Optimal Capital Allocation Strategies: CFOs Pondering Business Systems Agility and Resilience

What are the functions of CFOs? How do firms determine the optimal capital allocation strategy- best mix of debt, equity, and internal financing that maximizes the return on invested capital? How do firms choose their capital structure? How do firms align and integrate their business systems and processes to facilitate learning, coordination, collaboration, and innovation? These strategic questions relate to business systems agility and resilience in disruptive, emergent and dynamic circumstances; and the optimal capital allocation strategies and capital structure of a business enterprise-the appropriate mix of debt and equity that maximizes the return on investment and shareholders’ wealth while minimizing the weighted average cost of capital (WACC), simultaneously.

While disruptions often reveal the potential vulnerabilities of business systems, processes, and procedures, they also provide insights into business agility- capacity for rapid change and for flexibility in operations and resilience- ability to anticipate, recover from disruptions, emergencies, withstand or recover quickly from difficult and adverse conditions. Clearly, effective capital allocation strategy is vital to a sound business strategy designed to maximize the wealth producing capacity of the enterprise. In these series on optimal capital allocation strategies, we will focus on business systems and processes agility and resilience and provide some practical guidance. The overriding purpose of this article is to highlight some key portfolio of CFOs as we ponder industry best practices in business systems agility and resilience. For specific financial management strategies please consult a competent professional.

Some Duties of CFOs

CFOs are responsible for firms’ past and present financial health and constitute an integral part of a firm’s senior leadership in charge of financial management-acquisition and allocation of financial resources. CFOs have multiple duties, that include reviewing and presenting financial statements, planning budgets-cash and capital; and deciding where and when to invest firm’s funds. CFOs design, plan and execute the capital structure of the firm-determine the best mix of debt, equity, and internal financing. Addressing the issues surrounding optimal capital structure and allocation is one of the most important duties of CFOs.

Some Practical Guidance

As I have already explained, while disruptions often reveal the potential vulnerabilities of business systems, processes, and procedures, they also provide insights into business systems agility and resilience. The COVID-19 pandemic was not an exception, it tested the effectiveness of firms’ capital allocation strategies, planning and execution. Firms that were able to quickly re-prioritize investments and re-allocate capital have weathered the storm and, in some cases, even improved their competitive position. But a slight majority of CFOs indicate the COVID-19 pandemic had an overall negative effect on their firm’s ability to efficiently and effectively invest capital in 2020. The apparent lack of agility and resilience in so many firms call for culture of assessment and opportunities for continuous improvement.

Most CFOs indicate the pandemic has forced them to completely rethink their capital allocation strategy, business financial systems, processes, and procedures. There is gathering empirical evidence suggesting that many firms have embraced remote work based on veritable data on productivity. For example, health care providers have fully embraced telemedicine. Many manufacturers have established new health and safety procedures. The question every firm must now answer is which of the many business model changes are strategic and which are only transactional? Additionally, the COVID-19 pandemic has accelerated some trends that were already in place, such as the push into all things digital. In fact, digital technology, which supports trends such as telemedicine and remote working, is the area were CFOs most frequently indicate investment increased in 2020 vs. 2019.

A significant majority of CFOs indicate accelerated digital transformation will impact capital allocation going forward. With so much uncertainty, firms need to weigh the likelihood of various scenarios to determine what their business may look like in the future, and then align their strategy and capital allocation accordingly. CFOs must carefully determine what assets and capabilities they have and need. Once the future state of the firm is carefully assessed, then CFOs must take inventory of the businesses and assets in their portfolio. Systematic periodic portfolio reviews can help CFOs find assets that no longer align with firm’s long-term strategy but can easily be divested to fund future investments.

There is gathering empirical evidence suggesting that the COVD-19 pandemic has forced closer examination of corporate financial portfolios. Indeed, significant majority of CFOs indicate they plan sustained review and rebalancing of their portfolios to focus on the core businesses. Firms should continuously evaluate which assets and capabilities within their portfolio will help enable their future-state business model. Should these assets and capabilities be owned because they are at the very core of the business? Could they instead be acquired through partnerships or purchased from third parties, with the trade-off of giving up some control? Many companies are considering these “asset-light” business models that look to source non-core capabilities or inputs into the business through strategic alliances, partnerships, joint ventures, collaborations, or outsourcing agreements.

