At these times I have gathered and grew up team of very talented young boys and girls, which then formed core of my research team (both stock markets and industries). There we had very interesting disputes on practical application of fundamental principles, such as valuation of options or discount rate estimates (with no sufficient data available), portfolio construction and the like.

I don’t pretend I am super-duper guru in securities analysis and portfolio theories, but one idea we have elaborated eight years ago I believe now has all proves.

The efficient frontier idea is based on the fact that there should be only one portfolio with the most optimal risk – return balance. This portfolio is defined at the point where efficient frontier curve contacts with the tangent line, where tangent line is based on risk free (presumably US treasuries) rate.

We were working in former Soviet Union countries at those times and practice kept showing something is wrong with it. By some reason investors from emerging markets were way more risky than their colleagues in developed countries (working at the same markets).

Our idea was basically to modify some assumptions to explain this. The modifications were the following:

1. There are numerous barriers for capital flows, de facto.

This means not all investors have equal access to specific security (say, US treasuries). This access is often restricted or limited with local currency regulation, banks commissions (funds transfer) and other barriers.

This means local investors, if they feel they are isolated, they use their own “risk-free” rate, which in practice reflects opportunity costs for them. In my practice custom logic in minds of investors were rate of deposits in the largest domestic commercial banks. Risk free? Not at all. But provided that at these times some of the local banks in Russia, Ukraine or Kazakhstan had credit ratings equal to sovereign, this rate was really perceived as risk free in isolated financial ecosphere.

2. US Treasuries are not risk free.

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Of course what is going on right now clearly illustrates, how US debts are paid. Releasing more dollars obviously helps you to repay nominal values of the debts.  Obviously this escalates inflation and balloons other rates. So, if we have US Treasuries as the basis, still we might have rates escalated, because “risk free” securities are USD denominated.

Now, simple geometry. When you have risk free rate going up, tangent line moves the contact point to the right to more risky and potentially more profitable portfolios.

This, by the way, is applicable to the philosophy in the minds of local investors, which make direct / private equity / venture investments. Opportunity cost, objective barriers for capital flow and perception of what is true risk free rate is drive them to take more risks.

Again, I can not tell I am so sophisticated to challenge Mr. Markowitz and other gurus in investment management, it might look stupid and weird, but my on-the ground practice in post Soviet countries showed some very good illustrations. Now the whole financial world says theories should be modified.

Piece to all of you,  be strong in the next wave of crisis, and think of real values – our families and our nature.

Best,

Ruslan

Recently I reviewed encouraging news – Nastya Uryasheva enters into the Founder’s institute, backed up by Bred Feld, with her AskDroid application. This turned out to be the first russian start up accepted by US mentorship programmes.

Whereas this is very great news, what make me think is that there are so many interesting and talented people in Russia and former Soviet Union, there are huge universities, which have very good education traditions. Think of University in Novosibirsk, to my best knowledge Intel and Microsoft have been present there and get best young people.

Obviously mentorship programmes become very popular and demanded in US and Europe. My strong believe former Soviet Union countries do deserve at least couple of mentorship programmes, co-led by global high-tech stars and local experts.

Hopefully, we will be able to create something similar to TechStars here in the region.

I have red nice blog from Prasad Thammineni, the CEO and Co-Founder of OfficeDrop, where he raises interesting points how clouds affect on software industry in the few recent years.

As a very small add-on to Prasad’s ideas, my view is that all cloud based software industry will be clustered, in other words segmented in few strategic alliances.

Think of airlines. You have number of international and domestic airlines, which merge their capacities in strategic alliances (still being more or less free) – Star Alliance and Sky Team to name couple in the list. Put together, they can offer you way more destinations and flights and more service / value by bringing better connection flights, better price, various add-on services and the like.

I think the software industry will repeat this trajectory. The alliances will be formed by companies, which provide complementary functionality (expertise), so users would get all-in-one or any combination they desire. The apps will be closely integrated with other alliance – members, even further, I would expect some additional quality and user experience standards and requirements obligatory to alliance members (above standard APIs).

