StartupEmpire Toronto
Some notes from the first two keynotes are Startupempire in Toronto.
Don Dodge – nice reality check – down turn does not mean lack of opportunity – just means adjustment
- great time to start up a new company
- vitamin vs pain killer
- vitamins are nice to have
- pain killers are things that are needed
- "me too" start ups will not get funded
- ad based companies won’t get funded any more; VC’s will do the math
- what does it take to generate $1M per month in advertising revenue
- its a large number
- angels vs VC
- angels are easier to convince if they know you, or know people who know you, or have been in the business themselves
- if they don’t know you, they are more difficult
- If Angels don’t know you VC’s are better because they are willing to take a risk
- do homework - where have they invested before
Austin Hill – successful entrepreneur – great talk. Some great tools referenced here.
- Advertising is not a business model
- getting customers is a business model
- the VC model is broken
- if you add up all the value in Skype/ youtube etc, it still does not equate to enough market cap to justify the IRR required by the VC model
- Canadian market is different
- Canadian VC are well sized - they can be profitable with one good deal
- Walmart - big and broad or Apple strategy - niched and focus
- understand metrics
- pirate metrics on slideshare http://www.slideshare.net/dmc500hats/startup-metrics-for-pirates-long-version
- productplanner.com - mapping user flows
- http://www.balsamiq.com/ - wireframing tool
- don’t try to build demand - develop partnerships with others who are being troubled by the current environment
- partnering strategies are one way to take advantage of the downturn - help them with their downturn problems
- topgrade: no time to compromise on inefficient people
- make real world meaning - there are enough tools already built for sharing video, tagging etc - focus on real meaning for customers and business value
- point to big shifts and here is how my company can use that opportunity (eg cloud computing, demographic shifts)
- hearts - minds - wallets | core to pitching
- do not talk about features
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Canadians are heavily into unsecured debt, and will go back to “old fashioned saving”
Good wake up piece here indicating the relative appetite for credit and in particular credit card and unsecured lines of credit in Canada vs the US. Not sure the numbers sound completely right, but the indication is that Canadians have relatively much more unsecured debt that Americans, and that might come as a surprise to most Canadians.
The article goes on to draw out the distinctions between passive saving while the stock market was rising, versus the current situation, whereby saving must come from monthly income - old fashioned saving as the CIBC economist calls it.
Plastic Nation: Canadians Drowning in Credit Card Debt | Epoch Times
“People have put themselves in this situation where they’ve got cars on lease or on loan, they have a huge mortgage on their homes and they may have $30,000 to $40,000 on lines of credit and unsecured debts such as credit cards and that’s just not sustainable.”
…
CIBC senior economist Benjamin Tal says savings rates went down because net rates went up. In recent years people were making a lot of money in the stock market and in the housing market, he explains, and this was their way of “passively saving.”
“But beyond that, now with the housing market levelling off we will see a situation in which people will go back to old fashioned saving, especially in an economic slowdown,” Tal predicts.
Unlike the US banks, Canadian banks hold back on dropping rates
The Canadian banks choose to rebel against the Government of Canada direction to reduce interest rates. The Central Bank dropped rates by a half percentage point indicating concern about the economy and in an attempt to ease credit. However the Canadian Banks are choosing to keep 50% of the drop for themselves. Story at the Globe and Mail.
Banks trim prime but lag BoC cut | Globe and Mail
OTTAWA — Major Canadian banks said they would lower their prime rates by just a quarter of a percentage point, refusing to pass along all of the Bank of Canada’s half-point decline.
The rebellious move is a departure from the past, when the big banks have fully matched central bank rate cuts, despite complaints they couldn’t really afford it.
Canada is in good economic condition, which will help weather global storm
While there is a general assessment that the US and European banking crisis will rub off on Canada, and provoke a recession, possible later in 2008, or early 2009, UBS acknowledge that Canada is in relatively good economic condition which will mollify the impact on the country.