The goal of evaluating whether your firm is the best owner of each asset is to free up capital to invest in the capabilities that will be core to the business enterprise in the future. Funding future portfolios requires a capital allocation process with governance that instills discipline and enables unbiased decision-making. The process must also be agile enough to adapt to changing business needs. But many CFOs indicate their capital allocation approach is not adequately flexible and regularly updated nor informed with necessary data. Therefore, the business financial systems and processes should be systematic, deployed and integrated to facilitate learning, innovation, and continuous improvement.

There is material empirical evidence suggesting that even when the process is systematic, more than a simple majority of CFOs indicate their capital allocation process is not always followed. Consequently, less than half of CFOs indicate they can quickly assess market threats and opportunities and reprioritize planned investments accordingly. This can hinder long-term shareholder returns as only slightly less average number of CFOs indicate their capital allocation process is successfully helping them achieve their Total Share Return (TSR) goals-a measure of financial performance, indicating the total amount an investor reaps from an investment-specifically, equities or shares of stock. In practice, TSR factors in capital gains and dividends when measuring the total return generated by a stock. The formula for calculating TSR is { (current price – purchase price) + dividends } / purchase price. TSR represents an easily understood metric of the overall financial benefits generated for stockholders. Therefore, TSR is a good indicator of an investment’s long-term value, but it is limited to past performance, requires an investment to generate cash flows, and can be sensitive to stock market volatility.

Process Alignment and Integration

Extant academic literature and best industry professional practices suggest that in firms with aligned and integrated business systems and approaches, operations are characterized by repeatable processes that are routinely evaluated for continuous improvement. Learning is shared and there is deliberate coordination among all business units. Further, processes adhere to key strategies and goals and are regularly evaluated for change and continuous improvement in collaboration with various business units. The firm so aligned and integrated seeks to achieve efficiency, quality, innovation, and customer responsiveness across all functional areas of the business enterprise through analysis, innovation, and sharing of information and knowledge management designed to create and maintain competitive advantage in the global marketplace.

Processes and measures track progress in key strategic and operational goals. Aligned and integrated processes require consistency among plans, processes, information, resource decisions, workforce capability and capacity, actions, results, and analyses that support key system-wide goals and strategic priorities. Effective align­ment requires a common understanding of shared purposes, critical functions, and goals. It also requires the use of complementary measures and information to drive planning, tracking, analysis, learning, innovation, and continuous improvement at all levels. Effective alignment and integration require harmonization of plans, processes, and knowledge management to support key system-wide goals. Therefore, effective integration goes beyond alignment and is achieved when the individual components of a firm’s performance management system operate as a fully interconnected unit. Functional adaptability is the measure of matured business systems and processes.

Agility and Resilience

Best industry professional practices suggest agility and resilience require business leaders to know, understand and anticipate emergent business challenges, stay flexible to adapt to shifts in the global marketplace and initiate change in their firms. It’s the dynamic business enterprises that have a much better chance to survive – and even to thrive – in the shifting global business environment. Further, agility and resilience relate to the firm’s ability to plan, anticipate, prepare for, and recover from disasters, emergencies, and other disruptions, and protect and enhance workforce and customer engagement, supply-network and financial performance, firm’s productivity, and community well-being when disruptions strike.

Additionally, resilience requires agility throughout the firm and goes beyond the ability to return to status quo ante when disruptions emerge. In practice, resilience means having a plan in place that allows the firm to continue operat­ing as needed during disruptions. To achieve resilience, business leaders must cultivate the agility to respond quickly to both opportunities and threats, adapt strategy to changing circumstances, and have robust governance with a culture of trust. Agile and resilient firms adopt an ecosystem mindset, embrace data-rich thought processes, and equip their workforce with ongoing learning of new skills and align business systems around critical functions.

In sum, changes in customer requirements, uncertainty over the pace of the post-pandemic recovery, challenges in developing accurate forecasts, and the need to decide which changes accelerated by the COVID-19 pandemic are strategic and which are transitory all point to the importance of culture of assessment and continuous improvement in the capital allocation systems and processes. While most CFOs indicate they review their capital allocation process annually, only few perform gap analysis and regularly analyze how the process needs to be modified.

Given the speed of market dynamic, firms should be striving for a capital allocation process that is fully aligned, integrated and innovative. The capital allocation process should not end when decisions are made. During implementation, CFOs and their teams should verify that the assumptions made around the investments are proving out or require in-flight adjustments. After implementation, governance should also call for gap analysis to determine the effectiveness of the allocation strategies and then incorporate those learnings into future investment decision-making. A clear majority of CFOs indicate their process framework and governance, and project monitoring and review are only slightly or not at all effective. These challenges can hinder business financial system agility and resilience during disruptions and changing market conditions, leaving firms vulnerable and unable to pivot when needed.

