tag:blogger.com,1999:blog-2884145695631515902024-03-13T23:24:41.883-07:00SMB ForumRosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.comBlogger28125tag:blogger.com,1999:blog-288414569563151590.post-28556842830630381422014-01-24T23:22:00.003-08:002014-01-24T23:23:33.252-08:00Rosetta Stone – Bad Economics and Unintelligent Marketing<br />
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<br />RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com0tag:blogger.com,1999:blog-288414569563151590.post-39191251506518899752013-03-03T13:38:00.000-08:002013-03-03T13:42:06.538-08:00“The only useful financial innovation is the ATM.” I couldn’t disagree more.<br />
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<span style="font-family: Arial, Helvetica, sans-serif;">The most
recent financial crisis spurred cynicism and skepticism regarding financial
innovation. <b>Paul Volcker, the former Fed
chairman, in an interview said that the only useful financial innovation he can
think of is the ATM. </b> Many people
believe the financial crisis was caused by Wall Street, thus picturing all
financiers with big horns and devilish appetite to dominate the world without
any positive contribution to society.<o:p></o:p></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;"><b>I couldn’t
disagree more.</b><o:p></o:p></span><br />
<span style="font-family: Arial, Helvetica, sans-serif;"><b><br /></b></span></div>
<div style="background: white; margin-bottom: 6.0pt; margin-left: 0in; margin-right: 0in; margin-top: 4.8pt; mso-line-height-alt: 9.6pt;">
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 11.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-theme-font: minor-latin;">In
times of crisis, we become shortsighted and we wipe out everything rational from
our minds and focus on finding a scapegoat to blame. If it is true that financial innovation is
the source of all evil, causing bubbles and crashes, then if we go back in time
when financial systems did not exist, it is logical to expect to see no
bubbles. However, history proves us
wrong. <b>The most famous one of all is the
tulip bubble of 17th century in Netherlands which had nothing to do with
financial markets, but everything to do with human insatiable appetite to
profit from pure speculation.</b> At the
peak of the tulip mania, a single tulip bulb sold for 10 times the annual income
of a laborer. When the bubble finally collapsed, many men lost their fortunes
overnight. <o:p></o:p></span><br />
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 11.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-theme-font: minor-latin;"><br /></span></div>
<div style="background: white; margin-bottom: 6.0pt; margin-left: 0in; margin-right: 0in; margin-top: 4.8pt; mso-line-height-alt: 9.6pt;">
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 11.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-theme-font: minor-latin;">We
do not need to go that far back in history to find more examples of crises unrelated
to financial markets. Over 30 million
people died of starvation in the Chinese experiment to collectivize
farming. <b>Chairman Moa did not rely on
financial markets to starve millions of people to death.</b><o:p></o:p></span><br />
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 11.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-theme-font: minor-latin;"><b><br /></b></span></div>
<div style="background: white; margin-bottom: 6.0pt; margin-left: 0in; margin-right: 0in; margin-top: 4.8pt; mso-line-height-alt: 9.6pt;">
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 11.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-theme-font: minor-latin;">Post
the financial crisis, support for capitalism has been falling all over the
world. <b>However, capitalism is not a
static phenomenon. It is dynamic and it
is constantly being updated through innovation. </b> Without innovation, capitalism will wither
and die. Financial innovation allowed an
average person to become a home owner.
Today, that innovation continues to bring up new ways to allow
capitalism to achieve society’s goals. Three such examples are: (1) The Benefit
Corporation, (2) Crowd Funding, and (3) The Social Impact Bond.<o:p></o:p></span><br />
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 11.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-theme-font: minor-latin;"><br /></span></div>
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<span style="font-family: Arial, Helvetica, sans-serif; font-size: 11.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-theme-font: minor-latin;"><b>The
Benefit Corporation</b> is an entity that combines charity with profit maximizing
motive. It is a new class of corporation
which <b>has a social mission in addition to maximizing profits for its
shareholders. </b>This innovation gave birth
to Grower’s Secret, a fertilizer company, which has the mission to restore the health
of our oceans caused by fertilizers washing into the waters.<o:p></o:p></span><br />
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 11.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-theme-font: minor-latin;"><br /></span></div>
<div style="background: white; margin-bottom: 6.0pt; margin-left: 0in; margin-right: 0in; margin-top: 4.8pt; mso-line-height-alt: 9.6pt;">
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 11.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-theme-font: minor-latin;"><b>Crowdfunding
</b>remains my favorite recent innovation. T<b>he
basic concept is that it allows people who believe in an idea to fund entrepreneurs
who want to make that idea reality. </b> Next
time you said “I wish I had a robot who answered all my work emails” you’d be
able to check on a crowdfunding platform if an MIT geek has figured out how to
make that happen – and you can invest in his idea and become a
shareholder. C<b>rowdfunding is used to support not only
for-profit-business ventures, but also for civic projects, disaster relief,
political campaigns, and to support artists by fans. An example of such platform is Wefunder (<a href="http://www.wefunder.com/">www.wefunder.com</a>) </b>, which helps crowd
investors purchase stock for as little as $100 in the most promising new
businesses around the country. On the other side, it helps startups raise funds
from their most passionate users who provide product feedback, marketing
evangelism, and business connections. <o:p></o:p></span><br />
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 11.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-theme-font: minor-latin;"><br /></span></div>
<div style="background: white; margin-bottom: 6.0pt; margin-left: 0in; margin-right: 0in; margin-top: 4.8pt; mso-line-height-alt: 9.6pt;">
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 11.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-theme-font: minor-latin;">The
third is the <b>Social Impact Bond.</b> It is a bond in the traditional sense,
however, <b>repayment to investors is contingent on the achievement of specified
social outcomes</b>. The idea is to let a
free enterprise solve a social problem. One example is the social impact bond issued
by the U.K. Ministry of Justice to finance a group of activists that they hoped
would help solve the recidivism problem of the U.K. prison system. They raised £5 million from social investors
who would make a profit only if the recidivism problem was mitigated as defined
by the bond contract. In the U.S. MA
and NYC are experimenting with social impact bonds and interest in this type of
funding is spreading across the country.<o:p></o:p></span><br />
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 11.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-theme-font: minor-latin;"><br /></span></div>
<div style="background: white; margin-bottom: 6.0pt; margin-left: 0in; margin-right: 0in; margin-top: 4.8pt; mso-line-height-alt: 9.6pt;">
<span style="font-family: Arial, Helvetica, sans-serif; font-size: 11.0pt; mso-bidi-font-family: "Times New Roman"; mso-bidi-theme-font: minor-bidi; mso-fareast-font-family: Calibri; mso-fareast-theme-font: minor-latin;">While
I do agree financial reform is necessary, we should not blame all our miseries
on financial markets, and we should not understate the great benefits of
financial innovation. If we describe
humans as a collection of emotions and impulses – then wise regulation needs to
address to restrain the animal spirits in us and help activate the circuits in
our brains that will limit our tendencies for fraud, mismanagement and
unethical behavior. However, we should
allow for innovation to continue to spur economic growth. After all, <b>bubbles are caused by investors’
animal spirits</b>; innovation simply provides more tools to our animal spirits to
act irrationally and create bubbles. <b>With our without financial markets, human
nature will find ways to create crises.</b> <b>On
the other hand, financial innovation can retool capitalism to solve world
problems.</b><o:p></o:p></span></div>
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RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com0tag:blogger.com,1999:blog-288414569563151590.post-66458368442368268082012-03-06T20:00:00.002-08:002012-03-06T21:14:54.449-08:00How did Apple get away with buying the iPad trademark for only $55,000?<span style="color: #656565; font-family: Georgia, "Times New Roman", serif; line-height: 145%; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";">Recent news developments in the iPad trademark case reveals that A<b>pple only paid $55,000 for the rights to use the iPad name in mainland China.</b><span style="mso-spacerun: yes;"> </span>While these rights are being contested by Proview, the company owning the name, I am puzzled by the valuation.</span><span style="font-family: Georgia, "Times New Roman", serif;"><br />
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<div class="MsoNormal" style="line-height: 145%; margin: 0in 0in 7.5pt; mso-margin-top-alt: auto;"><span style="color: #656565; line-height: 145%; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";"><span style="font-family: Georgia, "Times New Roman", serif;">Typically, trademark is valued by the premium price charged for a product over that of its competitors.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span>It is estimated that Apple sold more than 500,000 iPads in China this past quarter alone (not counting the gray market sales - source:computerworld.com).<span style="mso-spacerun: yes;"> </span>Assuming a conservative price premium of $200 (iPad’s average price in China is $900) that equates to at least $100 Million in premium in one quarter alone or $400 Million in a year.<span style="mso-spacerun: yes;"> </span>While more assumptions are needed <b>to calculate a true trademark value, a rough estimate will put the true value closer to the $2 billion asked by Proview than the price tag of $55,000 paid by Apple.</b></span></span><span style="font-family: Georgia, "Times New Roman", serif;"><br />
</span></div><div class="MsoNormal" style="line-height: 145%; margin: 0in 0in 7.5pt; mso-margin-top-alt: auto;"><span style="color: #656565; line-height: 145%; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";"><span style="font-family: Georgia, "Times New Roman", serif;">It may very likely be that Proview got the worst end of the deal, however, there is typically no legal ramification for asking too low of a price when both parties acted in good faith.<span style="mso-spacerun: yes;"> </span>However, Proview is challenging Apple on the validity of the licensing agreement - whether Proview’s subsidiary, which signed the deal, had the contractual rights to do so.</span></span><br />
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</div><div class="MsoNormal" style="line-height: 145%; margin: 0in 0in 7.5pt; mso-margin-top-alt: auto;"><span style="font-family: Georgia, "Times New Roman", serif;"><b><span style="color: #656565; line-height: 145%; mso-fareast-font-family: "Times New Roman";">How did Apple get away by paying so little for the deal?</span></b><span style="color: #656565; line-height: 145%; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";"><span style="mso-spacerun: yes;"> </span>Well, Apple never approached Proview. Proview, when signing the deal, had no knowledge who the ultimate beneficiary was. <b>Apple set up a special purpose company - <span style="mso-spacerun: yes;"> </span>Application Development Ltd (IPADL) – to negotiate the deal on its behalf without revealing to Proview Apple’s identity.</b><span style="mso-spacerun: yes;"> </span><b>This move is not unusual for a company when the mere fact of the deal will signal the market about its upcoming strategic moves and will threaten its competitive advantage.<span style="mso-spacerun: yes;"> </span></b>On another hand, it will help the negotiating terms when the two parties are on uneven grounds – that is when each party values the deal differently.<span style="mso-spacerun: yes;"> </span>In this case, <b>Proview’s blindness to Apple’s identity drove the deal valuation based on Proview’s prospects of monetizing the iPad name – hence, one can argue that without Apple’s marketing prowess, the iPad trademark would have been worth only $55,000.<span style="mso-spacerun: yes;"> </span>That is the economic value of the trademark to Proview.</b><span style="mso-spacerun: yes;"> </span>Had Proview known of Apple’s identity, it would have been bid up the deal to extract the economic value created by Apple.</span></span><br />
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</span><br />
<span style="font-family: Georgia, "Times New Roman", serif;"></span></div><div class="MsoNormal" style="line-height: 145%; margin: 0in 0in 7.5pt; mso-margin-top-alt: auto;"><span style="font-family: Georgia, "Times New Roman", serif;"><b><span style="color: #656565; line-height: 145%; mso-fareast-font-family: "Times New Roman";">There is nothing illegal or unethical in Apple keeping Proview in the dark about its identity.<span style="mso-spacerun: yes;"> </span>The deal should have reflected the fair economic value of the trademark, and not the strategic value to Apple.</span></b><span style="color: #656565; line-height: 145%; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";"><span style="mso-spacerun: yes;"> </span>A fresh way to assess the fair value is to ask “but-for the Apple deal, how else could Proview have monetized the trademark and how much value would the alternative have created?”<span style="mso-spacerun: yes;"> </span></span></span><span style="font-family: Georgia, "Times New Roman", serif;"><br />
