Posted by: prataap | December 23, 2008

MONEY TREND 2: RAISING MONEY


TREND 2:     RAISING MONEY

                     NEW MONEY GETS OLD FAST

                                NO TIME FOR R&D? BUY IT! BARTER IT !

 

 

Emerging Trends:

Banks may soon become relics of the old economy.   Banks have proven that they can no longer handle the high levels of risk they had taken on in the last decade. And now with the new era of stimulus packages and government regulations ahead of us, banks may soon morph into a different kind of animal than we have known for the last 100 years. On one hand when banks get into high risk investments they get into trouble as they did in the 1990s and are now with sub-prime mortgages. Meantime American Express is seeking to get into conventional banking. The old labels will no longer apply. We will soon have a whole new set of norms for how money is transacted. The Who and How of money transaction in the 21st century is fast mutating.

 

So what is the future of banking? Traditional banks can only hope that regulators will allow them to survive with much stricter regulations on risks.  A more likely scenario is Venture Capital and credit card morphing to include personal and small business banking as a small subset of their core business.  Charles Schwab, the investment house, is doing it now!  Personal banking as a stand alone industry will become a thing of the past in a matter of a decade.

 

Meanwhile, companies such as IBM, Cisco Systems, Intel, Nokia, Oracle and many others have decided that putting money into R&D is a lost cause in this fast paced Internet world. It is better strategy, faster and less expensive for Cisco to put $210 million into DSL HarvardNet and then publicly “certify” that 95% of its network infrastructure is built on Cisco gear.  A win/win strategic partnership.  If at any time Cisco deems it to be in its long term interest, it can simply buy up HarvardNet.  In the meantime it spreads its risk by also investing $85 million in Digital Broadband Communications to ensure it has multiple bases covered in the all important area of broadband capacity which is essential for the next wave of Internet media streaming.

Many companies like Cisco and IBM have had venture capital divisions within them for the last decade or more, targeted at picking the next new startup that could either compliment their product or simply be a good investment.  In either case it has been better than having to slog it out with in-house or outsourced R&D; the risk is minimized, and options for remaining nimble are left open.  But even tech savvy Intel Venture Capital missed out on AOL and Yahoo when as startups they were out looking for money.  The future has become ever harder to define in today’s investment world where Yahoo, Motorola, Sharper Image, and real estate have all tanked in 2008. Who would have figured that even 2 years ago? Be assured that fundamentally new concepts around the transaction of money will result from this economic melt down and rebuilding that is happening around us today.  And you can be part of creating some of them.

 

Next Opportunities:

One of the recent trends has been for startups to fund startups. Something like micro lending.  The next generation of venture capital may come from startups leveraging each other’s advantages and pooling resources to get to the marketplace, skipping the traditional method of shopping around for venture capital.  When two or more companies working independently on web phone applications decide to collaborate to create related content and seamless applications, they get to the market faster and are seen as way more attractive to a VC than one company at a time. Funding a whole package of partnership creates a new market as opposed to simply a new product.

 

Non-profit or grass roots venture capital began with the now famous Nobel Prize winner Muhammad Yunus, who started the micro banking trend with Grameen Bank in Bangladesh.  But the more current version is Kiva.org.  where any one can be a venture capitalist. You make an investment, not a donation, to a deserving company, not cause. Kiva simply acts either as the clearing house or a full service broker but does not take a fee from the lender or borrower. Check it out. It’s a brand new model for small scale venture capital as well as philanthropy based on a business model. 

 

Cities and towns will also get in on this act. Think past old fashioned tax breaks to cities becoming investment partners with startups and in certain key communication infrastructure like broadband, partnering with the local provider to become the monopoly. We are entering the age of government as business partner. After a 2 trillion dollar government intervention there is no other alternative but for it to be a big player in the economy for the foreseeable future. Get used to it.

Where do you fit in as an individual, you ask? Create that new i-phone application in your spare time, beta test it with the 19 year old gamer, or create the next social networking concept with a few key technical partners, and put together a basic business plan.  Take it to eBay or Kiva and get others to bid. Or put your money into the company that your high school or Harvard dropout friend is starting. If you pick right, putting small money in at the basement can pay big dividends in the next economic cycle.  This is not for the faint of heart, but then, it doesn’t have to be big money either.  Ask Bill Gates Sr. or Dr. Dennis Selko each of whom provided the seed money for his son’s internet venture and made out big. OK one made out better than the other.   Many major Internet companies started with money from their immediate family and friends. Yes, you could get burnt, but you could also retire real early if you get in on the next Google or FaceBook before it gets out of the dorm room or goes on line.

Typical technology startups are willing to pay for most services, real estate, legal advice, human resource management; you name it, with equity – stock options. Venture head hunters have been known to take a third of executive placement fees in first year stock options along with a cut of the salary. Even the cleaning firm that comes at night might discount its fees for stock.

Elite Island Resorts in the Caribbean is accepting reservations from now till Jan 31, 2009 for high-end resorts on six islands payable in upto $5,000 worth of stock transactions–with shares’ value rolled back to July1, 2008 premeltdown levels. Even major Silicon Valley law firms like Wilson Sonsini, Goodrich and Rosati have played this game of bartering services for future options. The game is part gamble and part barter. Startups base their equity on an infinitely bright future of fabulous growth potential, but need services right now to realize that future and have limited access to cash today. You have to pick the ones with the bright future that will payoff.  It’s Las Vegas but with real stakes that can transform the world!

What do you do, as Joe or Jane Smith with services to offer, wanting to cash in on this crap shoot? Do what the big guys do. Bill your service (whatever it is; catering, temp personnel, corporate limos) to the next startup partly in stock options, but make sure you get paid cash for your net cost and pick up options only for your profit margin – startups are a crap shoot. Odds are worse than an evening in Vegas, but you could get to ride the tiger for zero cash if the company paying you in stocks is the Apple of tomorrow.

Let your imagination run wild.

Create the future and smell the roses, it’s your move!

 

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