Penny Aitken, FQS Capital

Published in Hedge Magazine, March 2013. Original article here (p30-33).

Interview: Penny Aitken, global head of investment research and partner at FQS Capital
Penny Aitken is not particularly interested in hedge fund managers with so-called good instincts: “I would rather be with somebody who knows why they are good, than with somebody who thinks they know why they are good.” As global head of investment research and partner at FQS Capital, maths are Aitken’s secret weapon to separate the talented from the lucky: “Sometimes a hedge fund manager can think they are doing one thing, but the evidence says they are doing something completely different. When we share our analysis with the funds, it can make for some very interesting discussions!”

Innovative statistical models sit at the core of FQS Capital’s selection process. The company is the brainchild of maths whizz Dr Robert Frey, who headhunted Aitken while on maternity leave to run the company from London. Business-casual in a navy dress and subtle jewellery, Aitken greets me in a meeting room in the company’s City offices, taking a moment to admire the sweeping view over a frozen London. While her stint in accountancy before heading into investment means she is not afraid of numbers, Aitken’s social sciences degree bears witness to a more qualitative approach: “We do not expect our tools to give us answers; we expect them to give us very strong indications of where we should look. Then we go to meet the manager, review the business, consider all the qualitative and soft factors. We want to really test the thesis and make sure it stacks up from all angles.”

In essence, FQS’s data-churning methods are all about identifying alpha: how much of a returns stream is driven by market factors, and how much is driven by skill and expertise. “We can also use these tools to find ways of filtering funds and search for certain criteria among alpha-driven managers, such as managers with a certain volatility profile or behavioural pattern.” Because, stresses Aitken, investors can go out and buy beta performance with a cheap ETF, so you do not want your hedge fund to do that. “What you want is a diversified source of return, preferably one not coming from market factors.” When she finds a manager with this kind of alpha performance, and Aitken admits this is not that easy, she then looks for signs this can be maintained over time: “We find that kind of investment opportunity very compelling.”

By leaning on quantifiable metrics, FQS’s methods adds a clarity to proceedings in what has at times been an industry lacking in transparency. “The maths, and all of Robert’s expertise, provides us with a very robust ability to handle data, and an ability to generate ways of handling that data,” says Aitken. This also has competitive benefits for the firm: “It means we are not wedded to traditional metrics or tools, or to buying things off the shelf. We can generate our own systems and programmes to process data and spit out results.”

The single fund run by FQS Capital is currently fairly modest in size, at less than $150 million, initially established for Dr Frey to manage his own money. While he is still the primary stakeholder, FQS are now looking to add further investors. Established in 2010, the fund was not fully diversified until 2011 and is still evolving. As to the question of performance, Aitken says the fund has matched the industry average over the past year: “But we have done this on half the risk. On that basis we are pleased with that result, because it is proving our point in terms of our balancing of risks, of our understanding of how you diversify these factors in a portfolio context. It is still early.”

Having said that, the fund’s risk mandate is “conservative”, with a focus on capital preservation: “We are talking about long term compounding effects.” In an effort to identify the desired stability, the FQS data models will draw on up to 30 years of data from a variation of sources to understand what a specific hedge fund is likely to yield. Even when the markets are behaving unpredictably, models are still helpful: “Right now we are in a testing environment where you have low growth and low interest rates. So what you can do is calibrate and make tactical tilts.”

While discretionary managers responded to the lack of predictability following the events of 2008 by becoming more conservative, Aitken points out how quantitative managers were much more able to carry on as usual by programming the new risk factors into their models. But if what we are experiencing now is arguably historically unprecedented, I ask, can historical data really reveal the future?

“This is an interesting question, but there are lots of periods in history where we have seen huge transitions and huge intervention by policymakers. This, in itself, is nothing new,” says Aitken. Of course, if the prediction process could be perfected we would all be rich: “But the 2008 period was interesting because it created a huge data set from a risk point of view, a very different data set to what came before and after. For us it is about how you use that data and calibrate it with the other periods around it. We are data junkies!”

As a new company, FQS Capital has been designed specifically with a concern for survival during a period of industry contraction. This includes keeping a close eye on costs, an issue which Aitken admits may not have been a priority for the industry during the fatter years. FQS also provides advisory services for clients looking to make portfolio decisions, with emphasis on the ability to listen and provide solutions.

A lack of trust in the financial system is still an issue felt across the industry, says Aitken, who believes finance needs to be more transparent: “It needs to be more accessible and it needs to be more accountable. We are trying to do all of those things here. We are trying to not blind people with maths, but to share these mathematical techniques and improve their understanding.”

Cold, hard stats will have the ability to reveal what is really happening in an investment situation, as it is unaffected by the manager’s hopes and dreams. At the beginning of our chat, Aitken references a study (co-authored by London’s Wellcome Trust Centre for Neuroimaging) which suggests the human brain is slightly optimistically wired in terms of processing negative and positive information. In evolutionary terms, this may be healthy to ensure we keep going in the face of adversity, but it is more problematic if you are a hedge fund manager. FQS is attempting to circumvent such bias in its own ranks by keeping records of decisions and assess the outcomes: “We have a huge respect for evidence.”

On that note, Aitken is excited to be building a team and a process at FQS from “a blank sheet”. The opportunity to be part of a developing field is also why she transitioned from traditional asset management to the alternative sector: “With hedge funds you have much more flexibility. You have all these different tools to express yourself. I really enjoyed the challenge of that, and the fact it does not sit still. Hedge funds are constantly evolving at a very rapid rate; you saw that all through the 2000s, all the way up to now when they are probably evolving into a different lifecycle phase. But the challenges do not stop, they just change.”

Richard Longdon, CEO of Aveva

Published March, 2013.

The Megabuyte interview: Richard Longdon
Often when Richard Longdon meets people at social gatherings they don’t really get what he does for a living, even after it’s been explained to them. After all, what goes on at Aveva, the international engineering design software development company, is hard to compress into a soundbite. Not that this matters all that much to Longdon, though: “What people do is kind of irrelevant really, isn’t it? That’s just their job. You don’t like somebody because they are the CEO of a company. It’s about what they are like as a person.”

This could be an easy thing to say when you are at the top of your field, but Longdon seems to have a knack for listening to people: “My life revolves around talking to people in the business, to our employees, to the customers, and the shareholders and investors.” And this includes his assistant and the receptionist too, who tells me how friendly “Richard” is as I’m waiting for my taxi back to Cambridge train station, after the CEO in charge of 1400 people has drawn me into chatty banter far beyond what should probably go to press.

Longdon is working from his Cambridge office this week, but the international footprint of the world-class player in the software market for the power, plant and marine industries means the CEO is often on the road. “We just had our budget planning week, where the key financial stakeholders in different parts of the business from all over the world tell us what is happening, and what they expect they can do next year. […] It’s an interesting week because you get to speak face to face to each person in each division around the world, about is happening to them, what the critical issues are for them, what people and additional resources they need for next year.”

Balancing innovation
Aveva celebrated its 45th anniversary last year, and Longdon has been at the helm for the last 14. But his history at Aveva goes back to 1984, when he joined the process products divisions, and headed the German office for a while before returning to the UK as part of the 1994 management buyout. Aveva’s solid financial performance is a testament to Longdon’s ability to keep the company innovative, which includes strategic acquisitions. Aveva’s 3D products are now gaining traction, boosted by last year’s acquisition of Bocad for its structural detailing software, Global Majic Software for its visualisation technology, and Z+F for its laser scanning software.

“The exciting thing about global managing, and generally this is true with high-end visualisation too, is that you want to innovate with a small group of people. If you try to do it with a lot of people it will be really slow. You have to keep refreshing your ideas,” says Longdon, before telling the story of how Aveva had a 3D visualisation supercomputer to show customers back in 2000, which at the time felt like a sci-fi as you stepped inside a virtual environment. Except that people hated it: “Customers couldn’t get to grips with it, it made people feel sick, and you needed a million pound computer to make it run fast enough.” But now the technology has improved, cost has come down, and people are more familiar with the general 3D idea: “But while 3D computer graphics you get at home look flashy, it’s just the skin. Our 3D models have got masses of data behind them. […] We are moving objects around, and you can click on one and say, ‘Ok, tell me 100,000 things about that object.’ It’s a different ball game.”

While the initial 3D experiment at Aveva didn’t yield much financial reward at the time, Longdon admits part of the reason they did it was to stir up attention. While the industries buying from Aveva are “really, really conservative”, they face just as much pressure to remain cutting edge. This means Aveva’s job is in part to take customers forward at a pace they can handle, and this may mean introducing a concept such as immersive 3D a decade before the big push: “Customers want us to be innovative, but they don’t want us to give them anything that isn’t tried and tested.” The Cloud is a classic example: when first hearing about it, many of Aveva’s customers would flat out reject the idea of keeping data ‘out there’, but now they are starting to get onboard. “And if we hadn’t been doing any work on it, we wouldn’t be paying the game now. We have to try and predict, tease them with ideas and say, ‘We think this is quite good, what do you reckon?’ And often they will say, ‘No, bad idea, don’t do that!’ Then two years later it will be the best thing since sliced bread.”

So what’s Aveva’s secret to predicting which are the ideas that will kick off in the future? Longdon thinks it’s staying close to the customers. Building a direct sales channel between the company and the customers is one of the things he is most pleased with from his tenure at Aveva, which previously mostly used agents: “We spend a huge amount of time on customer clinics, and workshops with customers trying out our ideas. There has never been a piece of technology where we haven’t had industrial partners working with us before it ever saw the light of day.”

This sort of collaboration can be a lot of fun for Aveva’s employees, and as a former engineer, Longdon understands the value of giving people an amount of creative freedom. Aveva uses innovative work techniques such as Scrum to break through hierarchies, but still, with R&D happening in 15 separate locations, projects need strict managing to make sure they join up at the right time. Longdon acknowledges an ongoing challenge is to foster a feeling of cohesion as the company grows: “We learnt a lesson about this when we first started outsourcing to India, when we didn’t tightly manage the outsourcers. […] I think we have become pretty good at developing products in multiple locations and bringing them all into one unified source.” Video conferencing is a vital tool to achieve this, as was the case during a large marine development that was recently completed by teams in Cambridge, India, Sweden and Korea.