</span></div><div class="MsoNormal" style="line-height: 145%; margin: 0in 0in 7.5pt; mso-margin-top-alt: auto;"><span style="color: #656565; line-height: 145%; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";"><span style="font-family: Georgia, "Times New Roman", serif;">If the courts find the contract not to be valid, then the parties have to agree on what the terms of the deal should have been.<span style="mso-spacerun: yes;"> </span>Proview seems to be inclined to ask $2 billion, the trademark value created by Apple <b>– and Apple will have to argue that the fair economic value is perhaps closer to $55,000 and that Proview should not be entitled to extort value created by Apple.</b></span></span></div><div class="MsoNormal" style="line-height: 145%; margin: 0in 0in 7.5pt; mso-margin-top-alt: auto;"><span style="color: #656565; line-height: 145%; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";"><span style="font-family: Georgia, "Times New Roman", serif;">Of course, Apple’s argument may only prevail if the courts determine the parties acted in good faith. When ‘bad faith’ is assumed, not only Apply may have to pay any profits made on its iPad sales in China, but also punitive damages.</span></span><br />
<span style="color: #656565; font-family: Georgia;"></span><span style="font-family: Georgia, "Times New Roman", serif;"><br />
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<span style="font-family: Georgia, "Times New Roman", serif;"></span></div><div class="MsoNormal" style="line-height: 145%; margin: 0in 0in 7.5pt; mso-margin-top-alt: auto;"><span style="color: #656565; line-height: 145%; mso-bidi-font-weight: bold; mso-fareast-font-family: "Times New Roman";"><span style="font-family: Georgia, "Times New Roman", serif;">While Apple’s trademark dispute brings up interesting valuation dilemma, it also tells us the benefit of setting up special purpose entity to negotiate licensing deals without revealing the company’s identity.<span style="mso-spacerun: yes;"> </span><b>Next time you are considering licensing IP rights, consult your lawyer about the benefit of special purpose vehicles</b>.<o:p></o:p></span></span></div>RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com0tag:blogger.com,1999:blog-288414569563151590.post-22591282176172085232012-03-02T02:58:00.003-08:002012-03-06T21:24:06.412-08:00Is Facebook overvalued at $100 billion? The short answer is Yes.<span style="font-family: Georgia, "Times New Roman", serif;">While Facebook’s (“FB”) valuation has attracted a great deal of attention, it remains a mind twisting mystery how we continue to overvalue companies when obvious warning signs exist.<span style="mso-spacerun: yes;"> </span></span><br />
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<span style="font-family: Georgia, "Times New Roman", serif;"><span style="mso-spacerun: yes;"></span></span><div class="MsoNormal" style="margin: 0in 0in 10pt;"><span style="font-family: Georgia, "Times New Roman", serif;">A typical valuation is based on a combination of market value comparisons of similar companies and the company’s potential to generate future earnings.<span style="mso-spacerun: yes;"> </span>It requires sophisticated spreadsheets with projections and value comparisons to arrive at what may seemingly be a reasonable price to pay.<span style="mso-spacerun: yes;"> </span>But, when the assumptions used become outrageously flawed, so does the so-called “vetted” and “reasonable” valuation.<span style="mso-spacerun: yes;"> </span>How many of us still remember the dot.com bubble of a decade earlier?<span style="mso-spacerun: yes;"> </span>As a valuation analyst, I actually did see those “vetted” valuations that priced companies at outrageous margins – all were done in fancy spreadsheets – but had one thing in common: outrageous assumptions.</span></div><br />
<div class="MsoNormal" style="margin: 0in 0in 10pt;"><span style="font-family: Georgia, "Times New Roman", serif;">Without getting deep into the spreadsheet assumptions, I will offer a few simplistic ways to assess Facebook’s valuation:</span><span style="font-family: Georgia, "Times New Roman", serif;"><br />
</span></div><div class="MsoListParagraphCxSpFirst" style="margin: 0in 0in 0pt 0.5in; mso-list: l0 level1 lfo1; text-indent: -0.25in;"><span style="font-family: Georgia, "Times New Roman", serif;"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">1.<span style="font-size-adjust: none; font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span>Look at the stock performance of RenRen (the Chinese Facebook) and FriendFinder (another social networking platform) since their IPOs less than a year ago<b style="mso-bidi-font-weight: normal;">.<span style="mso-spacerun: yes;"> </span>RenRen lost over 60% of its IPO price</b> in a few months and has been unable to recover since.<span style="mso-spacerun: yes;"> </span>On the other hand <b style="mso-bidi-font-weight: normal;">FriendFinder has lost over 80% of its value</b> and is now trading under $2 per share.</span><br />
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</span><span style="font-family: Georgia, "Times New Roman", serif;"> </span></div><div class="MsoListParagraphCxSpMiddle" style="margin: 0in 0in 0pt 0.5in; mso-list: l0 level1 lfo1; text-indent: -0.25in;"><span style="font-family: Georgia, "Times New Roman", serif;"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">2.<span style="font-size-adjust: none; font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span>Calculate the value per active user across social platform companies.<span style="mso-spacerun: yes;"> </span>For example<b style="mso-bidi-font-weight: normal;">, LinkedIn with 135M users is trading at a value of $63 per use</b>r, <b style="mso-bidi-font-weight: normal;">whereas FB</b> with 845M users and $100B valuation is <b style="mso-bidi-font-weight: normal;">valued at $118 per user</b>.<span style="mso-spacerun: yes;"> </span><o:p> </o:p></span><br />
<br />
<span style="font-family: Georgia, "Times New Roman", serif;"></span></div><div class="MsoListParagraphCxSpMiddle" style="margin: 0in 0in 0pt 0.5in; mso-list: l0 level1 lfo1; text-indent: -0.25in;"><span style="font-family: Georgia, "Times New Roman", serif;"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">3.<span style="font-size-adjust: none; font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span>Compare FB to Google.<span style="mso-spacerun: yes;"> </span>Google’s market cap is $200B and with revenues of $38B, that makes $<b style="mso-bidi-font-weight: normal;">1 of Google revenue worth $5.25 to an investor</b>.<span style="mso-spacerun: yes;"> </span>While FB at $100B in valuation and $3.8B in revenue <b style="mso-bidi-font-weight: normal;">makes $1 of FB revenue be worth $26 to an investor</b>.<span style="mso-spacerun: yes;"> </span>Granted that FB has potential for growth – however, <b style="mso-bidi-font-weight: normal;">the inherent assumption is that FB has to grow organically at least 20% every year for the next 10 years to justify its valuation.</b><span style="mso-spacerun: yes;"> </span>While 20% may not be high for an early stage company, I have never seen a company do so for 10 years straight.</span><br />
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</span></div><div class="MsoListParagraphCxSpMiddle" style="margin: 0in 0in 0pt 0.5in; mso-list: l0 level1 lfo1; text-indent: -0.25in;"><span style="font-family: Georgia, "Times New Roman", serif;"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">4.<span style="font-size-adjust: none; font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><b style="mso-bidi-font-weight: normal;">Assess the disruption factor.</b><span style="mso-spacerun: yes;"> </span>Given the unproven nature of the social networking platform as a revenue hotbed, a fresh way to assess its potential value is by asking a simple question <b style="mso-bidi-font-weight: normal;">– “If FB ceases to exist, how will that impact consumers of the company vs. if Google ceases to exist?”</b><span style="mso-spacerun: yes;"> </span>Reframing the valuation paradox in terms of disruption factor can shed light into the potential value.<span style="mso-spacerun: yes;"> </span>Since a fundamental tenet of valuation is value comparisons across competitors, in an unproven industry it may be hard to do so – however, we can get a glimpse of the truth by assessing the disruption factor.<span style="mso-spacerun: yes;"> </span>If you think Google will disrupt your life far more than Facebook, then Google has more intrinsic value than FB.<span style="mso-spacerun: yes;"> </span>Over the long term, valuations tend to converge to company’s intrinsic value and therefore, it can be a good yardstick to measure current valuations against.<span style="mso-spacerun: yes;"> </span>With this rationale, each <strong>$1 of FB revenue will be worth LESS to an investor than each $1 of Google revenue in the long-term</strong>.<span style="mso-spacerun: yes;"> </span>Since today it is the opposite, <strong>this phenomena will cause FB’s market cap to come down over time. </strong></span></div><br />
<div class="MsoListParagraphCxSpLast" style="margin: 0in 0in 10pt 0.5in; mso-list: l0 level1 lfo1; text-indent: -0.25in;"><span style="font-family: Georgia, "Times New Roman", serif;"><span style="mso-bidi-font-family: Calibri; mso-bidi-theme-font: minor-latin;"><span style="mso-list: Ignore;">5.<span style="font-size-adjust: none; font-size: 7pt; font-stretch: normal; font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><b style="mso-bidi-font-weight: normal;">Review recent valuations of FB.</b> Just a year ago, FB was valued at $50B and only 2 years ago at $10B.<span style="mso-spacerun: yes;"> </span>While FB’s successful monetization of its user base can explain the valuation change since 2 years ago, however, I can hardly recall anything significant changing in the past 12 months to warrant doubling its value.<span style="mso-spacerun: yes;"> </span>This may be indicative of the IPO mania driving its valuation to the roof.</span><span style="font-family: Georgia, "Times New Roman", serif;"><br />
</span></div><div class="MsoNormal" style="margin: 0in 0in 10pt;"><span style="font-family: Georgia, "Times New Roman", serif;">While any of these factors in isolation will not be sufficient to draw any conclusions, there are too many warning signs to be ignored.<span style="mso-spacerun: yes;"> </span>Sometimes the sophisticated spreadsheets can miss the target when the assumptions go unchecked. <span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></div>RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com0tag:blogger.com,1999:blog-288414569563151590.post-2950195471855808812012-01-07T05:53:00.001-08:002012-03-06T21:17:36.911-08:00How to catch a liar? Interviewing tips to identify a fraudster or a lying friend<span style="font-family: Georgia, "Times New Roman", serif;">You suspect one of your employees has been embezzling money from your company, but don’t have the funds to hire a fraud investigator?<span style="mso-spacerun: yes;"> </span>These tips can help you sniff out the fraudster by interviewing the suspected employees on the details of the events.<span style="mso-spacerun: yes;"> </span>Most fraudsters have their lies memorized to cover their tracks, but if you can identify when they are lying, you can employ tactics that will help you win a confession.</span><br />
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<div class="MsoNormal" style="margin: 0in 0in 10pt;"><span style="font-family: Georgia, "Times New Roman", serif;">Well, these tactics are not isolated to catching a fraudster.<span style="mso-spacerun: yes;"> </span>They are universally applied to any situation, whether a lying friend or a lying criminal, when we have something to hide.</span><span style="font-family: Georgia, "Times New Roman", serif;"><br />
</span></div><div class="MsoNormal" style="margin: 0in 0in 10pt;"><span style="font-family: Georgia, "Times New Roman", serif;">The TV Show “Lie to Me” has raised awareness to gesture based cues of liars, such as, avoiding eye contact, increased breathing rate, touching of face, or asymmetrical facial expressions mostly of the lip, etc. However,<strong> in this blog I will offer tips based on text or language analysis which are easier to spot.<span style="mso-spacerun: yes;"> </span></strong>Here are a few tips:</span><span style="font-family: Georgia, "Times New Roman", serif;"><br />
</span></div><div class="MsoNormal" style="margin: 0in 0in 10pt;"><span style="font-family: Georgia, "Times New Roman", serif;"><b style="mso-bidi-font-weight: normal;">The lack of use of the word “I”:</b><span style="mso-spacerun: yes;"> </span>When covering up a misdeed, a liar will avoid the pronoun “I” and instead revert to passive sentences, such as “<i style="mso-bidi-font-style: normal;">The safe was left unlocked</i>” instead of “I <i style="mso-bidi-font-style: normal;">left the safe unlocked</i>” or the use of “you” instead of “I”…”<i style="mso-bidi-font-style: normal;">You try to lock the safe every night, but sometimes when you are busy you just forget to do it.”</i></span><span style="font-family: Georgia, "Times New Roman", serif;"><br />
</span></div><div class="MsoNormal" style="margin: 0in 0in 10pt;"><span style="font-family: Georgia, "Times New Roman", serif;"><b style="mso-bidi-font-weight: normal;">Switching between past tense and present tense</b>:<span style="mso-spacerun: yes;"> </span>When describing past events, deceptive people refer to past events as if the events were occurring in the present.<span style="mso-spacerun: yes;"> <strong> </strong></span><strong>Describing past events in the present tense suggests that he is rehearsing the events in his mind.</strong><span style="mso-spacerun: yes;"> </span>So, paying close attention to when the tense improperly changes to present tense can be a cue of the untruthful statement.<span style="mso-spacerun: yes;"> </span>An example is “Last night<i style="mso-bidi-font-style: normal;">, I locked</i> the safe and when I went out the door, a guy <i style="mso-bidi-font-style: normal;">jumps </i>in front of me and <i style="mso-bidi-font-style: normal;">puts</i> a gun to me …”<span style="mso-spacerun: yes;"> </span></span><span style="font-family: Georgia, "Times New Roman", serif;"><br />
</span></div><div class="MsoNormal" style="margin: 0in 0in 10pt;"><span style="font-family: Georgia, "Times New Roman", serif;"><b style="mso-bidi-font-weight: normal;">Answering a question with a question:</b><span style="mso-spacerun: yes;"> </span>Even fraudsters want to avoid lying, when possible.<span style="mso-spacerun: yes;"> </span>A typical response of a liar to this question “<i style="mso-bidi-font-style: normal;">Peter, if money is missing who do you think might have taken it?</i>” would be “<i style="mso-bidi-font-style: normal;">Why would somebody take the money?</i>”, whereas a truthful person’s typical response would be “<b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;">I </i></b><i style="mso-bidi-font-style: normal;">did not take it.”</i></span><span style="font-family: Georgia, "Times New Roman", serif;"><br />
