Archives For Ecosystem

MARTA Sign

Last January the The Atlanta Journal-Constitution published results of a poll it commissioned to gauge the community’s ties to MARTA, the city’s train and bus commuter system. The data showed something surprising: people who rode MARTA were more than twice as likely to feel connected to Atlanta than those who didn’t.

Of the respondents who rode transit, 51% reported strong connections to the region. Only 23% of non-riders said the same. The reporters asked a Morehouse College sociology professor why this might be the case. “You interact and share space with more people,” she responded, “and that makes you feel a part of the community.”

I’m skeptical of these findings as I’m riding MARTA’s Red Line last December, heading from the airport at the south of the city into Atlanta’s Midtown. I was there on business, working at the time for a company whose smartphone apps alerted riders when their bus was arriving. We liked this notion of public transit connecting people to their communities. Indeed, we had a vested interest in promoting the idea. As an experiment during this trip, I opted to skip the car rental counter at the airport. For the next three days I would travel all around Atlanta using public transit whenever possible, walking as an acceptable alternative, and UberX car-sharing if there were no other options. I was curious how navigable the city would be without a car, and I was eager to test the premise behind the newspaper article. Does public transit contribute to an enhanced sense of community?

My earliest impressions made me skeptical. In that first train ride, as I traveled south to north packed tight with a few dozen fellow riders in our compartment, there was plenty of opportunity for camaraderie but no takers. Quite the opposite in fact. Everyone seemed desperate to avoid even the simplest forms of contact, keeping their noses pressed against iPhones, books and newspapers. No one was making eye contact with others. No one was talking with anyone else. Physically, we were all together, but each of us was pretending we were completely alone.

If polled by reporters from the Journal-Constitution, what would these together-alone passengers have to say? Would they report a stronger attachment to the community for having ridden MARTA? Continue Reading…

I. An Image Problem: Hercules & The Hydra

Hercules was a real jerk. That’s my conclusion after thumbing through the tales of his conquests last night in Edith Hamilton’s Mythology. He’s lionized as the favorite Greek hero, but this dude had a serious case of roid rage, perhaps the first in all of literature.

To illustrate: his most famous adventures come from the “Labors of Hercules” in which he choked-out the fierce lion of Lemea, diverted two great rivers to clear years of accumulated animal filth in the Augean stables, and killed the many-headed Hydra of Lerna, a creature considered immortal until it met Hercules. But why was he checking all these chores off a list? They were part of history’s first 12-step recovery program, penance for a roid-rage fit in which Hercules murdered his wife and three sons. That backstory was conveniently missing from Disney’s cartoon movie. Seriously, we need to reconsider our heroes.

Hercules v. Hydra, Photo Credit:  Eagle Painter Wolfgang Sauber, Creative Commons License

Hercules v. Hydra, Photo Credit:
Eagle Painter Wolfgang Sauber, Creative Commons License

Here’s Hamilton’s description of the Hydra conquest:

The second labor was to go to Lerna and kill a creature with nine heads called the Hydra which lived in a swamp there. This was exceedingly hard to do, because one of the heads was immortal and the others almost as bad, inasmuch as when Hercules chopped one off, two grew up instead. However, he was helped by his nephew Iolaus who brought him a burning brand with which he seared the neck as he cut each head off so it could not sprout again. When all had been chopped off he disposed of the one that was immortal by burying it securely under a great rock.

Let’s refocus this tale from Hercules to the Hydra. Despite its evil reputation, I want to reimagine the creature in a more pleasant light. That ability to grow two heads where one is lopped off has been the source of nightmares, but I want to strip it of fear and turn it into a constructive metaphor for something we should want more of in our local economies. I’ll call them Hydra economies. Continue Reading…

(Or, Why I Put My Money In Self-Help Credit Union, Part II)

 1.

When Michelle Holland started her little bus company in 2009, she would rouse her son at four each morning. He was ten and his single mom had no option but to grab his pillow and plop him in a rear seat of her refurbished yellow school bus while running routes through Charlotte’s neighborhoods. He would grab his last winks of sleep while she collected students from their homes for delivery to a local charter school. For the privilege of avoiding the hassles of car pools, the parents would pay Michelle a small fee each month. She would drop them off before extending her trip a few extra miles to get her own son to his school.

Such was start-up life for Michelle and her Eagle Bus Service. It was tough, but it supplemented the income from her bookkeeping practice. And after several years spent juggling the demands of an all-consuming corporate life with the demands of being a young, single mother, it let her be near her son more often.

