Recession Anxiety

If you knew these last 3 recessions were going to happen, how would you have prepared? Will you be prepared for the next recession?  Does it matter?

The reality is that if you believe in capitalism and stick to a diversified market portfolio OVER TIME you will be alright—afterall, a quick look at the history of the Dow Jones Industrial Average ($INDU) should put your nerves at rest…

…BUT… what about all the crashes and bear markets of the past… Could you be better prepared? …AND… what about all the news (from very smart people like Ray Dalio) that the world has changed! The founder of Bridgewater Associates, thinks we’re back to the late 1930s. In an Aug. 28 LinkedIn post, as well as recent television interviews, he described three similarities between today and the decade that brought us the Great Depression. According to Dalio, if the economy begins to slow, these similarities may “produce serious problems.”

…AND… what about news from people that have predicted doom and gloom in the past successfully like Michael Burry (of “The Big Short” fame) who recently said: “The dirty secret of passive index funds — whether open-end, closed-end, or ETF — is the distribution of daily dollar value traded among the securities within the indexes they mimic.” “In the Russell 2000 Index, for instance, the vast majority of stocks are lower volume, lower value-traded stocks. Today I counted 1,049 stocks that traded less than $5 million in value during the day. That is over half, and almost half of those — 456 stocks — traded less than $1 million during the day. Yet through indexation and passive investing, hundreds of billions are linked to stocks like this. The S&P 500 is no different — the index contains the world’s largest stocks, but still, 266 stocks — over half — traded under $150 million today. That sounds like a lot, but trillions of dollars in assets globally are indexed to these stocks.” “This is very much like the bubble in synthetic asset-backed CDOs before the Great Financial Crisis in that price-setting in that market was not done by fundamental security-level analysis, but by massive capital flows based on Nobel-approved models of risk that proved to be untrue.”

You get worried… You ask, what if the world has changed? Just look at all this nationalism… that’s new right?

…But… then you realize, the market eventually did go up after the Great Depression of 1929… And the Great Recession of 2007.

…BUT… there is all this news about the Yield Curve Inversion and you think… maybe you can prepare your portfolio for this… after all if you look at the last 3 recessions of 1990, 2001 and 2007 and overlay the difference between the 10-year and 3-month Treasury rates on top of these 3 recessions and see how it compares to where we are today (September 2019)—yikes, we are sitting at 37.93% and it seems like many past recessions were predicted when the probability was approximately 30%– The $INDU index is currently ~27,200.  (note: The NY Fed has some history on using the difference between the 10-year and 3-month Treasury rates to calculate the probability of a recession in the United States twelve months ahead.  There are some practical issues with this model outlined here. )

So, you call up some experts and ask them and they say: “The yield curve inversion does not always lead to a recession. In fact, economist Ed Yardeni has noted that an inverted yield curve can occur prematurely. For example, it turned negative a couple of times during 1995 and 1998, but a recession did not officially begin until March 2001. Therefore, we don’t think a recession is certain and more data is needed to make an intelligent decision.”

You say to yourself—JUST CALM DOWN and remember what John Templeton said, “I never ask if the market is going to go up or down because I don’t know. It doesn’t matter. I search nation after nation for stocks, asking: ‘where is the one that is lowest priced in relation to what I believe it’s worth?'”.  You get it, Microeconomics is the study of individuals and business decisions (supply/demand, labor costs, production costs) and that is what is important for investing…

…BUT… more Macroeconomic news about Monetary Policy (Fed cutting rates & printing money), Trade Issues with China, Wealth Inequality (In 2016 the top 1% shared ~40% of the wealth versus ~25% in the 1980s), US GDP and Dept being way out of whack.

But you get comfort in remembering that Warren Buffet never listens to economists.

Then you calm down again and realize you are not a trader… you are an investor and you are going to have trust in capitalism and your long-term investment strategy.