This does not, however, means that you (as user) can not have two applications which are not in the same gang, and still have integrated. Yes, it will be possible, but most likely either you will not get price advantage (comparing to what you might have, should you use applications from one strategic alliance) or there might be some quality (usability) issues. Again, this is very similar to airlines. Nobody prohibits you from buying, say tickets from two different airlines (when you have two connected flights). But most likely, if you buy these two tickets from alliance members you would get price benefits, or better connection (less waiting time), or other benefits, or all of them.

I presume there will be number of alliances in the following sectors:

1. Business applications for individual entrepreneurs and small businesses
2. Business applications (corporate applications) for medium sized and large businesses
3. Entertainment (games / music / photo / video) + social networking
4. Personal productivity (calendars / communication / document management) + social networking

Who will form these alliances? Software vendors – both giants and small, which have very complementary functionality and which would agree to internal rules (the rules, most likely, would be prescribed by the giants). My guess there will be:

1. “Platforms”
2. “Satellites”
3. possibly – Data centers

“Platforms”

The core of the alliance would be large cloud based software vendors. I think there will be giants like Salesforce and Netsuite or someone else – call them Platforms. They have enough capacities and far exceeded critical mass in users base to become a gravity centres. The giants understand they will never ever satisfy requirements of all users, and they don’t need to. Their role is being the platform. Third party applications will gradually merge them through API or even deeper integration. This way goes Salesforce.com, I believe with its Force.com platform.

Another platform could be Facebook and LinkedIn – the same reasons: giants which have tremendous users base and are to be very attractive for small software vendors. Facebook seems to be more open, whereas LinkedIn looks like having tough “face control” at its gates. Both approaches have pros and cons and have ground – think of Android and iOS as platforms for applications.

Who else? Quite likely – Google. Quite likely someone from conventional software grands: Apple? Oracle? IBM / Lotus? Microsoft? SAP? We will see.

“Satellites”

These are smaller companies, niche players, which satisfy specific unique needs of larger markets. These could be vertical solutions for niche markets as well. Think of various document management, email marketing, project management / collaboration, reporting and all other software vendors, which could be perfectly matching and complementary to the Platform.

Most Satellites will try to live in two worlds and try to get integrated with different Platforms, competing to each other. The reaction of the Platforms – they either would ignore it, or they would put strict exclusivity conditions.

“Data centres”

I am not pretty much sure about this for the moment. However, I think it is quite possible that hardware world will be involved in the future fight. You could get additional tactical and strategic benefits having data centres as partners. The software and hardware world live integrated, and could be very successful. Obvious examples of such fusion are Apple and Google (with their efforts in hardware world).

Therefore, I could imagine to see an alliance which merges (both large and small) software vendors with hardware world.

It would be interesting to guess, what alliances could appear in the future, if you agree with this view. Constant Contact, Zendesk, @Task, Xero, Salesforce, MailChimp, NetSuite and the whole world of others. What would be the alliances?

This is a gang which is around you, which supports you along your ways, helps you not to fall, and – if you collapse – helps you stand up. The true gang shares with you victory and the pain.  It becomes your family. I like small companies primarily because of this atmosphere, this feeling you can create in your team – impossible to fully get in large corporations. At least what I did previously at the time I worked at the executive level was fantastic to me, great teams, but still, they mirror and get some, I would say, dilution by the mass of the large corporation surrounding you. Perhaps this is just my own feeling, and I am not actually good at building teams in large corporations. Still, smaller teams are like families. You see the response, you see and understand everyone. You feel everything.

Traditional fashion of the corporate websites and annual reports or social responsibility reports is to name people as one’s assets. Strongly disagree. Your people is your liability, more precise – responsibility. You can not use your people as assets, instead you are responsible for every member of your team.

The only way to have your gang entirely with you, fully committed, motivated, ready to go grapple in fight screaming pirates’ “Yarrrrrrrrr !!!” is to give them something. What is that?

To me every person acts in primarily selfish reasons.  My understanding every person expects from any job something (or everything) from this:

1. Money
2. Experience (expertise)
3. Network (contacts, relations)
4. Self-actualisation (self-realisation)

Now important to me is what the balance is.  While interviewing young people with up to 2 years of experience for my various businesses in the past I come across with very ambitious boys and girls, which believe they know everything and all the world owes them for their existence and therefore the pay should be this amount. Well, normally they indicate something which is quite difficult to get for people with 5 years experience. Pity.

