scale differentiator primarily for three reasons:

  • Large installed customer base: SS&C has a great many customers and users – therefore more opportunities for machine-driven learnings – the benefits of which accrue to all SS&C Singularity customers.
  • Purpose-built from the ground up: SS&C has incorporated machine learning into Singularity from Day One, providing the company with a significant and sustainable advantage over competitors who may try to retrofit a third-party’s machine learning layer on top of legacy products and services. Retrofitting legacy technology simply can not be as effective from a throughput and efficiency standpoint as a new, modern-architected platform.
  • Cost prohibitive: It’s not an insignificant dollar amount that’s required to build a modern, ML/ AI/ RPA-powered Fintech platform from scratch. To replicate Singularity from a domain-expertise and technology perspective would be cost prohibitive.

VC’s would be wise to avoid trying to disrupt this market. As I see it, the only way to replicate what SS&C has built would be to acquire the company.

Narcissistic CEOs Carry Greater Legal Risk

Narcissistic CEOs Carry Greater Legal Risk

The below content is comprised of excerpts from an article previously published by the Stanford Graduate School of Business.

Charles A. O’Reilly recalls the time that his wife encountered Apple co-founder Steve Jobs in the Whole Foods market parking lot in Palo Alto. “She was walking out when he was walking out, and when he climbed in his car and pulled out, he had parked in a handicapped spot,” recounts O’Reilly, the Frank E. Buck Professor of Management at Stanford Graduate School of Business.

That same self-entitlement and willingness to ignore rules — detailed at length by Jobs biographer Walter Isaacsonwas part of what enabled Jobs to disrupt multiple industries and transform everyday existence with an innovation called the iPhone. But, O’Reilly explains, some of the same traits that we exalt in visionary business executives also are characteristics of narcissists. In that personality disorder, a sense of superiority and overconfidence are accompanied by low empathy and a tendency to take advantage of others.

“Narcissists like and want admiration,” O’Reilly explains. “There’s evidence that they seek out positions where they can demonstrate to others how great they are.”

At first glance, it might seem worth it for a company’s shareholders to tolerate a narcissistic CEO’s abusive personality, given the out-sized success that Jobs and others like him have achieved. But narcissistic CEOs’ rampant hubris also has a serious downside, O’Reilly notes. Studies indicate that they’re more likely to engage in questionable tax-avoidance schemes, to manipulate accounting data, to overpay for acquisitions, and to seek excessive compensation.

In an article published in Leadership Quarterly, O’Reilly and colleagues Bernadette Doerr and Jennifer A. Chatman of the University of California, Berkeley, show that narcissistic CEOs subject their organizations to potentially ruinous legal risks as well. Not only are they more likely to become embroiled in protracted litigation, but their personality traits make them less sensitive to objective assessments of risk. Narcissists are less willing to take advice from experts and to settle lawsuits — even when it’s likely that the company will lose.

Narcissism and Lawsuits

In one part of their work, O’Reilly and his colleagues utilized a confidential survey of employees of 32 large technology firms, in which respondents answered questions about their CEOs’ personalities, with the understanding that neither the individuals nor the firms would be identified. In addition to analyzing that data, the researchers gleaned information about major lawsuits — i.e., those in which damages might exceed 10 percent of corporate assets — from the companies’ annual reports. The result: a significant correlation between the level of CEO narcissism and the length and duration of lawsuits.

“Narcissists are less sensitive to avoidance of punishment and more sensitive to possibility that they’ll win big,” he says. “When the risk goes up, what they see is that if they win, they’re going to be heroes. Now most of us say, ‘Ah, the probability of losing is high, so I’m not going to do it.’ But the narcissist says, ‘Yes, the probability of losing is high, but look at what happens if I win!’”

Why VCs Like Big Egos

That same excessive confidence is what often helps narcissists rise to the top in the first place. “Venture capitalists like narcissists,” O’Reilly explains. “Imagine you’re a venture capitalist and you’re thinking about which of two companies to fund. Let’s say, for the sake of argument, that both have the same technology and the same market risk. But one is headed by someone who is confident that she’s going to change the world, who thinks people who disagree with her don’t know what the hell they’re talking about. The other is headed by some introverted engineer. Which are you going to pick?”

Narcissists also are hard to turn down, because they’re often skilled manipulators, adept at spinning falsehoods. “They’re often quite good at reading other people,” O’Reilly says. “And they don’t have a problem making promises they can’t keep. If I lie to you, and you find out about it, I’ll feel terrible. A narcissist doesn’t feel terrible.”

