Evaluating the Paypal Spinoff

• Paypal holds more growth potential than marketplace side of E-bay  
• Paypal could see major growth if it gets access to upward trends in mobile payments and other emerging markets 
• Paypal will be challenged by Apple Pay and Google Wallet in mobile and other regulatory and legal barriers
• Paypal should be fairly valuated at around $40-45 billion when it spins off  

     As I've suggested in another article technology has systematically disrupted information based industries and potentially the next industry that's in line is the more entrenched world of finance. One company that is uniquely poised in that disruption is Paypal. According to Paypal's next CEO Dan Schulman "There is no question that change is going to sweep through the financial industry. The financial industry is no different from other industries where technology has touched down."

Background: In late 1998 at Stanford, Peter Thiel introduced the idea of a digital wallet to Max Levchin and Luke Nosek. The three began working on the concept which later turned into the company they founded Confinity.  That service (after a brief stint with Elon Musk as CEO) evolved into PayPal in 1999 and was acquired by E-bay back in 2002. Although integrated with E-bay at this point it was still an unsustainable jumble of ideas kept alive by future Silicon Valley influentials. Its payment volumes mostly came from the E-Bay which made it a natural acquisition target for the E-bay. Paypal survived mainly because most of E-bay users were individuals or small businesses that were unable to accept credit cards. After struggling to find place within E-bay's growing user-base, in the second half of 2004, PayPal Merchant Services began to enroll other online merchants outside eBay as well as reducing fees for online purchases and launching PayPal mobile.

     Since then Paypal's contribution to E-bay's earnings has continued to outpace the growth of its parent company and E-bay may have even slowed Paypal's ability to expand its reach, specifically in hindering the launch of PayPal App. Along the Paypal has been able to acquire other related startups like Braintree, Venmo, card.io, fig, bill safe, and Bill me Later that have roughly fit into its lofty although vague mission statement being the "Web’s most convenient, secure, cost-effective payment solution," in some cases doing it better than Paypal itself.  Still after the spin off, will Paypal still thrive without Ebay's backing? At this point Paypal seems to have more potential and more opportunity for growth than its parent and with its spin-off coming in early 2015 it's worth taking a look where its potential lies, what lurking obstacles might hinder that potential and what a good price for the company would be when it does break away.

http://www.businessinsider.com/the-mobile-payments-industry-update-2014-10

Upside-The biggest immediate challenge and opportunity for PayPal is racing against tech giants like Google and Apple in the sphere of mobile in store payments. Mobile payments alone are predicted to have a 90 billion market by 2017.  Along with these grandiose tech companies, major credit card companies will also vying for this space. Paypal has already preemptively produced an app although it has still fallen short of anything that is as efficient and easy to use as traditional credit cards. Google wallet and Apple pay have the huge advantages in this area because they are backed by large established databases and services customers already trust. At the same time the size and scope that these companies work under could slow down their ability and motivation to profit from this area of tranformative growth.

In Paypal's favor, its future CEO Dan Schulman seems to be suited almost specifically for this task. His experience came from telecom starting out as an AT&T executive then in 2001 growing Virgin mobile USA to be acquired by Sprint in 2009. Most recently he has been trying to expand the reach of American Express to people without access to traditional banking by using digital alternatives like mobile. While in this endeavor, he caught the vision of a tech driven sea change in how banking can be done.  Driven by a desire to give banking access to under-served populations, and undo the convention that "its expensive to be poor" he says: "I believe that we are entering into the era of the non bank. An era where consumers have all the power of a bank branch in the palm of their hand. Its not hard to imagine that technology is going to redefine the world of consumer retail banking.  Digital wallets are morphing into tools that can serve as a real alternative to bank branches." And while I don't think we will see traditional banks disappear altogether I do think he is on the right track for growth and how to reach youth and lower income segments.  It also suggests that Schulman will do whatever is necessary to cut costs to the user while working to make the Paypal app more intuitive user-friendly. I also think he may also try to make other relevant banking services accessible to Paypal users through the Paypal app. While he has the right direction and motivation I could see him struggling to adapt to a more startup, innovative minded environment and pulling together the right team and working to get the technology right as his background is more from an executive and finance mindset.

In addition to a CEO who will pursue his vision of bank alternatives, Paypal has already established agreements with retailers that it will could try to expand into in store purchases. Most likely Apple, Google and Paypal grow with this trend with Paypal getting the most movement if it is able to make a compelling app and partner effectively with banks or credit card companies in the process.
 
   In addition to replacing credit cards there is also a  growing market of peer to peer digital payments, Mobile peer to peer and Paypal at this point is by far the most recognized and trusted service positioned for growth in this field.  Along with direct peer to peer payments using Venmo, growth could come in this segment as services like Uber, Lyft, AirBNB, and other mobile transactions rely on its service to make their businesses work.

http://www.cardfellow.com/blog/paypal-here-vs-square/

     In a related application Square has enabled transactions for small business and opened up a new market which can work with Paypal and which  Paypal has countered with its own mobile transaction device to compete with square.
As other small businesses and store fronts convert to using a computer checkout they often favor this convenient device for credit card transactions. Although insert will  become obsolete with implementation of mobile payments, it will likely continue to fill a necessary niche for a long while before payments go completely to smart phones.