</span></div><div class="MsoNormal" style="margin: 0in 0in 10pt;"><span style="font-family: Georgia, "Times New Roman", serif;"><b style="mso-bidi-font-weight: normal;">Use of qualifiers:</b><span style="mso-spacerun: yes;"> </span>Vague statements and expressions of uncertainty allow a deceptive person leeway to modify his or her assertions at a later date.<span style="mso-spacerun: yes;"> </span>Therefore, liars have a natural tendency to overuse “sort of”, “maybe”, “might”, “approximately” among a long list of qualifiers, whereas truthful people tend to give more factual and certain answers.</span><span style="font-family: Georgia, "Times New Roman", serif;"><br />
</span></div><div class="MsoNormal" style="margin: 0in 0in 10pt;"><span style="font-family: Georgia, "Times New Roman", serif;"><b style="mso-bidi-font-weight: normal;">Average length of sentences used:</b><span style="mso-spacerun: yes;"> </span>An average person uses 10-15 words per sentence to describe truthful facts.<span style="mso-spacerun: yes;"> </span>When lying, there is a tendency to either omit details or exaggerate events thus excessively shortening or lengthening the average sentence length of a response. </span><span style="font-family: Georgia, "Times New Roman", serif;"><br />
</span></div><div class="MsoNormal" style="margin: 0in 0in 10pt;"><span style="font-family: Georgia, "Times New Roman", serif;">While deception cues should not be analyzed in isolation, as many factors of culture or personal habits may influence how a person behaves, it is advisable to look at them holistically.<span style="mso-spacerun: yes;"> </span>The more cues you gather, the higher probability is that your subject is lying.<span style="mso-spacerun: yes;"> </span>So, how can you get a lying person fall into his own trap?</span><span style="font-family: Georgia, "Times New Roman", serif;"><br />
</span></div><div class="MsoNormal" style="margin: 0in 0in 10pt;"><span style="font-family: Georgia, "Times New Roman", serif;">The following tips may help you:</span><span style="font-family: Georgia, "Times New Roman", serif;"><br />
</span></div><div class="MsoNormal" style="margin: 0in 0in 10pt;"><span style="font-family: Georgia, "Times New Roman", serif;"><b style="mso-bidi-font-weight: normal;">Ask questions in reverse chronological order:<span style="mso-spacerun: yes;"> </span></b>People, who fabricate a story, need to memorize the sequence of events they invent.<span style="mso-spacerun: yes;"> <strong> </strong></span><strong>Recalling events in reverse chronology, when the event is experienced, tends to be far easier than recalling it when it’s just a cognitive exercise.</strong><span style="mso-spacerun: yes;"><strong> </strong> </span>How many of us can count the alphabet backwards, but have an easier time to tell about our day starting from dinner moving to breakfast?</span><span style="font-family: Georgia, "Times New Roman", serif;"><br />
</span></div><div class="MsoNormal" style="margin: 0in 0in 10pt;"><span style="font-family: Georgia, "Times New Roman", serif;"><b style="mso-bidi-font-weight: normal;">Praise them for their misdeed: </b>The psychological reward of being praised lets the fraudster take claim of the action.<span style="mso-spacerun: yes;"> </span>Start with a sentence such as “I’m impressed that you went around the system…can you tell me what happened?” However, do not outrightly accuse them with such words as “you took the money.”</span><span style="font-family: Georgia, "Times New Roman", serif;"><br />
</span></div><div class="MsoNormal" style="margin: 0in 0in 10pt;"><span style="font-family: Georgia, "Times New Roman", serif;"><b style="mso-bidi-font-weight: normal;">Interject with surprise questions: </b><span style="mso-spacerun: yes;"> </span>Throwing them off-course can be an effective way to digress their train of thought and cause extra stress on the brain to keep up with the lies. This technique is widely used on TV shows because it is simple to use, yet truly effective.<span style="mso-spacerun: yes;"> </span></span><span style="font-family: Georgia, "Times New Roman", serif;"><br />
</span></div><div class="MsoNormal" style="margin: 0in 0in 10pt;"><span style="font-family: Georgia, "Times New Roman", serif;">Once you become confident which employee has been stealing from you, you can plan to take action.<span style="mso-spacerun: yes;"> </span>Read </span><a href="http://smbizconsult.blogspot.com/2011/01/you-caught-employee-stealing-from.html" target="_blank"><span style="font-family: Georgia, "Times New Roman", serif;">“You caught an employee stealing from you…Now what”</span></a><span style="font-family: Georgia, "Times New Roman", serif;"> for next steps.</span></div>RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com0tag:blogger.com,1999:blog-288414569563151590.post-26003887480663697692011-12-06T06:53:00.001-08:002012-03-06T21:19:47.300-08:00Why we have horrible bosses? … Bayesian economics can help leaders avoid the pitfalls of horrible bosses!<span style="font-family: Georgia, "Times New Roman", serif;">Many of us share the frustration of ‘horrible bosses’…and as a valuations expert, I find ‘horrible bosses’ inconsistent with the ‘profit maximizing’ paradigm of companies…why<strong> would a company nurture a culture of ‘horrible bosses’?</strong> In this blog I try to explain the evolution of the ‘horrible bosses’ phenomena and how senior leaders are clueless.</span><br />
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<span style="font-family: Georgia, "Times New Roman", serif;">Based on my research, inertia is a main contributor to the creation of a company culture that creates its own demise.<strong> Leaders lead under the faulty assumptions of growth even when the company stops growing. Inertia keeps leadership from accepting the new paradigm of maturity.</strong></span><br />
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<span style="font-family: Georgia, "Times New Roman", serif;">There is nothing more rewarding to be part of an organically growing organization where employee opportunities for growth and to be challenged are abundant. That environment attracts top talent and leadership has little to worry andhas little need to invest in maintaining top talent.</span><br />
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<strong><span style="font-family: Georgia, "Times New Roman", serif;">As organic growth begins to slow, the organization finds itself with a leadership team who grew up with the company during its growth phase and operates under outdated assumptions of growth.</span></strong><br />
<span style="font-family: Georgia, "Times New Roman", serif;">When interviewing senior leaders of companies with recent growth history, I found a common thread of outdated assumptions that they all fell into. Almost uninamously they said:</span><br />
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<span style="font-family: Georgia, "Times New Roman", serif;">1. We are not hierarchical</span><br />
<span style="font-family: Georgia, "Times New Roman", serif;">2. We are pure meritocracy </span><br />
<span style="font-family: Georgia, "Times New Roman", serif;">3. We have plenty of growth opportunities</span><br />
<span style="font-family: Georgia, "Times New Roman", serif;">4. We value diversity</span><br />
<span style="font-family: Georgia, "Times New Roman", serif;">5. We are listed as one of the top places to work</span><br />
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<span style="font-family: Georgia, "Times New Roman", serif;">What is unfortunate is that all these assumptions used to hold when today’s leaders were the new associates at the company. However, they fail to weigh in the new evidence. In fact, #5 blinds them further. </span><br />
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<span style="font-family: Georgia, "Times New Roman", serif;"><strong>Well, #5 is the most dangerous</strong> of all as it typically holds true for mature companies. But what changes from the organization’s early growth phase is how and why and by whom it was voted as the best place to work. In its early stage, employees who value growth and challenging opportunities are the ones tipping the scale on the “best place to work” ranking; and these employees tend to be the top talent that brings the company’s success. However, as growth slows down, the middle talent who is more likely to value “flexible” hours and “work from home” abilities far more than “ability to make an impact” tips the scale. <strong>Therefore, evidence from the average employee working there is weighed more heavily than from the top talent the company needs to build up its pipeline of new leaders.</strong></span><br />
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<span style="font-family: Georgia, "Times New Roman", serif;"> </span></strong><span style="font-family: Georgia, "Times New Roman", serif;"><strong>And, diversity falls prey to that as well for 2 reasons.</strong> As the company becomes more established, the stakes become higher to truly value diversity of opinions. <strong>Leaders will reward those who think and act like them.</strong> A lively example is when I heard a charismatic and Type “A” leader support the promotion of an associate with the remark <strong>“I think Jim is great and deserves a promotion! He takes a stand and defends it strongly even when he is very wrong; unlike Kim who is open to hearing different perspectives BUT does not hold her ground as strongly.”</strong></span><br />
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<span style="font-family: Georgia, "Times New Roman", serif;"><strong>Secondly, diversity falls prey to the slowness in growth and the failure of meritocracy based promotions.</strong> <strong>When promotions take 7 instead of 2 years, women lose the ground.</strong> As Sheryl Sandberg (Facebook COO) says “Women leave before they lead”; the longer women have to wait for the well deserved promotion the more likely they will be at-risk of leaving the promotion arena…well, women are the ones with the most child rearing responsibility…. (<em>Even Harvard Businss School recognized this pitfall in MBA recruiting when it used to require 5-6 years of pre-MBA experience and opened enrollment to students with no work experience – simply to accelerate women to leadership positions</em>)…and thus, the organization’s pipeline of leaders will begin to skew towards male dominance, risking to lose its truly diverse culture.</span><br />
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<span style="font-family: Georgia, "Times New Roman", serif;"><strong>Well the slowness of growth kicks meritocracy out the door. Technicalities become more important to filter down the promotion pipeline<em>. </em></strong><em>Promotion guidelines grow and thus it will be rather easy to find an unchecked box from that long list to hold back a truly deserving candidate.</em> Rather than “ability to manage and lead” being the primary criteria, the mature organization begins to generate leaders who are their mirror images (of personality and not of talent)...after all, Jim got the promotion even though he is opinionated and is often wrong compared to Kim – but he is loud and outspoken just like his boss.</span><br />
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<strong><span style="font-family: Georgia, "Times New Roman", serif;">Yet, when interviewing senior leaders I was shocked at their stronghold belief that their organizations are flat, meritocratic and diverse!!! Leaders may be the victim of the 80/20 rule where the average talent may be satisfied, but not the top 20 and most deserving talent. </span></strong><br />
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<span style="font-family: Georgia, "Times New Roman", serif;">How many of us have had bosses that we have questioned how did they get so far ahead? <strong>Well, when technicality overrules meritocracy and promotions begin to take longer and longer, the truly deserving talent leaves the scene and the average Joes rule the team. </strong></span><br />
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<span style="font-family: Georgia, "Times New Roman", serif;"><strong>Therefore, questioning their stronghold beliefs is necessary for leaders to resist the powerful pull of inertia. And, that is what Bayesian economics suggests.</strong> Bayes’s theorem addresses this issue: How should we modify our beliefs in the light of additional information? Bayesian asks three questions: </span><br />
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<span style="font-family: Georgia, "Times New Roman", serif;">1. How confident am I in the truth of my initial belief? </span><br />
<span style="font-family: Georgia, "Times New Roman", serif;">2. On the assumption that my original belief is true, how confident am I that the new evidence is accurate? </span><br />
<span style="font-family: Georgia, "Times New Roman", serif;">3. And whether or not my original belief is true, how confident am I that the new evidence is accurate?</span><br />
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<span style="font-family: Georgia, "Times New Roman", serif;">Leaders need to re-evaluate their apriori beliefs of meritocracy in light of evidence of company’s growth slowing down. They need to question the rise of unhappiness among top talent, and question whether true top talent is falling through the cracks or being recognized. And, if it is truly the top talent with morale issues, leaders need to alter their original hypotheses and develop new guidelines for promoting a truly meritocratic culture away from technicalities. Well, the recipe for such culture is not simple and companies need to devote resources to identifying what works best for them. However, ignoring the issue and still operating blindly under old beliefs can be suicidal for the company. After all, leaders are known to act only when employee morals hits bottom low.</span><br />
<strong><span style="font-family: Georgia, "Times New Roman", serif;">The one advice to our leaders is that if you are not thinking like a Bayesian, perhaps you should be.</span></strong>RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com0tag:blogger.com,1999:blog-288414569563151590.post-67664544100497529052011-11-29T06:21:00.000-08:002012-01-07T05:55:10.071-08:00The education bubble…perhaps we need less investment!As a recent MBA graduate and re-entrant to the workforce with a higher education, I could not help but question the value of higher education in the United States. <strong>What feared me the most is the uncanny similarities I found with the Mortgage Bubble. Both have asymmetry of risk tangled with government policy detaching it from free market forces, and a society with psychologically deep rooted beliefs on the merits of its value.</strong><br />