Unfinished business
Anyone who becomes an Aveva employee gets a trip to Cambridge, whether they be a marketing assistant from Beijing or the new head of America. Longdon meets them all during their visit, which includes learning about the company culture and providing feedback to the management. And then they all go to the pub. It must foster loyalty, I point out: “Yes, it shows you care enough to try to make them feel part of the family.” But is loyalty the reason he has been with Aveva for 29 years?

“No, not particularly. It’s more that I still feel there is a lot of opportunity, so it feels like the job is never done. But I had never stayed in a job for more than three years before I came here. […] I knew about the business when I was in engineering, and though that company could be interesting. I took a pay cut, gave up my company car and came here.” But did he think he would have the big seat? “I didn’t think I would be CEO, no!” Longdon laughs. “But it has worked out rather well. It’s different all the time. Always new challenges. Either we’ve got an acquisition opportunity, we are developing a new product, or we have hired a different group of people that bring more diversity to the business. You can see it growing.”

This is Longdon’s key motivation for sticking with Aveva after all this time: “We have taken a company that, when I joined, should have been way more successful than it was. It was a government research laboratory with fantastic technology, but it was massively under-exploited and that was a real frustration for me. We have being playing catch up for a long time. Having got to the position we are in now, I think we could become a much, much bigger company.”

Longdon views Aveva as a classic case of a privatisation done badly, “in terms of giving rights to people that should never have had them to sell the product, which undermined the company and locked us out of key markets as they were starting to really take off”. Our conversation trails off to Cambridge’s start-up arena, where Longdon finds it disappointing that so few make it to the stockmarket: “If I were starting a tech company today it wouldn’t be in the UK. Too much legislation.” Longdon has previously spoken to the press about the possibility of Aveva leaving the UK over the red tape issue, the details of which he will discuss at length. But how serious is he?

“Would we actually move away? We think about it from time to time. We would still have this office in Cambridge together with all the people here, and would just relocate the headquarters. But the company is becoming more and more diverse at management level. […] Businesses like us want to be successful on the global stage. We just happen to be in the UK but it is not a big driver for us. The big driver is Asia.” This is not because Aveva doesn’t want to pay tax, emphasises Longdon, but due to regulation: “Our future competitors are going to be mostly American or Asian businesses, so we want to be in a place where we can be the most competitive.”

In the fast lane
At 58, Longdon will hit his retirement age in four years, but reckons he may keep working: “But my lifestyle is not conducive to living a long time!” He jokes, because he loves cars to the point he is running out of garages. He reluctantly gives me the number of vehicles in his possession, as he doesn’t want to come across as just being in it for the money. There’s a photo of one of the Aston Martins next to the wall of awards, he has a Lamborghini, couple of motorbikes, a boat. He is part-owner in a pub chain, he likes skiing. “I am just mad keen on life, really.”

Longdon reckons he may become a Chairman one day, but it’s not something he spends any time thinking about. Asked about mentors, Longdon notes Aveva alumni Robin Lee, who was part of the MBO, and Richard King, the first Chairman following the MBO: “King is a terrific guy. We naively thought we were picking our Chairman when we went to interview him for the role, but he said, ‘You think you are interviewing me for the job, but I am seeing if you are good enough to have me!’ He saw us through some really difficult situations.” Longdon pauses for a moment. “To be honest, being a CEO can be a lonely job sometimes, because you can’t cry on anybody’s shoulder.” The Chairman is an exception to this, he adds, as long as you have a good one, like Aveva does again now with Phil Aiken. “You have to lead from the front and give the impression that we are going to fix this, even if in that moment you don’t know how. […] You have to be good at being self motivated. You have to get up every day and get back to the fight.”

The business of people

Published in Megabuyte, November 2012. Original article here (£).

The Megabuyte Interview: Martin Leuw
The business of people

It must be good to be Martin Leuw these days. Looking back, he has a decade of overseeing IRIS as its annual revenues grew from £9m to £120m in 2011, making it one of the UK’s biggest private software groups. This is a pretty decent CV to flaunt around as Leuw decides what he wants to do next. “My canvas is gradually being filled up,” he says as we are discussing his various projects, of which there are many – but it’s clear the businessman is excited by the relative freedom he is currently enjoying.

“I decided to leave IRIS because I wanted more variety,” says Leuw as I ask what it’s like to start afresh after such a long and involved task. We’re in a café in London’s West End, where Leuw likes to go because it’s good for work and has WiFi. He’s in a sharp suit, but his elegant cufflinks are contrasted by a sporty wrist watch and a saffron-coloured string bracelet. Leuw’s morning has taken him from his North London home, where he works in his garage office, to a meeting at the Prince’s Trust, and later he has a business lunch and a meeting in South London. One day a week he goes to Clearswift’s offices in Theale near Reading: “My life is very mobile, which is what I like.”

Growth and talent
Leuw joined Clearswift last November as a “significant minority” when Lyceum Capital backed the management’s buy-out. Leuw is acting as executive chairman until a new CEO is appointed, news on which should follow shortly. “What I’m looking for is a small number of businesses that I can invest in at the early stage, or mid-market companies like Clearswift. I’ve also invested in a start-up investment scheme as effectively an angel investor. I’m really looking for a mix of opportunities where I’m backing talent and putting money into areas with good growth potential,” says Leuw. While he can see himself as an active investor in several companies, Leuw’s aim is to be involved in about three companies, meaning there should be more board roles to come: “But most important is to make a difference, personally. I want to back talent, and I want to be in businesses I can be proud of and excited about.”

This potential is one Leuw sees in Clearswift, which he considers to have a significant opportunity to become a notable player in its particular slice of the security software market: “We’re in the contents inspection and data part of the market, focusing on helping organisations protect valuable IP such as confidential records and customer data from leaving the organisation, as well as providing protection from external threats,” says Leuw, describing the business model as one he knows well: “It’s a high growth business based on subscription, so about 80% of revenues comes through regular contracts.” Leuw was drawn to Clearswift, which generated £19m in revenues last year, because it already sells to Government, defence and other major organisations: “It’s a blue chip customer base you’d give your right arm for. But the business was nowhere near as differentiated as it could be, so a lot of the work is about pulling out those key areas and seeing where we can better meet market needs.”

But back to leaving IRIS. Leuw is only 50, so does the fact that he’s not looking to be CEO again mean there is a limit to how many times you want such an undertaking? After all, raising a family is rewarding, but maybe once is enough? Leuw laughs, before conceding it takes a lot out of you emotionally to grow a company from 100 to 1200 people. “The big challenge wasn’t moving from one business to another, but from one business to nothing. When I left IRIS I thought, ‘Now what do I do?’ It was like starting with a blank canvas, having a rough idea what you want your painting to look like but not having put in the details,” says Leuw, who is learning to paint and draw. “My aim is to spend, very roughly, a third of seven days on office and business activities, a third on charitable activities and philanthropy, and a third on leisure.” The latter is the purpose of Leuw’s upcoming trip to China, one of many things he’s always wanted to do but never had time for.

Focus on people
IRIS wasn’t the first company Leuw grew, though. Before arriving at the business software group in his mid-30s, he ran a small cartoon animation company which he turned around from being lossmaking. He then created and rapidly built Access24, an award-winning corporate venture within PPP Healthcare, before running venture capital-backed dot.com Medidesk. “The most important thing I learnt along the way was really about developing a vision and a strategy for a business. So if you’re a David in a market full of Goliaths, rather than going head-on, how can you find ways to differentiate? You want to be running rings around the giant, throwing stones rather than being squashed.”

Throughout our chat, Leuw keeps coming back to the importance of creating a strong management team. Leuw’s IRIS figured out it could gain market share through selling software on subscriptions way before Saas was a thing, not to mention how the IRIS experience has instilled in Leuw lessons about providing the sort of direct service that makes customers recommend you to others. But the end it’s all about who you surround yourself with:

“The big, big lesson for me was about people. If I look back, quite often when you’re growing a business it’s very easy to fall into the trap of taking on people who are good at the time but don’t have the capacity to grow. [...] I’m a very strong advocate of developing people and teams, but at the senior level it has to be people with the capability to take the business forward,” says Leuw, who recently spoke at a conference where most of the 100 CEOs present conceded to having significant weaknesses within the senior management, but practically no one had plans for how to fix it.

But how does this happen, I ask; these CEOs aren’t oblivious to their problem? Leuw explains how this is a risk particularly with growing companies, as the team can be fine one day, but when growth changes things, this may no longer be the case. “A focus at IRIS was developing the team leaders and middle-managers along the way, so we had the strength throughout. Often when people get promoted, businesses don’t put in place the framework and support to help the person move into that new role.” Business culture is a key focus for Leuw, who sees this as crucial for building a sustainable business with happy customers. “If you’ve got highly motivated people coming into work who love what they’re doing, they will provide really good service to their customers.”

The private equity experience
IRIS underwent a number of changes in terms of backers while Leuw was at the helm, having first joined during the tenure of Lloyds TSB Development Capital. Hg Capital backed a buyout in 2004, then Hellman & Friedman came along in 2007 and majority-funded an IRIS enlarged by merger, before Hg Capital returned in 2011 and created two separate groups, IAS and CSH. When asked whether it is conducive to a company’s development to keep changing its backers like this, Leuw compares it to how a stockmarket-listed company won’t change the way it’s run just because someone buys or sells shares: “Quite often what people don’t realise is that generally speaking, the same thing should apply with a mid-market private equity house. [...] One of the lessons I learnt when I was first running a small VC-led business is that you can’t let the institutional shareholders drive the strategy too hard. Their focus is quite often on exit, but you have to be careful not to let that get in the way. An exit strategy is very much a shareholder strategy; a business strategy needs to be driven by a chief executive, with help from a chairman, as I’m doing now.”

