Could we have predicted that Elon Musk’s restlessness would have led to his founding of (SpaceX) even though he more than had his hands full with Tesla? How about his latest company – “The Boring Company” – could its founding have been predicted? The answer is “maybe”. Are we surprised by Musk’s emotionless approach to…
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”.
Many of our readers are Technology CEOs and institutional investors. If you wish to tell your company’s story, or a portfolio company story let us know. Beginning in 2019 we plan to occasionally profile Technology companies in these pages and on our CEORater Podcast. Send me a note directly at firstname.lastname@example.org. Thanks for reading!
Subscribe to access premium TEK2day content
Our full analysis comparing the personality traits of Mary Barra vs. Elon Musk may be found HERE. Reach us at email@example.com to inquire about our CEO Personality Analytics service. If you wish to run a query on a particular CEO, send us an email at the above address and be sure to include CEO name and company ticker symbol.
Here’s a teaser:
Elon Musk’s behavior over the past several months is simply Elon being Elon. It’s baked into his personality.
The S&P 500 Information Technology (TKR: S5INFT) returned 6.6% on a Weighted basis over the same period.
The Powershares S&P 500® Equal Weight Technology ETF (TKR: RYT) returned 2.2% on an Unweighted basis over the same period.
Stay tuned for more as we plan to productize our IP in the coming months as an active investment product.
The three Leadership qualities that matter most (CEO or otherwise): 1.) Have a Point-of-View: It is essential to have a point-of-view. Right or wrong time will tell. For example, if a Board of Directors is looking to fill a CEO role, a CEO candidate ought to have a point-of-view in terms of a broad strategy…
I’m puzzled by the mess that is GE. The Company recently removed former CEO John Flannery after only 14 months at the helm only to replace him with a Board member (Larry Culp). I was a fan of Flannery’s effort to decentralize operations and to divest non-strategic businesses. However, I did not agree with all…
“CEO Tenure Is Getting Shorter..” the Wall Street Journal writes. Research indicates that the optimal tenure is 4.8 years. Median CEO tenure at large cap companies was five years in 2017, one year less than the median in 2013 (Equilar). To quote the article, “Xueming Luo, professor at Temple University’s Fox School of Business and…
The CEORater Technology Founder CEO Index outperformed its peer group Year-to-Date through September 18th 2018.
The CEORater Technology Founder CEO Index returned 32.3% and 28.5% on a Weighted and Unweighted Stock Price Return basis respectively (click here for detail) during the January 2nd 2018 – September 18th 2018 period.
The S&P 500 Information Technology (TKR: S5INFT) returned 16.0% on a Weighted basis over the same period.
The Powershares S&P 500® Equal Weight Technology ETF (TKR: RYT) returned 16.6% on an Unweighted basis over the same period.