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Here’s a brief history of the student loan market that highlights the never ending cycle of ever increasing tuitions.<br />
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As banks withdrew from the student loan market, the Department of Education (ED) became the direct lender to students. Because the ED can borrow at low Treasury Bill rates, student loans at 7.9% interest rates became a hugely profitable business for the government - especially when the ED does not bear the risk of delinquencies.<br />
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As a result, maximum loan amount available to students continues to soar. <strong>As students can borrow more each year, schools have been raising tuition keeping up with the increase in loaned funds.</strong> In fact, according to ED statistic, college tuition increased from 6% of average household income in 1990 to 17% in 2010 – almost tripling! <br />
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<em>The effect of combining a government who profits from lending to students, colleges who benefit from raising tuitions and students who believe higher education is worth any price, is the creation of a reinforcing cycle of ever increasing student debt.</em><br />
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However, this cycle is detached from the reality of demand and supply.<strong> The flood of highly educated work force has increased the price of entry to the corporate world</strong> – <em>well, price is a misnomer since corporations are demanding graduate diplomas for jobs that can be performed by interns, yet the global competitive forces bar corporations from paying salaries commensurate with a rate of return on the education investment.</em> And hence, we have created an environment of defaults and delinquencies. According to another statistic only 37% of the 2005 borrowers have made timely payments.<br />
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As with the mortgage bubble, the lending risk is absorbed by a third party other than the lender. In case of mortgages, it was the holders of the asset-backed-securities and for education loans it is ultimately the taxpayer – as government is the lender. This asymmetry of risk creates a moral hazard<strong>. <em>The ED only reaps the benefits of the higher profits from ever increasing loans without the need to look at the risks of lending. Sounds familiar?</em></strong><br />
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<strong>That moral hazard created easy money for the housing industry</strong> and thus sellers could sell a house at a price based on how much a borrower can borrow – completely detached from the fundamentals of the borrowers’ ability to pay based on his/her earnings. <strong>It is the identical pattern in the education industry where tuitions are increasing according to the availability of funds detached from the earnings potential that education investment will generate. </strong><br />
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And of course all this is possible by creating a culture that values the asset beyond rational limits. The idea of the American Dream made the average American value its investment in the house more than the reality of market forces. After all, the Germans and the French rent their homes. <em><strong>The same cultural belief in the value of higher education has made the American public ignore the forces of demand and supply and the market equilibrium price of education - whereas global forces have kept the earning potential in check and return on education investment in the negative.</strong></em><br />
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However, when the education bubble bursts, the taxpayer will absorb all of the costs, unlike the mortgage crisis where some of the loss was absorbed by shareholders. And given that education loans, at $830 billion, have surpassed credit balances at $825 billion, we have more than the overpricing of education to worry about.<br />
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<strong>It’s perhaps that we do not need more investment in education to exacerbate this bubble further, but less.</strong> To compete in the global field, perhaps we need to set the price of education working backwards from the potential earnings it can generate in this global world. <strong>Perhaps the woes of the American downfall is not that we score poorly in math, but that we pay too much to score poorly in math.</strong><em> After all, how many scientists do you know who work as business analysts rather than working on that next invention. Do we really need more scientists then?</em>RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com4tag:blogger.com,1999:blog-288414569563151590.post-21597832883192713142011-09-17T13:22:00.000-07:002013-09-12T18:45:57.914-07:005 Factors that increase the value of your patentPatent quality is key in driving valuation and defensibility in the courtroom. Although the subject matter (the essence of invention) itself is important, the quality of the patent application will drive a significant portion of the value. Factors, as simple as number of words, or citings influence your patent value, and therefore, it is crucial to read the following five factors when drafting your application.<br />
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<b>Disclosures </b>– The more thorough your patent disclosures are, the higher your patent will be valued at. Often, the mere <b>number of words </b>contained in patent specification and the number of figures described <b>will drive up valuation.</b> So, keep the words flowing.<br />
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<b>Claims – </b>The breadth and quality of the claims made, as measured by the number of words per claim, and the number of independent and dependant claims, influence the patent quality. <i>The more words and the more claims you have, the better your patent is deemed.</i> More surprisingly, the choice of words can enhance or detract from its value. <b>Words, such as “means” are regarded as limiting language, and if used in a patent application, it negatively impacts value.</b><br />
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<b>Inventors and Ownership –</b> Although the more inventors listed correlate with higher value, it is interesting to note that patents that are assigned tend to have higher valuations than patents owned by the inventor. Of course, the larger the entity they are assigned to, the better are their valuation prospects.<br />
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<b>Prior Art or Backward Citations –</b> The number of cited prior art references, and the average age of the references enhance value. Backward citations and number of claims have been related with the novelty of the patent, i.e. technological distance between the protected invention and the prior art.<br />
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<b>Forward Citations –</b> Although cannot be controlled at time of application, if you have a portfolio of patents, keep in mind that future citations of your already existing patents, enhance their economic value.<br />
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Read more about patents: <a href="http://patent%20quality%20is%20key%20in%20driving%20valuation%20and%20defensibility%20in%20the%20courtroom.%20%20although%20the%20subject%20matter%20%28the%20essence%20of%20invention%29%20itself%20is%20important%2C%20the%20quality%20of%20the%20patent%20application%20will%20drive%20a%20significant%20portion%20of%20the%20value.%20%20factors%2C%20as%20simple%20as%20number%20of%20words%2C%20or%20citings%20influence%20your%20patent%20value%2C%20and%20therefore%2C%20it%20is%20crucial%20to%20read%20the%20following%20five%20factors%20when%20drafting%20your%20application./">"When is it a good idea to patent your invention"</a> and "<a href="http://smbizconsult.blogspot.com/2010/07/get-patents-cheaply-and-dont-worry.html">Get patents cheaply and don't worry about quality."</a>RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com1tag:blogger.com,1999:blog-288414569563151590.post-38721491467799170702011-08-28T11:05:00.000-07:002011-08-28T11:05:26.850-07:00Valuation of Motorola patents – a deeper problem of the U.S. patent cultureThe ever increasing valuations in the mobile and telecommunications space signal a deep rooted problem of U.S. patent laws, and its litigious culture. Although some claim the “bubble is over” with Google’s recent acquisition of Motorola; the war is far from being over. However, in the short-term, an early stage start-up can ride the wave by improved valuations and larger venture pay-offs.<br />
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Those who believe that the bubble is over, miss out on some key factors driving the recent intellectual-property (IP) arms race in the smart phone industry. These believes cite that Google by acquiring Motorala, has put an end to the race of acquisition craze, because Google’s entrance to the smart phone marketplace will establish the much needed balance of power and will end the IP hoarding race. <b>It is partially true that patent acquisitions and valuations are driven by strategic factors; however, fending off litigation has been at its core.</b> <br />
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The basic principle to determine the value of a technology patent is how much it could allow a company to gain price elasticity and market share. When the industry witnesses a flurry of patent suits, <b>the value of a company’s market share will be highly correlated with how well it can protect itself against litigation liability.</b> Hence, the IP valuation and IP litigation become intertwined; <b>patents deriving their value not by how much value they create, <i>or strategic value</i>, but how much negative value (damages to pay in lawsuits) they can defend against, <i>or</i> <i>defensive value</i>.</b><br />
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The rise in litigation is highly due to the complex nature of smart phone technologies that connect different innovations both from computing and the mobile telephony, that have to be interoperable and work together. Google’s chief legal counsel, David Drummond states in one of his blogs a <b>smartphone “might involve as many as 250,000 (largely questionable) patent claims.” </b>Such patent complexity makes the smart phone industry a hot bed for litigation. Although, the slowing of the IP acquisition race may influence valuations, the industry will increase its IP litigation, thus driving up the defensive value of these patent portfolios. <br />
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Mr. Drummond is not alone in his assessment of these patents to be “questionable.” The USPTO office has been under attack for loosening up its standards on technology patents. The most famous attacks on the USPTO dates back to 1999 with Amazon’s 1-click patent, which is the technique of allowing customers to make online purchases with a single click. The 1-click patent application has been denied in Europe; while it has been widely contested in the U.S., it still stands as a valid patent and online companies have to pay Amazon for the right to use 1-click purchase technology. <b>Many of smart phone “patents” are claimed to be questionable. With a price tag of $1 million to challenge questionable patents for validity, many of them remain uncontested until they become involved in infringement lawsuits.</b><br />
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But, this is not the only cause. Apple, Miscrosoft, Nokia, Samsung have all used the International Trade Commission (ITC) to file their patent lawsuits, instead of filing in federal court. <b>Although ITC was formed to help companies find speedy resolutions to their claims, it has caused increased litigation by technology companies eager to capitalize on the speed and expertise of the specialized venue.</b> ITC specializes in patent litigation (85% of lawsuits filed at ITC are patent related), making it an attractive venue for the smart phone industry. And, with the lower cost of litigation and speedy resolution of claims, it has attracted lawsuits that the slow federal court system would have otherwise detracted. <br />
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More troubling is the size of patent damages awarded. <b>While the average patent award in Chinese courts is $25,000, in the U.S. it has risen to $12M, more than doubling in size since the last decade, although the award in the U.S. can easily be as high as $1.5 billion.<br />
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<b>Therefore, the economics of patents encourages litigation - driving up their <i>defensive valuations</i>.</b> Without any serious reform on how patents are granted and litigated, the smart phone industry will remain to be the hotbed of litigation and the defensive value attached to their patents will continue to rise. <br />
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However, regardless of the reasons underlying these valuations, if these acquisitions are indeed priced solely on a cost-per-patent basis, as looks likely, it would set a benchmark for valuing intellectual property portfolios, and hence help your early stage start-up valuations. Recent acquisitions of Motorola and Nortel, each give a valuation of $510,000 per patent acquired. And since venture capitalists heavily rely on relative valuation methods, it is good news for the early stage start-up. <br />
RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com0tag:blogger.com,1999:blog-288414569563151590.post-36752844359886336862011-08-12T07:28:00.000-07:002011-08-12T07:28:27.717-07:00How to use social media to predict stock price performance?<b>As engaging as it may be, social media is a powerful tool to predict stock price performance.</b> As a business owner, not only you have to worry about the impact of tweets on your brand perception, but also on your market valuation. Here’s why:<br />
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<b>Many investment analytics are being built on social media opinion mining;</b> those innocent feeds are no longer so innocent. On the bright side, as an investor, you can capitalize on those tweets to bet your way into fortune.<br />
