Tag: Institutional Investors

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

 

Share Your Story with Us

Share Your Story with Us

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 jmaietta@ceorater.com. Thanks for reading!

 

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CEORater Technology Founder CEO Index Outperforms in a Turbulent Market

CEORater Technology Founder CEO Index Outperforms in a Turbulent Market

The CEORater Technology Founder CEO Index returned 7.3% and 7.4% on a Weighted and Unweighted Stock Price Return basis respectively (click here for detail) during the January 2nd 2018 – October 26th 2018 period.

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.

CEOs Must Be Intellectually Engaged to Remain in the Chair<span class="badge-status" style="background:red">Premium</span> 

CEOs Must Be Intellectually Engaged to Remain in the ChairPremium 

“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…

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Don’t Believe The Hype

Don’t Believe The Hype

Cryptocurrency firms fell from grace (Chain and Lightyear merged to form Interstellar) as valuations and expectations got too far ahead of themselves for both the various “coin” firms as well as for blockchain – the distributed database technology that enables digital currency transactions. We are long-term bullish on each – particularly blockchain.

The crypto space isn’t the only sector that grew overheated as reality has set in to the autonomous vehicle space. Apparently robot cars won’t be shuttling all of humanity to and fro by 2025. We expect that autonomous vehicle startups will suffer a materially adverse impact to their respective valuations.

The two technology hype scenarios got us thinking about previous technology hype cycles. Thus, we created the TEK2day, CEORater “Technology Hype Curve” to visually represent an all too familiar pattern as it relates to hyping new technologies. Click HERE to download the Technology Hype Curve graphic.

The Road Less Traveled: Opportunity Cost and Shareholder Activism<span class="badge-status" style="background:red">Premium</span> 

The Road Less Traveled: Opportunity Cost and Shareholder ActivismPremium 

Opportunity Cost for Active Managers Is High Institutional investors typically contemplate opportunity cost within the context of portfolio returns, individual stock returns and ROIC. What however is the opportunity cost associated with pursuing a broken business model versus correcting course? The capital markets are filled with smart people and smart machines. It is more difficult than ever…

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Founder CEOs: Creators vs. Builders<span class="badge-status" style="background:red">Premium</span> 

Founder CEOs: Creators vs. BuildersPremium 

Every founder CEO begins as a “creator”. Not every founder CEO graduates from “creator” to “builder”.  Creators eventually self-implode (Elon Musk, Tesla and Travis Kalanick, Uber) whereas other founders are able to scale over the long-term. For example, Microsoft founder Bill Gates and Amazon’s Jeff Bezos are builders (We provide a list of Builder CEOs…

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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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CEORater Technology Founder CEO Index Remains Undefeated

CEORater Technology Founder CEO Index Remains Undefeated

We created the CEORater Technology Founder CEO Index in 2017 to illustrate our strong belief that founder CEOs are better qualified to lead Technology companies than are “hired” CEOs/ professional managers. The CEORater Index remains undefeated through July 13th 2018.

The CEORater Technology Founder CEO Index returned 24.7% and 22.8% on a Weighted and Unweighted Return basis respectively (click here for detail) during the January 2nd 2018 – July 13th 2018 period.

The S&P 500 Information Technology (TKR: S5INFT) returned 13.7% on a Weighted basis over the same period.

The Powershares S&P 500® Equal Weight Technology ETF (TKR: RYT) returned 14.5% on an Unweighted basis over the same period.