Once they’re ensconced in the C-suite, narcissists’ self-aggrandizing ways can lead to business breakthroughs, but their tendency to be control freaks can wreak havoc and make subordinates’ lives miserable. “They want control, so they create these corporate environments full of fear, where people are afraid of what the boss is going to say,” O’Reilly says. “There tends to be less collaboration.” And because narcissists are rule-breakers, that lowers the bar for integrity in the organization itself.

Unfortunately, when narcissist CEOs get their companies into trouble, they often manage to avoid consequences. “If they fail, they get a golden parachute,” O’Reilly notes. “It’s others who pay the price.”

CEORater Technology Founder CEO Index Significantly Outperformed YTD

CEORater Technology Founder CEO Index Significantly Outperformed YTD

Regular readers know that we are partial toward Technology Founder CEOs vs. hired CEOs as a general rule.  Our experience is that founder CEOs are generally better than hired CEOs at anticipating customer market needs, in many cases before customers know they have a need. Founder CEOs care deeply about details of the business that a hired CEO may not give more than a casual glance. Founders in many cases work to leverage their smart senior business leaders whereas hired CEOs may feel threatened by a direct report’s potential. We could go on.

Our CEORater Technology Founder CEO Index has performed well year-to-date through December 6th enjoying a Total Unweighted Return of 14.2% and a Total Weighted Return of 17.1%.  The comparable benchmarks returned 5.1% and 4.4% on an Unweighted and Weighted basis respectively. You may access the detail HERE.

Speaking of Technology Founder CEOs, we recently hosted a podcast with SS&C Technologies (ticker: SSNC) founder & CEO Bill Stone where we discussed M&A strategy, SS&C’s decentralized management approach (another core principal of ours) as well as SS&C’s “Singularity” artificial intelligence (“AI”) and machine learning (“ML”) initiative. In the case of SS&C, we believe that AI and ML will drive efficiencies across back office and middle office-related products and services – enabling customers to drive incremental throughput with less effort. Further, AI & ML has the potential to create revenue and EBITDA opportunities for front-office customers (facilitating deal sourcing as an example). You may access the episode below:

Don’t Give Investors A Reason to Say “No”

Don’t Give Investors A Reason to Say “No”

Investors Allocate Premium Valuations to That Which They Understand

My theory is that institutional investors implicitly penalize complexity. I base my theory largely on 23 years of capital markets experience and intuition and admittedly have little data to support it. I believe that investors will invest a dollar in Company A assuming that “A” has a simple story (one that may be tracked by observing revenues, operating profits, earnings and user growth) before they will invest a dollar in Company B, where in the case of B there are multiple business drivers and a lack of user metrics. I believe this to be true even if B has slightly better top-line growth, bottom-line growth and a slightly more attractive valuation. In other words – transparency and simplicity is preferred over complexity – even if all else isn’t necessarily held equal.

The primary drivers for the above behavior are threefold:

1.) Institutional investors have limited resources;

2.) Institutional investors are concerned for their jobs (rotation of assets from active to passive investment products, fee compression and market volatility account for numbers 1 & 2);

3.) Human nature – it’s easier to support an investment idea when one understands the drivers at a nuanced level.

Therefore, many investors will follow the path of least resistance and invest where they are comfortable and avoid complexity.

Remove Friction Points from Your Investor Story

Public companies must remove obstacles that prevent investors from participating in the stock. Much like software companies work to remove friction points from the user experience, companies ought do the same with investors – don’t give investors a reason to say “no” to your story.

Where possible Enterprise Technology companies ought to disclose user metrics. I understand that to disclose the number of users would not tell the full story for many companies. For example, one could not neatly attach a user count to consulting revenue. It would be equally difficult in many cases to attribute services revenue to a defined user set. Certain offerings are not billed at the user level, therefore it is difficult to arrive at a user count. This should not prevent you from working to arrive at some aggregate user count even if doing so would only partially tell your company’s story.

I can imagine a line in a quarterly press release that would read as follows: “User count was 15,000 as of 9/30/18, up 5% from a year ago. This user count is relevant to approximately 70% of our business from a total revenue standpoint.”

The above disclosure probably isn’t useful if it describes less than half of your total revenue. However, increasingly Enterprise Technology companies are moving to subscription billing models that incorporate user counts into the pricing equation and therefore lend themselves to a reported user metric. If you are new to this publication, we are big fans of recurring revenue models (our recently published article: “Every Company Should Consider Adopting A Subscription Revenue Model“).