In the current climate of companies increasingly choosing private over public life, Leuw continues to be a fan of the private equity model because it allows for a longer-term perspective: “In the mid-market, you often need to make changes and invest for growth. The challenge of running a [smaller] public company is how your market doesn’t like short-term reductions in profit while you’re building up.” Clearswift is now undergoing significant changes in terms of management and product development: “It would be much harder to do that in a public company environment.”

The key to thriving as a privately-backed company is choosing carefully who your backers are, emphasises Leuw. “At IRIS we didn’t say, ‘Who is going to pay the most money?’. We focused on which investors would work well with us, and add the most value. Obviously price came into it, but we wanted to ensure we would have investors to take us on the next phase of our journey. It’s a bit like a dating agency. You’re meeting different investors and you’ve got to decide: Is the chemistry right? What kind of investor are they? Are they hands off? Hands on? Do they have sector experience? Would they add value? Have they got deeper pockets to provide follow-on investment?” Not to mention how they had behaved with previous companies, especially at the point of exit, adds Leuw, who’d collect numerous references to answer this question.

All about the challenge
Right now, Leuw is looking at a range of ventures he considers to be potentially disruptive to existing marketplaces. “I think this is a really exciting time. The economic climate is driving people to do things differently; they say the best time to start a business is during a recession because it drives change and evolution that much quicker. I’m coming across a lot of young [business] people with new ways of doing things.”

One of these young industrious people is Leuw’s 23 year old daughter, who is launching her own web-based business to the pride of her father. “Often what holds us back is our own fear of failure. In my 20s I kept meeting people who lacked some expertise, but they got a long way with confidence. Believing in yourself is one of the most important things. I have also learnt not to be shy about networking, and not to be scared of reaching out, because you’d be amazed by how many people are willing to help.”

Leuw has a business degree specialising in marketing from Manchester University, after gaining his first arbitrage lessons as a teenager when he sold first-edition books to West End specialists after having seen them cheaper in the suburbs. He then trained as a chartered accountant, before earning his first director role in his late 20s and running his first business at 31. A key influence was Leuw’s grandfather, an East End immigrant who built a series of ventures before going on to found a business school at a college at Oxford University: “He was very provocative, innovative and did things differently.”

Quick to credit mentors with helping him developing a mind for business and introducing him to people, part of the reason Leuw wants to step into an advisory role is a desire to do the same for others. But ultimately, Leuw likes to create things, and he likes a challenge: “If someone tells me I can’t do something, I take it as a red flag to do it. It’s quite interesting! When I started at IRIS they’d just done a £30m buyout, and I said to my shareholders: ‘I really think we should set a target for £100m when we come to exit.’ I was told, ‘Martin, please don’t say that publicly because it’s a big stretch.’ But I told the whole company. I always wanted the business to be the best rather than the biggest, but in terms of the size, that’s where I wanted to get. Any area I go into, I like to challenge and provoke and do things differently.”

The hedge entrepreneur

Published in Hedge Magazine, October 2012. (Original article here, p32-36)

The hedge entrepreneur: Investing is believing
Ambition is in plentiful supply for Jeroen Tielman of IMQubator, the hedge fund seeder with the self-appointed mandate to lead the change for the new generation of alternative investment management. This is certainly a tall order, but the CEO and founder seems confident he may be the man for the time and place: “We believe we are facing a new normality, and what that means exactly is not yet clear.”

Having founded IMQubator during the turbulence of January 2009, Jeroen Tielman is not sitting around waiting for the markets to get back to pre-downturn conditions. Over teas in London’s Fitzrovia, the Dutchman explained to us how he believes we will see a stabilisation, however investors need to understand that life as we knew it is over. “There is a fundamental uncertainty amongst investors, because we seem to be moving into a new era, as compared to the last 40 years. This is a major change that could make investors more reluctant, but it could also push them to put more money into a skill-based asset class such as hedge funds.”

The first investor getting onboard with the philosophy presented by Tielman, formerly global head of product development at ABN Amro Asset Management, was APG, which manages the assets of the largest Dutch pension fund. The Eur250m committed by APG is almost fully invested now, says Tielman, but what does his principles for next generation hedge funds look like in practice?

“Even before the beginning of the crisis, back in 2008, investors had certain complaints about the functioning of hedge funds. This led to a realisation: the provision of seeding capital to new hedge funds, led by people who had been very successful in the past, represents a unique moment of true alignment of interest between the investor and the fund manager,” says Tielman. For investors, getting in on the ground means being able to customise their product: influence charges, improve transparency, gain consultation rights, and so on. By making investors into co-launchers, they are no longer passive consumers of a product.

A key consequence of this approach is a better understanding of the investment, especially the risks involved. Better transparency is a significant part of this, says Tielman, as well as equalising the division of responsibility between the investor and the manager: “The interesting observation is how all products in the financial industry are being engineered by the suppliers. Hence in the whole governance structure, the interest may become skewed towards those of the suppliers.” By participating in the set-up process of the product, investors have the opportunity to correct this potential imbalance.

Of course, this method means investors could be additionally out of pocket should something go wrong. The downside depends on the level of involvement, says Tielman, as he explains how IMQubator may typically invest the first first ticket of Eur25m, and take a 25% stake in the company in question. The equity will be secured at a nominal amount, meaning investors will only lose a very small sum should the stake prove worthless. If things go well, however, the equity could result in a nice bonus.

As to the fund’s performance, IMQubator will not publish numbers, however Tielman confirms the aim for the total portfolio is capital preservation in these so-called “abnormal” market conditions. In more “stable” circumstances, the aim is a 7-9% return: “I would not say this is a low-risk portfolio, but we are not aiming to shoot out the lights with a highly risky approach either. It is a solid and stable portfolio.

IMQubator currently runs nine funds, with Volvar Eurozone Volatility being the most recently launched this February. Its mandate is to make lemonade from a very large pile of lemons, laughs Tielman, before conceding: “But it is a challenge to find the winning strategy in the current climate.” Still, during the first month of operation it had a return of over 3% with its a volatility arbitrage strategy; “It is invested in several derivative instruments where they benefited from changes in volatility in the market.”

IMQubator’s most established fund is the Branta Solutions Fund, which has performed steadily since inception: “They are really showing the market that a sustainability theme can be actively implemented, instead of just being a passive filter excluding certain activities.” Also interesting is the Mcapital Special Situations Fund, investing in stressed and distressed credit funds in Asia and Europe: “We may expect some uploading of distressed securities by banks down the road, and the capital is well positioned to benefit from that, if and when it happens.”

With each fund run by its own dedicated management team, Amsterdam-based IMQubator has six people in the core team, soon to become seven. Tielman oversees dealmaking and valuation of individual funds, while CIO Rikard Lundgreen, formerly CIO of Folksam Asset Management and founder of advisory group Valor Partners, oversees total performance. COO Remco Zomer, formerly of investment group Orca Finance, tends to operations and structure. Tielman emphasises how selecting the right people to work for, and with, IMQubator, is crucial for the company: “And not just in terms of what people have done in the past and how natural is it for them to start their own fund, but also their passion and drive.” In a timely metaphor, Tielman looks to hire people who not only have the drive to want to join the investment Olympics, but who also stand a good chance of winning in their respective disciplines.

On that note, May saw IMQubator launch the Capital Introduction Network, which means the group will work with a selection of small boutique placement agents enjoying longstanding relationships with their clients. So far, seven agents, operating out of New York, the Middle East and continental Europe, have joined the network, which theoretically gives IMQubator access to 240 additional end-investors. Another initiative now underway is the pair-up with Synergy Fund Management, which was launched in January with the exciting mandate of seeding and accelerating emerging hedge fund managers in the Asia-Pacific region. Tielman is however careful to manage expectations for the initiative: “It is a step by step approach which could turn into a mutual advisorship. We see this cooperation, currently focused on sourcing managers, as a logical step to get to know each other, and to see what opportunities are available.”

Still, Tielman is optimistic when it comes to emerging managers as an investment niche, which he seens as a relatively new and unknown, but growing area: “Curiosity, skill, and the ability to learn from every step is what you need to enter such an area. With emerging managers you need a moment of alignment of capital and talent, and this is more tangible than investing in mature hedge funds.” Tielman points out how US pension funds have tentatively started denominating emerging hedge fund managers as a separate asset class, a trend also spotted in Asia and the Middle East.

While always quick to qualify his visions for his company and the industry, Tielman is determined to grow the IMQubator business. And there is no doubt he is having fun with the task, bringing onboard an entrepreneurial spirit as he develops his new approach to alternative investment management: “Yes, I’m enjoying it, absolutely!” Right now this means getting more high profile investors onboard and talks are underway to this end, and eventually Tielman also wants to expand IMQubator to international locations. “We will also aim to provide acceleration capital in addition to seed capital,” says Tielman when asked to cast his net even further into the future. “In the long-term, we believe seeding capital is not only very interesting for hedge funds, but also for private equity funds. So there you have my wishlist.”

The social revolution

Published in Megabuyte, July 2012. Original article here (£).

Letter from the West Coast
3. The social revolution

“Yammer is going to be huge,” I remember thinking as I walked down the street after meeting with co-founder Adam Pisoni in San Francisco, feeling buzzed up and inspired about how technology is changing the way we live and work. Yammer may be an enterprise social network group, but what CTO Pisoni and CEO David Sacks are trying to do is to change the way companies collaborate and innovate.

It was only a few weeks later it became clear that the mighty Microsoft had reached a similar conclusion, putting down $1.2bn to secure Yammer. Microsoft CEO Steve Ballmer pledged to let Yammer continue to develop standalone services and “maintain its commitment to simplicity, innovation and cross-platform experiences”, before talk turned to “complementary offerings” and integration with Microsoft Office. We can only hope this coupling works out for Yammer, which is only four years old and could potentially benefit from a hand in dealing with its supersonic growth. And as Microsoft’s move into social follows Salesforce’s buying of Buddy Media, and Oracle’s buying of Virtue and Collective Intellect, let there be no doubt: social business tools will be part of our future, and it will happen soon.