Risks-Some obstacles that Paypal will continue to face are similar to ones that it has faced since it began:
-Continuing to gain the trust willingness of customers to use Paypal without direct support from E-bay
- Still being unproven method of handling money and continuing to get access to more retailers and users to give it a chance despite many drawbacks
-Pressure from Visa and Mastercard older, established systems that have huge experience and databases that are not going to give up their position willingly. For Paypal to compete with the credit card system they would need instant transactions rather than waiting for days for orders to process as they currently do with E-Bay
- Paypal has many of the safety issues of a bank, hackers and fraud that have used its open nature to take advantage of Paypal users. As Paypal grows it will continue to have to deal with regulation and how to interface with purchases in other countries etc.
    Along these lines my own experience has been that when selling larger priced items on E-bay there are offers from scammers in questionable locations like Nigeria offering to buy the item. I can only guess, but I imagine once they see the item being shipped they cancel the payment and take advantage of the time lapse in payment to take the merchandise and run. Luckily I'm not naive enough to send a $500 camera to Nigeria but this is just one anecdotal sample of likely countless other instances where users have hacked accounts and found other fraud angles to take advantage of the weaknesses in this new type of transaction. As with many types of new technology and the sharing economy, it assumes a certain level of intelligence and self reliance in its customers which is wonderful but only works if people actually live up to these ideals. If customers act like users in the old banking system and care more about fraud than getting things done better the system will not move forward.

Conclusion- While about a third of Paypal's payment volume still comes from E-Bay, there seems to be little doubt that the more profitable of the two companies will ultimately be PayPal. Current E-bay CEO John Donahoe has indicated that "While eBay’s marketplace, the company’s core business, accounts for over 30% of PayPal’s annual revenues, that figure will dwindle to just 15% within three years. And while the Ebay's $9.9 billion in revenues last year eclipsed PayPal’s $7.2 billion, PayPal’s 19% annual revenue growth outpaced Marketplaces’ 10%."  As seen in the chart below Paypal has grown consistently along with E-Bay since 2002 and went from making up 18% of its revenue to 38% in 2011.

http://vator.tv/news/2012-07-08-now-10-years-after-being-acquired-paypal-going-strong 

         So there's a lot of  room to grow and a lot of potential, but what it actually worth? Both E-bay and Paypal have about 150 Million users. In E-bay's 2012 Revenues was about $16 Billion in 2013 and  probably around $19 Billion in 2014. As Donahoe points out 40% of that is coming from Paypal so simply taking 40% of E-bay's current would give a rough valuation of  $40-45 Billion not factoring in Paypal's more optimistic future. For me anything below $40 Billion divided by the proposed number of shares would be enough margin of safety to get a stake in Paypal growth. The growth will likely be a very bumpy ride but if you stick it out, there will quite possibly be solid upside that will continue to compound as it plays an integral part in financial transactions for a long time to come.

Bhutan House

A quick colored pencil of some traditional Buthan architecture I have been looking at lately. I like the low, slightly sloping, horizontal lines and wide intricately decorated roofs that flow seamlessly into the landscape. Their landscape actually reminds me a little of the hills of Northern California (maybe that's just me) but I feel like the style would be fitting for the Asian influence there. It does slightly remind me of some architecture is Berkeley but apparently University of Texas El Paso campus has a heavy Bhutanese influence.  

A Grocer's approach to health insurance- Rewarding health with wealth

If you work for Whole Foods or Safeway, staying healthy is more than just good advice, it also means better benefits. As of 2010 John Mackey the CEO of Whole Foods released a letter that proposed an interesting new method to giving employees discounts. As seen below, this letter offers employees a better discount as they perform better on tests of smoking, cholesterol and BMI. John Mackey has the right idea as there may be few other individuals who can better combine a better understanding of health and free market enterprise for the benefit of the general populace and really, if you're thinking about working at Whole Foods you should expect something like this. Along with the discounts, Whole Foods offers a custom insurance plan for its team members as well as a total health immersion for members that are especially sick or struggling with weight. While for most team members the discount they can receive may not have much impact on them financially its is a small start and may be just enough incentive to nudge them in the right direction.

http://lol-rofl.com/treadmill-cartoon/

This attitude that Whole Foods is presenting seems not to be that far ahead of  other organizations to encouraging workers and citizens to take their health and finances into their own hands.  The former CEO of Safeway Steve Burd, was an early adopter of financial incentives to help employees cut tobacco use and reduce blood pressure and cholesterol levels. Burd has said that obesity and smoking rates among employees in the voluntary program are roughly 70 percent of the national average. Like their employees' bellies, Burd testified before congress that his company’s health care costs have been flat “while most American companies’ costs have increased 38 percent over the same four years.” This topic of how much employers can encourage their workers to stay healthy is one that has been debated and addressed initially by the US government under HIPAA and then expanded through Obamacare.

Currently companies like Scott's Miracle Grow, IBM and even the state of Alabama are thinking along the same lines and have already applied policies that will reward healthy living. Along with state and businesses adoption of health promoting incentives, health insurance companies and hospital groups are beginning to adopt programs with similar incentives. So these wellness programs designed to motivate workers to adopt healthy lifestyles aren't going away, and if anything are part of a trend that will likely continue to grow.