Consumerization of Investor Communications

Last, the benefit of this disclosure goes beyond transparency and simplicity. I believe there is an investor psychology benefit. Investors intuitively understand “user-driven” business models as most investors – particularly younger ones – are abundantly familiar with user-driven companies from their day-to-day lives: Netflix, gym memberships, premium apps, AMZN Prime. This familiarity helps grease the skids on the investor due diligence path. We have experienced the “Consumerization” of Enterprise Technology. Think of this as the “Consumerization of Investor Communications”.

Every Company Is A Content Company

Every Company Is A Content Company

Notice anything about the above image? It looks like a Facebook feed and five of the nine content pieces (only three are fully visible), are videos. The image is a screen capture from Goldman Sachs’ homepage – part of a modernization/ outreach effort under new Goldman CEO David Solomon.

Personally I’ve noticed that companies are increasingly publishing video content to their Instagram and YouTube pages and Websites in an effort to tell their story (86% of companies publish video content to their Websites and 77% publish video to their social media pages). This is surely becoming a prerequisite for recruiting and engaging employees as well as a tool for articulating use cases to customers and prospects.

Below we highlight several examples of companies that imaginatively use content. We focused on Websites as opposed to social media pages as many companies view their Website experience as an afterthought and doing so carries significant opportunity cost. Websites typically have less than 10 seconds to make an impression before users move on.

1.) Goldman Sachs: the company uses content to tell a story and to provide direct access to CEO David Solomon. Congrats to a company in an unsexy space deploying engaging content to its benefit.

2.) Red Bull: perhaps the best pound-for-pound content delivery company. RB homepage is video-driven, tells stories and mimics a social media feed while optimized for the mobile experience.  https://www.redbull.com/us-en/

3.) GoPro: visually engaging and easy to navigate retail-centric Website. https://gopro.com/

Key takeaways:

Engage visually – especially with video. Important both in terms of capturing viewers’ attention and also in terms of providing access to senior management. It’s up to you what video content you want to post publicly, although the world is becoming increasingly transparent. As CEO why wouldn’t you want to make time for regular, short-form video content that keeps employees (most important), customers (2nd most important), the Board, the community and investors informed about your current thinking?

I believe 100% that companies which communicate regularly with employees in a transparent manner are going to win the war for talent. Video is ideal for communicating in a scalable, global fashion. You should assume that video messages created for intracompany consumption will find their way outside of your company. Therefore, construct your message with this in mind. One transparent message for consumption by all is the best way to ensure consistency across audience cohorts.

Young users want to watch a short video, swipe right or left and engage through voice.

Google, Microsoft and Amazon have open-sourced their core machine-learning layers as well as basic AI-services, so it’s easy to deploy AI-powered voice assistants and to capture those front-end customer interactions in your machine learning layer.

Google ML-development kit for mobile developers

Microsoft Cortana Dev Center

Microsoft Azure Developer Tools

Amazon Alexa Dev Page

 

CEORater FinTech Founder 5

CEORater FinTech Founder 5

The 5 top performing FinTech stocks year-to-date (as of 11/08/18) that are led by founder CEOs. This list is based on an extract from the CEORater database (CEORater.com). Access PDF version HERE.

Square (ticker: SQ) YTD stock price performance: 108.0%

Square founder CEO Jack Dorsey

Green Dot (ticker: GDOT) YTD stock price performance: 55.8%

Green Dot founder CEO Steven Streit

Virtu Financial (ticker: VIRT) YTD stock price performance: 36.3%

Virtu Financial co-founder CEO Doug Cifu

SS&C Technologies (ticker: SSNC) YTD stock price performance: 27.8%

SS&C Technologies founder CEO Bill Stone

MSCI Inc. (ticker: MSCI) YTD stock price performance: 19.1%

MSCI founder CEO Henry Fernandez

 

7 Rules for Keeping Activist Investors Away<span class="badge-status" style="background:red">Premium</span> 

7 Rules for Keeping Activist Investors AwayPremium 

The following 7 rules apply to public companies across a variety of industries – particularly to Enterprise Software, FinTech and Information Services companies. 1.) Make Your Numbers 2.) Regular, Transparent Investor Communication 3.) Drive Expanding Operating/EBITDA Margins 4.) Don’t Stockpile Cash 5.) Control Waste 6.) Use Debt as a Tax Shield 7.) Board Composition –…

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