…BUT…

Street Smarts

I’ve been asked a few times what I meant by the phrase “Street Smarts” that I mentioned in Action #3 in the note titled “Your next 5 months as CEO” so I am going to go into more detail below given its importance…

I’ll use a version of the DIKW Pyramid that I modified to illustrate.  I find that looking at the pyramid in this way bridges the gap between Information and Wisdom given the wide use of CRM and Machine Learning solutions available today (Note that I added 3 new categories to the Pyramid: ‘Background Knowledge’, ‘Prediction’ and ‘Intuition’).

Regarding the weather example in the graphic below: Machine learning can be used to ‘Predict’ the weather but this is not really ‘Wisdom’ (knowing the right thing to do) and we are also likely a few years away from a computer having ‘Intuition’ (something that one considers likely from instinctive feelings rather than conscious reasoning).  The key differentiator, and what I have referred to in the previous article as ‘Street Smarts’, is the ‘Background Knowledge’ that encompasses a general understanding of how the physical world works, how human motives and behaviors work and knowledge of common facts that an average professional working in this field possesses.  It’s the experience and knowledge of success, and potential difficulties and dangers of the vertical. This usually requires a lot of experience and it’s why your best employees almost always have great situational awareness.

Now, let’s relate the Pyramid to the case study outlined in the previous article.

Getting ‘Data’ on the housing market such as After Repair Values (ARV), tax and mortgage records is quite easy.  Overlaying where your company has been successful on to that data turns it into ‘Information’ and provides you with the ability to build Algorithms that you can easily program into your CRM and Marketing Automation systems as ‘Foreground Knowledge’.

As the new CEO you must grow the business and that requires you to choose new markets to push into.  Can you rely on ‘Foreground Knowlege’ analytics to predict those markets? Maybe, but you won’t know how to be successful in those new markets without a thorough understanding of the ‘Background Knowledge’. As a side note… This always reminds me of the following quote:

Everyone has a plan until they get punched in the mouth

– Mike Tyson

As a new CEO it is very important for you to separate the ‘Foreground Knowlege’ from the ‘Background Knowlege’ used to make decisions at every stage of the real sales process. 

In our case study, the ‘Foreground Knowlege’ was straight forward… If there was a low probability of recession in next 6 months, and a property’s ARV was between 150k and 500k, and the property had been owned for more than 10 years, and the owner was behind on their mortgage or tax payments then the property may be good to purchase, fix & flip. This would be very easy to code into a simple formula to program into the CRM. The data was also very easy to come by given all the history available on past transactions. As an example:

However, what criteria for decisions were the employess really making? When asked, they were considering items such as — If the property was in an area that they had worked in before, would the job require permits, would there be a lot of capital at risk, was the location within 50 miles of a disposition manager, would it be fixed and listed in early summer or spring (best times to sell), was the owner temperament pleasant, and was the property vacant — only then would they consider it a good purchase, fix & flip.

These items are a bit more difficult to assess from available market data, but required if you are to have any ‘Wisdom’ about the items required to grow the market or to succeed in a new market.

This example outlines only one of the many decision points that needed to be understood to determine if a new market was appropriate and how to setup that new market for success.

Warning: If you leave it entirely up to the data people in your company to guide decisions you will likely fail. Only you can get the company to truely understand the ‘Background Knowlege’ (Street Smarts) required for success by asking a lot of questions. Consider using the ‘Five Whys’ technique.

As you deconstruct each of the stage gates in the company’s real sales process you will hopefully gain the ‘Intuition’ required to know when the market is changing and how to react to those changes.

Good luck! —a bit of luck never hurts when you are a new CEO.

Your next 5 months as CEO…

You have now been the CEO for 30 days and you followed the process outlined in the article “Your First 30 Days As CEO” as much was possible. You understand your inherited business and you are not impressed.  But you realize you would probably say this about every business you go into repair—because someone else created the mess.  Guess what? It’s now your mess because you are the CEO.  You pause, then realize that every business you will repair will have both a different set of complex challenges yet the same 2 causes: Poor leadership that led to poor management (never forget… Leaders deal with management shortfalls…).