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With the advent of the internet, it is now possible to measure the impact of online news and social media on stock prices. Hardly a novel concept, as market sentiment has been a core element of behavioral finance and investment theory. One of the two building blocks of behavioral finance is cognitive psychology, or how people think; this is where social media plays an important role. Behavioral finance success has been fueled by the inability of traditional investment theory to explain bubbles and market crashes. Who does not remember the housing bubble or the tech bubble and their subsequent crashes? <br />
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A recent study found that language usage is a powerful predictor of stock markets. <b>The diversity, or lack of, of vocabulary used across the web, highly correlates with stock market performance. </b> In simple words, <b>when stock markets are rising, online conversations use similar words</b> of “rise”, “fall”, “gain”, and share similar stories of optimism of the recent past. However, <b>as sentiment goes negative a far more divergent vocabulary is used across online channels. Stories become more divergent as well; people recalling independent moral stories of bubble investing dating as far back as the tulip bubble of the 17th century.</b> Perhaps, this phenomena can be explained by Tolstoy’s quote: “<i>Maybe it’s a bit like happy families are all happy in the same way, but unhappy families are unhappy in many different ways.”</i> The chart below shows such correlation.<br />
<div class="separator" style="clear: both; text-align: center;"><a href="http://4.bp.blogspot.com/-cC-LZhemiLk/TkU37giOvhI/AAAAAAAAADw/aa0lyDuCkAk/s1600/Blog.bmp" imageanchor="1" style="margin-left:1em; margin-right:1em"><img border="0" height="302" width="400" src="http://4.bp.blogspot.com/-cC-LZhemiLk/TkU37giOvhI/AAAAAAAAADw/aa0lyDuCkAk/s400/Blog.bmp" /></a></div><br />
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Besides language usage, tone can be analyzed to identify sentiments such as fear and joy, uncertainty and urgency, which all directly influence stock market performance.<br />
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Although, to-date most investment social media analytics has focused on predicting the overall stock market performance – same can be applied to companies. A negative sentiment of companies voiced on tweets can not only affect the brand perception, it may lead to massive “sell” signaling, exacerbating the downward spiral of the valuation. Therefore, in the age of social media, perception management has become even more crucial than in the offline world. <br />
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However, as an investor tuning your ears to tweets, social posts and blogs can pay off by helping you pick winners & losers and avoid bubbles & crashes.<br />
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Of course to an skeptic, correlation and causation will remain a point of analysis. However, since overshooting of stock prices are rare phenomena, you can still catch the winner in the beginning of its rise. And, most importantly you have another tool to identify bubbles to help you decide if you want to avoid them or take part in their rise.<br />
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A few more insights can be found in this article.<br />
http://socialtimes.com/sentiment-analysis-socialmedia-marketing5_b60015<br />
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RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com1tag:blogger.com,1999:blog-288414569563151590.post-17503333405789820892011-07-01T05:03:00.000-07:002011-08-05T09:50:56.988-07:00Why will GroupOn succeed?GroupOn’s ability to survive lies solely in its ingenious appeal to the psychology of the consumer and merchant – its valuation is outrageously irrational; its business model equally flawed from “rational” economic players perspective, yet I will confidently say it has high chances to succeed, as long as the psychological game persists and remains unchallenged. <a href="http://smbizconsult.blogspot.com/2011/06/groupons-valuation-myth-debunked.html">In a series of bogs, I debunked the valuation of GroupOn</a> and the <a href="http://smbizconsult.blogspot.com/2011/06/myth-of-deals-industry.html">deal industry</a> in general; however, <b>why do I still believe they will succeed?</b><br />
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The underlying success of GroupOn is pinned in its appeal to the psychology of the consumer and merchant. GroupOn is the first deals based business model that went viral, even though its business model has been around for decades. Since the advent of ecommerce, retailmenot.com, coupons.com among others, preceded GroupOn inviting far larger user base, but far too small valuations. Then, what is the secret sauce of GroupOn? <br />
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<div></div><b>The ingenious strategy of “prepaying” for deals & “framing” of savings is where GroupOn innovated.</b> The prepaid nature of GroupOn creates commitment and anticipation which have viral elements. <br />
<ul><li><b>Commitment –</b> Unlike a 10% coupon which you can let expire, when prepaying for a saving, you commit to make the transaction. While a 10% savings offer may be lost in your memory, prepaying keeps it fresh in the mind …you'd better remember that you have already paid for a service that you have not yet consumed… so it’s on top of your mind to buzz about it at parties, among friends… </li>
<li><b>Anticipation -</b> Most consumer research shows that the prolonged period between commitment and delivery of experience creates additional excitement. Moreover, anticipation keeps the excitement of the experience fresh, exacerbating its viral component. Remember that anticipated vacation you were telling your friends months in advance?</li>
<li><b>Framing –</b> Even when the deal is ordinary, GroupOn can make it sound exciting by framing it in a way that resonates with the customer better. How would you like to receive a $20 for $10 GroupOn for Old Navy instead of 20% off $50? Cialdini spends volumes talking about the psychological pitfalls framing leads us to, but when manipulated smartly by a marketing company, it can attract consumer’s wallet share.</li>
<li><b>Addiction </b>- Studies show the happiness factor associated with an experience decreases significantly at the time of payment…hence; we tend to enjoy prepaid vacations more. GroupOn allows you to partially prepay for your experience, thus mitigating the displeasure of payment associated with a service you bought…making you “enjoy” your GroupOn dining experience more than otherwise, and in turn, causing you to come back for more GroupOns.</li>
</ul><div> </div>Well, merchants also like the <b>immediate cash flow</b> <b>infusion,</b> giving them immediate gratification over other long-term marketing investments. In addition, it is a great tool to <b>solve for overcapacity and slow moving inventory.</b> But, is the cost justifiable to a small business? Rice university research states over 32% of merchants find GroupOn deal to be a financial disaster. <br />
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<div></div><b>However, as long as demand for GroupOn remains strong, merchants will</b> learn the price elasticity of the GroupOn psychology and <b>pass on the cost to the consumer</b> in terms of higher list prices or smarter framing of deals. After all, how do you determine the fair price of a hot air balloon ride? <b>Your willingness to pay for the service is the GroupOn adjusted price - but, what makes you confident that the GroupOn adjusted price would not have been the true price had GroupOn never existed?</b><br />
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<div></div>Although some myths dominate the GroupOn controversy about its lack of targeting …these are easily solvable. With time, GroupOn will possess enough consumer data to allow it to data mine and target offers to consumer preferences. As for GroupOn fatigue, well, that is no different than any form of direct marketing…<br />
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Despite all the controversy, GroupOn has the potential to succeed as its innovation appeals to the consumer psychology and merchants will continue to supply it, as long as consumers are willing to buy. <br />
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<div></div>RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com0tag:blogger.com,1999:blog-288414569563151590.post-40133980161698248762011-06-22T17:54:00.000-07:002011-08-05T12:17:23.902-07:00GroupOn is like “dating in NYC”…therefore, every merchant’s nightmare!Well, you can replace “NYC” with “LA” or any other major metropolitan city that offers too much of a good thing – a proliferation of single eligible men & women (which is a paradox in itself.) <b>The simplistic theory that explains this paradox is the non-committal factor, since everyone is waiting for the “next best thing.”</b> Why commit to a relationship when you are swimming in a sea of options? <b>Too much of a good thing can be dangerous for commitments.</b><br />
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</b>And this is the story of the avid GroupOn user. For GroupOn to succeed, it needs to generate excitement and loyalty to its business. <b>However, GroupOn loyalty outrightly means non-commitment to a merchant, the merchant that GroupOn is designed to serve … and hence, the nightmare of the small business begins.</b><br />
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Loyalty is what most businesses thrive on. Loyalty makes a business sell not 1, but 100 widgets to one consumer, increasing profits. But, the case with GroupOn is a bit more complex. <b>When GroupOn creates loyalty to its business model, it creates a vulture who thrives on deals…a vulture that is waiting for the next best deal…this vulture is not the ideal customer that the small business had in mind when signing up for GroupOn.</b> The merchant’s viability and interest in GroupOn is to attract a new user base who will eventually become loyal customers of its establishment and not of GroupOn. But, that is in absolute contradiction with what will make GroupOn thrive & explode in success.<br />
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<b>The conflict of interests is deepened by competition that has innovated in the deals space to further shape the future phsychology of this vulture to become even fiercer deal hunter. </b>Such recent innovation is the “instant deals.” With instant deals, the consumer can plan its day around the deals available to him on that day.<br />
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Although, the instant deal can be a fantastic “just-in-time” inventory clearing mechanism, or extra capacity management for a merchant, when adopted by the majority it will become the merchant’s nightmare. Everyday, one of your competitors, featuring the deal, will be stealing your customer base, who now have become GroupOn loyalists.<br />
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Of course, this theory is only valid if GroupOn and the deals industry become really successful. So, let’s revisit the numbers from GroupOn. In my first blog of this series <a href="http://smbizconsult.blogspot.com/2011/06/groupons-valuation-myth-debunked.html">-“GroupOn’s valuation myth debunked!!! A cautionary tale of the deals industry…” </a>I visit GroupOn’s valuation. The $30 billion valuation for GroupOn tells us how optimistic investors are about the industry. <b>For GroupOn to be worth that</b>, it needs to become at least a $15 billion business, therefore, <b>needs to sell at least 600 Million deals a year </b>(based on average revenue of $23 per deal see S-1 filings). <b>Either U.S. will more than double its population or GroupOn will have to create a lot of loyal customers who will buy quite a few deals per year. Now if we add Living Social, Facebook’s deals, we can picture the gigantic success investors expect.</b><br />
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Unfortunately, the small/local business who is the GroupOn user is so fragmented that they will not have the typical power to restrain GroupOn’s empire. The death of the small business will come slowly and ‘unexpectedly’ by the vulture that GroupOn will create. “Unexpectedly,” because a small local merchant will fail to see beyond the short-term effects, meanwhile the downfall will be building up and will be macroeconomic in nature.<br />
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<b>GroupOn creates a conflict between its success and the success it promises to the small business. </b>However, GroupOn has a potential to succeed, which is not based on “rational” theory, but the pshychology of the merchant and consumer. Read <a href="http://smbizconsult.blogspot.com/2011/07/why-will-groupon-succeed.html">“Why will GroupOn succeed?”</a> for more.RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com1tag:blogger.com,1999:blog-288414569563151590.post-83662684899245391802011-06-19T10:14:00.000-07:002011-08-05T09:51:48.643-07:00The myth of the deals industryTo understand the basics of the deals industry, it is important to go back to how and why deals originated in the first place. <b>If we begin from the “rational” player’s point of view, then prices will be set at the equilibrium point where demand equals supply.</b> However, that requires businesses to have perfect information about consumer demand and price elasticity. In reality, such perfect information is non-existent, leading to mispricing of goods. <br />
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As economies got more competitive, the problem of mispricing extended to overflooding of businesses. Typically, there is an optimal supply of any good or service that will yield the highest societal utility from pricing and profit maximization perspective. <br />
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A third pervasive problem that deals came to solve was the miscalculation of demand and hence, inventory mismanagement. <b>In a perfect world, where information can solve the problem of misprcing, inventory management, and the number of ideal competitors, then there will be no reason for deals. The deals industry will simply vanish.</b> <br />
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The wide success of the likes of GroupOn is indicative of a deep rooted problem of over-supply, and inability of businesses to get perfect information. As such, <b>the deals industry is only a primitive attempt to solve the imperfections of the capitalist economy. The advances of information technology, optimization tools, data analytics and innovative crowdsourcing business models are more advanced techniques designed to solve the same problem of imperfect information, and therefore, are a serious threat to the viability of the deals industry.</b> <br />