Recession? You don’t say | Globe and Mail
“An important point of distinction for the Canadian economy is that, for the first time most can surely remember, the underpinnings are sound going into a downturn,” UBS said in a note to clients. “Specifically, consumer debt service ratios are historically only average, the budget is in balance with debt ratios less than half US/European levels. Accordingly, the economic risk in Canada is far lower, and there is more ammunition available to undertake countercyclical initiatives, if so desired.”
Stock markets suggests US banking crisis does not appear to be mirrored in Canada
The mainstream press do a good job of presenting quick quotes, and implying all kinds of dread and panic. Its worth looking beyond the headline and some facts at the differences between the US situation and Canada.
Future of Canada’s economy comes into question as TSX ends week of panic | Canadian Press
The theme of the article is broadly the spillover effect of a slowing US economy, reduction in credit availability, and reduction in consumer spending.
It is certainly not our place to make predictions or make economic commentary, but some facts might be useful. Then we can each decide the reason or cause for any panic reflected in the TSX.
Some basic facts in the diagram below, compiled courtesy of Google Finance. In order to highlight the relative effects of banking in each country’s stock market. We have US on the left, Canada on the right.
The US Dow is down 26% and roughly the same in Canada at 27%.
However when we look at financial services, a component of the Dow index, the American index is down 52%. This suggests that the Dow banking sector is worried. The sentiment of the market is that the US is in a flat out banking crisis.
In Canada it appears to be the opposite - what exactly are we panicking about in Canada? Clearly not banking, because relatively speaking the Canadian banks are holding the Canadian stock market higher, with the TSX is apparently being dragged down by other factors. We may well have cause for panic, but it doesn’t appear to be reflected in market sentiment for Canadian financial services.
What happened to personal accountability?
Let me make this a bit more clear for you if you are having trouble following me. If you were walking down the street and a drug dealer popped out and offered you some drugs for free, would you take them? You know it's bad for you even if it is free. You know this decision is not likely to have a good outcome for you, but you decide to give it a shot anyway because everyone else is doing it and the dealer tells you it's good for you and you can handle it.
Is it the dealer's fault that you decided to take something you knew was bad for you? Now we all know that the dealer is a bad guy and should be punished for breaking the law and dealing drugs. But, aren't you also somehwat responsible for your bad choice? Shouldn't you shoulder some of the blame?
By now, you know where I am going with this. Sketchy mortgage brokers and slick Wall Street types told you that you could afford that $500,000 house even though you had not saved for your down payment and you only made $50,000 per year. After all, all your friends and neighbors were doing it, right? Even though it was available to you, you knew it did not make sense that you could get such a loan. But, you took it anyway. Then, when your house rose to $700,000 in value, another slick mortgage broker told you take take a second mortgage for $200,000 so you could put in a pool, go on that nice vacation and buy that expensive car. Or maybe you could just refinance your first mortgage and "Pick Your Payment" so that you could cover the new GIGANTIC mortgage (at least for 12-24 months until the payment adjusted). Hey, you deserve it and everyone else is doing it. Never mind that you couldn't affored the first mortgage payment much less the second mortgage payment.
Now that all of these loans are going bad (not really a shocker, by the way), banks and mortgage companies are going under and the securities issued to allow these silly loans are defaulting, people are trying to blame everyone but themselves. Greedy CEOs, lying mortgage brokers, etc. are the only ones to blame. It's not my fault that my payments are TWICE AS MUCH as my income!!
Why don't people start to take a little responsibility for their decisions and actions. Sure, there are plenty of cases of legitimate fraud, lying, cheating and stealing and the corporations that profited from all of this mess should also be severely punished. But, if that were the only problem, we would not be in this mess. The bottom line is that Americans have spent more than we make for over a decade now (think negative savings rate) and it is catching up to us. So, here is who I blame (in my opinion):
1) Individuals: if you are not diligent enough to read your own loan documents and understand them, then you probably shouldn't be taking on the debt required to buy a house, car, etc. While the small print is mind numbing for sure, the Truth in Lending Disclosure is actually pretty easy to read (shows the costs of the loan and your payments over time). If your paycheck was only $2,000 per month, you can't afford a $4,000 per month payment (now or 24 months from now)! It really is that simple! Spend less than you make (that's called saving, by the way) and don't get duped into believing it's OK to do otherwise.