Most complex challenges however start with revenue – it’s been flat or going down…   Why?  Your first month of digging into the data should give you what you need to understand the causes.   It may be due to brand issues, lack of focus, lack of good market analytics, lack of rich customer prospect data for targeting or generally just not keeping technically up with the market… It may be due to being out done by competition or poor sales management, lack of product market fit, quality, customer satisfaction etc.  It may also be due to lack of investment, making the wrong strategic bets or lack of strategic planning.  Who knows—there are way too many issues to outline but I am confident in saying that the skill of (or lack of…) leadership had a big part to play…

There are 5 Actions below to help you stay strategic at this stage—none or all may be applicable to your situation, but my hope is that they help you take your strategy to the next level.   I’ll use a recent experience (repairing a real estate wholesale business) to provide some color on how I used each of these actions. 

Case Study Background

My team was brought into the referenced company by the co-founders.  The company had a well-known regional brand because it ran localize television commercials for 15 years and transacted in over 3 thousand properties.  However, the company was struggling to grow, and other competitors were coming into the market using the same model this company pioneered and taking away market share.  The company built their business with both wholesale and Fix & Flip transactions.  

  • Wholesaling real estate is when a company puts a distressed home under contract with the intent to “assign” that contract to another buyer. The wholesaler doesn’t plan on fixing up or selling the property and never takes ownership of the property (hence no debt is leveraged for property acquisitions). Instead, they market the home to potential buyers for a higher price than they have the property under contract for. 
  • In contrast, Fixing and Flipping real estate consists of buying a property that needs repair and fixing it up before reselling it for a profit.  The “fix & flip” scenario is profitable to investors because the average homebuyer lacks the time and funds for repairs and renovations, so they look for a property that is ready to move into. Also, most traditional mortgage lenders require the home to be habitable with no significant repairs. 

Every city has a set of real estate investors—just Google “buy home for cash” and you will find several in your area.  The industry refers to most of these companies as “bandits” because of the “bandit signs” that they use for marketing.  However, the company I am referring to here was past the ‘bandit’ stage regarding their maturity.

The real estate wholesale sub-vertical is fascinating because it is simple (real estate transactions) yet so complex given it’s a 2-sided marketplace with multiple stage gates on both sides.  The most interesting thing is that success-at-scale is nuanced and difficult to see.  The vertical is also unique in many ways:

  • Scale: The vertical contains everything from people purchasing a home every couple months (Husband and wife teams that watch too much FYI and HGTV and mom and pop construction companies looking to keep crews busy) to sophisticated franchises, hedge funds and REITs (examples: http://www.triconcapital.com/ , https://www.frontyardresidential.com/, https://rentprogress.com/). 
  • Ways to make money: Beyond the obvious strategies of wholesaling, Fix & Flip and Fix to Rent there are people making money in many unique ways given the financials involved and the number of transactions.  There are people making money teaching ‘how to invest in real estate’ seminars, running master-mind groups such as https://thecollectivegenius.com/, selling data to investors such as https://www.attomdata.com/, selling technology tools like vertical CRM solutions to bandits, making loans, offering title services—this list is long.
  • Debt: A pure wholesaler never takes ownership of a property hence they take on little to no debt; a company doing Fix & Flip transactions usually has to take on a small amount of debt to take possession of the property, afford the construction and pay the utilities/taxes while they own the property. However, a company doing Fix to Rent transactions usually has to take on a great deal of debt.
  • Breadth of Communication: To be good your organization must be able to communicate effectively at all ends of the spectrum… On the Disposition side (selling properties) the team must be able to communicate across a spectrum—from construction employees with 9th grade educations to MBA types at hedge funds.  On the Acquisition side (finding properties to put under contract to wholesale or purchase) the team is dealing with all types of hard personal issues (people going through recent divorces, dealing with uncurable diseases or the recent death of a family member) and mental states (many sellers are hoarders and are embarrassed by their state of affairs and the last thing they want is for many people to visit their homes).

Results of our first 30 days

So, we built the scorecard referenced in the “First 30 Days” article … If you were to look at the company as a ‘lifestyle business’ that would throw off enough cash to make the founders comfortable then more items in the scorecard would be yellow (At Market) but we were brought in to turn the organization into a GROWTH company and from this perspective it was A LOT redder than most… There were times when I personally wondered if a growth-oriented turnaround was even possible, but the one thing the company had going for it was that it was bringing in revenue and covering expenses. …and in the business of repairing organizations–revenue heals many wounds.  There were also some bright spots in one of the most important categories—people.