The bulk of the US's health care costs come from preventable diseases. Obviously these incentives wont completely change attitudes or the world, but could be enough to give an extra push to people that just need an excuse to eat right or do things better. Of course there are a lot of genetic and otherwise currently un-treatable diseases, but the since its the preventable ones that are hurting us the most they are a good place to start. One objection against this incentive based approach brought up by AARP is that if you give one person a reward that someone else will end up having to pay for it. This shortsighted thinking fails to see that any immediate cost difference will soon be outweighed by the benefits as long term costs are severely reduced because the program is based on preventative steps shown conclusively to prevent disease. Giving people incentives to stay healthy is an obvious application of an ounce of prevention to avoid having to pay for a pound of expensive cure.

http://www.brit.co/stars-stripes-in-fruit-form/

In reality one of the greatest downsides to this approach may to those who are not working and continually punished by a system that only rewards people that only share its attitude. This could cause people who are already struggling in other areas of their life along with their health not be able to find employment. So then, the challenge is to keep it a positive non-exclusive incentive. Rather than punishing or excluding people through hiring, companies would need to design incentives that will take current workers and subtly encourage any step they take to pursue better health as Whole Foods does. Another potential downside I see is where government or companies use this as an excuse to intrude on people's personal lives. Tests about depression and other more personal matters may not be desired, but I think as long the the checks are moderate and left to the private sector this could be a very helpful tool to urge the working American public in the right direction. It will work best for those who just need a small excuse to change things. As people actually change their habits they create less costs because in theory, the illness will be prevented. As long based on clearly demonstrated data everyone can potentially benefit from incentives that motivate people to take better care of their health.

http://jezebel.com/5456561/weigh-less-pay-less-whole-foods-offers-discount-based-on-bmi

Americans Support Health Insurance Discounts for Healthy Lifestyles
http://www.rasmussenreports.com/public_content/lifestyle/general_lifestyle/may_2012/americans_support_health_insurance_discounts_for_healthy_lifestyles

http://newsroom.intel.com/community/news/blog/2012/5/16
Future Food Service-John Dickman

7 Reasons to Like Wes Anderson

Wes Anderson's movies are the indie music of film. Like the folk, indie music, Anderson will never be on the same level mass distributed franchise media because he doesn't excel with hi-tech, digital, special effects laden, eye-catching work. He will stay in a hallowed realm in the entertainment industry; as he consistently produces films and also draws in an increasingly interesting troupe of actors. Unlike high-budget digital films, if you are not tuned in to the subtleties that make his films appealing, you might call them dry, slow or pretentious. Still, I think there's a level on which most people are entertained by Anderson's work because despite their niche appeal, they are still very successful at conveying stories that capture human quirks and idiosyncrasies in a humorous (and highly-stylized way). My feeling is that he will continue to make films and although they may not be as fiercely original what the ones he first wrote Owen Wilson, he will further explore his storytelling ability and artistry further.

1.The Kids of Rushmore  To get to get to know where Wes Anderson comes from you don't have to go much further than his second film, Rushmore. Like the protagonist played by Jason Schwartzman, Anderson attended a private school (St. Johns in Houston, TX) when he was young. He projects himself onto Schwartzman's character, whose picture might be found in the dictionary under "precocious." He is a natural organizer and leader, and is in his element as he confidently strides around looking over his busy productions and discussing the details of some loose end. Underneath Max's accomplished exterior (and similar to Anderson's own school years), there is rebellious adolescence, dissatisfaction with his own father and contempt for other authority figures.  This growing conflict eventually climaxes and Max is defeated and crushed, giving up all pretense of greatness. As Schwartzman's character accepts his dad's own humble circumstances, I think Anderson also expresses (through this film) acceptance of his own background with its shortcomings and humble situation. This is one of his better films because rather than a soul-less upper class searching for meaning, it shows a dissatisfied middle-class striving for recognition, and learning self-respect among-privileged peers. I enjoy films where we see the development and growth of Anderson through his characters. I love the conflict, competition and hilarious pranks that the struggle produces.  As Anderson projects himself onto the young protagonist, it shows another theme repeated in his films of respect and recognition of children as worthy peers.

http://www.architecturaldigest.com/blogs/daily/2013/11/

2. Lasting friendships When asked what the defining characteristic of his fans is Anderson said that his films appeal to outsiders. Individuals that don't belong find identify with Anderson's films. It might sound cheesy, but friendship is a theme at the heart of Anderson's movies and it is a theme that has lent warmth and timelessness to Anderson's films and is true to Anderson's own experience. The idea for Rushmore was conceived by Owen Wilson and his college roommate in Austin, Texas as the two together plotted ways to get back at their landlord.  Like Owen Wilson's character in the Royal Tenenbaums, Anderson seems to fit in well with the Wilson family and included Owen's other brothers Luke and who are all present in both films and the main characters in his first film Bottle Rocket and Anderson has continued to remain friends with Owen to this day. So while Anderson continues to collaborate on films with many others, his most successful and memorable films were written teaming up with his old pal Owen.

3. Bill Murray and the Gang. The same goes true for the other members of Anderson's acting troupe. After he somehow managed to recruit Bill Murray and Schwartzman for Rushmore he has continued to develop these working friendships and has never felt a need to replace them for newer faces over the years even as he recruits more respected actors to his films. Along with Bill Murray, Anderson seems to recycle other sidelined actors like Jeff Goldblum and Adrien Brody that otherwise may have faded slightly  further into obscurity. They still have an appeal and juice, just not enough to dominate the limelight and Anderson, is more than willing to use his films as an excuse to continue hanging out with this amazing group. If nothing else Anderson's movies have become a fitting museum for Bill Murray's comedic legacy.
   