Firms should utilize advanced tools to gather and analyze data. Key performance indicators (KPIs) are being evaluated on more metrics than ever before, both quantitative and qualitative. For example, sustainability metrics are now critical and go beyond revenue and profits but also address the social and environmental impacts of business strategies and decisions. Missing key industry benchmarks on any of these metrics can imperil earnings, firm’s reputation, and long-term value creation. Lack of data and analysis capability are among the most cited barriers to optimal capital allocation. All decisions must be data driven if firms are to create and maintain competitive advantage in the relevant market segments.

Effects of the current US regulatory environment on family businesses

In the wake of the outcry from the Great Recession directed at Wall Street, the federal government has taken both legislative and regulatory measures that many fear will miss the mark. Rather than making investors more confident and making business more efficient, there is a possibility that new laws and accompanying regulations will hamper decision-making and divert attention from core business activities. While most of the new regulations target large public companies, there are some implications for family businesses and family offices that are important to note.

As usual, the concern after this round of new legislation is what the actual consequences of these rules will be once implemented. These concerns are compounded today by two rather unique factors. The first is the structural nature of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which has left it to the Securities and Exchange Commission and other regulators to clarify how the law is implemented in many cases. Second, it is the latest set of elections that have changed the balance of power in Washington and effectively raised more questions about what will ultimately be the law of the country.

Prudent business practices tell us to prepare for both the expected and unexpected consequences of government action. So, in that spirit, it may be worthwhile to take a closer look at some of the implications of the Dodd-Frank Wall Street Reform and Consumer Protection Act that was signed into law on July 21, 2010. While, as its name suggests, the law addresses major consumer protection reforms, And the commercial restrictions of major banks, regulation of financial products, it also contains important new requirements for corporate governance that may directly affect family businesses.

Consequences, intended or not

As an example of how these decisions affected family-owned businesses under Dodd-Frank, in clarifying reporting requirements for family offices, the Securities and Exchange Commission (SEC) drew a clear line between a single-family office and those serving multiple families. As a result, family offices that have been opened for other families to share their services and the costs of offering them to the public as investment advisors may be excluded. If the Securities and Exchange Commission (SEC) determines—based on its October 12, 2010 definition—that the family office is in fact providing investment advice to the public, it will be required to register with the Securities and Exchange Commission under the provisions of the Advisors Act of 1940. In the past, advisors who They have less than 15 clients from the provisions of this law. However, the new legislation overturned the exemption, with the likely result that only single-family offices would be able to avoid registration and reporting. Apparently, hedge funds, not family offices, were the intended targets of these changes, but the result still prompted the Securities and Exchange Commission to develop a definition of family office that seemed more restrictive.

Unintended consequences like this – and the results of attempts to clarify or reform laws and regulations – can often cause the most difficulties, precisely because no one saw the problem in advance. While some of them may have a direct impact on family businesses, such as in family offices, others may have a more systemic impact. For example, after Sarbanes-Oxley passed, public companies were required to disclose more information and significantly expand their filings with the SEC. So much of this paperwork has become so prevalent that it has affected what banks and other financial institutions require of all their customers, thus complicating the process of securing other lines of credit and borrowing for private businesses as well.

Agent Arrival

One of Dodd-Frank’s most widely discussed and potentially far-reaching provisions deals with proxy access. Soon after the law was passed, the Securities and Exchange Commission approved new rules allowing shareholders to have access to a public company agent to add their nominees, at the company’s expense, for election to the board of directors. Although there are restrictions on the number of nominees that can be placed on proxy by shareholders over those selected by the corporation’s nominating committee, this change sends shock waves through corporations. An investor or group of investors needs to own only 3 percent of the company’s voting stock to exercise this judgment and to place candidates for up to 25 percent of board seats on an agent. This is a relatively low threshold for many pension funds, labor unions and other active shareholder groups that have their own agendas. This small percentage can represent a crippling force for family businesses that have sold even a small portion of their stock in a public offering.

This is sure to discourage many family businesses from turning to the public markets for funds to grow their businesses and effectively cuts off an important source of investment capital. Any family business considering a future public offering should carefully consider opening its board of directors to opposition groups with agendas set by minority owners outside the family. Proxy access will also give new ammunition to those who want to challenge stock categorization in ways that enable families to retain control of voting. The New York Times and Barnes and Noble newspapers have had these types of attacks in the recent past.