Now word was spreading to other charter schools that Michelle could solve their transportation woes. The state gave them funding to educate kids in their own unique ways, but it didn’t give access to the county-run fleets of buses. Principals saw what Michelle was doing for her first client, and they wanted her to expand; to help them, too. They were offering guaranteed payments and year-long contracts if only Michelle could scale-up her service. If only she could get more buses and more drivers.

Michelle's Bus Fleet (Credit: Michelle Holland)

Michelle’s Bus Fleet (Credit: Michelle Holland)

This is the story I’m getting first hand from Michelle in a phone conversation one afternoon last fall. We had been trying to connect for weeks, but Michelle isn’t exactly swimming in spare time. Her morning schedule remains largely the same as it was in 2009 – up well before dawn, preparing to get students safely to school – and her days are spent balancing the desk work of Eagle Bus with the needs of her few remaining bookkeeping clients. In the meantime she was searching desperately for another bus to add to her growing fleet. She usually bought them in North Carolina, but someone was grabbing all the state surplus vehicles before she could get to them. Michelle had just driven to rural Virginia to find one that met her standards. We were speaking because I was interested in how she got the money for that purchase. Continue Reading…

My September books brought so many amazing learning experiences, not to mention the discussions they generated with family, friends, colleagues and even one of the authors.

Financing Our Foodshed by Carol Peppe Hewitt

Let’s start with the winner of the prestigious Most Dog-Eared Book of the Month Award. Thank you Carol Peppe Hewitt for writing Financing Our Foodshed: Growing Local Food with Slow Money, a collection of 22 stories on North Carolina food entrepreneurs (farmers, bakers, restaurateurs and the like) to whom Slow Money NC has introduced local financiers eager to fund sustainable local eating ventures.

IMG_20130929_124805Mainstream investing has become overwhelmed by the opportunity cost heuristic, guided by the simplistic question, where can I make the most money as quickly as possible with the least risk? 

This is not entirely bad, and I’m not quick to cast moralistic aspersions on using capitalism in pursuit of profits. There’s a place for that, and there always will be. But it brings to mind the notion of hypertrophy, this glitch in evolution’s system by which nature allows (for example) a male ibix to grow horns so large, its neck cannot support the weight. Yet those large horns have become a proxy for virility, and the females are programmed to mate with him whose horns spread widest. And so this glitch propagates through the generations with the genes of big-horned ibix begetting even bigger-horned ibix until an entire species is handicapped with antlers with all appeal but no function. I can imagine the big cat mountain predator eager for this easy prey. Given enough generations of reproducing those big horns, the hypertrophy glitch will bring doom to that gene pool.

It’s not that big horns are bad, but there is such a thing as too big.

So it is with capitalism and opportunity cost. It’s not that it’s bad, but there can be too much.

In chasing the biggest-dollar, fastest-bang, lowest-risk return, we put all our resources into high-scale enterprise that promises crazy riches while we starve our local entrepreneurs of the capital they need to get off the ground or grow. Herein lies a hypertrophy risk in our investing system. We chase the promise of the next Facebook (that big-horned ibix) while ignoring the small-scale businesses that create happier, healthier, more sustainable local economies.

The weight of that imbalance threatens to topple us. Continue Reading…

Bill SpruillPhoto Credit: Bill Spruill

Bill Spruill
Photo Credit: Bill Spruill

When an investor believes he has an edge, he’s supposed to stay quiet. He’s supposed to focus his energy on exploiting his advantage, not on trying to teach others the methods behind his approach. That’s conventional wisdom anyway.

And yet here I find Bill Spruill, an angel investor who backs software startups (and a stranger to me just a few months ago) explaining his investing strategy in painstaking detail. It’s the day before Thanksgiving, and we’re sipping warm beverages at the Whole Foods café near my home in Raleigh. We’ve rendezvoused at local coffee houses since September, and at each meeting – despite knowing I’m both an investor looking for ideas and a writer likely to tell my readers all that I learn – he reveals a little more about what we’ve come to call the Spruill Theorem for Reasonable Angel Returns.

In a calm and thoughtful manner befitting a college professor, Bill presents case after case for me to consider. This morning he pushes a folded copy of the day’s Wall Street Journal across the table and points to an article about a high-flying social media venture attempting to raise a fresh round of funding. Its prospects are a bit dimmer than the last time it went looking for cash. “What’s going to happen to the early investors,” Bill asks me in his Socratic style of teaching-by-interrogation, “if this effort fails? What’s going to happen to other promising startups looking to get off the launch pad?”