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The simple question to ask is “would Macy’s prefer to split its revenue with the likes of GroupOn or, would it prefer to have a crystal ball, that can help predict with great accuracy how much to produce and how to price to clear all inventory?” <br />
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Clearly, that crystal ball has more futuristic movie appeal than immediate implementation, but that time horizon is not far away. Today, predictive polls, using the wisdom of crowds are being experimented. Data analytics has taken a wing of its own. The predictive models still lag behind, but the momentum is driving us in that direction. <br />
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So, the question remains…<b>if you had to bet your money in the future, which would you pick, deals or information technology /optimization tools/ crowdsourcing for predictions?</b> It may be a good exercise to revisit the “Wisdom of Crowds” before calling your bet. <br />
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But, this is not a solution residing in the faraway future. It is a problem requiring deep soul searching today. <b>Valuations are predictions of the future. GroupOn’s $30 billion valuation is a bet on that future. </b><br />
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THIS IS the cautionary tale of the deals industry. <br />
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However, I had opened my earlier blog <a href="http://smbizconsult.blogspot.com/2011/06/groupons-valuation-myth-debunked.html">“GroupOn’s valuation myth debunked!!! A cautionary tale of the deals industry…”</a> stating that <br />
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GroupOn’s ability to survive solely lies in its ingenious appeal to the psychology of the consumer and merchant …I will confidently say it has high chances to succeed…</i> <br />
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Before I reveal the secrets for GroupOn’s success, read another cautionary tale <a href="http://smbizconsult.blogspot.com/2011/06/groupon-is-like-dating-in-nyctherefore.html">“<b>GroupOn is like “dating in NYC”…</b>therefore, every merchant’s nighmare!” </a>explaining the conflict between the loyal GroupOn customer and the merchants GroupOn serves.<i> <i></i></i>RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com0tag:blogger.com,1999:blog-288414569563151590.post-28479583038421559742011-06-16T14:45:00.000-07:002013-09-12T18:39:12.159-07:00GroupOn’s valuation myth debunked!!! A cautionary tale of the deals industry…<b>GroupOn’s ability to survive lies solely in its ingenious appeal to the psychology of the consumer and merchant </b>– <b>its valuation is outrageously irrational;</b> its business model equally flawed from “rational” economic players perspective, <b>yet I will confidently say it has high chances to succeed, as long as the psychological game persists and remains unchallenged.</b> In a series of blogs, I will debunk the valuation of GroupOn and the deal industry, in general.<br />
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Since its IPO announcement, a lot of investor mania has surrounded GroupOn. But, is its value of $30 billion justifiable?<br />
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The true value of an asset, theoretically, equals how much cash it can generate in the future. Using this simplistic theory, GroupOn’s $30billion valuation assumes that the company soon will grow to at least $15B in revenue (estimate arrived using 10% discount rate, 20% margin and other projections by GroupOn). Given its revenue growth and consumer’s willingness to pay, such projection seems aggressive, but well within the realm of reasonableness. However, the challenge lies on the supply side. $15 billion of GroupOn revenue equates to $45 billion a year that small/local businesses will have to part with and hand it to GroupOn as marketing expense. (GroupOn keeps 1/3rd of the deal)<br />
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As all valuation models are based on the assumption that decisions are purely “rational”, a merchant shall accept a deal with GroupOn only if it can generate positive ROI. <b> From the macroeconomic scale, the GroupOn model simply crumbles.</b><br />
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<b>The fundamental question to ask is if GroupOn actually contributes to value creation or redistribution of funds?</b> Are you, as a consumer, spending more of your income or simply allocating your disposable income differently because of GroupOn? <b>The simple answer is the latter. </b> GroupOn has no capacity to create economic value, but it merely redistributes revenue from non-GroupOn merchants to GroupOn merchants. <b>The question that bags itself is: If all merchants participate in a GroupOn offering, then where will the redistribution come from?</b><br />
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Based on data provided by the SBA and Economic Census Bureau, it is estimated that small businesses, at best, in the consumer sector, generate about $1-$2 trillion in annual sales. Assuming 10% profit margin, all consumer small business profits are around $100-$200 billion. For GroupOn to generate the revenue it forecasts, at least, ALL small businesses shall sign a deal with GroupOn and decide to give away $45 billion out of $100 billion profits they make. <b>Wow, that’s a whopping 45%.</b><br />
If not all merchants participate, the story is even more bleak. The $45 billion will have to come from smaller number of merchants.<br />
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Aha, <b>two fallacies in the valuation are exposed. Is it reasonable to assume that ALL small businesses will sign up? And second, will a rational business owner simply give away a quarter, or half, of its net cash receipts to GroupOn, when there is no promise of true revenue growth or positive ROI? </b> Let’s remember that GroupOn’s valuation of $30billion requires that almost all small businesses sign up for a deal with the Company…therefore, no net redistribution of revenue will be possible. Month 1, one merchant will pocket more revenue as a result of its GroupOn deal; however, in months 2-12 it will forgo its revenues to fund the redistribution of industry receipts to its rivals featuring a GroupOn deal. <br />
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And of course, let us not forget the copy cats proliferating the market. One might ask if international expansion is their basis for growth…that sounds too optimistic - China alone has already launched over a 100 GroupOn competitors. It’s an industry with zero barriers to entry, and therefore, competition is rampant.<br />
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If GroupOn’s valuation appears so optimistic, the entire industry taken together appears highly speculative. I would highly caution any venture capitalist, and investor pouring funds into the industry. <br />
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But, where did this all start? The deals industry… The power or bargaining power… The concept of offering a deal to seduce customers… <b> Read <a href="http://smbizconsult.blogspot.com/2011/06/myth-of-deals-industry.html">“The myth of the deals industry”</a> for more.</b>RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com3tag:blogger.com,1999:blog-288414569563151590.post-30038511428617670602011-03-30T06:02:00.000-07:002011-06-19T07:06:49.781-07:00Minimizing taxes with offshore transactions? Watch out for your IP!It is reported that Google pays only 2.4% taxes on its offshore profits – made possible through a web of transfer pricing transactions. <strong>Transfer pricing allows a corporation to transfer profits to lower tax countries by cleverly choosing where to house its intellectual property “IP”. </strong><br />
It’s that simple to save millions in taxes! If your revenues are in the US, by transferring your IP to a subsidiary in a country with low tax rates, you will pay royalty to the offshore subsidiary, thus effectively transferring out profits and minimizing taxes. Google, has its IP in Mountain View, CA and therefore, has the incentive to pay as little in royalties to the US parent. <br />
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Although tax law requires royalty rates to be set as in an arm’s length transaction, it is extremely difficult to challenge the rates that companies set, since no market exists to determine fair market value of highly company specific IP assets, such as algorithms and customer lists. If the IP is housed in a high tax country, such as in the case of Google, companies intentionally understate the royalty rate. On the other hand, if paying royalty to a subsidiary in a low tax country, the incentive is to overstate the royalty rate.<br />
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<strong>It works perfect, when tax minimization is your main concern. </strong> However, it is important to understand the implication on your IP rights when those rights are contested. Here’s why.<br />
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Assume you understate the intercompany royalty rate to minimize taxes; in the event your IP is infringed upon and you sue for damages, the intercompany royalty rate will be used to determine the damages you are owed. <strong>In effect, reducing your tax liability significantly reduces recovery of damages, and hence your valuation.</strong><br />
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Another issue relates to your ability to sue an infringer. <strong>Only patent owners and exclusive licensees have the standing to sue infringing parties, but non-exclusive licensees do not. Transfer Pricing structures almost always rely on non-exclusive licenses. </strong> Exclusivity will prevent other subsidiaries of your company from using the IP, and therefore is never used. <br />
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<strong>Furthermore, where non-exclusive licensees lack standing, the patent owner's recovery may be limited to reasonable royalties</strong> — even though the entity seeking injunctive relief or lost profits damages is part of the same wholly owned corporate family as the patent owner.<br />
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Therefore, it is crucial to assess the impact of intercompany transfer pricing agreements on a company’s ability to defend its intellectual property. Unfortunately, transfer pricing is done by tax professionals with the sole purpose of minimizing taxation.<br />
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<strong>Transfer pricing policies that create non-exclusive relationships can compromise IP protection. Thoughtful coordination among tax professionals, business leaders and law departments can prevent these problems,</strong> but care must be taken up front - once an issue is revealed in litigation, it is usually too late.RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com0tag:blogger.com,1999:blog-288414569563151590.post-81329262054121834732011-03-27T15:08:00.000-07:002011-03-28T19:09:06.682-07:00How much your data safety is worth?A few months ago LinkedIn users were slammed with “update your account” messages. If they responded, their computer got infected with data swiping malware, stealing credit card information from their hard drives. <br /><br />Not so bad if only your personal data was stolen. What if you have stored client data and it got breached? <br /><br />Unfortunately, credit card fraud protection only applies to an individual being a fraud victim. However, as a business owner, you are responsible for all losses your customers suffer, if you are held to have breached reasonable standards of protection. And, most small businesses fail to meet the standards that courts hold them responsible for. <br /><br />With the proliferation of computer malware, small businesses have much to worry.<br /><br />If you are playing the “odds” game, there is room for much concern. Gone are the days when fraudsters invested much time and brain power to create specialized software to commit their deeds. Nowadays, a burgeoning market for malware allows fraudsters to buy turn-and-click software that are operational within minutes, allowing them steal credit card information, keylog sensitive passwords and spoof wire transfers. And, all this for a few thousand dollars in investment only!<br /><br />Bugat, the malware behind LinkedIn attack, costs only $500. SpyEye and Zeus Builder are a few other examples that cost only a few thousand and provide the fraudster with a huge upside.<br /><br />As malware is constantly updated, even the most sophisticated security software may not safeguard you against novel malware. Therefore, the best protection is to have a dedicated computer for financial transactions with limited internet and no email access. <br /><br />However, in the unfortunate event that a breach occurs, detailed documentation of your safety processes are your only savior out of liability in the courtroom. Invest the time to ensure your safety procedures will meet the “reasonableness” standard set by the law. This investment will save your business from coughing up millions of dollars to make your victims whole.<br /><br />For additional information safety tips, you can consult the <a href="http://www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt132.pdf">Federal Trade Commission</a> website.RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com0tag:blogger.com,1999:blog-288414569563151590.post-45850566967102268992011-02-21T07:07:00.000-08:002011-03-28T19:11:16.326-07:00Is customer loyalty really worth the hype?As a company progresses through the various stages of growth, marketing strategy often evolves from customer acquisition to retaining the customer base. At that critical transition, many companies fall prey to following strategy with bad economics. The challenge becomes how to decide how much your customer loyalty is worth to you. <br /><br />Bad economics arises from a few common pitfalls that can be avoided:<br /><strong><br />Misjudging the value of loyalty can bleed your company to extinction</strong> – The purpose of developing loyalty program is to increase your company valuation. That is, every dollar spent on loyalty should result in more than a dollar in revenue creation for the company. If not, your company is heading towards extinction. The cost benefit analysis should be performed holistically, including all fixed costs of resources used. Measuring the impact on revenue is one of the most complex valuation exercises, since it is difficult to isolate the impact of the loyalty program. This exercise should be performed on a granular level, analyzing changes in customer survival rates, average ticket size of purchases, and purchase frequencies.