Many people are surprised when they see Royal Tenenbaums for the first time with its A-list actors like Ben Stiller, Gene Hackman, Gwyneth Paltrow, Bill Murray, Danny Glover and Alec Baldwin, but in this film more than any other Anderson demonstrated mastery at weaving so many unique personalities into a cohesive and entertaining story. Anderson is completely competent with high level actors, using  his classy, not confrontational approach yet still keeping a very clear vision of how he intends his movies to look . He allows actors to work without in a straightforward less demanding production. They might not gain any major attention, but they don't need it and are okay with the lower stress and easier pace of these more marginal films. This is Anderson's circle and in fact, at any point where Anderson has tried to edge into large productions with heavy action or special effects like the Life Aquatic or Fantastic Mr. Fox, it has ended in box office disappointment.

4.  Nostalgic Musical Selection
 Even in Anderson's least successful films, the music selection for are a masterpiece unto themselves but even more amazing is how he brings the music to life through the movies. For some of the songs its as if this was the music video they never had but needed. As with his actors, Anderson has a continuing working relationship with Mark Mothersbaugh who has contributed theme music and filler music for Bottle Rocket, Rushmore, The Royal Tenenbaums, the Life Aquatic, The Fantastic Mr. Fox and Moonrise Kingdom. The other most common songs and bands from the 70's resurrected through Anderson's signature slow motion or underwater shots. Bands like the Beatles with singles by Nick Drake and less heard tracks by Rolling Stones stones sprinkled with a collection of tastefully selected classical music. Even though Anderson's vacation to India excused by the productions of Darjeeling Limited (I would have preferred somewhere closer to home like central America) fell short with limited viewers and a hollow plot, his music selection showed through unforgettable.

5. Deliberate Dialogue. His dialogue makes little pretense at being natural or reflecting real life which actually makes it even more memorable.  Like many of the shots in his films, it is so obviously crafted that while it can't be mistaken for a casual conversation that same awkwardness gives it a human touch.  The characters are direct yet polite, not violating and social norms until the the situation has become so extreme that they are forced to. In some ways it reminds of the slow moving, hand crafted dialogue from classic films that expresses itself succinctly if not poetically. Anderson's phrases seep into one's memory and come out often and they could make for an meta type play. Clever comebacks are constant because the characters are quick-witted and the humor is woven into the events themselves. The characters are not trying to be funny and their humor comes out as an extension of their already developed personality. Along with the subtlety in the characters, anyone with an eye for detail will notice the shots are minutely managed and color and symmetry are closely calculated.  Along with the dialogue almost every shot in Anderson's films  are deliberate but I think the tightly written dialogue is something rarely seen anymore and what I enjoy most. 

6. Family. Movie themes of family failure and conflict and reconciliation are at the center of almost all his films along with character introspection and subsequent development. In particular The Royal Tenenbaums came out before Arrested Development or Modern Family but I would trace the cultural roots of both back to this, Anderson's finest film. Both Tenenbaums and Arrested Development include formerly successful families having to come to terms with what really holds them together after their fortune and fame have been stripped away. The more you compare the two, the more similarities can be drawn; one of the most obvious is that both include something resembling incest between two family members which is source of comedic material and drama.  In fact Arrested Development creator and head writer Mitchell Hurwitz said that when he saw The Royal Tenenbaums, he already had the idea for Arrested Development in mind and thought, “Well, I guess I won’t be doing that,” but subsequently changed his mind. Again, Children are also a consistent and prominent presence in Anderson films and they are presented in as real characters who demand respect, not mere tolerance. He does his best when working with intensely felt emotions buried under social conventions which makes for forced understated and awkward interactions. 

7. Low Budget. Overall watching Anderson's movies is like eating a meal that is full of organic eclectic ingredients, flavorful yet not overtly appealing. There is a methodical feeling to his films and unlike other mass produced movies that leave you feeling gross, lazy and overwhelmed at the end you feel more like you have been out with old friends in  the clean, calm, organized (though quirky) world of someone who thinks clearly and deliberately about what they're doing. Anderson may not do as well channeling huge amounts of  cash into higher budget action productions that will leave you reeling yet you will still laugh, wonder and be drawn in by unique characters and their struggles. I tend to think that Anderson will continue for many years ahead to make films and I would really like to seem him write another film with Owen Wilson. I think Wilson's foray into historical fiction like Night at the Museum and Midnight in Paris type would be a perfect fit for Anderson with just the right amount of fiction to take the audience beyond reality but not so much that its totally reliant on digital, high tech special effects and could bring Anderson further into mainstream. Either way Anderson will never have the raw violent emotional appeal that captivates the masses and for those of us who do appreciate him, we wouldn't want it any other way.

Lazin' on the bay

I was interested in the reflecting light on the sea lions so I decided to paint a group of them. As usual the painting doesn't really do justice to the real thing, but its more about the process
.

Lending Club IPO- Transforming Lending

I submitted this article to seekingalpha.com

Summary: Lending club has had consistent growth in number of loans issued since 2009, and holds a competitive advantage over traditional lending institutions. While I don't generally recommend Initial Public Offerings, this company doesn't seem to be going public because they need money. 

Background:  What do Borders and Blockbuster have in common? They are both information based businesses that have been largely displaced by the internet. Looking back at the story of the US economy during the turn of the century I think we'll agree the dominant trend will be the internet disrupting large, information based products like these.