The cross-platform hub
The day I met with Adam Pisoni, however, there was not so much as a whisper around to reveal what was in the works. If Pisoni knew, he certainly gave nothing away. Yammer has been doing pretty well on its own though: over 5m corporate users on a freemium model, including employees at 85% of the Fortune 500, of which 20% are paying customers. This percentage is double that of the industry average, as estimated by Constellation Research. Yammer’s revenues have not been disclosed, but speculation puts it between $22-30m. So how did Yammer manage to get so far so quickly?

“The market is so large and growing so fast. We are partially a catalyst for the growth of this market, but it is growing despite us,” says Pisoni, pointing out that more than half of Yammer’s traffic is now in Europe even though the company is not really present there yet. A big push is now underway in London, which Pisoni expects to be huge this year. But still, Yammer must have something going for itself; it is not like customers are lacking in options, especially with Salesforce’s Chatter benefiting from the name-recognition factor. On this note, Pisoni argues that Chatter is a good activity stream sitting on top of Salesforce’s other functions, but it is not really an enterprise social network because it does not let people collaborate in the same way as Yammer does: “Chatter is not meant to be your aggregated activity stream across all your applications. … Our goal is to be the enterprise social network, to be the hub of where people come to get work done, communicate and collaborate.”

Innovation at the edges
As 13-year-old Salesforce is getting on a bit in technology years, this brings about the questions about innovation and cannibalisation of the old models. This, however, is where Yammer starts to look different, as part of its business model is to avoid exactly this pattern: “What is becoming more important is how quickly you can innovate, not how quickly you can preserve value. Companies are not going to be defined as much by a product or service, you are going to be defined by your velocity and your ability to adapt.”

Most technology companies will say this, but for Yammer this shift is not only their philosophy: it is also their business plan. While Yammer is still small, Pisoni explains how customers are changing from an attitude of centralised innovation, where ideas are generated at the top and spread outward, to a system of innovation at the edges: “As older companies think about how to become more innovative they are doing it in an old way: ‘We need to figure out the next innovation.’ But there is no next innovation! It is about constant innovation, and organising around letting everyone innovate.”

Yammer’s software is designed to enable this new culture of creation to unfold on a practical level. The key elements to empower employees and decentralise execution, says Pisoni, as well as to operate on a transparent model where everyone can see what others are doing and build on it. This lets people connect and organise themselves in the optimal way, pushing past the boundaries of communication and job descriptions. “Yammer is all about self-organisation and empowerment but also transparency and trust, and you need both of those things to be successful,” says Pisoni. Better informed employees make better decisions, and in turn make the company more adaptable and innovative.

Creating the roadmap
As a former office worker, this sounds downright wonderful. But, I put to Pisoni, middle management is going to hate this. This is such a significant shift in thinking that it that may even require a generation shift to come to fruition.

“People ask us, who is your target customer? But is not a geography, it is not an industry, it is not a size. It is companies that recognise that they have to make this shift. [Our demographics are] an even slice across industry, geography, and size, but the consistency is that they are using Yammer to transform into a new kind of company.” While some people get it right away, Pisoni acknowledges that the novel nature of Yammer’s offerings mean lots of conversations with customers to help them see how they can take these ideas and use them in a practical way in their companies. “There are not really any good roadmaps. Plus to become a transparent company is difficult and there is friction involved,” says Pisoni. Explaining how this can be done, and why it is beneficial, is a big part of Yammer’s challenge.

‘Facebook for business’ tends to be the shortest way to explain what it is Yammer does, and it has played a significant part in helping people understand the basics of Yammer’s operations. But considering Pisoni’s face when I bring this up, these reference points are starting to feel limiting.

“The comparison was somewhat useful in the beginning, but yes, now we find a little bit annoying.” Pisoni laughs. “Really early on, we started Yammer because we recognised where this new form of [self-organising meta-to-meta] communication was going. It was revolutionising how we communicate in our personal lives [through social media], and this was likely to go to enterprise,” says Pisoni, emphasising that Yammer was the first to come out and state their intention to become a social enterprise. The manifestation of this, however, looks very different from Facebook. In the business context, the focus is on people self-organising into groups, getting work done as teams, and integrating with applications and business processes.

Yammer’s interface also distinguishes between content generated by people and applications, a factor which Pisoni highlights as an advantage over Chatter and Tibbr: “You do not want the human generated content be pushed down [the information stream] by a mass volume of computer generated content such as printers out of ink. Over time we will let people interact with [computer-generated] stories: they can comment on them, or ‘like’ them, and that will move them over into the human-generated content feed as it has been signalled that people care about it.” What Yammer is doing now is developing its cross-application workflow systems, meaning data will flow together whether it is from SharePoint, Salesforce, NetSuite or elsewhere. As data volumes grow, the human interaction with the content will be crucial to determine its importance, hence helping the system keep noise at a manageable level for the individual users.

A softer world
Business evolution is no longer a seminar that is held once a year: it is becoming a way of life. Pisoni is proud that Yammer practices what it preaches: a decentralised organisation where innovation happens at the edges. Staff who feel empowered make for better workers, and the role of management is shifted from telling everyone what to do, to organising people so they can interact and create in an efficient manner.

This approach is different from what came before and can feel a bit fuzzy and difficult to quantify, but this is what happens in a social space. What Facebook, Twitter, Tumblr and all the other social networks have done is to take something people do naturally offline and move it online, and the likes of Yammer are picking up the elements that can improve business relationships. A new entrant on on the social technology scene is Pinterest, which was founded three years ago in Palo Alto by Ben Silberman and Evan Sharp. Now with over 10m users, Pinterest lets users create ‘pinboards’ of images and share them, like themed scrapbooks: “The things you collect says so much about who you are and what you are interest in. That is what I wanted to capture with Pinterest,” said CEO Ben Silberman at March’s SXSW gathering in Texas. “I cannot say the idea came from hard-nosed business analysis. It was just something I really wanted to see built,” said Silberman, who admits the company is still experimenting with revenue models. So far affiliate links seems to be the main method.

Pinterest’s product-before-money attitude is mirrored by Facebook’s Mark Zuckerberg, who declared in his IPO letter an intent to make money to create better services and not the other way around. There are two reasons this is not as crazy as it may seem, starting with the fact that social tools are based on people choosing to spend significant amounts of time on these sites; in order for this to happen, people need to feel they are having a genuine experience with other people, with the selling kept in the background. Then there is the fact that our expectations have never been higher: “People can use Facebook which is the pinnacle of social design. They can use Apple which is the height of interactive design. They can use Google products which are beacons of efficiency,” said Silberman. “If you do not give people something that is worth their time, they should not give you their time.”

The differentiation is often a sleek interface and beautiful design, as efficiency is no longer enough and we need a little something extra to be charmed. Pisoni talks about the joy of creating a product that makes people’s workday better; Silberman kept saying how satisfying it is to create a beautiful site where people can share things that make them happy; Zuckerberg wants to change the world, plain and simple. The new social layer means technology is no longer just about creating something that works and making some cash, but to make things better, more beautiful, more meaningful. Now that the human element has been mixed into technology there is no turning back.

The innovation cycle: The agony and the ecstasy

Published in Megabuyte, June 2012. Original article here (£).

Letter from the West Coast
2: The innovation cycle: The agony and the ecstasy

Instagram, the popular photo-sharing app, drew a $1bn price tag when Facebook came knocking back in April. It is a massive leap of faith to pay this much for a company lacking that pesky thing that is a revenue model, but equally, it is a powerful signal as to the importance of photos in the new social internet future. So then why is it that just four months earlier, the inventor of the hand-held camera filed for bankruptcy? It is not like people had lost interest in photography, the lifeblood of Kodak, in fact quite the opposite.

When it folded, Kodak was worth almost exactly as much in cash as Instagram was worth in dreams. Instagram was funded on just $500,000 back in October 2010, with a second round in February 2011 bringing onboard $7m from big-name investors. Of course we have the benefit of hindsight, but it would have been so easy for Kodak to make its own Instagram. So why did they not?

Small ideas in big companies
To be fair, Kodak had not exactly been sitting on its hands in the run-up to the bankruptcy; the 133-year-old company actually now draws 75% of its income from digital businesses. While change is constant, the current technological leap is bigger than usual: the coming of age of the internet means photography becomes digital, newspapers go online, music is available for immediate download, and books are read on e-paper. While Kodak had the money to try new things, it would seem that it did not quite have the courage to shake things up to the extent that was really necessary to survive.

Before Oliver Roup founded VigLink, the web-content monetisation software group in 2009, he was in charge of products for Microsoft’s media outfits such as XBox Live Video Marketplace and MSN Entertainment. At the time of our meeting in San Francisco, Roup’s idea had grown into a 22-people-strong operation. So why did he leave Microsoft to do this?

“The main reason I left was to get more autonomy. I wanted to build something of my own,” said Roup. When looking ahead at the kinds of projects he would be working with at a big company like Microsoft, he found they paled in comparison with the excitement of entrepreneurship. But from the point of view of his former employer, why were they not bending over backwards to give industrious employees a chance to develop new ideas in-house?

“The thing is that their interests and goals are different. I think a company like Microsoft, if they could create a business worth a $100m a year, that is not even worth it to them. The intellectual overhead of even thinking about it …” Roup shrugged, but quickly added that this is not a reflection of incompetence nor malevolence on part of a big organisation: “Priorities shift when you are already making $60bn in revenues. In order to move the needle and impress your investors you have to make strides that are material to that number, and that’s a very hard thing to do.” In other words: they are looking for guarantees, and with start-up adventures there is no such thing.