Even small businesses, defined as those selling less than $75 million in stock in the public markets, will be subject to this new agent rule. However, the SEC has suspended enforcement for small businesses for three years to allow time for the rule to be applied to larger companies to be considered. It is therefore crucial for family businesses that fall within this definition of a small business to begin planning their strategy for controlling this new threat within the short period for which they have to prepare. Possible strategies may include stock buyback plans and other ways to reduce exposure before the three years are up.

Compensation and say pay

Although not an immediate threat to control, saying over wages presents potential interference and disruption to the governance of a publicly traded company, even if the controlling stake is family owned. This part of the regulation requires that shareholders at least every six years (which can often be by shareholder vote) have a non-binding vote on executive compensation. Although a non-binding vote would not directly affect an executive’s actual compensation, it could potentially give an additional voice to dissident groups that do not understand or care about the competitive environment in which the company operates. This process will undoubtedly be another reason why family businesses may want to avoid raising capital through public offerings of their shares as so many have done in the past.

Impact on family businesses

Given the issues raised above, an unintended consequence of the Dodd-Frank Rules and the resulting rules the SEC implements them may be shutting down an important source of growth capital for family-owned businesses. Families have always had to carefully consider the pros and cons of selling some of their stock in the public markets for privacy reasons. Now there is a real threat of control, even if a minority of shares are put up, and many may choose not to go down that path, even if it means slower growth and lost jobs.

Also, it is important to remember that even family businesses that do not sell any shares on public exchanges are likely to be affected by the continued development of new regulations as a result of the Dodd-Frank Act. As with Sarbanes-Oxley, banks and financial institutions will adjust their operations and practices to comply with new regulations for public companies. This will undoubtedly mean that family businesses will need to respond to issues designed for public companies simply because they have become part of the way financial institutions do business. It is important that these companies begin to anticipate these changes and work with bankers, accountants, and lawyers to be ready.

Of course, not all of the effects of these changes are bad. The goals of the Securities and Exchange Commission are to develop new regulations to comply with Dodd-Frank’s intent to promote effective communication and accountability among shareholders, owners, directors, and executives of the company. These are also important goals that any family that owns a business should pursue. Trust and harmony between the family is built and emphasized through transparency between the owners and intended owners of the family business. Much of what Dodd-Frank seeks to impose on public companies in terms of compensation practices and shareholder access can be used to preserve the patient capital on which family businesses depend.

Leading change in a global environment

World affairs are often unstable. This month, the Japanese stock market faltered again, capping its worst one-week performance since the global financial crisis in 2008. Japan is not alone in its underperforming markets. However, globalization has linked countries through various elements. Financial markets are no exception. This article explores issues of change in a global environment and discusses the advantages of change agents in today’s organizations.

Change comes in many ways for organizations. In Harvard Business Review, author Rod Ashkensas laid out a framework for how to approach change: “It’s easy to beat ourselves up because of failures to manage change and the various studies that show we don’t get better at it. But we really know how to implement discrete changes.” The fundamental change in organizations is as gradual (gradual) and disruptive (radical). Incremental change can be defined as “a small adjustment made towards an end result”. Managers are either aware of the change or have enough notice so that they can respond in a controlled and predictable manner.

With incremental changes, organizations can make slow and systematic improvements. If you think about Whirlpool and its machines, one will have a good idea of ​​how organizations are responding to the incremental changes. Customers wanted their devices to reflect societal changes. Given this reality, appliances such as refrigerators have gone from basic black and white colors to more distinct color combinations. Electronic technology has been incorporated into the smart device industry. Companies now have plenty of time to respond to consumer demand. Disruptive change does not give organizations a generous reaction period.

Disruptive change is what causes great companies to fail and respected CEOs to be fired. Organizations cannot afford to misunderstand this type of change. Unlike incremental change which may have some predictability, disruptive change can be categorized as unpredictable, illogical and unstable. All of these qualities mean greater risks for organizations. Disruptive change speaks to the changing nature of our society. Young people feel comfortable with their technology. We live in an instant society that wants everything right now. Disruptive change can provide a market advantage.

Harvard professor Clayton Christensen, author of Innovator’s Dilemmacoined the term disruptive innovation to describe how innovation changes an existing market or sector by providing customers in a simple, convenient, accessible and affordable way. In fact, product and service will be inferior to the production or service of the status quo. Disruptive innovation is one that creates a new market and value network and ultimately disrupts the existing market and value network, displacing market leaders and established alliances. Distance learning is one of the most disruptive innovations in modern education. Traditional universities have tried to ignore the model with only a modest mission. The University of Phoenix, a non-profit higher education institution with more than 100,000 students and 112 campuses worldwide, has slowly overtaken the educational market. While the university has been criticized for its business practices and lost students, no one is saying that the innovative strategy of distance learning and treating students like customers is a wrong paradigm.