Those two questions signal the reasons Bill wants to tell me and other prospective angel investors about his insights. What we think we know about the risks of these investments may be misguided. And sticking to conventional wisdom carries with it consequences not only for individuals but for the larger dynamic between investors with cash and entrepreneurs with their creative visions.

It’s bigger than Bill’s portfolio.  It’s bigger than any one startup. It’s an ecosystem issue. And Bill believes that debating the ideas of the Spruill Theorem will make for better informed angel investors and ultimately a healthier ecosystem of software startups in our Triangle community.

“Angel investors are heeding the wrong models,” he tells me. “We’re trying to copy the huge successes, thinking we’ll get the same outcomes. But these stories can be dangerous. These models rarely work for angels.”

He pauses for a moment before adding, “We need new models to follow.”

Continue Reading…

lucyThe Case for Conscious Capitalism

Next week Austin will play host to a group of executives that label themselves “conscious capitalists.” [See consciouscapitalism.org.] John Mackey, founder and CEO of Whole Foods, will provide the keynote address and suitably so. In 2007 he loaned his influential voice to this movement by penning the missive “Conscious Capitalism: Creating a New Paradigm for Business.”

It’s worth the read, and you can download it here. [pdf] The gist is this:

There is a longstanding prejudice that businesses exist for the enrichment of shareholders. While this is technically true, the notion has been interpreted to mean that corporate managers have the fiduciary responsibility to grab profits whenever they are available for the taking, all other constituencies be damned. It is the investor dominated viewpoint, often ignores the other stakeholders in a business, and it can be obscenely myopic. (See my related article, Whom Does Management Serve?)

It also creates, Mackey argues, a zero-sum game that pits investors against managers, employees, customers, vendors and all other stakeholders. By spending more on employee pay and benefits than absolutely necessary, for example, you’re taking earnings off the table that are the rightful property of investors. If employees win, investors lose.

The Conscious Capitalist movement argues for a different framework for understanding the game of business. Rather than a zero-sum dynamic, it suggests viewing it as a system of interconnected parts. By investing more in employee benefits, Mackey says, you get happier employees who better serve the customer…who then buys more products…which leads to higher profits…which can be shared with investors. Treat all stakeholders in a fair manner and the whole system is hoisted ever higher in a virtuous cycle. The sum of the parts, working in unison, become much more valuable than the individual components.

Continue Reading…

F. Devices like Kindles which encourage consumption of higher margin digital media as well as increased shopping on Amazon.com.

Much has been written about the likelihood that Amazon is losing money on each individual Kindle Fire it sells. Estimates range from a few bucks to over $50 per unit.

The former assumption (from iSuppli and reported here at CSMonitor.com)

According to iSuppli, a market research firm, the cost of the components required to build a Kindle Fire tablet – from the battery to the memory to the plastic shell – totals approximately $185. Add in manufacturing and assembly fees, and that figure rises to $201.70. That’s $2.70 more than the $199 price tag on the Fire.

The latter – bigger loss – assumption (here) lead to fears such as this:

Assuming Amazon is able to sell 2.5 million tablets in the fourth quarter, Munster says the loss on each Kindle Fire could affect earnings by 10 percent to 20 percent.

Allow me to go heavy on the links in this edition of Playing Offense or Defense.  Forbes writer Eric Savitz wrote in January 2012 about an RBC analyst survey of 200 or so Kindle Fire users (link). What were their purchase patterns from Amazon once the Fire was in their palms?

“Our assumption is that AMZN could sell 3-4 million Kindle Fire units in Q4, and that those units are accretive to company-average operating margin within the first six months of ownership. Our analysis assigns a cumulative lifetime operating income per unit of $136, with a cumulative operating margin of over 20%. We believe these insights could ease some investor concerns around operating margin compression per Kindle Fire unit in 2012, which bodes well for Amazon shares.”

Other key findings were these:

Over 80% of Fire owners have purchased an e-book, and 58% had purchased more than three e-books within 15-60 days of buying the Fire. He estimates that customers will by 5 e-books per quarter. At a $10 ASP for the books, he says, that would mean $15 in e-book revenue per quarter.

66% of the survey group had purchased at least one app; 41% have purchased three or more. He assumes 3 apps per purchase per quarter, suggesting $9 in paid app revenue per Kindle Fire unit per quarter at above-company average operating margin.