One of the most useful deep dives from the “First 30 Days” article was the “Sales: Do a deep dive on sales stages” exercise. When evaluating how the organization worked (and eventually comparing it to how it should work) we did a deep dive on the organization’s sales stages (none of which were in the outdated CRM—the current CRM was used to capture the opportunity notes, some call logs, contact info and if the opportunity was alive or dead).  Here is how the organization really worked: marketing programs were used to find sellers of properties that fit a profile (~70% of the ARV minus repairs), those sellers are nurtured through a sales process and based on the sellers circumstances (need to sell in the next ~30 days) a decision is made to purchase or assign the property.  Then a purchase contract (with an expiration date) is created with the seller.  This is how inventory is created and is referred to as the ‘Acquisition’ process.   Then the property either gets marketed to buyers list (wholesale) or fixed up and listed on the MLS (fix & flip)—this is referred to as the ‘Disposition’ process. If you have ever purchased or sold real estate, you know how complex the process is and all the unexpected fees that take a bite out of the transaction (every state has different laws and fees).  When we evaluated the stages we were amazed by how many hands touched each stage of an opportunity and the business logic used at each stage (most of which was in people heads versus algorithms in a system).  Here is a list of the real stages and what we eventually built into the new CRM:

Over the course of the first 30 days I personally filled at least 3 notebooks, but I only have time here to outline my summary notes.  Here is what I wrote down on day 30:

In today’s world where tech is inexpensive, and DATA IS EVERYTHING. When you see an organization that is not deep into harvesting and leveraging data (about its industry, its suppliers, its customers, it’s competition, and most important itself) you should worry. This is basic 101 for growth companies—if this is not part of the company’s DNA then it’s toast.   … and this company:

  • Was not using data to drive their marketing (targeting) strategy
  • Could not track marketing spend to results or doing any type of A/B testing
  • Was not using computer algorithms to make decisions
  • Could not track how and why people perform or didn’t perform
  • Could not track how long key process were taking within the company to find bottlenecks and issues
  • Did not have consistent approaches to on-boarding, off-boarding, compensating, or managing employees
  • Was not capitalizing on symbiotic revenue streams
  • Could not tell at any moment in time where the company was on its P&L or budget
  • …and most importantly did not really understand the variables of success.  They didn’t understand the variable that made the big companies in this space successful. …and at a micro level they didn’t understand the variables that made them successful with their suppliers and customers (if profit was the only variable of success) so those variables could be scaled and replicated. I’ll refer to this as street smarts.  Most execs kind of know what these variables are but only the successful execs can crisply articulate them and more importantly make them programmatic KPIs that drive systems and business logic.

They were also committing the #1 sin of good old management 101—consistent listening and communicating…

Revenue was flat because the co-founders basically mismanaged the opportunity.  Over the course of the last 15 years (time this company was in business) other entrepreneurs-built companies in the same vertical worth well over 1B.  So, step 1 here was stabilization and getting the company to Par (basic 101… rebuilding the company DNA), step 2 would be growth…

Actions: The Repair Begins

You will find that there is always going to be a great deal more to do than you can afford to do in order to turn the organization the right direction and light its fire.  You will need to pick your battles and prioritize the items with the maximum return but the least cost.  One challenge may be that one item requires another item, so you must choose wisely. Remember, Leaders deal with management shortfalls…

Action #1 – Establish a consistent protocol for transparent/honest communication with employees

Your employees have the best ideas… they know how things should be run… or at least they know how things should not be run… there needs to be a consistent forum where people can state their mind without fear of retribution.  You as the new CEO need to own and moderate this forum.  Repeat back what you heard at the last discussion, talk about how the feedback has shaped your thinking or actions or why the company is not going to proceed down a certain path.   In the company we are using as a case study here we were small enough where we could do mandatory Friday lunches and bring in other offices via zoom meetings.   We went around the group (much like a SCRUM) and asked people to speak about good/bad issues from the current week, plans for next week and blockers that may inhibit effectiveness.  Your job as the CEO is to make sure that the team is being honest and open and talking about hard issues.   You must participate in this forum as well and speak to what was good/bad for you this week and what your plans are for next week and what the blockers may be that might inhibit your effectiveness. Obviously with a bigger team you must be creative in your approach however the need is the same—be consistent, listen, use the data or be honest why you are taking a different path, communicate plans and positive/negative company performance. BE HONEST… BE TRANSPARENT…