The acquisition challenge
76 year old Spirent, the technology testing group operating out of Silicon Valley, only needs to point to its age to demonstrate its skills as an innovator. Successful acquisitions have played an important part for the Crawley-born company: the 2002 acquisition of Caw Networks, which makes network performance testing appliances, gave the group a foothold in a growing niche, while the same is hoped to be the case for Mu Dynamics, a cloud- and app-testing specialist brought onboard earlier this year.

“But acquisitions are always challenging. You have a different culture and you have a product that is fairly typically early in its life cycle. You have to nurture the relationship, the culture and the product area, and they are not always successful,” CEO Bill Burns said as we met in his Sunnydale office. The challenge of being able to predict which trend will spark and catch fire is immense, and even if you get the trend right, the technology may be wrong.

Take Cisco’s acquisition of Flip, the little pocket camera, which came at a time when personal videos and YouTube were booming. Cisco was right about the trend, but it was the smartphone that would become people’s recording device of choice. Burns added: “You wonder if a Kodak could have done something around enhancing photo activity. Could they have sold the intellectual property around cameras in smartphones? Could they have turned themselves into a web service around photo processing?” Not knowing exactly which trend was going to be the winner, Kodak hesitated too long and ended up missing the boat.

Now Research In Motion seems to be where Kodak was a few years ago, instilling fear in the hearts of those of us still dedicated to the BlackBerry. “There are some things they excel in, such as battery life,” said Burns. “I think it is about the refinement of the product over time. They probably got too wedded to their keyboard.” RIM probably had numerous user surveys telling them never to do away with that keyboard, but then Apple, a beacon of innovation, came along with their touchpad, and lo and behold. As Steve Jobs once said: “People do not know what they want until you show it to them.”

The cannibalisation dilemma
Eric Kessler, co-president of cable TV channel HBO caused a stir last month when he said he thinks the move away from traditional TV to an internet-based model is just a “temporary phenomenon”. Consider then the fact the HBO series “Game of Thrones” is rapidly becoming the most pirated TV show of all times, with over 25 million downloads this spring as HBO refuses to let people pay for new episodes on Netflix, Hulu or iTunes.

VigLink’s Roup pointed out how the issue is difficult for HBO because the group gets most of their money from the network operators, and an online service would cannibalise this. Kessler is taking the conservative stance and sticking with what he knows, which makes sense. Added Roup: “If [at HBO] you throw out the Comcast business to go after that web business, maybe ten years from now someone else will be glad you did. But you will be out of a job, and that is what makes it hard.”

The fact that it is difficult for established companies to take chances is also part of what creates opportunities for start-ups. For young software companies, providing a pure Cloud offering from day one means they come across as modern and nimble, unencumbered by transitional issues. These remain a source of unending distractions for the incumbents as they try to keep everyone – new and old customers, as well as investors – happy, while they try and keep up with neverending change. But as a company grows and the management becomes invested in the status quo, is it possible to maintain that start-up spirit?

Staying ahead
“The start-up spirit was essential to us when we were tiny, we would not have survived without it. But it is hard to keep working at the pace and intensity of a start-up forever,” said Suranga Chandratillake, CEO of video search software outfit Blinkx. For large companies it is possible to throw money at the problem and buy what looks good from the upstart pool, and then strive to find the right balance between nurturing the growing company and leaving the entrepreneurs at the helm alone as much as possible lest they feel stifled and leave.

As Microsoft is looking to pay as much as $1bn for Yammer, it is hard not to be fearful: what if the tech giant starts stomping around at Yammer, imposing rules and processes and demanding ties instead of jeans. After meeting Adam Pisoni, co-founder and CTO at Yammer, it is hard to picture him being happy as a cog in the Microsoft machine.

“The thing that excites me [about running a start-up] first of all is the idea that we can build products that people want to use. I recognise that that is a bit vain, even,” said Pisoni. “The other part is feeling like you can build a better company. That you cannot only build a better product, but you can build a company that is sustainable, that is a better company than those who have done it before.” Before establishing Yammer just four years ago, Pisoni was software architect at Geni; he was instrumental in the systems architecture at Shopzilla; he co-founded web development consultancy, Cnation, which serviced big names such as CBS, Fox, Nissan and Honda.

And while the point about the jeans may sound superficial, Chandratillake argues that it is not: “It may sound silly, but things like this makes a big difference to the atmosphere at a small company.” This is also why Blinkx, whose market value has reached £150m, will regularly put engineers in start-up mode when working on new projects. “We pull people together from different teams, put them in a room together and give them crazy deadlines,” says Chandratillake. “Many of our employees find it empowering to work like that every now and again. It gives them a sense of ownership over the product. Keeping the start-up spirit alive is an important tool for staying ahead.”

Child’s play: Banking for boomers, generation X, Y, Z and beyond

Published in Banking Insight, June 2012. Original article here.

Child’s play: Banking for boomers, generation X, Y, Z and beyond
As the digital natives are growing up, banks are discovering the generation gap is bigger than usual. Soon the baby boomers will no longer be the biggest customer group, meaning banks are facing the pressing challenge of catering to the unique tastes of the millennial generation.

Rapid advancements in technology are changing the way we interact with each other. The more we can do over the internet and via mobile phones, the more we come to expect the same convenience when conducting business. For banks, this means heightened expectations for how people want to manage their money and interact with their financial advisors.

The banking industry has dealt with generational changes before, but the digital natives of Generation Y (Gen-Y) have brought about a unique set of challenges. In essence, the group of banking customers now aged between 18 and 30 are more different than usual, meaning banks have to step up their game.

“Gen-Y is so different from their predecessors that banks must understand their needs if they want them as their customers. Banks will need to use an approach distinctly different from anything they have been accustomed to in the past,” concluded technology group Oracle in its report on Gen-Y banking, developed in collaboration with the European Financial Marketing Association. “The imperative is that as the economic power of Gen-Y expands, its members will change how financial transactions are conducted, together with patterns of spending, saving and investments.”

Boomers, and their “silver generation” parents, currently make up the biggest segment of the banking population. Boomers are people born between 1945 and 1960, followed by Gen-X, born between 1960 and 1979. Gen-Y is the millennial generation, specifically those born between 1980 and 1992, and it is the gap between this group and its predecessors that has got banks worried; this is the first group of customers who were raised on the internet. And like it or not, Gen-Y will supplant the older generation as the largest customer segment by population by the end of this decade, according to research by technology group Cisco.

What millennials want
“We live differently now. Together, technology and customer demand are driving a complete transformation of how banking is done. There is a growing global tribe of consumers who want anytime access to services and banking is no exception,” said Steve Bertamini, chief executive officer of consumer banking at Standard Chartered. A personalised experience sits at the heart of these expectations: Gen-Y wants to be treated as individuals.

Technology is the backbone of this change. Gen-Y is comfortable using online forums to communicate and solve problems, they like talking to customer services representatives in company chat rooms, they like receiving information via video, and they like to be able to access all these things on their own time, either on their computer or their mobile phone.

“Banks have a tremendous opportunity to provide Gen-Y and Gen-X consumers with personalised advice and value propositions. In fact, retail banks that execute correctly will become financial services providers of choice for these consumer categories,” concluded Philip Farah at Cisco IBSG, in his report on the next growth opportunity for banks.

Farah has outlined three key elements for banks to meet the needs of Gen-Y customers: a mobile-enabled online interface for personal finance management emphasising a holistic view of the customers’ needs; a video-centric advisory model that allows customers to interact with bank staff; a bank-moderated community or social networking venue providing virtualised advice on demand.

While offering extensive online banking facilities will be a great start for banks to appeal to young customers, research from global professional services group PricewaterhouseCoopers (PwC) shows there are significant opportunities for those willing to take it a step further. The majority of respondents in an international survey were willing to pay up to £10 a month for digital banking services if they perceived them to offer both convenience and value. Features of particular appeal include social media notifications, and an electronic wallet for loyalty cards where accumulated points were converted into cash, according to PwC’s report, ‘The new digital tipping point’. The future’s digital features will, according to PwC, be focused on innovations in user experience; mobile devices and networks; social media and collaboration; customers analytics; and channel integration.

A partnered approach
“The growth of digital has removed key barriers to market entry, including the need for large branch networks, customer inertia and brand trust,” said Nicola Shield, partner in the Northern retail and commercial banking group at PwC. “Because of this, banks need to consider strategic acquisitions or partnerships with digital innovators to secure their long-term position and market share. Incumbents in developing markets, where there is a larger share of unbanked consumers, will experience the greatest threat from new players if they do not improve their digital offerings.”

While many banks have already woken up to the fact that the up-and-coming generation of customers want a different experience, this is a far cry from being able to provide this in the manner expertly suited to meet their needs. Part of this is because it is not necessarily the most experienced bank executives who can best get into the heads of young adults.

“Engaging younger employees more actively may help provide the necessary reinforcements to accomplish this,” said Steven Hatfield of global professional services group Deloitte. In his report on Gen-Y banking, Hatfield has recommended leveraging key qualities of Gen-Y employees such as innovation, tech savvy, enthusiasm and creativity, in order to connect with younger customers. This view is echoed by PwC’s report, which emphasised the importance of connecting with external experts in technology, telecoms and other non-traditional banking providers; “Identifying partners to acquire or help deliver the vision becomes of critical importance.”

Scratching the surface
Standard Chartered has done just this, by handing over the development of its mobile banking platform ‘Breeze’ to a small team of mobile- and social media enthusiasts: “The best ideas will not necessarily come from the top, or even from bankers,” explained Steve Bertamini. “It also means changing the approach to the consumer, offering financial services in ways that matter to people’s lives.” An example of this is how Standard Chartered’s ‘Wishlist’, a savings feature within ‘Breeze’, has been integrated with Facebook and bulk discount aggregators, meaning people can share savings goals with friends and receive discounts from companies. Furthermore, ‘Breeze Living’ is Standard Chartered’s augmented reality smartphone application where users can capture and share merchant discounts while on the move.