As Lending Club CEO states: "There have been many examples of this happening before, whether it was when Borders could not react fast enough to Amazon or when Blockbuster could not react fast enough to Netflix and eventually went bankrupt. There have also been many attempts at companies trying to survive by spinning out low-cost operations... Despite their best efforts they keep the same culture."
Renaud Leplanche 1 

The financial industry could very well be the next one up for a ride.  Every interaction of the financial industry is currently being re-evaluated from transactions with Paypal, to fundraising using Kickstarter public funding with Neighborly and even currency itself using Bit-coin. While I'm not totally convinced that all these "innovations" will turn out to be real improvements, one in particular has caught my attention. Partly because Lending Club is going public, I've been thinking about Peer to Peer Lending. Peer to Peer Lending first emerged in the UK with Zopa followed by companies like Funding Circle and Assetz Capital.2 The essence of these peer to peer lending is that the companies are not issuing the loans but simply use the internet to facilitate loans being made from one person to their peer.

Peer to Peer Lending
https://www.prosper.com/welcome/how_it_works.aspx

Peer to peer lending is the natural development of applying the internet to finance. This is the emergence of an entire industry not limited to one or two companies. Along with peer to peer lending, micro-finance organizations for charity like Zidisha have popped up using the internet to give individuals access to funding otherwise un-available in  developing world. Out of this developing field two major players in the U.S. that have shown staying power are Prosper and Lending Club. In 2008 during the financial crisis, the SEC required these companies to register their loans as traded securities, and offer re-sale on a secondary market which ended up suspending new loans from being issued and forced Zopa out of the US market.2 After adjusting to the new regulations, both companies were able to resume issuing loans near the end of the financial crisis of 2008-2009 with Lending Club taking the lead as the largest, best run Peer to Peer Lender in the US.  Lending Club had originally been formed by Renaud Laplanche in 2007 partly "after he became irked by the massive disparity between the 18% interest rate on his credit card bill, and the 1% savings rate at his bank."Laplanche collaborated with Oracle co-worker Soulaiman  Htite in 2006 and initially tried to issue loans through Facebook but later realized they would have to build their own platform. Video summary: http://youtu.be/GWsVTu1rgUo

Potential- Since then Lending Club has continued to facilitate more loans, gain financial strength as well as recruit prominent financial industry leaders to their team. John Mack former CEO of Morgan Stanley and Lawrence Summers former chief economist at the World Bank, Simon Williams former Citigroup head of Global Consumer Risk are the more notable recruits.4

https://www.lendingclub.com/info/statistics.action

Probably the strongest indicator of their success though, is the continued increase in number of loans facilitated which more than doubled from $600 million in 2013 to $2 billion in 2014. In addition to this consistent upward trend as LePlanche states: "I feel that our competitive advantage compared to traditional banks is really long lasting because, again, it is grounded in technology and cost, not something they can react to. The amount of debt that American families are carrying is really huge, so the opportunity to make an impact and help people is really tremendous."1

2013 SEC Report http://tinyurl.com/n93dj9u  p.58

Risks- while Lending Club has enormous promise and is growing at an surprisingly consistent pace, it should still be remembered that this is a high risk start-up that has only 1 year of actual functioning with positive income. This is an industry that 10 years ago wasn't even an idea and it has never paid a dividend and is untried in its long term performance. With revenue of about $100 million and net income for the first time becoming positive around $7 million in 2013 this company has a long way to go before living up to the $1.55 billion dollar valuation heaped on it via the loans from $125 million investment by Google, $15 million from Kleiner Perkins and others. 7 For the long term investor it will likely take years and overcoming some large setbacks for Lending Club make money for  its investors. It is by no means a sure bet during the bull market in an economy artificially propped up by a federal stimulus.

Along with its profitability, Initial Public Offerings in general are not a great way to find value, as Warren Buffet has stated in different ways on multiple occasions: "It's almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors)."8 His own history speaks even louder as he grew his wealth without ever having to purchase an IPO.  Or as Seth Klarman explains: "Gone are the days when a new issue was a collaborative effort in which a business that was long on prospects but short on capital could meet investors with capital in hand but few good outlets. Today the IPO is where hopes and dreams are capitalized at high multiples." 9  Or as Ben Graham, quips IPO really stands for Insiders Play Only, so for the true value investor IPO's are out of the question.

http://www.lendingmemo.com/lending-club-for-investors/

Despite the IPO drawbacks, I think that for every 100 or so overvalued new issues there may a few good ones hidden in the mix if you have the time, acumen and patience to identify them. And if we can take LePlanche at his word, Lending Club isn't actually going public because they need the cash but primarily " to use it as an opportunity to raise awareness for the company."1

Recap: Because Lending Club is run using the internet to its advantage, I believe it will continue to take market share away from banks, credit card companies and other traditional lenders by offering better rates to individual borrowers and lenders. Although Lending Club is a company organized around the internet and has a culture that will give them a competitive advantage, it is still an untried business model in an emerging industry. My personal interest in this company is not purely about making more money so much as participating in the greater cause of reducing people's personal debt and losing less money in unnecessary administrative and bureaucratic costs that have built up in older financial systems. I have used Lending Club's service as an investor for about 6 months and I think it holds the potential for a genuine improvement because it should enable  people to more quickly reduce personal debt and get above a 1% return on their savings.

Disclosure: I am an investor in loans using the Lending Club website. I will most likely invest a small amount of money in the IPO depending on the price.