Globalization, in all its wonders, is a threat from disruptive change. Organizations need leaders who are agents of change during this time in history, not just managers. Dr. Christenson points out the failures of big companies like Sears in unexpected change: “As we shall see, the list of leading companies that failed when faced with disruptive changes in technology and market structure is long…One common theme among all of these failures, however, is that The decisions that led to the failure were made when the leaders in the questions were widely viewed as among the best companies in the world.”

What is a change agent? A change agent is someone who “helps an organization transform itself by focusing on such things as organizational effectiveness, improvement, and development. A change agent has a high internal change locus. This reality means that this person is driven from the inside out. Under adversity, he has this The individual is sufficiently internally motivated to overcome external forces.Os Hellmann, author Change Agent: Use Your Passion To Be The One That Makes The Differenceargues that agents of change are special people.

In order to change a culture, Hillman notes, an individual needs to be special: “It takes less than 3-5 percent of those working on the tops of a cultural mountain to change the values ​​represented on that mountain.” Many organizations are stuck in a rut and need a change agent to implement it. In most organizations, significant changes do not take place from the bottom up. The characteristics of an effective change agent in a global environment are: (1) brave, (2) ethically grounded, (3) global mindset, (4) visionary, (5) strategic, (6) adaptable, (7) relational, and (8) committed.

Therefore, leaders in power need to be agents of change in their organizations. Unfortunately, many CEOs are unwilling to invest their time in developing and promoting change agents in their organizations due to concerns about their shareholders and financial critics. With change continuing more rapidly and unpredictably, today’s organizations need to equip themselves effectively. They must embrace the recruitment and development of change agents within their organizations.

© 2016 by Daryl D. green

This work is licensed under a Creative Commons Attribution-NoDerivatives 4.0 International License.

Lord Shiva: Pioneer of Disruptive Innovation

To establish in me the elements of creation in perfection.

May the greatest that he can make in the world be by me, and by us, by all living things.

I respect this divine potential that Shiva has shown for the common good.”

– (Panchashri Mantra.)

Time is a wonderful transformative tool that tests the four stages of our lives and defines our entire life in a boundless cosmic platform. Time is eternal, created from a breath of divine energy that nourishes the universe. We ourselves have even seen nature used as little tools in the hands of eternal time. Whether it’s the scorching tremors, the sweeping tsunami, the creeping crawling of an earthquake or the fury of a volcano we’ve all seen these natural disasters happen on Earth.

Mythology asserts that God is beyond time, form, space, and sound and has the power to create or destroy time and the universe in a fraction of a second.

God Shiva is the master of eternity, full of life leading the forces of destruction and transformative creation. He is seen in his formidable avatar of Rudra, as a destructive form of the Almighty, destroying everything into nothing. Shiva has done such destruction countless times in different ways – subtle or cruel, but with the world perfectly recreated, we can never understand if he destroyed or recreated it? A goldsmith plays the role of melting existing jewelry to reproduce pure gold that can be used to create other decorations with exquisite design and precision.

Shiva represents the Higher Self, in which one is willing to transcend forward and evolve into cosmic existence.

Schiff, in the truest sense of the word, is the primal pioneer of evolutionary energy and innovation.

Innovation is the introduction of new products into the market to meet times of survival. Not only organizations, but countries and continents are racing to build a strong innovation culture that opens the door to sustainable performance. Moving forward, even individuals innovate themselves by learning new skills, developing character and knowledge and incorporating innovation into their field to be more recognized and successful.

With more than ten types of innovations on the market, a disruptive innovation is an innovation that disrupts the existing arrangement resulting in more improvements or value-added benefits for better rebuilding. Characteristics are derived from a user research process targeting a specific consumer base to provide a specific perimeter in broad disruptive innovation terms.

Tandava is a powerful form of the Shiva dance that fades to re-create the process of creation, preservation, disruption, and recreation in the universe. The tool is a symbol of life cycles that include creation and destruction such as the daily rhythm of life and death. This is how Tandava can balance this perishable world. Tandava is Shiva’s powerful tool for disruptive innovation for the sustenance of the new creation.

Hilal Shiva indicates that we should have a perfect thought process while being vigilant about the environment around us. This quality is important for innovators because they need to have complete knowledge of the market and be alert to market movement. The moon indicates that innovators should think a hundred times and then take a step forward.