In Australia, UBank is using a Facebook-presence to launch new product ideas and source user opinions. Collaboration is encouraged via the ‘Click to Chat’ tool, with other features available on the social network include savings tips, discussions and links to instructional videos on YouTube. Japan’s Jibun Bank is taking it even further by using the mobile channel as its primary means of contact with the consumer, allowing customers to open accounts using just their phone and its camera. “The point is that innovation is now about adding value to customers’ lives, not about what products we can offer,” said Bertamini. “In many ways, we have only just scratched the surface on how banking is going to change.”

While their earning power is not as great as their parents yet, capturing the attention of Gen-Y, and the upcoming Gen-Z, is important as they are now at an age where they are forming banking relationship they may keep for the rest of their lives. But having said that, the younger generation is more likely than ever to change banks if they are not happy: 36% of Gen-Y customers are planning to change banks due to increased fees, while 33% will leave if another bank provides solutions that would improve the customer experience, according to a survey from business management solutions provider Intuit Financial Services.

Past generations have been reluctant to swap banks, but as this is changing with Gen-Y, financial groups will need to provide continually fresh offerings if they are to keep this demanding lot happy. Furthermore, Gen-Y’s prolific use of social media platforms makes them extremely well connected, meaning they will quickly spread the word of a negative (or positive) experience. The good news is that customer service is a major attraction also for Gen-Y, a penchant they very much share with the Boomer generation.

The power of Boomers
“The Boomer generation likes to have a relationship with their banks, to meet with a friendly face and to speak with people who use their names,” said Suzie Mitchell, founder of Mitchell PR, a US public relations agency specialising in understanding Boomers.

While preparing to meet the needs of Gen-Y, banks should not forget the influence the Boomers still have; they act as advisors both for their children as well as their ageing parents. And it is a mistake to think that Boomers are not technologically savvy, asserted Mitchell: “78% of Boomers are online, and out of these, 55% bank online. We have to remember that Boomers grew up with technology too; Apple computers was not even invented when they were in college, meaning they have been using this technology since the early days.”

And teenagers are not the only ones eager to own a handy smartphone; as mobile devices and tablet computers become increasingly intuitive, Boomers are happy to download apps and use them for shopping. Ease of use is key to make the internet accessible for Boomers, especially smooth site navigation, logical placement of key information, uncluttered presentation and an overall sense of trustworthiness.

The main problem, however, is a concern over safety and privacy. While concerns about ‘Big Brother’ watching your internet activities will be a deterrent for some, the fear of online fraud remains the key fear for most Boomers. But Mitchell believes most older generation banking customers would be happy to use modern features if they were properly reassured they were safe: “Boomers are very adaptable.”

Banks have become better at protecting people as online banking technology has matured, but equally important has been to teach people about safeguarding their details online. “Better public information about computer safety could save huge numbers of people the hassle of having their personal details stolen,” said MP Andrew Miller, chairman of the UK House of Commons Science and Technology Committee. While determined fraudsters will still find ways, the committee concluded the internet is a “reasonably safe place” as long as people take “sensible precautions”.

While Boomers still pack the biggest punch in terms of spending power, the global financial downturn has prompted changes in their spending patterns that mean banks have even more reasons to turn their attention to the upcoming generations.

“Although banks have invested heavily in meeting the financial needs of Boomers, this segment has seen its financial prospects dim with the recent collapse of asset values. Many Boomers are pushing out plans to retire, revisiting their portfolios and spending less,” observed Cisco IBSG’s Farah. “Although increasing restraint and financial anxiety on the part of Boomers do not necessarily denote trouble for banks, interest and fee income associated with older consumers is at greater risk than in the past due to a decreased appetite for new loans and the coming transfer of wealth to younger generations.”

Meeting the challenge
The question now is whether banks are adequately prepared to meet the expectations of Gen-Y. Not everyone is convinced that this is the case: “Industry leaders are generally misunderstanding the profundity of this generation gap,” said Jim Van Dyke, president of research group Javelin Strategy & Research. Gen-Y and Gen-X will be tied in terms of income by 2020, on Javelin’s estimates; “The mobile, payments and financial services generation gap will cause many banks, payments firms and technology vendors to play catch-up, or simply miss out altogether on crucial market opportunities.”

Banks are facing a choice between the old, proven ways and the untested future, meaning new entrants who ‘get it’ could find this is their moment to undermine the incumbent providers. Some banks may view the Gen-Y trends as a distraction, risking alienation from the future customer base: “The victors will be those who recognise the changing ecosystem and set out on a clear digital vision for securing customers’ relationship primacy,” concluded the PwC report.

There is however a gap between understanding that something needs to be done, and knowing what that something is. Choosing the right technology and the right partners will be a key challenge for banks, which are typically large, complex organisations not normally known for their innovation or speed-to-market.

“In the future, banks will have to become serial innovators, move with the urgency of start-ups and look for ideas everywhere. The task is not only to meet customers’ needs but to capture their imagination,” said Standard Chartered’s Bertamini. “As I see it, the changes underway in technology and consumer demand represent not so much a threat but a great opportunity for banks to move to an unprecedented level of closeness with the customer. If we embrace it now, more than ever, we have the chance to make banking a true enabler in people’s lives, helping to change the industry for good.”

The magic in the Valley

Published in Megabuyte, June 2012. Original article here (£).

Letter from the West Coast
1: The magic in the Valley

Silicon Valley sounds like it should be an airborne construction of glass and steel, with flying cars whizzing around as entrepreneurs test out their latest inventions. But instead, this capital of innovation is string of small suburban towns: San Jose, Santa Clara, Sunnyvale, Mountain View and Palo Alto, all nestled in the crook of the San Francisco peninsula. So what is it about Silicon Valley that makes it the world’s most dynamic place to be a technology startup company?

During the month I spent in the Bay Area I spoke to several entrepreneurs about what it is about the Valley, and the same thing happened every time: their eyes lit up, and they used the word “buzz”. The best people come here, they said, generating such a volume of ideas at such a rapid pace. Being constantly surrounded by this pushes you, it forces you to up your game.

Something in the water
“You can look at every metric of our company and see that it inflected when we moved here. This includes user growth. I cannot even explain that. There is this energy here,” said Adam Pisoni, CTO and co-founder of Yammer, the enterprise social network. I met Pisoni a few weeks before reports surfaced that Microsoft is prepared to pay over $1 billion for Yammer, which has come a very long way in only four years. The company scores highly on the “cool” factor with its San Francisco office, which is full of people in jeans, roaming dogs and discarded bikes, surrounded by framed praise from Forrester, BizSpark, the New York Times and the Wall Street Journal. Yammer spent its first year in Los Angeles, but access to “the best talent in the world” is first on Pisoni’s list of reasons to be on the West Coast: “Also, when you are here there are so many great companies, the bar you set for yourself is higher. You are comparing yourself to the greatest companies, the fastest moving companies in the world. So you start taking your goalposts and throwing them way out in front of you.”

Mountain View, home to Google and neighbour to Facebook, is just an hour south of San Francisco, courtesy of Caltrain. Walking down the street of this little town that intellectual property built I was surprised to find the innovator spirit is actually present in a very physical sense. On Castro Street, the main thoroughfare, you can hear people in Mozilla Firefox shirts talking shop, while the next killer app is being drafted on a napkin upstairs at Red Rock Cafe. It was here it all started, in 1956, when William Shockley left Bell Labs over his conviction that it was silicon, not germanium, that was the future of the transistor. Shockley Semiconductor Laboratory now has a plaque to mark this fact, but the real legacy is probably that of having nurtured employee Gordon Moore to go found Intel in 1968.

The kids are allright
Down the road in Sunnyvale, next door to Yahoo and Juniper Networks, is the operational headquarters of London-listed Spirent. Founded in the UK in 1936, the £1bn market cap is by no means an upstart, but the tester of telecoms and networking equipment still sees a presence in the Valley as vital. “Our operational headquarters are here is because our largest customers are here. If you look at the Bay Area in general, whether it is Cisco or Juniper or Extreme or Broadcom or Brocade or all the IP companies, the Googles, the Facebooks, the Yahoos … clearly it is the centre of tech,” said CEO Bill Burns. “Everybody who is anybody in technology has some kind of presence here.”

While Spirent is not fighting for its place in the sun in the same way as a company like Yammer, it does not take much revision of Valley history to remember that the world of technology innovation is ruthless. While Burns acknowledges that being “a young CEO with a ponytail” is fashionable, he points out that most companies are run by people who have grown up in the industry. Still, Burns thinks the constant influx is valuable also to the established businesses: “It is good for the industry to have smart and innovative new ideas, because it pushes all the rest of the companies to continue to do that. It really is about trying to transform your business over and over again, because if you do not keep up and do not make that transition, someone else will supercede you. [...] Start-ups push bigger companies to be more innovative and make that change internally, or they go and acquire the new technology because the smaller company is further along with it.”

Friends of friends
Entrepreneurs keen on more urban settings in downtown San Francisco are mostly found in SoMa, an up-and-coming innercity area far from the chipper bells of the city’s ubiquitous cable cars. VigLink’s business is weblink monetisation, and founder and CEO Oliver Roup moved to San Francisco especially to set up the company in 2009, after leaving Microsoft.

“San Francisco is unmatched as far as the density of the people you want to reach. They are all right here, and many of our customers are a couple of blocks away. Every party you go to, every time you go to a bar you meet someone who is somehow related and helpful, and the ability to grow your network is amazing,” said Roup, as we met in his company’s warehouse office, where the birds on the walls reveal the former tenant’s identity as Twitter. In the Valley, Burns said similar things about the organic development of networks: “People meet at social or charity events, or while supporting local schools and universities. People are open and friendly and always willing to set up things. The introduction at an event is followed up with: ‘Hey, we met last week, we should go and have a coffee’.”