1. http://www.lendingmemo.com/lending-club-renaud-laplanche-interview/
2. http://www.bizjournals.com/sanfrancisco/stories/2008/10/13/daily55.html
http://en.wikipedia.org/wiki/Peer-to-peer_lending.
3. http://www.forbes.com/sites/parmyolson/2013/05/02/google-buys-stake-in-lending-club-valuing-peer-to-peer-lender-at-1-6-billion/
4. https://www.lendingclub.com/public/board-of-directors.action
7. http://www.forbes.com/sites/parmyolson/2013/05/02/google-buys-stake-in-lending-club-valuing-peer-to-peer-lender-at-1-6-billion/
8 Margin of Safety Risk Averse Value Investing Strategies for the Thoughtful Investor Seth Klarman
9 http://www.cbsnews.com/news/buffett-ipos-are-almost-always-bad-investments/

"Neither do men put new wine into old bottles: else the bottles break, and the wine runneth out, and the bottles perish: but they put new wine into new bottles, and both are preserved." Mathew 9:17

Meeting up, the Social Media Bubble and the advantages virtual life

"[social media] takes everything subjective and unspoken about human interaction and reduces it to objective, explicit numbers. I’ve never felt more alive."

— Community's Abed Nadir, App Development and Condiments

Awhile back I took a short lunch break and wanting to get through my sub as quickly as possible, I sat at the nearest table even though it was already occupied. As I was eating I incidentally started talking to the guy next to me about how hard it is to meet new people in the U.S. without going out drinking after work. He mentioned a website Meetup.com which was simply a way for people with common interests to arrange a time and place to get together. When I got off work I found the site was free and as expected it is a useful tool arrange meetings for people of similar interests that would not otherwise be able to find each other. I noticed that it was surprisingly well laid out and I did use it myself a few times to find groups to play ultimate, go to a movie and do yoga but I could tell meetup still had a lot of untapped potential. [a] Scott Heiferman a founder of Meetup put it nicely: "As the screens get more interesting, their pull gets stronger.  Strangers are getting stranger and less trusting of each other. This makes Meetup’s mission of connecting people in real life only more relevant."[b]  Since then the site started charging for meetups and has continued to grow as well as a slew of other social media that continue popping up like weeds across the business landscape.[i] 

The ironic thing is that people who use meetup.com with diverse interests actually have some unspoken things in common: that they have a computer, use the internet and are willing to try new things. A decade or two ago that might have only allowed for a select crowd but as programs are designed  in more user-friendly ways, that circle seems to be growing wider and wider. The cultural price of social media and the effects it will have on this generation raised on it have yet to be completely explored and we can only wonder where this road leads us. In a world where communication is primarily via internet, video games and twitter, traditional skills of getting along with co-workers, members of the opposite sex and other real life skills are undoubtedly shifting. As I work, communicate with family, friends and develop relationships over facebook, Skype, and meetup I often wonder what, if any, is the major downside?  One thing we can say for sure is that the virtual social world is one layer removed and therefore less extreme than the social construct of the past. It is a sedated, domesticated and sterilized version of social life. Still, as a means of communication, the increasing number of social media sites are a substantial improvement over real life interactions with strangers in some very tangible, fundamental ways:

1. This may seem obvious, but people never get murdered, or any other physical or sexual abuse via virtual interactions; no one ever was impregnated from virtual interactions. This is probably the most important, if we think about all the useless violence that has happened over the years that can be avoided if people were just to sit down and type out their ideas rather than fight in real life. Gang violence, street violence whatever, just wont happen if these emotions are channeled into some kind of virtual communication

2. People never get diseases over the internet. While there might be some pretty messed up computer viruses out there, really the worst computer virus is much better than the slightest cold. While sitting at a computer all day is definitely not great for our health, people are never going to get STD's, Malaria, or AIDS through a computer.

3. People aren't physically robbed in virtual interactions.  True, people have lost a lot of paper money, reputations and even lose their jobs[ii] over stupid stuff they say on the web, but you will never lose family heirlooms, or valued memorabilia over the internet. 

4. You can read or watch online interactions as many times as you need or want to. In real life how often do we get annoyed having to repeat or being asked to repeat something or have to say it louder or too loud. In social media people can read, watch or listen to your posts at their leisure and if they miss something they can review it as many time as they want without you getting annoyed.

5. There is actually some dialogue taking place, as opposed to TV, movies and newspaper which are more passive consumption. So even if it’s just people clicking the "like" icon on things they see on people's facebook page, there is more thought involved than consuming pre-programmed media through the television.
6. People that are online are literate enough to type and advanced enough to sit quietly for a moment at a computer. Granted some of the most primitive, thoughtless, grammatically incorrect failed resemblance of intelligent commentary is posted across online everyday but at least they're trying right? At least they're sitting still and focusing long enough to type those jumbled letters out, so there's hope.

So while the amount of money and attention that social media is currently receiving is surely overblown and the social media bubble will likely one way or another collapse, the creative boom is fascinating to witness. This new media is potentially an upgrade over passive media intake like TV and newspaper and is actually better than much of our day to day communication. The reality remains that we can isolate ourselves more as we try to connect exclusively online[iii] yet social media also serves as a filter, gatherer and organizer, purging a lot of the negative side of human interactions...right?