<br /><br /><strong>Loyalty programs targeting your entire customer base breeds disaster </strong>–It is important to understand your customer base and how they contribute to your company earnings. Chart out in a histogram to determine the distribution of “dollars earned per customer” - the distribution will tell you if your company has a natural segment worthy of loyalty marketing. If you determine your customers follow an 80/20 (i.e. 20% of your customers make you 80% of your earnings), 90/10, or 70/30 distribution then you have a natural segment worthy to target. By focusing on that 10-30% of your customer base, you significantly reduce marketing costs and focus on the most profitable segment to retain. If not natural segment is found, perhaps loyalty marketing is not suitable for your industry.<br /><br /><strong>Following competitor’s strategy will increase your costs </strong>– Companies going through the exploding phase of growth often forget that their success was due to the unique product/idea they created. During this critical phase, companies fall prey to copying competitor’s strategies. This is bad, because it commoditizes the strategy. Once a commodity, you need to keep on fighting on the ‘price’ of the loyalty program to keep your customer’s happy. <em>We don’t need to look any further than the credit card industry with its cash-back rewards. To maintain competitive rewards, card companies continue to increase the cash-back bonus, which in turn erodes their bottom line and profitability. </em> One wonders if they are following ‘survival of the fittest’ strategy or their rewards offering is based on careful study of loyalty economics. Think outside the box, evaluate your core competencies and create a loyalty program that adds to your unique value proposition, further differentiating your company from the masses. And, most importantly know the minds and hearts of your consumers to excite them with what they perceive as ‘value’ when creating your loyalty program.<br /><br />One size fits all loyalty will create bad economics. Know which segment of your customers to target and carefully monitor how your loyalty program contributes to your business value. The innovative spirit that made your company succeed should be brought to your loyalty strategy to help you create unique value proposition to your consumer.RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com0tag:blogger.com,1999:blog-288414569563151590.post-13084463089685499062011-01-17T11:25:00.000-08:002011-08-05T09:54:55.552-07:00You caught an employee stealing from you…Now what?Employee fraud is estimated to cost U.S. businesses $1 trillion a year, equating to 7% of company revenues. Small businesses are particularly vulnerable to employee fraud because they employ limited controls over accounting & treasury functions. <b>The median loss suffered by organizations with fewer than 100 employees is $200,000.</b><br />
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Creating a zero tolerance environment, performing regular bank reconciliations, running surprise function audits can help mitigate the risk of employee fraud, but what to do in the event you uncover one of your employees has been stealing from you. Here are a few things to consider:<br />
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1) <b>Terminate the employee to set an example of zero tolerance.</b> It is estimated that 80% of employees who steal, do so because they feel they can get away. Expelling an employee, even for a small infraction, can set the tone that there will be repercussions thus curtailing employee appetite for fraud.<br />
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2) Estimate the amount of the loss. This is crucial step to determine whether it’s worth filing charges and pursuing recovery. When large dollars are at stake, it is best to consult with an attorney to file criminal, and or civil charges. Fraud is a criminal offense punishable by incarceration.<br />
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3) <b>How about filing a civil lawsuit to recover the funds? </b> In most cases, the fraudster would have already exhausted the embezzled funds, and will have negative equity. You may force liquidation of his personal assets by filing expensive lawsuits, which you may or may not win. Proving fraud in the court room requires confession by the fraudster, or non-assailable evidence. <br />
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<b>Even a victorious lawsuit does not guarantee recovery.</b> At the end of the day, if the fraudster has little equity, then your net recovery may be negative due to the legal & accounting fees you incur, in addition to the time and energy diverted to the lawsuit.<br />
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4) <b>However, there’s a sweet and legal way to render some justice. Send the fraudster a 1099 Form for the amount of the embezzled funds and for an extra kick, label the source as “FRAUD EARNINGS.” </b>After all, these are funds earned by the employee, although illegally and criminally, and the fraudster is liable to pay taxes on them. <br />
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<b>The beauty of the 1099 is that it will put the criminal in the hands of the IRS.</b> Let’s not forget that Al Capone was convicted for tax evasion and not for his criminal acts.<br />
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The best way to fight employee fraud begins with good controls. In the event you become the victim, consider the likelihood of funds recovery before expending more funds in fighting a lawsuit. The best way for revenge is to simply send the criminal a 1099 and put him in the hands of the IRS.RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com0tag:blogger.com,1999:blog-288414569563151590.post-59173775979219980802010-12-05T13:23:00.000-08:002011-08-05T12:16:40.800-07:005 Tools to save your business time & moneyYou wake up in the morning, get ready for the million things you have to do today and before you know it, the sun has set and your to-do list has gotten longer. <br />
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One of the top challenges for small business owners is time management. In the recent past, several online companies have popped up with fabulous innovative tools to help you manage your time more efficiently. Here are a few:<br />
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1. NeatReceipts<br />
<a href="http://www.neatco.com/">http://www.neatco.com/</a>. <br />
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Ever wish you no more had to sort through the pile of receipts in shoe boxes? NetReceipts allows you just that. You can scan your receipts with your mobile phone or a scanner and the software will index, categorize and file your receipts for you. For a small investment ($199), you no more have to dread that meeting with your tax accountant since all your receipts will be digitally filed and categorized. <br />
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2. EverNote<br />
<a href="http://www.evernote.com/">http://www.evernote.com/</a><br />
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What use is information if you cannot access it when you need it? Whether it was an inspirational idea you jot down on a post-it or an image you saved on your desktop, EverNote makes that information easy to find at any time from any device. You can capture business cards, jot down ideas, save trip information direct from the internet or through your scribbled notes, and the software will organize, index and make the information searchable for you either on your PDA or your desktop, accessible from any device at anytime. <br />
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3. LastPassword<br />
<a href="http://www.lastpass.com/">http://www.lastpass.com/</a><br />
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The old adage used to be to use the same password for all your log-ins. Unfortunately, that is no longer possible with websites increasing password scrutiny and requiring/disallowing the use of special characters, small caps, large caps, etc. If you are tired of the dozen variations of your password to access websites, LastPassword can save you that headache. It is a password management tool, which is easy to use and above all, is free. All you have to remember is ONE password for you lastpassword account and the software will manage the rest for you. Above all, if you kept all your passwords on post-its attached to your monitor, it will help increase password security by no longer needing to parade your passwords openly. <br />
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4. Virtual Assistant<br />
<a href="http://www.yourdailytask.com/">http://www.yourdailytask.com/</a><br />
<a href="http://www.bpovia.com/">http://www.bpovia.com/</a><br />
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If your business is not large enough to hire a full-time assistant, or wish you could hire one person with many skills, think about renting one virtually. Websites like YourDailyTask.com and Bpovia.com help you offload tasks ranging from word processing, email management, to product research. You tell them the task you need to be completed and they match you up with a virtual assistant for you. Not only you can keep costs down, but you can tap into specialized knowledge. <br />
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5. Freedom<br />
<a href="http://www.macfreedom.com/">http://www.macfreedom.com/</a><br />
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Many of us are guilty of falling prey to the information web of the internet. If you feel you get distracted by the internet and are constantly tempted to be online to check the latest news, or research any word that pops into your head, Freedom.com can come to your rescue. It locks you off the internet for up to eight hours at a time, helping you stay focused.<br />
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These are my Top 5 tools. If you like to share yours, post your comments.RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com0tag:blogger.com,1999:blog-288414569563151590.post-6610511542253575672010-10-28T15:05:00.000-07:002010-10-28T15:11:16.978-07:00Do you really need a $100MM idea to get venture funding?The early stage capital wisdom has attracted the love for the $100MM dollar valuation. With each economic boom, start-up valuations have kept on creeping upwards. Every start-up, which I have advised, has felt the pressure of “valuation management”. Creative forecasting and overly ambitious assumptions have been utilized to bump up valuations to $100MM. <br /><br />In recent history, the start-up community has been captivated by venture capitalists. Unfortunately, to get the attention of most venture funds, you need to have a base of $100MM valuation. But that leaves out of the equation the role of the Small Business Administration (“SBA”), whose sole purpose is to serve small businesses with net worth less than $18MM.<br /><br />The SBA, through its venture arm “SBIC,” has provided over $50 billion in seed funding for small companies. The program has been in existence since 1958, however, it has not been as well advertised as the SBA loan program. <strong>In 2009 alone, SBIC funded over 200 companies in existence for less than a year.</strong> And, average investment size varies from $250,000 to $5,000,000.<br /><br />The beautiful aspect of the program is that it does not limit funding to equity. You may qualify for a combination of debt + equity, equity alone, or debt alone. <strong>This flexibility of funding shifts the power to the entrepreneur, without having to worry about handing over control and equity.</strong>The program works through a network of investment firms who receive low-cost funding from the SBA to provide equity financing to small businesses. You can find a list of <a href="http://www.sba.gov/aboutsba/sbaprograms/inv/esf/INV_DIRECTORY_SBIC.html">participating firms</a> on the SBA website.<br /><br />This program is in addition to the various grant programs that SBA provides. If your business is located in rural or low-income areas you may qualify for additional funding from the SBA.<br /><br /><em>If you are a start-up and:<br />• your valuation is less than $18 million?<br />• your investing need is between $250,000-$5 million?<br />• you prefer flexibility in financing types (equity alone, debt+equity, debt alone)<br />then, </em>think about the SBIC as the alternative financing source for your business needs. <br /><br />For more <a href="http://www.sba.gov/aboutsba/sbaprograms/inv/esf/inv_sbic_financing.html">general information</a> or <a href="http://www.sba.gov/aboutsba/sbaprograms/inv/inv_aboutus_program_financing.html">financing statistic </a>visit the SBA website.RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com0tag:blogger.com,1999:blog-288414569563151590.post-12206210587832493802010-09-27T23:57:00.000-07:002010-09-28T00:07:18.154-07:00Are you worried about an IRS audit?With a 0.5% IRS audit rate, it may seem rather unlikely that your small business will get audited. But, that is the exact problem of looking at averages. Although, on average that has been IRS’s audit rate, there are a few criteria that most start-ups meet, exposing them to a higher risk of an IRS audit. The question is what to do to minimize the impact on your business of such audit?<br /><br />As most start-ups meet the following 3 criteria, the odds of an IRS audit are significantly higher.<br /><br /><strong>First,</strong> being a small business subjects you to a higher audit rate. Small businesses in general have a higher likelihood of being audited as they pose a higher risk of tax evasion. IRS knows that deducting personal expenses as business can be very tempting to entrepreneurs. Let’s face it, how many of us have never been tempted to classify a “dinner with friends” as a business expense?<br /><br /><strong>Second,</strong> most small businesses do not report income in their early years. IRS looks suspiciously at businesses that show little or no taxable earnings and have high levels of expense deductions. One statistic cites the audit rate to be as high as 2.15% when no taxable income is reported.<br /><br /><strong>Third,</strong> simply being a “C” corporation increases the audit rate. A “C” corp. is twice as likely to get audited compared to an “S” corporation or a Partnership.