People want to work for a stable company where they are treated fairly, where they have a future, where they are heard and where their teammates and work are intellectually stimulating.   They also want to know that they are fairly compensated for their hard work and the more they perform the more they make.  It’s your job to create this environment if you want the company to scale.

Action #2 — Track, measure and automate success

If a growth company is to scale and leverage technology and automation at all levels it must invest wisely in the platforms that run the company such as the financial system, the CRM, the Call Telephony Integration (CTI) system, the marketing automation, document management, analytics etc. and the systems need to be tightly coupled yet flexible enough to quickly change with ever changing business processes.

With our reference company the current CTI, CRM and document management/electronic signing systems had to go, and much more sophisticated platforms needed to be brought in.  We chose Salesforce.com, RingCentral & HelloSign and built out the object models and business logic to map the company’s real stage gates.  This was not a cheap or easy undertaking, but it was a necessary step to get the fundamentals of the company to work at scale.  Widgets and reports were created to show everyone the performance of the company at the macro level (how’s the month looking, the quarter, the year—based on the pipeline and probabilities) and the micro level (how an individual was performing & how they compare to their peers (# deals, margins, type of deals etc.)).  Notifications were created for handoffs between Acquisition, Disposition and finance teammates and partners.  Reports were automated for opportunities with issues or business processes taking too long to complete. Automation was created if checkboxes were checked (example: automatic customer or supplier emails at certain stages with pertinent status updates).

Your company’s technology platforms must work for the team versus being a tool for management and they must be mobile.  API’s need to be programmed in to prepopulate data (in real estate as an example, API data from companies like ATTOM), the systems should algorithmically help with the decisions and no communication, action, decision, event, spending, result should go untracked/measured from the creation of inventory to the sales of inventory to the support of customers and performance of partners.  There is a reason that Salesforce.com purchased and tightly coupled Pardot (marketing automation), Datorama (marketing intelligence), Tableau (Analytics) and made an app exchange that allows third parties like RingCentral and HelloSign to integrate seamlessly into the platform—it’s because customers, partners and suppliers expect this from all companies.

With tightly coupled systems you will be able to determine:

  • What is the performance of all levels of marketing spend (cost per lead)
  • What percent of leads turn into discussions
  • How many times the sales team needs to reach out to a lead
  • What times and mediums (SMS, call, email etc.) work or don’t work to contact a prospect
  • How fast does a lead needs to be contacted
  • What percent of discussions turn into appointments, what causes them to and not-to tun into appointments
  • What percent of appointments turn into contracts, what causes them to and not-to turn into contracts
  • What percent of contracts turn into revenue, what causes them to and not-to turn into revenue
  • Of the leads that turned into revenue, what was the lead origination? How much was spent on marketing and overhead to acquire the opportunities revenue?

This list can go on forever, but I think you get the point…

Action #3 – You should now clearly understand what makes the company successful and why (street smarts). It’s now time to make it programmatic and then do more of it.

When we asked the employees of the referenced company “when we were successful, why were we successful?”, we heard -“we are on TV”, “we have the best SEO and are the first to show up on a Google search”, “people know our jingle”, “we have the best BBB ratings and Google/Facebook ratings”… but they really didn’t know because they didn’t ask the people they purchase houses from or the people they sold houses to. They didn’t measure the attribution of a lead—did the customer see the TV ad… then do a Google search… then read a direct mail flier… or was there an article they were reading that made them fill out a form on the website?  The reality was that they were successful on the Acquisition side because of the companies honest and ethical track record; and they were successful on the Disposition side because Assignment buyers thought there was enough margin left in the property for a construction company to make a profit if they performed the Fix & Flip.