2) Congress/Federal Reserve: The knuckleheads in Congress and the Fed have promoted easy money for so long now that we all believe we are entitled to it. When a number of Congressmen raised the issue that Fannie and Freddie might be a disaster in the making (in 2004 and 2005), most folks in Congress buried their heads in the sand. "We are meeting our housing objectives" (this is code for people that can't afford homes are getting loans for them - this is also known as "subprime" and the initial shoe to drop in this mess). Even Alan Greenspan (who shoulders a good chunk of the blame for his easy money and 1% interest rates) noted that Fannie and Freddie were a potential ticking time bomb. No one in DC listened and now they want to spend $700+ billion to try to fix the problem (I'm skeptical this will work, by the way).
3) Wall Street/Ratings Agencies: We were all convinced that the smart guys on Wall Street had invented a way to make risky borrowers less risky. Somehow, through financial alchemy, Lehman Brothers, Bear Stearns, UBS, etc. all convinced us that you could take a bunch of risky loans, wrap them up into a nice little bow, slap some insurance on them and call them AAA quality. Then, the ratings agencies, who were being paid to provide ratings on these securities (no conflict there), called them "Investment Grade" which allowed pension funds, retail investors and others to buy them up. As if that weren't bad enough, the investment banks et al decided to borrow 30 TIMES their equity capital to buy these toxic securities (for every $1 of capital they had, they would borrow $30 and buy these bad securities). When it came time to borrow more money as loans came do, the investment banks imploded.
So, what can we learn from all of this? First of all, people need to take responsibility for their own decisions and the consequences for those decisions. If you bought more house than you could afford, you have to live with the consequences of that decision. If you are spending more than you make on your credit cards, that too has a consequence for you. Just because you got a great 0% APR offer (think free drugs - see above) that doesn't mean it's a good decision to load that card up. I fear that the government bailout only reaffirms the dangerous and increasingly pervasive cultural phenomenon that individuals are not responsible for their own decisions. If there is always someone to bail you out when you make a bad choice, then is it really all that bad a choice to make in the future? The corollary to this is that good decisions are not rewarded, but rather penalized (think higher taxes). Until we return to the basic economic principals of freedom, individualism and true capitalism, I fear there is going to be a lot of economic pain in our great country.
$500 oil coming?
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Here comes $500 oil
(Fortune Magazine) -- Matt Simmons is as perplexed as anyone that it has fallen to him to take on OPEC, Exxon, the Saudis, and all the other misguided defenders of conventional wisdom in the oil patch. Why should one investment banker with a penchant for research be required to point out what he regards as the obvious - that from here on out, oil supplies can't meet demand, and if we don't act soon to solve this crisis, World War III could be looming?
Why should a man who scorns most environmentalists have to argue that locally grown produce and wind power are the way of the future? Why should a lifelong Republican need to be the one to point out that his party's new mantra - "Drill, baby, drill!" - won't really fix anything and that his party's presidential candidate is clueless about energy? That the spike in oil prices earlier this year wasn't a temporary market anomaly and the recent retreat in prices is just a misleading calm before a calamitous storm? That we're headed toward $500-a-barrel oil?
Read the rest of this article online at Fortune.com (click here).
Banks, investment banks, and government - state of crisis
Today will be a bloodbath on the markets, following Sunday when we saw the end of Lehman Brothers, Merrill Lynch, and a deepening crisis for AIG Insurance.
Wall Street shaken by Lehman failure, Merrill sale | Globe and Mail
NEW YORK — — Global markets plummeted on Monday after investment bank Lehman Brothers Holdings Inc. [LEH-N] filed for bankruptcy protection, rival Merrill Lynch [MER-N]agreed to be taken over and the Federal Reserve threw a life line to the battered financial industry.
As a deepening crisis took new, bigger victims, the U.S. Federal Reserve said for the first time it would accept stocks in exchange for cash loans and 10 of the world’s top banks agreed to establish a $70-billion (U.S.) emergency fund, with any one of them able to tap up to a third of that.
On a black Sunday for Wall Street, frantic attempts to find a rescuer for Lehman failed, and troubled insurer American International Group [AIG-N]asked the Fed for a lifeline, according to news reports.