72% of the sample had not used the Fire to buy physical goods on Amazon.com. Of the 26% who had, a third said the purchases were incremental to what they would have purchased on the site otherwise. 51% increased their physical purchases on Amazon “slightly to significantly” because of owning the Kindle Fire.

In the name of conducting my own market research, I purchased a Kindle Fire for myself in March and combined the device with a Prime membership subscription (which I wrote about here). Here are some of my observations…

  • I quickly purchased a $20 Kindle Fire cover. Amazon puts tight controls over Kindle accessories, allowing others to manufacture and sell them, but the mothership gets a higher percentage of each of these transactions. I’ll assume 25 percent. So, at $5 gross profit, Amazon already recouped the $2.70 loss estimate, but has a way to go if the true price to cost discrepancy is $50. No worries, Amazon. I’m still buying…
  • I’ve consumed a fair amount of paid digital content, including…two videos for my daughter to watch on a long car ride ($3.98), several MP3 songs for cloudplayer ($10.96), and one app ($1.99). At 20 a percent gross margin assumption (probably WAY underestimated for digital content), Amazon made another $3.40 off me.
  • I’ve accumulated $120 in “convenience” purchases that would have otherwise gone to Target (diapers and other such baby paraphernalia). Let’s say they get 15 percent on those, there’s another $18 in gross profit. (Though this is arguably more of a Prime Membership thing…I did order it using the Amazon app on the Kindle Fire.)

So, there we have $157 in incremental Amazon purchases that represents somewhere in the ballpark of $25 of gross profit for the company. Best case scenario, Bezos et al. made a profit off me within days of selling the Kindle Fire at a small loss. Worst case, they’re about half way to breaking even while getting some very sticky fingers on my wallet.

Conclusion: While none of this is scientific, I think it’s fair to assume Amazon is accomplishing a major offensive victory by (potentially) taking a loss on the sell of each Kindle Fire by getting people like me more interested in exploring what else Amazon has to offer me. I continue to look for excuses to buy every day stuff from Amazon to avoid family trips to Target. Bad news for Target…my wife seems to concur!  

If Amazon is losing $50 per Kindle Fire, and these losses are multiplied across millions of Fires sold each quarter, I (as a potential investor) welcome the hit to earnings and the dissonance (a la the Shleifer Effect) it will create for short-term shareholders. While hopeful, I’m also skeptical of the big losses.

Next on the impact of expense investments on Amazon’s earnings, we consider this…

C. Content to encourage more customer loyalty via Amazon Prime membership.

I joined Amazon Prime last month for $79 a year. I promptly dropped my Netflix membership in favor of Prime streaming videos, found a book I wanted to “check out” for free on my Kindle this month, and went looking for items I could put on “subscribe and save” status. Oh yes, I’ve ordered several more things this month than I ordinarily would as a test to see how extensively I could use Amazon Prime as a replacement for my family’s weekly (or more) trips to Target and to revel in the close-enough-to-instant gratification provided by its two-day shipping at no additional cost.

We’re hooked, and I have no doubt we’ll spend a lot more money at Amazon as a result…which will translate into less money at Target and even fewer reasons to visit other web retailers at all.

Growth At Too High a Cost?

A site called firstadopter.com singled out Amazon last month as its “secular short of 2012.” It makes a reasonable comparison to dot.com bubble company Kozmo when considering the cost of cheap delivery:

Back in the dot.com bubble there was a company called Kozmo.com that offered free 1 hour shipping of array of small goods like books, videos, magazines, etc. To my amazement, I tried the service and ordered a pack of gum. Within an hour someone was at my door to deliver it. The company reported amazing revenue growth. Obviously investors should have discounted that sales growth as it was an “uneconomic” business model.

Amazon is doing a similar thing by subsidizing free shipping. Anecdotally I am hearing customers who have Amazon Prime feel compelled to order small items to take advantage of the free 2-day shipping benefit. They are ordering batteries, Listerine, toilet paper, water bottles, etc. all with free 2-day shipping, which is goosing Amazon’s revenue without helping their bottom line.

If you sell $1.00 of value for 99c, you will show amazing revenue growth. It’s all fine and dandy until your free shipping offering hits critical mass with take-up accelerating and the losses start ballooning.

The author makes good points, and it’s hard to disagree that Amazon shouldn’t put itself on a slippery slope of economic destruction via cheap delivery. We must, of course, consider Amazon’s rationale for embarking on this program and its capacity to continue it without overwhelming the business economics.