When asked why he decided to move to the city and not Palo Alto, Roup chalks this up to personal preference for an urban environment, and does not see the two as vitally different in terms of nurturing companies. The fundraising community, the venture capitalists, the banking resources, the law firms with the best technology knowledge for patents and M&A, all extend to cover the whole area. The same is also true on the flipside, however: the price of talent is steep. Every t-shirt wearing CEO I spoke to agreed that this is a place where the best engineers can wear what they want, come into work when they want (within reason) and collect good salaries before moving on to something new in a year or two. “But on balance, I think this the best place to start,” said Roup. “If you want to be an actor, you go to Hollywood; if you want to be in the money industry you go to New York;, if you want to be in start-ups you go to Silicon Valley. You can certainly do all those things in different cities, but you are not where the action is.”

Appetite for risk
Other cities could probably replicate many of Silicon Valley’s key characteristics to attract a startup community, but it would be hard to supercede the Valley’s size and history. The sheer tolerance for risk is a particular element that feels very alien from a UK perspective. Suranga Chandratillake, the San Francisco-based CEO of London-listed Blinkx, explained during our chat how the UK venture capital scene has many players from a finance or big company background, but you cannot use those criteria to assess a startup because they work completely differently.

“With a startup it is more about products, the market, and about what products will work for a market. It is about what kind of personalities you need to build a team,” said Chandratillake, who founded video search software specialist Blinkx in 2004 and spun it out from Autonomy in 2007. It is understandably hard for a venture capitalist to back an entrepreneur with nothing but a PowerPoint presentation and a big idea if he or she has no idea what that is like; this is an extreme example, but the West Coast is probably one of the very few places where that can happen. Part of the reason for this, said Chandratillake, is because the Valley now has an investor community that is established enough for former tech entrepreneurs to have gone full circle, meaning many are now part of the funding teams themselves.

And with tolerance for risk also comes a vastly more helpful and encouraging atmosphere. Sam Shank co-founded HotelTonight, a mobile app for same-day hotel bookings, in 2010. As we met in his SoMa offices, the CEO tells me how he found the Bay Area to provide a very different experience than other places in the US. “In Chicago, when I said I was starting a business, people said: ‘That’s so risky, I’d never do that.’ In Chicago, you get the five reasons why it is not going to work. In San Francisco, you get the five things you should do to be successful. You get, here is why you are going to succeed, and some introductions to help you succeed. Everyone wants you to succeed.”

Fail better
The fact that this hyper-optimism also allows for people to make mistakes is probably one of the key differences that makes Silicon Valley such a powerhouse. This attitude is instrumental to creating a nurturing space for feisty tech geeks to try out new ideas: you cannot make an omelette without breaking a few eggs. Of course, no one has forgot what it looks like when it goes wrong: the dot-com bust was only 12 years ago. And now, heat is again building in the sector, as seen with the values attached to the Facebook float and increasingly highly priced M&A activity with billion-dollar price tags for Instagram and Yammer.

Looking at the big picture, San Francisco is in many ways the ultimate boom-and-bust town, stretching all the way back to the Gold Rush in 1849. The same attitude that meant the city was rebuilt at a pace of 15 houses per day following the 1909 earthquake, which flattened the city, may be the very same reason the Bay Area has such an impressive track record for coming up with things that literally change our lives. There is of course the hope that the Valley has learned a thing or two from its previous failures, and will avoid busting quite so spectacularly again. Fingers crossed that 56 years of experience will count for something.

Video to the people: YouTube comes of age

Published in The Market magazine, June 2012. Original article here.

Video to the people: YouTube comes of age
As YouTube steps up to claim its place among the TV channels, the online video arena is hitting its stride. We explore the recent developments in this exciting space, and find video on the web is no longer just for fun, but increasingly a vital business tool.

Over 800 million people drop by YouTube every month, looking for music videos, film trailers and funny clips of cats in boxes. The online video pioneer is unsurpassed when it comes to bringing the world an abundance of dogs on skateboards, but still it is perhaps no surprise that YouTube wants more. There is certainly lots to come: since the 2011 confirmation that the group will be launching original content channels, hardly a week seems to go by without an announcement of newness from YouTube.

‘TeamUSA’ is one of these new channels, themed to the 2012 Olympic games. The parent group of the Tribeca Film Festival will make another channel, while ‘Life and Times’ is masterminded by rapper Jay-Z. Another is ‘Wigs’, created by ‘Black Swan’-producer Jon Avnet, to feature scripted dramas; this provides another example of how YouTube has included a number of big names in its new venture. Other channels include the ‘Red Bull’ action sports channel, ‘American Hipster’, ‘Young Hollywood Network’, and ‘My Damn Channel’ which broadcasts live comedy from established and emerging talent. The list goes on, and on top of this, YouTube has signed deals with film producers Paramount, Sony, Warner Bros and Universal to offer pay-per-view film streaming.

A dedicated shift
Having pledged to spend over $200 million to market the new channels, YouTube is clearly dedicated to this shift towards quality programming. One reason this has become relevant is because technology lets us feed the internet into our television sets, meaning we can watch YouTube channels from the sofa. But there are other drivers for YouTube’s new direction as well, one of them being competition from the likes of Vimeo. Both individuals and corporations are waking up to the value of moving content, and as with any technology company, YouTube must innovate or die.

“When we look at the internet, we see it will make possible a kind of channel that is more interactive and more niche than has been possible through one-way broadcasting. We want people to become the platforms for this next generation channel,” said YouTube chief executive officer (CEO) Salar Kamangar at January’s ‘Dive Into Media’ conference in California. While YouTube is committing significant resources to bringing in big names for its channels, this does not mean the company is no longer interested in the custom of its significant user base, which contribute 60 hours of video every single minute. But what YouTube wants to do now is to group this content into channels, meaning your video of a piano-playing toddler will be placed alongside similar content, not only generating more views per video (and more advertising money) but hopefully also creating a community group.

Interactive content is key to YouTube’s new strategy, and Anthony Zuiker, the producer behind the successful CSI crime drama franchise, has explained how he will incorporate viewer feedback into his YouTube channel. Another way for people to engage when watching sports is to choose which camera to view a game through, or eventually even have a say in what the coach does next. Niche content is another buzzword for YouTube, whose channels aim to enable broadcasters engaging viewers in a unique way.

“All this will be possible, and it will change the way we experience content,” asserted Kamangar: “When we look at the way the future is moving, we see the experience as being more niche, more interactive, more open, more global. So we are focusing our recent efforts as being a better platform for those kinds of channels.”

All about content
34 million Britons watched online videos in January, representing 80% of the total UK internet audience, according to digital research group ComScore. ComScore found the size of the video viewership to have remained stable in the past six months, however people are watching 28% more videos than before and spend 42% more time on them. This suggests not only that online video usage is a major trend, but also that people are migrating towards more engaging content.

“Like everything else on the web, online video is about content. It is easy to fixate on the hub [such as YouTube], but it really is all about the content. Take Facebook for example: you do not use it because it is nice, you use it because all your friends are there,” says Suranga Chandratillake, founder and CEO of Blinkx, a London-listed search engine for video and audio content. Blinkx is a spin-out from British success story Autonomy, which last year was bought by Hewett-Packard for over $10 billion. While YouTube’s business is based on hosting, Blinkx’s focus is on search to help people find visual content, be it from YouTube or elsewhere.

“YouTube grew fast in the early days, as it was the only place you could really get content. Now people watch things from other sources, such as Netflix and iTunes,” explains Chandratillake. “So things are different now. One moment you will be watching an episode of The Sopranos on Netflix, then next a cute kitten on YouTube. Both platforms matter, as people will go to the one that has the content they want.” He points to streaming site Hulu as a hub that was initially chastised for its poor interface, but eventually succeeded because it was able to offer popular videos.

“YouTube has realised that to generate and keep a large audience they need better content,” says Chandratillake when asked about YouTube’s decision to create original programming. The trouble, however, is that creating your own material is notoriously difficult. The AOL Time Warner merger, which the company itself has admitted was a big mistake, is a cautionary tale of just how wrong it can go when a platform company tries its hand at creation. Netflix is now working on its own programming, but the jury is out on how successful this has been. While YouTube has managed to secure alliances with entertainment companies to show films, Chandratillake points out that this is unlikely to be massively profitable for YouTube; he who owns the content gets a significant slice of the money pie. This also goes a long way to explain why YouTube ultimately wants to own this part of their business too.

Visual business
Attracting the big viewing crowds is key to generating any significant advertising money, but the online video trend has not gone unnoticed by business users. Consequently, YouTube and its peers are finding an increasing number of customers willing to pay for professional services.

“Video is a powerful communications tool, especially when trying to be heard above the chatter and increasing volumes of content online,” says Katy Howell, managing director at Immediate Future, a public relations group specialising in social media. “The medium is also remarkably flexible. It can be used for a variety of communications objectives,” adds Howell, describing how Dell uses video to explain technology features; BlackBerry to presents engaging case studies; Old Spice created a buzz around its videos to reposition the brand; and Tippex used in-video interaction to keep its product at the front of people’s minds. “Video can bring a more human side to a company, explain difficult ideas, but it will also bring concepts to life and create stories around brands that are more memorable, engaging and inspiring.”

Making an engaging video and putting it on YouTube is one thing, but companies need to get people to see them. 81% of marketers are now using online video, according to the Web Video Marketing Council, and the majority will combined it with email, websites and social networks. Howell believes social media is a natural fit for online video, providing a great way to ensure a video travels beyond the reach of the company website. “Also, social media allows audiences to interact with a video, whether that is through comments or by video replies; in fact the latter is often a way to further engage an audience and create more value for a video.” The proliferation of smartphones and tablets is an increasingly important driver for online video: nearly two-thirds of smartphone owners have watched video on their device, according to a survey from In-Stat. This number is even higher on tablets, where 86% of users have watched videos.

While Howell believes most companies understand the opportunity that video poses in order to communicate or explain a message, the question often centres on how much to invest in creating the content: “Quality video production not only requires great story telling and superb visuals, but often experience in filming and editing too,” says Howell. “Oftentimes companies try to create content cheaply, ignoring production values. And the results often fail to impress audiences or deliver tangible results.”