<br /><br />Most entrepreneurs are less concerned with bookkeeping than with creating breakthrough products. However, an audit by the IRS will consume so much of your resources in time and money. Most likely, grey area items will be contested. Will you have the time to gather the documentation and pull up the resources to fight the IRS?<br /><br />The following few IRS secrets may save yourself a lot of trouble. <strong>There are 3 accounts that trigger an audit. These are Meals & Entertainment, Home Office and Automobile logs. </strong>Be extra careful when making those deduction choices and, if you are expecting a net loss for the year, be more diligent in keeping documentation. Those dinner receipts should clearly indicate the names and the nature of business discussion. <em>And, if you are deducting the entire auto lease as business expense, the IRS will certainly want proof of the existence of a second personal car.</em> <br /><br />In addition, 2 general ledger accounts capture the IRS agent’s fancy: Repairs & Maintenance and Miscellaneous. <strong>When faced with grey area expenses, try to avoid categorizing them as Repairs & Maintenance or Miscellaneous expense.</strong> During an audit, those two accounts are heavily scrutinized by the IRS agent. Many tax evasion scams have utilized these accounts to park ineligible deductions and thus the IRS loves digging extra deep into them.<br /><br />Although painful, keeping good documentation can save you a great deal of trouble during an IRS audit. Especially when your business is still in the growth phase with little or no earnings. Regardless of your accountant’s advice, avoid using “Repairs & Maintenance” or “Miscellaneous” expense categories as a catch-all, parking your grey area expenses. If you follow these advices, you will have the peace of mind if your business becomes the victim of an IRS audit.RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com0tag:blogger.com,1999:blog-288414569563151590.post-18167876863217728752010-08-12T06:07:00.000-07:002011-08-05T09:57:30.680-07:00Does C Corp really protect you from Liability? Think Twice!One of the key reasons behind forming a corporation is to shield the personal assets of the shareholders from the debts and actions of the corporation. However, this is not an automatic protection. If you are a small business there are many pitfalls to observe, otherwise, you will still be held liable, even in the event of bankruptcy of your small business. What are they?<br />
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There is a legal term “Piercing the Corporate Veil”, which exposes you to liability. You will be held personally liable to pay all the debts of your company. Although, this may apply to any corporation, piercing the corporate veil typically is most effective with smaller privately held business entities (closed corporations) in which the corporation has a small number of shareholders, limited assets, and recognition of separateness of the corporation from its shareholders would promote fraud or an inequitable result.<br />
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There is a long list of factors that courts often consider; however, a few are common pitfalls that small businesses tend to fall into.<br />
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<b>Commingling of personal and corporate assets: </b> If you pay for your BMW lease with company checks, or if you transfer funds between your personal and company bank accounts without signing loan agreements or promissory notes, then most likely you have violated this factor.<br />
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<b>Undercapitalization of the C Corporation:</b> Many small business owners set up very small equity, and take out most of the corporate earnings in terms of salaries or dividends. If courts find that your business is insufficiently capitalized compared to industry standards, you face the risk of personal liability in the event of bankruptcy.<br />
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<b>Failure to observe corporate formalities in terms of behavior and documentation:</b> Do you keep corporate minutes? Do you conduct shareholder meetings? Regardless of how small your company is, courts may still consider violating this standard as a basis to get to your personal assets.<br />
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Regardless how tempting it is to shift as many personal expenses to your company, even if you get through the IRS, you may fall victim to the “Piercing of Corporate Veil” when trying to protect your personal assets from the liabilities of your corporation. Remember that simply paying the fee to register your company as a C Corporation does not automatically protect you from liability. It is best to seek professional advice if you suspect your personal assets may not be shielded.<br />
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For additional resources and case examples <a href="http://en.wikipedia.org/wiki/Piercing_the_corporate_veil">click here</a>.RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com0tag:blogger.com,1999:blog-288414569563151590.post-27555610913263894472010-07-11T05:50:00.000-07:002011-06-19T07:11:45.889-07:00Get patents cheaply and don’t worry about quality: A good strategy?In response to my earlier blog, <strong>I received several comments suggesting to “get patents as cheaply as possible” and to not “worry about the quality.” </strong>The comments were based on the assumption that holding a patent, although has little protection for a small company, still offers great value to fend off potential suits, and increase a company’s appeal to potential acquirers. Although I agree with the assumptions, however, I have to warn my readers about the dangers of their conclusion.<br />
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Often amateur valuation specialists overlook the strength of a patent and simply assume all patents, regardless of quality, contribute equally to business value generation. However, that is not the case.<br />
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The key test I employ when considering the value of a patent is its contribution to the <strong>true business value </strong>of a company. <strong>Will your company be worth more when you file for a patent?</strong> That’s when quality plays a key role.<br />
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A patent that has been litigated and has been sustained in court is more valuable than a patent that has not. That is because <strong>many patents are found to be invalid by the courts.</strong> An invalid patent, not only is useless, but harmful. It is harmful because when filing for patent protection, you disclosed to the world your technology; an invalid patent will allow your competitors to legally copy your technology, and compete for market share.<br />
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A poorly written patent, even when held valid by the courts, may still offer you no value enhancement. When key design elements are omitted, or worded poorly, it may render your patent useless. Whether in an acquisition or a potential lawsuit, experienced patent attorneys are hired to provide the due diligence on your patent portfolio. If of poor quality, potential acquirers will back away when your patent is the centerpiece of your business. The quality of the patent will also influence the decision to proceed with potential lawsuits by your competitors, as your negotiating chip will be eroded by a poorly written patent.<br />
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<strong>The quality of the patent influences the probability of negative outcomes.</strong> A weak patent will have higher probability of being subjected to litigation by competitors, and lower probability of finding an acquirer. <strong>Both of these negatively influence your business value.</strong> For those with valuation background, these probability of events will increase the discount rate applied to a business’s earnings potential, thus depressing its value.<br />
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This all assumes that the USPTO will grant you a patent on a poorly written application. Many applications have to be resubmitted several times, costing the entrepreneur time and money. <br />
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It may be worth investing in your patent application. After all, if patent attorneys did not add value, there would not be so many of them. However, it is important to have a careful strategy to optimize the value your investment. For more information see <a href="http://smbizconsult.blogspot.com/2010/07/when-is-it-good-idea-to-patent-your_06.html">When Is It A Good Idea to Patent Your Invention?</a>RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com0tag:blogger.com,1999:blog-288414569563151590.post-86199812606112555582010-07-06T10:24:00.000-07:002011-06-19T07:14:54.269-07:00When is it a good idea to patent your invention?Most entrepreneurs rush to the USPTO office to patent their inventions with little regard to the value of their patent. With the proliferation of patent applications and the fast speed of inventions, it is worth to ponder whether it is worth to spend thousands of dollars to obtain a patent.<br />
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A patent gives the holder the exclusive right to the invention for 20 years. <strong>However, enforceability is a key issue to consider.</strong> Simply holding a patent does not stop your competitor from using your patent. Applications are often so vague that parties may disagree whether one is infringing or not. To enforce your rights, you may need to take legal action. It is estimated that a typical patent infringement lawsuit costs approximately $1M. <strong>Unless you have the funds to back your patent rights, merely holding a patent may not be useful. </strong> <br />
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Although it is possible to retain legal counsel on contingency, the market value of your patent should at least exceed the anticipated legal costs. <strong>If it would cost you$1M to defend a patent with market value of $250,000, it is a net loss situation.</strong> <br />
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Five questions to ask:<br />
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1. How easy it is to design around the patent? <br />
<em>If a competitor can easily design around the patent, then the existence of your patent does not add to the value of your business.</em><br />
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2. What is the product lifecycle? <br />
<em>Whether you are a life science or a technology company influences how valuable your patent is. When lifecycles are short, such as in technology companies, your enjoyment of patent protection is limited to the lifecycle of the technology usefulness. </em><br />
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3. Do I have the funds to protect my patent? <br />
<em>If not, consider getting insurance.</em><br />
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4. What is the market size of the product using my patent?<br />
<em>Even when your patent is infringed, how much value you can recover from the infringer is limited to the units sold of the infringed product. That, of course is limited by how large the potential market is.</em><br />
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5. Are you targeting venture funding? <br />
<em>Venture funds often require patenting your invention. That is because to obtain venture funding there is an implicit assumption that your idea will be worth at least $100M. With that kind of optimism, it would be unwise not to patent your invention. </em><br />
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This is all good for the United States. But how about global protection? Check out <a href="http://smbizconsult.blogspot.com/2010/07/when-you-obtain-patent-your-invention.html">“Is My Patent Valid in the World?”</a>RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com1tag:blogger.com,1999:blog-288414569563151590.post-29633390001956790292010-07-06T10:04:00.000-07:002011-08-05T09:58:37.207-07:00Is my patent valid in the world?When you obtain a patent, your invention is protected only in the United States, unless you apply for protection in foreign countries. To obtain worldwide protection, you need to apply in each country, separately. The cost can run in hundreds of thousands to obtain such protection. <br />
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However, there is another danger to patenting to consider. When you file for patent protection, you will have to publicize and disclose to the world details about your invention. If you only patent in the U.S., nothing will stop a foreign competitor to copy your invention in China and Europe, as long as they do not import the “infringing product” into the U.S. <b>In a sense, by patenting your invention, you may allow your competitor to legally “steal” your invention.</b><br />
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Therefore, it is crucial to give careful consideration to your patent strategy. Here are a few questions to ask:<br />
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1. Who is my competitor?<br />
<i>Whether you are competing globally or targeting a niche U.S. market, may determine whether worldwide protection is necessary.</i><br />
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2. What is the size of the worldwide market?<br />
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3. Where are some strategic markets you see expanding your product in the next few years?<br />
<i>Consider patenting in select few countries that matter to your business strategy. That way, you can control patenting costs.</i><br />
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4. How is enforceability in other countries?<br />
<i>You hit a sore topic for discussion. Not all countries have same attitude towards patents. Even when enforced, you may recover a token amount. Who will pay for your legal fees?</i><br />
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The value of the patent is another important element to consider. Read <a href="http://smbizconsult.blogspot.com/2010/07/when-is-it-good-idea-to-patent-your_06.html">"When Is It A Good Idea To Patent Your Invention?"</a> for more information. <br />
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Before you run out spending valuable cash on patent attorneys, assess your patent value and the level of business protection from such patent.RosetteMhttp://www.blogger.com/profile/07089517571024963144noreply@blogger.com0