First, the Prime program is several years old at this point. If I recall correctly, it started at $99/year before Amazon started dropping the price (as it has a habit of doing). Management has had time to review the data and look at its impact on the business. Unless we have reason to believe that Bezos et al. are irrational or such brinks-men that they would double-down on a value-destroying initiative, I think it’s fair to give them the benefit of the doubt and assume they’re seeing some positive things coming from the effort.

In 2008 Bezos did this interview with Businessweek in which he commented on the benefit of being big when you want to try innovative things:

One of the nice things now is that we have enough scale that we can do quite large experiments without it having significant impact on our short-term financials. Over the last three years the company has done very well financially at the same time we’ve been investing in Kindle and Web services – and all that was sort of beneath the covers.

Remember, Prime is part of a marketing tactic for Amazon that presumably fits within the context of a much larger strategy. Inexpensive (or free) shipping is not a business model for them as it was for Kozmo.com.

Second, I’m reminded of a story from Built From Scratch, the autobiographical book from Home Depot’s founders. Early in the company’s history they began offering no-question refunds to their customers. Anyone could bring in any item purchased from Home Depot and get a full refund without any flack from the store. It should be no surprise that this practice invited abuse and fraud which really irked some employees. They couldn’t stand the idea of being fleeced by freeloaders and fraudsters. When they complained to Bernie Marcus and Arthur Blank, the founders told them to suck it up. Despite the handful of jerks eager to take advantage of them, the lenient returns policy was driving more business to their stores and away from competitors who would wrestle with customers over each return. In context of the big picture, the losses were tiny compared to the gains from all the additional business.

The Amazon Prime Impact

Last December, Ben Schachter of Macquarie Research put together a piece of homespun research called The Amazon Prime Impact: A Self-Portrait Case Study. (Hat tip to amazonstrategies.com for that link.) He looked at his own buying habits pre- and post-Amazon Prime membership. His data demonstrated these points:

  1. Increasing Order Activity: His annual number of orders was up 7x and dollar spend up 500 percent.
  2. Declining Order Size: His cost per order dropped from $70 to $54.
  3. Gross Profit Benefit: Overall gross profit dollars to Amazon were up though percentage margin was down.
  4. Loss Leaders: 33 percent of his orders lost money for Amazon.

The key points are that he increased his orders and dollar spend with Amazon, AND while its margins were lower, Amazon likely netted higher overall gross profit dollars from Schachter using Prime membership so extensively. He says his margin percent dropped from 25 to 18 but because he did so much more volume, the overall gross profit generated went from  $322 before he joined Prime to $816 in 2011.

It’s critical to understand that absolute gross margin dollars generated by sales trumps the gross profit percentage in Amazon’s business model. Why? I wrote this last year when evaluating Overstock.com (here):

I go so far as saying that I don’t necessarily care what a company’s gross margin percent is. I want to see the dollar amount covering the expenses. After expenses are paid for, I’m all for selling more product or service at any gross margin percent as long as that doesn’t hurt the franchise, the business’s long-term prospects, or increase expenses. Why? After your expenses are paid for, each additional $1 of gross profit drops straight to the earnings box regardless of whether you sold it at 20% or 1% margin. Percentages be damned! That’s cold, hard cash.

Back To My Own Experience

I considered myself an Amazon consumer fan for years, and yet I didn’t join Prime. As Amazon expanded the Prime experience, however, it became a no brainer to do it. (Indeed, it paid for itself twice over when I canceled my Netflix subscription.)

Amazon is creating another virtuous cycle by plowing hundreds of millions into content for Prime members. But it’s not going to show short-term earnings benefits. Over the long haul, however, I expect my experience will mirror the overall increased adoption rate. At some point the value becomes so high, many more Amazon customers will do it because it’s just dumb not to.

Amazon found my tipping point, and now I’m a Prime member who spends more money with them and has even paid to rent a few videos for my daughter to enjoy on the Kindle Fire during long car rides (something I would not have done if i weren’t already enjoying the “free” streaming videos courtesy of Prime).

Moreover, I’ve canceled my Netflix subscription and am actively looking for more ways to spend my shopping dollars with Amazon instead of making trips to Target.

Conclusion: If Amazon is not locking itself into a Kozmo.com uneconomic business model and is, as Schachter’s self-analysis suggests, building in higher overall gross dollars to cover its expense nut…AND…it’s building customer habits and loyalty…AND…it’s taking business away competitors. Well, i think this counts as an offensive move.