[a]https://www.youtube.com/watch?v=lisYoTfvsGA,https://www.youtube.com/watch?v=oOkZNkZTLeY
[b]http://www.forbes.com/sites/alexkantrowitz/2013/04/23/meetup-ceo-points-to-booming-growth-as-his-company-hits-100-million-rsvps/
[i] http://en.wikipedia.org/wiki/Social_media#cite_note-93

[ii]http://mashable.com/2011/06/16/weinergate-social-media-job-loss/#_

[iii] http://www.theatlantic.com/magazine/archive/2012/05/is-facebook-making-us-lonely/308930/

Defending Steve Jobs-4 Balancing Forces in the Man behind the Mac

What do you get when you put the brain of a professor, with an American blue collar work ethic in the heart of Silicon Valley? Steve Jobs was one of those people that you either love or hate, partly because he was "either trying to seduce you or telling you you were crap."[i]  Thankfully I never had to work with the guy, but still when I hear him criticized, as a Bay Area citizen I must opine. First, I would point out that he never actually planned on being a business guy or starting a company. He was initially intrigued by the the idea while working nights at Atari and even then, he only allowed himself to work a normal job after he was assured by his Buddhist guide, Kobun Otogawa, that it was possible to keep in touch with his spiritual side while working. At that point he still had a job and he only ventured out on his own after he felt sure he could make a decent living as an engineer. His actions in the business world may be controversial, but even if he did LSD, he never really liked alcohol and although betrayed his friends and got his girlfriend pregnant, he later settled down and effectively adopted his estranged daughter. Beyond i-pods, i-phones and Pixar, Jobs embodied four other paradigm shifts that have since become the norm.

1.Your business and your cause are one. Jobs always saw his work in technology as more than a livelihood but an opportunity to build a better tool for the human mind. Jobs briefly set up a charitable foundation but became annoyed at having to deal with it. For Jobs greatest way to contribute to social causes was to build amazingly useful devices and that made the world a more efficient place and in the end he channeled most of his ideology into his company. This was at the root of his ability to persuade or motivate for Apple. As he said to John Skulley “Do you want to spend the rest of your life selling sugared water or a chance to change the world?” With Jobs it was  never about promoting his computers, it was about the greater movement. Since then, the popularity of entrepreneurship business as means of attacking social causes has continued to increase.[iii] Businesses now act more like social causes and charitable foundations appear more like businesses. Basic products like shoes (Toms), Unilever and every other food label have to justify their existence through some charitable cause. Indeed it seems you cannot produce a lasting business unless you have a fundamental benefit for the modern world and an equally powerful cause to help the developing one. 

2. The chic geek. Jobs popularized the chic geek and clearly showed that nerdy can be stylish. There were professors and there were rock stars, he was both. Before him computers were large metallic, grey and black. He showed that you can work in a lab with computers and not have to check your sense of style at the door. “Great art stretches the taste, it doesn't follow them.” He would say. He took cues from great Western European architects like Mies van der Rohe and Walter Gropius and God in the details and clean lines and their modern heirs in the likes of Johny Ive. He also revered the beauty of the Kyoto gardens and the underlying Eastern philosophy and designers like I.M. PEI and Issey Miyake and valued their aesthetic. He set the tone for tech company cultures where smart unorthodox thinking is embraced and glorified. In a sense he epitomized Californian Bay Area, a place where the some of the smartest and most brilliant people are drawn to do high level research, but still retains a very distinct attitude and style, a place where Eastern culture meets the Western system.

 Edwin Catmull, Steve Jobs and John Lasseter fortune.com

3. Simplicity still is the ultimate sophistication. “The lesson Jobs learned from his Buddhist days was that material possessions often cluttered life rather than enriched it." In world that becomes increasingly complex, simple solutions become even more valuable. Jobs never had an entourage, personal staff or security detail and he always made his own calls and drove his own car. He lived up to his own ideals and delivered empowering technology that lifts and enables the most common user.   “Any idiot can make something complex; it takes true intelligence to make something simple.”[iv]  The kind of simplicity referred to doesn't mean a simplicity that ignores complex issues, but that harnesses, harmonizes and balances the opposing complexities into lasting solutions as jobs did in his own life. The ability to to sift through large amounts of data and not lose your humanity and common sense in the process is a trait that Jobs possessed and it is an ability that will be even more valuable as we become laden with more and more data.


4. Shared Ideas in a Closed System. “Good artist copy and great artists steal…We have always been shameless about stealing great ideas.”[i] Jobs used good ideas regardless of where they come from or who gets credit for them combining artistic creativity with unabashed hijacking. This attitude is probably also the biggest critique of Jobs in a culture of patents, works cited and copyrights. Steve Jobs disregarded those concerns and just presented the best ideas as his own and incorporated them into his working world. When Jobs first walked into Xerox and was introduced to a graphic user interface he didn’t ask who came up with this or how can we make money on it. He just gushed “this is it!” He later recalled: “It was like a veil being lifted from my eyes. I could see what the future was destined to be.[ii]”  He was far enough ahead and managed to avoid getting bogged down squabbling over where or who they came from. Jobs was quick acting and adaptive partly  because he cared more about making brilliant ideas happen than worrying over who thought of it first.

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[i] Bill Gates 
[ii] Steve Jobs by Walter Isaacson p. 98

[ii]  Isaacson p 97

[iii] Michael Porter: Why business can be good at solving social problems http://www.ted.com/talks/michael_porter_why_business_can_be_good_at_solving_social_problems.html

As well as other talks on related topics http://www.ted.com/playlists/139/social_good_inc.html
[iv]Richard Branson

On Buffet

What's so Great about Warren Buffet? 

5 Unexpected Traits in the U.S.'s Greatest Businessman

Whether or not you’re interested in money, if you have ever bought chocolate from See’s Candy, seen a GEICO ad, or been to Dairy Queen you should know something about the owner Warren Buffet. You might assume since he’s super wealthy, that he’s a greedy corporate jerk.  In fact, for a business person, he is amazingly honest, open and humble. In many ways he is the exemplary business person and his method has brought him nearly infinite financial rewards. Yet, despite being one of the richest men in the world,* what is most interesting about the guy is not his money. Here are a few ways he might surprise you.