The advertising hook
For a corporation, making online video can be viewed as pure advertising, but technology has come a long way in allowing them to track how people are interacting with online services. “This year, more companies are asking the right questions. They are detailing who is watching and sharing their videos, delving into the demographics, optimising in real time and monitoring sales uplift and benchmarking results,” says Howell.

The same principle holds true for the advertisers, which are having to find new ways to interact with discerning internet users who will hit the “skip” button on ads they do not want to watch. “Users expect ads they want to watch,” said YouTube’s Kamangar, a sentiment echoed by Blinkx’s Chandratillake: “Instead of focusing on the performance of ads, where you pay per click or view, Blinkx focuses on brand-driven ads which are visual and emotive.” A key feature of the Blinkx software is the ability to recognise content and meaning from audio and video, enabling the group to place only relevant advertising alongside the content.

Enter the competition
A key competitor for YouTube is Vimeo, traditionally the choice of a more discerning user base such as independent filmmakers and graphic artists. But last year’s launch of Vimeo Pro ensured the platform has become a serious contender for business customers.

“We look at the space for professional video hosting as two extremes. There is the free services with limitations, and there is the other extreme of the professional services which tend to be very expensive. Our goal is to fill the void in the middle,” Vimeo general manager Dae Mellencamp said on ‘The Roadmap’, an online programme focusing on technology innovation. For only $200 a year, Vimeo Pro users will get 50 gigabytes of storage, enough for 500 five-minute high-definition videos. This should cover 99% of people’s needs, asserted Mellencamp, explaining how the service will give users the freedom to use their own company branding; a corporate Vimeo account will look like it is owned by the company and not just an extension of Vimeo. Private links are also possible, so if a group like a doctor’s surgery wants to use Vimeo they can make videos that go out only to their patients.

YouTube offers custom-branded channels as well, but the pricing is much less straightforward and closely linked with advertising spend. Companies will need to contact YouTube for price quotes, but the cost will likely start at four figures and go up from there. This means Vimeo should be able to carve out a niche here. “I have the impression companies are increasingly choosing Vimeo over YouTube for their business videos,” says Blinkx’s Chandratillake.

Vimeo is still small compared to YouTube, but the Goliath will likely be keeping an eye on Vimeo’s David; the latter has been praised for placing the user experience at the forefront with an uncluttered interface that avoids pre-roll ads. This tactic paid off when Apple chose Vimeo, not YouTube, as its partner for the new Mountain Lion operating system.

Still, YouTube looks to be pretty wholeheartedly focused on creating its own content, meaning there will likely be room for several operators in the various niches of the online video market. One thing is certain: as this arena grows at a rapid pace, the race is on for the participants to stake out their claim on this brave new world.

The ghost in the machine

Published in The Market magazine, January 2012. Original article here.

The ghost in the machine:
Why is the stockmarket so unpredictable?
The stockmarket is far more emotionally charged than logic dictates, constantly swinging between fear and greed. We spoke with consultant Michael Cahill about the psychology of the stockmarket, and how a finer awareness about our strengths and weaknesses as decision-makers can make us better investors.

At first glance, the stockmarket can appear jittery, mysterious and maybe even treacherous. Companies’ share prices can move even if nothing new has happened, or stocks can fail to respond even though the business has just issued a trading update. The explanation is usually there after a bit of investigation: maybe the stock responded to news from a competitor, or if there was lack of enthusiasm, the market could have already anticipated the news before it happened and pre-adjusted the stock.

The problem is we need the benefit of hindsight to see these patterns, while investment is all about the future. While we can make highly educated guesses, the fact remains that in the days leading up to an event it is ultimately guesswork. Sometimes expectations can get overheated: shares in Symantec fell when the security giant reported excellent numbers in October, because the market got ahead of itself and expected even more growth.

The difficulty in getting it right is further illustrated by the fact that only 33% of full-time investment professionals managed to add value in 2011, according to a study from Citywire. The conclusion is that the stockmarket is ultimately unpredictable, because if that was not the case, stockbrokers and fund managers would not lose money, bubbles would not happen and markets would not crash.

Head and heart
“It is an art, not a science. The market is far more emotionally charged than we might like to believe. It is far more emotional than what the emphasis on an ‘efficient’ or rational market would suggest,” says Michael Cahill. Now running the MarketMatters consultancy, Cahill spent 16 years as a high-level analyst in fund management and investment banking, and is the author of the book ‘The Financial Times Guide to Making the right investment Decisions’.

While using a word such as ‘emotional’ to describe the stockmarket may have a ring of truth to it, it still seems incredible that the collective intelligence of all its participants is not enough to maintain rationality. Take the example of mortgage-backed securities: these complex financial instruments were dreamt up by highly intelligent people, but the system collapsed spectacularly because it failed to take into account the fact that people are not entirely rational. The market swings between extremes, because even at work we are ruled by our hearts as well as heads.

Price risk and the unknown future
Fear and greed are the two main drivers of the stockmarket, says Cahill: “In a bear market, fear takes over. In a bull market, greed comes back. The new vernacular is ‘risk-on’ or ‘risk-off’, but the psychological drivers are the same.”

It is this polarity that creates the fluctuations in the market: when things go well, investors are happy to accept risk, but in a downturn our acceptance of risk changes radically. “What we are constantly trying to do is to price risk and the future,” explains Cahill. “But the problem is that the market is uncertain and the future is unknown. If you flip a coin ten times I can tell you the probability of how many times you will get heads or tails, but we still cannot determine the likelihood of Greece defaulting, or a break-up of the Euro. Therefore the shifting appetite for risk and uncertainty over an unknowable future makes for volatile markets.”

Or put it this way: it is business as usual at BP, until one day an oil rig explodes in the Gulf of Mexico and 40% is wiped off the company’s value. This is an extreme example, but the point is that the chance of something going wrong is always there, but in a bull market we find this acceptable and in a bear market we do not. The economists tasked with assessing the problem that is Greece can look to similar situations in the past for hints, but this does not provide any guarantees. In addition, the unprecedented levels of government- and individual debts we are currently experiencing is making historical comparisons even trickier.

The contrarian solution
As a financial coach, Cahill’s clients include top level executives, keen to make sure they are prepared for any eventuality: “Companies are trying to take a ten-year view, or more, while the market takes an hourly view. So the challenge for the companies is often to take long-term decisions, but then to present this in such a way that the investors will stay with them through the volatility. The idea is to have a clear and compelling strategy: how do we maximise growth while at the same time minimise risk and deliver sustainable value over the long-term.”

This sums up the challenge for investors in the current market: how to find a company that keeps growing without too much vulnerability. “In order to do this, investors need to pay attention to what really matters: the cash flow,” says Cahill. “But few in the market seem to be taking a long-term view at the moment.”

The king of long-term investing is Warren Buffett, who ignores trends, stating: “Our favourite holding period is forever.” What makes Buffett interesting is how he acknowledges that he cannot predict the swings of the market, and instead looks at a company’s fundamentals and cash flow, and makes his decision based on what he believes a business is ultimately worth.

Similarly to UK star fund manager Anthony Bolton, Buffett is a contrarian investor. This is one strategy to try and beat the fluctuations of the market, but if it were easy, everyone would do it. Life as a contrarian is lonely and requires mental fortitude; you may have to wait a long time to be proven right and maybe even endure a fair bit of mocking in the process.

“Being contrarian is hard, because although we want to believe we are right, ultimately we want to believe together,” says Cahill. The problem with going against the herd is that it is difficult to be sure we are right because of ‘confirmation bias’: we look for evidence to support our assumed conclusion. Cognitive neuroscience specialist Charles Faulkner puts it this way: “Human decision-making works by pattern recognition. We see something we already know, something we already have a mental model of. We make analogies with the mental models we have to gain insights into the new situation to take action.” Here it seems we could learn a thing or two from George Soros, whose investment philosophy is to actively look for evidence he could be wrong.

Optimistic programming?
While individual investors can attempt to ride out market jitters by taking a long-term view, the way recent economic turbulence has affected society on every level is a strong argument to try and understand the market better on a collective level.

“There is no easy answer to this, but the conclusion may be that we need to learn a lot more about the emotional elements of the market and why we behave the way we do,” says Cahill. “We need to be more humble about what we know, and more self-aware about our strengths and weaknesses as decision-makers.”

Charles Faulkner leans on psychology to explain why we can be reluctant to take in inconvenient information, but there is also research suggesting a possible physiological cause. The human brain is resistant to recording overly negative experiences, according to a paper published earlier this year in Nature Neuroscience, by researchers from Germany and the Wellcome Trust Centre for Neuroimaging in London: “We found that optimism was related to diminished coding of undesirable information about the future in a region of the frontal cortex that has been identified as being sensitive to negative estimation errors. […] This human propensity toward optimism is facilitated by the brain’s failure to code errors in estimation when those call for pessimistic updates. This failure results in selective updating, which supports unrealistic optimism that is resistant to change.” If this is true, the human animal would actually appear to be programmed for optimism, presumably to ensure we keep going in the face of adversity. This may also explain why we fail to learn from even very recent financial crises.

A new approach
Our ingrained sense of cheer may be good for evolutionary progress, but when it translates into the economy it causes problematic extremes: episodes of wild optimism, which are corrected with periods of deep depression. And the cycle keeps repeating itself: take the accounting scandals of Enron, Worldcom and Parmalat. This happened only ten years ago, meaning we know about the dangers of debt, but somehow we keep neglecting to learn the lesson. Maybe this is because, as Cahill points out, when things go right, we attribute it to skill, but when things go wrong we say we were unlucky.

To take emotional and behavioural elements into account for something like the stockmarket, which is technically supposed to be a dispassionate pricing tool, may be controversial. Still, Cahill believes there is an emerging trend of exploring the contribution of the human element to all aspects of economic and political life. Considering the extreme situation we now find ourselves in, a fresh perspective may well be in order.

Jessica Furseth

Category Archives: Business features