Sitting on or wrapped in tiger skin in his meditative trance, Shiva contemplates his next creative cycle. Leopard skin represents a high potential energy in the wearer which is expected to be the most important characteristic of the innovator. The potential energy of the innovator should be a vital aspect that drives the entire innovation process in the form of potential to conquer the goal.

Thomas Edison, the Wright Brothers, Mark Zuckerberg, Steve Jobs, Sergey Penn, Bill Gates, and others did what they imagined based on their potential.

Kamandalu, a bowl containing nectar is always spotted on the ground next to the Shiva. This Kamandalu is not made from gold or silver, but from dry gourd similarly, innovators need to focus on using natural resources, taking care of the environment, conserving energy, and ensuring that sustainability is the top focus when creating innovation.

The watch glass case is a combination of two triangles separated by a fine-line structure. The drum known as damru provides the sound for the tandava dance. The sound of the drum is only heard in deep meditation. For the innovator, this cylinder is a user search tool where the innovator needs to listen to the user’s needs and preference in deep interest and empathy.

The flowing ganga from Shiva’s long, sensual, copper-clad tufts signify abundance, fertility, and a noble cause to support life on earth. Innovation must be done in a state of high spirits, vitality and enthusiasm but human welfare philosophy must be kept in mind for the well-being of human beings and society.

Holding snakes and Rudrakshas represents law, order and justice which are the basics of any science, including the science of turbulence. Innovation must not violate the luxury or the harmony of the environment.

Trident represents action, willpower, and knowledge the three essential qualities of every disruptive innovator. An innovator must possess the ability to turn his ideas into action with tremendous willpower and specialized knowledge.

Nandi, his bull is waiting for Shiva to wake up from meditation, and listen to the universe. remove ignorance. Inheriting wisdom to the followers of Shiva. This is how an innovator should learn; Convince users of the purpose of innovation and how we can mutually advance with invention.

His dance in the hot red flame, rising from his tongue and left hand tells us that everything will be consumed over a period of time, and therefore we need to keep up with the pace.

Lord Shiv and Shiv-tattav (Principles), the power of reproduction in reality are also the elements of disruptive innovation. As we associate these wonderful symbols, myths, and cosmic tools with the science of turbulence innovation, it is clear that the God of Destruction was the original pioneer in turbulence innovation.

Whatever the origins of Shiv, as described in the Puranas and the sacred Vedas, the properties inherent in him and the role he plays in the cosmic activity of the universe, may be clearly regarded as an art or a science of inventing disorder.

The biggest tech IPO of 2018 was overdone

Admit it… I’m one of those people who sing really loud (and off-key) when I put on my headphones. Especially if Journey’s “Don’t Stop Believin” comes out.

I can’t help it, the music moves me…to the displeasure of anyone within listening range.

In fact, most of my iPhone’s memory is for my playlists. Before upgrading my volume recently, I actually had to delete the photos in order to keep all that music ready to go off with the touch of my finger.

Now, I have plenty of room…but there is a problem.

I’ve been known to spend upwards of $20 a month buying songs from Apple. I know this is completely unnecessary with today’s streaming technology. But I was stuck in my ways.

Recently, I “dismantled myself”… and joined the Swedish-born live listening service, Spotify. I will never go back.

So when Spotify – which is worth about $20 billion – announced its IPO in March/April in a unique way, it improved. I’ve started combing through the headlines, and analysts have already called this the biggest technical initial public offering (IPO) of 2018. The expectation is huge!

But, unfortunately, I am cynical in my heart. Despite my enthusiasm, I had to ask myself… is the publicity for Spotify stock really worth it? So let’s take a detailed look at this IPO today to find out.

Talk about a musical revolution

In my opinion, Spotify has been part of the most significant solo innovation in music since Kurt Cobain discovered perhaps ear-breaking reactions and raw, turbulent lyrics about teenage anxiety.

The concept is simple: you can stream music online. Free. Or, at most, a small monthly fee of $9.99. You just need the Spotify app to access them all.

When Spotify launched in October 2008, this was a disruptive and revolutionary idea. That’s why the company helped lead in the music streaming market, paving the way for services like Apple Music (Apple’s streaming service, which was launched later in 2015).

Spotify is an endless and easy to use treasure chest.

You listen to what you want, wherever you want, whenever you want. The app is compatible with practically every device I can think of, from computers to smartphones to tablets.