Point is there is not that they want money (this is OK), point is they have wrong balance in their expectations. To young people, I believe, must be Experience and Network as top priority. Self actualisation comes along, as if you do what you like and recognise you are getting more and more proficient in this – this should be fuelling your self-esteem. Money comes last in the list. In fact, money come later, when you have expertise and get sort of marketing valuation of your expertise.

This actually relevant to elder professionals as well. Money is important of course. But from the employer’s point of view, if the only thing your employee wants to get is money – too bad for you. You will spend much to pay salaries, and finally you will loose this guy (or girl), simply because there is nothing which glues him with your company, except money. They will leave you as soon as they find another alternative.

So the question is what balance this person has. Below is the balance we look for in all new people joining DealBoom team.

People, focused on getting expertise, building own network and eager to get self-actualisation (in whichever form it could be) – this is where you can find your pearls.

The balance in itself may (and will change), as the person get older and more experienced. While working with people, I used what I call Trajectory of Life. This is set of key milestones in your life – something you have when you are 25 years old, 30, 35, 40 and 45. More or less what you get in your 45 – this is the orbit you will fly till the end of your life.

At each milestone I try to understand what every person has in mind and wish to achieve. To be short – it refers to the same four things – Self-Realisation, Experience, Network and Money:

Self-realisation

- are you happy with what you do?
- do you feel others value high what you do?
- do you feel your life means something to you?
- is your dream similar to how you live?
- would you repeat your life in the same way?

Experience

- what can you do?
- what success you did?
- what failure you did?
- how did you overcome difficulties?
- how did you survive failures?
- how you communicate / deal with people?
- what education you have?

Network

- whom do you know?
- what experts in your industry you can communicate regularly?
- do you have Teacher (the person who leads you and helps you on your way)? Who is he (she)?
- what experience, network of people in your surroundings? Are they satisfied with the way they live?
- how easy you can expand your network or involve new people from absolutely different area (industry, country and the like)?

Money

- how much capital do you have?
- how your house (apartment) looks like?
- where your house (apartment) located?
- how much do you earn per year / month?
- how much do you spend on living?

My practice is quite simple.  I assume that the person I see in front of me is not with me forever.

1.  Accept that he (or she) has own dreams, wishes and expectations. Try to understand this (this also would show level of ambitions and degree of freedom this person has)

2.  Understand what is his trajectory of life.

3. Understand what exactly person wants to get on his next milestone.

4. Understand if and how trajectory of your company can match to the trajectory of his life.

This turned out to be very useful practical tool to (1) get right people onboard and to (2) monitor, if your team-member satisfied (or dissatisfied) in working with you. Normally, I just go to cafe and sit with this guy / girl to see where we were, where we are now, and where we are heading to. With young people I try to sit every quarter (they always get much more time and attention). With elder and more experienced people it is worthwhile to sit at least couple of times per year.

People treat this approach as very sincere and fair and accept it as kind or roadmap in your mutual relations for the next period they work with you.

Hope this helps.

See you soon!

Buying things has always emotions behind. Guess why Apple fans stand in a queue overnight against Apple Stores  awaiting for their admired iPhones, iPads and other “iThings”. I am in China now, writing this blog, and I have seen the same queue against Gucci shop, with the entrance guarded by security – they let few people get in while few go out, so they try to rescue this shop from wiping out all the goods with the shelves. Guess why you buy food of common brand and when exactly you decide to try something new. When you prefer safety and buy Heineken in a bar at the very end of the world, and when you prefer to try very national food, even if you know you will never ever try it again?

When do we make purchase? Well, unconsciously we always (always!) make vis-a-vis comparison between Price and Value. Price is what you actually pay for what you buy. Value is what you actually get with this purchase. What that means? Simple thing: if Price is higher than Value than you don’t buy. If Value is higher than the Price you buy. if Value is way higher than the Price you stay in the queue 15 hours against Apple Store.

Value is very objective and closely related to yourself and to the context. Say you go walking on the street in your home city and buy bottle of mineral water. How much would you pay? 50 cents? 1 dollar? Would you pay 50 bucks? Would you pay 100 bucks? Would you pay 100 bucks for bottle of water if you are in desert, thirsty and almost dying and no other chances to get any drop of water whatsoever? Value is relative, value is subjective.