But the larger question remains - what does this all mean for Banks and financial institutions. The day to day Banks that we all see are enormous holding companies comprising banking, brokerage, mutual funds, and investment banking. Then there are the specialised investment banks such as Merrill and Lehmans, So the obvious school of thought is that the big bank holding companies will simply take over the investment banks. Bank of America is paying 48 billion for Merrill.
Banking models | The Financial Times
Is it the end for standalone broker-dealers? Many believe the fading of the light at Bear Stearns, Lehman Brothers and Merrill Lynch proves that the independent investment banking model is dead. Even the mighty Goldman Sachs and Morgan Stanley are under pressure to explain how they will survive on their own. The new mantra is that investment banks only have a future within large financial institutions.
That view is wrong. Indeed, until recently, investors argued the complete opposite. Universal banks such as HSBC and UBS, for example, have long been accused of being too diverse, with their share prices underperforming the broader sector as a result. Common complaints were that global banks lacked focus, or scale in particular businesses. And the revenue benefits from running, say, a wealth management division next to investment banking, were also tricky to identify.
However as the FT points out the complaint on the banks is that they are already too widely spread and have become unwieldy. The notion that the average persons bank account funds should be held and managed to support risky investment banking, for example is not something that everyone agrees with. When the investment banking arm loses money, whose fees are raised to compensate?
Banks are also becoming even closer to the central banks, particularly in the US, with the latest episode yesterday resulting in the Federal Government providing $70 billion in support.
The credit crisis has laid bare the banking model, and the relationship between the banks, the investment banks, and the government. It will be fascinating to watch how the crisis is managed over the next months and years. Yesterdays events appeared US specific, but Barclays Bank from UK were also involved. This is a global crisis, and Canada is not immune - the reverberations will hit us at some point.
“The days of cheap money are over,” | RBC
This additional quote from Nixon of RBC pretty much answers the question in our last post.
Credit crunch fallout will cast a long shadow
“The days of cheap money are over,” said Gord Nixon, Royal Bank’s chief executive officer. If anyone would know, he would.
…
That means the banks’ own cost of money is likely to stay high. The credit crunch was a useful reminder to bankers of the value of a large, stable base of retail deposits. The institutions that failed - Northern Rock and Bear Stearns - didn’t have it. Everyone else wants it and they’re going to have to pay for it. That could work to savers’ advantage, but for borrowers, it’s nothing but grim news. The banks will pass on their elevated funding costs to the customers.
Even in Turbulent Markets, the Core Business of Banking Remains Profitable in Canada
Irrespective of the way that the capital markets react to this week’s earnings announcements from most of Canada’s largest banks, the core message from each of their announcements will be clear – banking in Canada continues to be a highly profitable business, this, despite the significant issues around sub-prime investment exposure and a worsening economy.
Looking specifically at the BMO and Scotiabank announcements of Tuesday August 26th highlights this message.
While BMO did report a third quarter profit that missed analyst projections, they also reported one of their best quarters ever on the domestic core banking. According to today’s Globe and Mail reporting on the announcement, “Profit in the core Canadian consumer banking division, which comprises the largest portion of the company, fell 3.2 per cent from a year ago to $343-million. But the bank said the results in this unit represented “one of our best-ever quarters,” as the profit was up more than 3 per cent from the prior quarter. Expenses were up nearly 7 per cent from a year ago as the bank opened and expanded branches.
The Scotiabank announcement contained similar news. Again from the Globe and Mail reporting on the announcement, “Highlights in Scotiabank’s results included a record quarter from its domestic retail banking unit, an area that chief executive officer Rick Waugh has targeted for growth. Net income for the division rose 16 per cent, year over year, to $456-million.”
So what does this mean for the promise of social lending in Canada?
The fundamental premise of social lending is to connect Canadian lenders with Canadian borrowers in a safe and secure lending platform where they can set their own rates and receive the resulting benefits excluding the middleman.
Even in today’s turbulent financial markets, Canadian banks are proving that this core business of banking in Canada is a strong and profitable business indeed.