And if all that music sounds overwhelming, don’t worry – you can also use our unique music discovery feature to find songs that suit your musical tastes.

The whole platform is a great idea.

Unfortunately, investors like us have not been able to participate in this revolutionary service because the company has been privately owned for the past decade. Now that we can part with the stock soon, we need to make sure it’s worth the investment.

The Times, It’s Changing the $1.8 Trillion Industry

The first thing to note is that according to PwC, the global entertainment industry is expected to grow from $1.8 trillion in 2016 to $2.2 trillion by 2021. That’s fine, but it’s a 4.2% compound annual growth rate – down from 4.4 percent expected in 2016.

This means that the old-school entertainment industry is beginning to stabilize. To fix this, the industry needs to focus on building sustainable relationships with customers.

After all, consumers are king. When it comes to recordings – movies, TV, music – we have to dictate what we want to see, hear and experience. We vote with our time, attention, and a small subscription fee (think Netflix, Amazon Video, Hulu).

Just as industries and products like healthcare, automobiles, refrigerators, thermostats, etc. needed a revolution – see precision medicine and the Internet of Things – so did entertainment.

And this revolution is here. Spotify is just one of the top players.

That’s why Spotify has about 140 million active listeners, 70 million of whom pay extra for advanced features. Even better, the service boasts 30 million songs and adds more than 20,000 songs per day.

It also has more than 2 billion playlists, created by the company’s growing user base (a great idea that engages the customer more directly), and an additional 5 million playlists are created or edited daily.

This is clearly a massive reach. However, there is one problem…

Problem: money, money, money

Despite all this, Spotify hasn’t found a way to make a profit.

Yes, sales jumped 52% to $3.09 billion in 2016. But the net loss more than doubled, reaching $568 million. (Although the adjusted net loss is like $310 million.)

For example, approximately $2.62 billion of that revenue evaporates with cost of goods sold. Another $440 million disappeared in sales and marketing expenses, etc.

At least EBITDA came in at negative $169.2 million in 2016, compared to a $180 million loss the year before, painting calculated.

But we need to see the company generate positive income.

Spotify is not. So the numbers surprised me. With that in mind, I turned to Paul Mampilly for his thoughts on the public Spotify listing.

Paul Mambele speaking Spotify stock

Paul is the go-to guy for all things disruptive tech, so I knew he must have some interesting ideas about it. This is what he told me:

Spotify’s public listing is interesting from two angles: First, it’s an unorthodox IPO because it cut Wall Street from setting prices. Instead of making the shares available to the general public, Spotify will list itself directly on the exchange. This means that only institutional investors have access – eliminating the need for banks to set an initial price, link sellers and buyers, etc. This is something that makes initial trading essential because Wall Street’s involvement provides price stability for IPOs.

Second, Spotify is still losing money, despite having a huge subscriber base. However, it’s also a subscription business, which means repeat revenue – and that’s a great model. Plus, like Netflix, it’s a global company, so it can continue to grow.

So, the biggest concern for Spotify is this: Will enough people buy the IPO for you to want to be in it from day one? Because most of the time you get the chance to buy it at a lower price. That’s because most people play IPOs for a quick show on the first day or first week, and then ditch it.

I say that people who want to buy shares as an investment should devote their time, wait and see how the shares trade – and watch how Spotify’s business does over a few quarters. Then you can build your site up over time, if things look right.

All in all, Spotify is a great product with a great model. This may eventually lead to profitability in the future. But this is “wait and see”. Don’t get caught up in all the fuss just yet!

Amazon, King of Troubles

an introduction

When it comes to disruptive technology, one company is at the fore. Amazon ($AMZN). Amazon and its groundbreaking founder and CEO, Jeff Bezos, are responsible for disrupting more industries than I can count on my own hands, and they keep going. In this article I will explain what makes Amazon an efficient machine, disrupting many industries.