1: Buffet Has Not Always Been Wealthy- Warren grew up during the Great Depression and it left a lasting impression on his psyche. He felt firsthand the gnawing, crippling effect that a downed economy can have on people and a country. Since then he seemed driven to seek out business opportunities. He delivered papers, sold bubble-gum, Coca Cola and even bought pinball machines. One of his most memorable jobs was at his uncle’s grocery store. It was here that his uncle taught Warren the importance of saving and had a lasting impression on him and his future business partner Charlie Munger. At 11, Warren made his first stock purchase and the world has never been the same since.

 2 Business School Was Not Crucial to Buffet’s Success- Buffet has on multiple occasions said: “The business schools reward difficult, complex behavior more than simple behavior, but simple behavior is more effective.”From his youth Warren said he loved “analyzing, buying and selling stocks, but my results were no better than average.  Beginning in 1951 my performance improved. The only ingredient was Ben Graham’s ideas.[1]”  He later reminisced: “I attended Colombia University not because I cared about the degree, but because I wanted to study under Ben Graham. The time I spent in Ben’s classes were a personal high. [2]” After school Graham still refused to let Buffet work for him and worked for his dad’s investment firm where he went door to door trying to sell stocks one of which was GEICO. After marrying, Graham let him work for his firm Graham-Newman Corp where he worked until it closed in 1956 until Buffet was able to form his own partnerships.

Buffet and Graham

3 Buffet Is Not Naturally Frugal- Buffet throughout his early years and much later was extremely, famously frugal. He is legendary for driving a used VW beetle and buying a used Cadillac even though he was able to afford a new one. His children didn’t know what he did for work to the point where his daughter mistakenly told her class their dad was a security guard. He continues to live in the same house that he bought in 1958 for $31,500.  While his frugality might just seem like an odd personality quirk, the real reason he was so frugal is because he really believed he had to be. Even up until 1980, he openly questioned whether his company after all their much blood sweat and tears had done more than kept pace with the value of gold.[3] He knew all too well the business risks involved and he still honestly did not know if he would make it until much later in his career and at which point his frugal habits had become a part of him.

4 Buffet is Not The Most Talented Money Manager Alive - Buffet was anything but a genius when he started out and even now, it’s not his brilliance that makes him unique but his perseverance and unique combination of CEO and money manager.  He started out buying textile factories which were largely economic mistakes and even after experiencing years of lackluster performance he stubbornly stuck to it and as he relates jokingly “in a rare burst of brilliance I went out and bought another textile factory.[4]”  Before he perfected his investment technique he tried and failed investing in aluminum and acknowledges the low returns on his attempt at investing in airlines.  

     Besides Buffet’s mistakes, Warren recognizes that the GEICO money manager Lou Simpson often outperformed his own investments. There are examples of other fund managers like John Neff who have long successful records but usually while was working for others.  What’s different about Buffet is unlike Lou Simpson or John Neff, Buffet is putting his own money in along with his partners’ and has consistently stuck with it longer than anyone. He follows the example of one of his store owners Rose Blumkin who continued to work well past her 90’s and they both had the attitude that you die when you stop working.   

In addition to his long lasting investing career, Buffet acts both as CEO and yet still think like an investor. There might be better investors out there and many more talented CEO’s, it is very rare to find the head of a company who is also great at re-allocating cash the business produces. Buffet’s combination of both CEO and financial advisor is partly why Berkshire Hathway operates with minimal corporate staff and because he continues to reinvest the proceeds at high returns, his company is able to grow at an extremely accelerated pace.  

5 Buffet Doesn't Actually Love Money- Lastly and what is most striking about Buffet is that he can do high level managerial skills yet still relate to people he grew up with.  According to his own family, money hasn’t really changed Buffet on a fundamental level.[5] His definition of success is "being loved by the people you hope love you." When I look around, I often see people who drastically change their habits and feel the need try to improve their lifestyle when that start making a lot less money than Warren Buffet. In a modern world of flaunting wealth I think we need more Buffet-ness. 
      Bufffet completely cemented his greatness in 2006 when he committed to giving 85% of his wealth to the Bill and Melinda Gates foundation. While there have been major philanthropists before Buffet, (he and Bill Gates have been been compared to Dale Carnegie and John Rockafeller) few have done it in such extremes and influenced so many other wealthy individuals in the process. George Washington was said to be greatest man who ever lived because he was able to lead an army and gain their trust yet not be swallowed by that power when he turned it over to congress. Buffet has similarly shown such mastery with the market, being able to command more of it probably that anyone alive and then turn it over to philanthropy.  Buffet demonstrates the great paradox about money that the more you are able to emotionally detach, the better you are at handling large amounts of it. As I take and honest look at myself and others I sometimes wonder if we all could do the same.

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*After promising much of his money to the Bill and Melinda Gates Foundation Buffet’s ranking on Fortune’s list has lowered while Gates has shot to the top. If you consider the donation to the foundation still as part of Buffet’s wealth Buffet could definitely be considered the richest man alive. 

[1] Berkshire Hathway Letter to Shareholders 2000

[2] Letters 1995

[3] Letters 1979

[4]Letters 2010
[5] The Tao of Warren Buffet Mary Buffett & David Clark