What Value actually is? In other words what exactly do you get for the Price?

Often Value means status or kind of image you would like to be associated with. Rolex, Parmigiani, Bentley, Louis Vuitton, Four Seasons you can count further. But this is not always luxury. Diesel, Burton, Apple, Sony, Honda, and whole tribe of other brands, not luxury, but still shaping some image, so other people associate specific features of the brand with you, who use (wear, drive, drink, eat, ….) things of this brand. Brand is a formula, a DNA of specific features / qualities which shall be attributed to whatever thing under this brand, but that’s separate story.

Lets get back to the Value. Sometimes Value is some memory, or wish to catch up and maintain some good feelings or emotions. Otherwise, what the bloody reason is behind spending billion dollars on useless toys, magnets, photos, souvenirs in every tourist location in the world? The Value could be experience of specific feelings or getting other utilities.  Roll-coasters, skiing, snowboarding and all other types of sports, fitness and tourism could be an example.

Now, could anyone confirm, is Lexus actually better than Toyota at the same degree it is more expensive? Nope. People are prepared to overpay for perceived Value (utility, status, whatever other forms of the Value you can imagine). Value is relative, value is subjective.

That is one of the key reasons why advertising and all other marketing campaigns are often so much emotional and targeted to raise specific emotions and inject DNA of specific brand into your brain.

The purchase is always action to meet expectations that you have. You expect to experience some taste and enjoy specific food in Japanese sushi restaurant. The same way you expect to get satisfaction to your ego when you buy (if you are lucky enough) the next Lamborgini. You expect to survive and ready to pay whatever you have for the last bottle of water in desert.

So, the purchase decision sequence in my view is more or less this.

1. You get some cocktail of emotions, associated with what you are thinking to buy. This could be something you already know or aware of (brand you love) or something very spontaneous.

2. You get expectations (actually what you will get if you buy this). In other words you formulate your immediate perception of Value, as of now.

3. You (consciously or unconsciously) weight it with the price.

4. You buy or you don’t buy. Or you negotiate trying to put the Price below the Value.

Emotions formulate our expectations from potential purchase and thereby drive our decisions.

Next time we will try to figure out what are the tricks with expectations.

See ya!!

What I’ve seen for dozen of years of running trough all M&As, bonds issues, restructuring and turnarounds, start ups and kick offs, is the decision making way is always the same. Your guess? Forget about multiples, DCFs, simulations and sensitivity analyses. It’s just peanut, as overwhelming majority of decisions is based on emotions.

The sequence I saw (see now and, I believe, will see in the future) is very simple.

1. You get your first impression (emotions). You might have known people approaching to you, or they were introduced to you by someone you know and like (emotions).
2. You get into the details and see forecasts, spreadsheets and valuations. Objective? Really? Would you really judge 15 years forecast based on objective data to be objective? DCF is always mirror of your expectations and your beliefs. Are you excited? Scared? Stuck? This is what you see in data set.
3. And finally, when you make decision, it goes up from very depth of your heart (not brain). So you believe or you don’t believe.

You are driven by emotions, when you choose your new start up and God knows what will be in few months. You are driven by emotions when you buy / sell stocks. You are driven by emotions, when you enter new markets. And of course, you are full of emotions, when you are fighting to protect your business from hostile takeover.

Emotions rule. But what emotions?

Awe is on the top of my rating. This is something that drive most of the fears and averseness in decision making.

Most obvious is that people try to avoid uncertainty. We are uncertain about future or about market and competition. We sometimes unsure about our own capacities to perform. This results in what people diplomatically call “conservative approach” or “risk averseness”. This is exactly what affects on all data sets in your cash flow model and on DCF based valuation.

You can often come across with fear driven subjective decisions. Think of government people or most of bureaucrats. Their decision would be motivated with more intention to avoid future possible problems and changes, often at a cost of rationale and common sense. No chance for innovation, brave moves or quick decisions.

The degree emotions affect on the decision making is overwhelming. In most of the cases they dominate over the rationale and push people to make spontaneous, strange, sometimes stupid and genious moves.

Someone could say that emotional decisions are subjective, biased and likely to be wrong. The figures and statistics are unarguable facts. May be. But the trick is that it is not about the fact. Trick is about your attitude to this fact, and this is very personal and emotional.