first blood

When was the last time you walked into Barnes & Noble ($BKS)? Or any other library for that matter? What about the last time you visited Amazon? I’m willing to bet everyone reading this has been on the Amazon website for the past few days, and I’m equally willing to bet almost no one has been in a bookstore for quite a while. The bookstore industry, symbolized by former giant Barnes & Noble, was the first victim of Amazon’s disruptive tendencies. Amazon’s roots go back to 1994 when the company established an online bookstore. By designing as an online bookstore, Amazon has been able to offer a much wider selection than any physical bookstore, along with being able to offer the same selection at a cheaper cost to the consumer. Since the free market behaves naturally, consumers have chosen the cheapest option when offering an identical product or service. By 2007, Amazon had surpassed Barnes & Noble in revenue from book sales, the same year it released the first edition of its Kindle e-book reader. By 2010, sales of digital books exceeded sales of physical books through Amazon. Amazon also operates the company and website Audible, one of the biggest players in the audiobook game. In 2011, Borders Group, what had been just a few years before, the second largest bookstore chain in the United States, filed for bankruptcy, and after a few months ceased to exist. At the time of writing this article, the market capitalization of Barnes & Noble is approximately $454 million. Amazon has a market capitalization of about $832 billion. By market capitalization assessment, Amazon is worth nearly 2,000 times that of Barnes & Noble. Amazon’s entry into the bookstore industry and its replacement of pre-established businesses in its place is simply the first of many industries the Amazon bull has disrupted.

No end in sight

After profiting from direct retail sales and fees from third-party sellers on the Amazon website, Amazon generates the largest percentage of its revenue from the Amazon Web Services (AWS) division. AWS has a history dating back to 2006. Over the course of 2006 Amazon successively launched Simple Storage Service (S3), which is a file storage service as the name may imply. Simple Queue Service (SQS), a service intended to automate message queues. To end the year, they launched Elastic Cloud Computer (EC2), a service that allows users to pay for server time to run programs and simulations. Today there are around 100 different services offered under the Amazon Web Services umbrella that can cater to almost every digital need. Nowadays, nearly half of all digital cloud computing is powered by Amazon. Similar to what happened in the bookstore industry, Amazon took control. By 2020, the value of cloud computing is expected to reach more than $400 billion. And Amazon is set to dominate this market for the foreseeable future.

Claim to fame

The retail and grocery industry is a great example of an industry that has been permanently changed by Amazon, and what it is best known for. However, initially, Walmart (WMT in USD) has nearly three times the annual revenue of Amazon, so it’s not as if Bezos & Co. have taken over the retail industry, but they certainly made a negative impact. One could say they have disrupted the industry. While it was founded in 1994, for the first four years it was just an online bookstore, but in 1998, the company expanded its catalog and began selling more than just books. Since then, the company’s online sales have grown exponentially year on year, and they have been accused of putting many traditional retailers out of business. Amazon generates about 85% of its revenue from its own retail business, so it’s clearly the bulk of Amazon. By pioneering online retail, Amazon has managed to establish itself as one of the largest retail companies despite being fully online, in part due to convenience and low prices. Most recently, in 2017, Whole Foods, a luxury grocery store, was acquired by Amazon to increase its market share in the retail and grocery scene. With its online retail arm and physical grocery arm, Amazon is able to capture a significant market share and acquire an agency across the space. Just to put Amazon’s domain in perspective, more than two-thirds of all households have an Amazon Prime subscription.

But apart from that

Above I talked about what the largest divisions of Amazon are, and what they are most famous for. But here I will talk about the lesser known parts. Amazon operates its own Amazon Video service and is available to all Prime customers. A competitor to traditional TV and media and popular with cable cutters, the service rivals other streaming services like Netflix ($NFLX) and Hulu (soon to be owned by Disney, ($DIS)) and offers thousands of movies and TV shows. There is Amazon Drive, which offers unlimited file storage for just $59.99 per year. Recently, they also acquired the website Twitch, the largest video game streaming site giving Amazon market share in the streaming and e-sports industries. One of the first affiliates is A9, a highly advanced search engine and marketing company that works using machine learning. Amazon is also after self-driving car companies like Tesla ($TSLA) and Google’s Waymo ($GOOG, $GOOGL). Although Tesla is not as advanced as many think, nor is it considered a good investment. Back on track, they also have Amazon Music, Amazon Tickets, Amazon Home Services, Amazon Inspire, IMDb, Amazon Go, Fire TV, Goodreads, Zappos, and more. Go ahead and look up Amazon companies or services that Amazon offers which I haven’t talked about, you can probably find at least a few dozen more. Two days ago, Amazon announced that it was buying an online pharmacy in order to offer an online pharmacy, drug delivery service that would disrupt traditional pharmacies.


Currently, Amazon is the second most valuable company by market capitalization in the world. The only company that has been outdone is the tech giant Apple ($APPL). Based on Amazon’s huge potential for growth, and the lack of equivalent competition, I believe its value will continue to rise. They are in the unique position of disrupting nearly every industry you can think of, and succeeding at the same time. Amazon is a great company that will continue to expand indefinitely, and I would advise anyone to invest in the company, even though some think it is overrated.