When we asked the employees of the company “what motivated sellers to sell to us?”, we heard –Divorce, Disease, Death and Financial Distress…. This always came up in the initial call as the seller usually discloses it on their own—now with a good CRM you can record this and measure if its accurate and how much of it is driving sales—or is something else we don’t understand driving sales this month?   However, the team was correct–these sellers are motivated to sell in the next 30 days because of a life changing event and they don’t want to deal with a realtor because they don’t want people visiting the house and they don’t want this to take time and they don’t want to spend money fixing the issues with the property.   We also found out how much empathy for the sellers situation was important–afterall this was likly one of the sellers biggest financial transactions and it was coinsiding with a life changing event… and that would be overwealming for anyone.

Once we understood these very basic success variables:

  • We started talking to data providers like Experian, ATTOM, Quantarium etc. for target marketing, we tuned sales scripts, we reflected how we solve the pain in content for SEO/PPC (adwords) and began to tune messaging. 
  • We built algorithms into the CRM to help the Inside Sales Rep (ISR) determine a go – no-go decision for an appointment.  This all started with the After-Repair Value (ARV) minus a high-level repair estimate minus some fixed costs to see if an Assignment is plausible; Then it looks at the mortgage to see if the seller would get anything out of a transaction.  Then it factored in what the seller was expecting out of the transaction.   This is all done in just a few minutes and automated using simple algorithms programmed into the CRM.  
  • We built out other algorithms to specify the deal type and range the Home Visit Specialist (HVS) could offer the seller and enabled the Seller to electronically sign the sales contract on a tablet that the HVS brings with them to the meeting.  Those docs then get automatically stored in the CRM along with the pictures of the property. 

Then we went a bit deeper and asked the employees, what makes a great property to purchase versus assign, they said the following:

  • Probability of recession in next 6 months under 30% = 0 (good); else = 1 (bad) (use this link)
  • Correct ARV (predictability of pricing) – commodity area we know w/more than 3 examples = 0 (good); non-commodity area = 1 (bad)
  • Accuracy of Rehab — commodity house w/non-permit rehab = 0 (good); permit rehab = 1 (bad)
  • Amount of all up-capital risk (Cost of managing bills, loans, paperwork, insurance, maintenance over contract length) is <30k = 0 (good); else = 1 (bad)
  • Location within 50 miles of a dispositions manager = 0 (good); else = 1 (bad)
  • Time or year for list/exit early summer spring = 0; late summer & winter = 1 (bad)
  • Owner temperament pleasant = 0 (good); else = 1 (bad)
  • Property vacant yes = 0 (good); else = 1 (bad)

It’s easy to turn such a list into an algorithm in a CRM with a weighted risk score that tells an HVS to move forward with a purchase or not.

Once the deal type was locked (Assignment or Fix & Flip) and the sales contract was signed then Dispositions would be notified by the CRM and either marketing or construction began—either way different processes in the CRM needed kicked off and different costs needed to be tracked in the financial systems.

A good CRM with tightly coupled tools and well thought out business processes is worth its weight in gold—but it is also key to survival in todays business world and is the price of entry (at Par).  However, for true growth, algorithms need to be built that work for your company based on the street smarts that made you successful up to this point.

“If you can’t explain it to a six year old, you don’t understand it yourself.” –Einstein

Action #4 – You should also now clearly understand the characteristics of a company in your vertical at the next stage of success.  It’s time you begin acting like one of those companies!

Who are the companies at the next stage of success?  It’s hard to even call them competitors because it’s likely you don’t see them because you don’t act like them.  However, the exercise of the “First 30 Days” should have made you aware of who the next stage companies are and what characteristics they possess.   For this reference company the biggest characteristic that identified these companies was the number of transactions per month (properties purchase/sold). 

However, these stage III companies approached the market differently and these nuanced characteristics would be the most important items to understand if we were to move the company from point A to point B.

If you talk to the companies at stage II you will find that they all believe that the most important thing to get right is to buy the property at the right price and if this happens there will always be a buyer (If we get the Supply right, then the Demand will follow). This may be the truth; however, it is a very unsophisticated way of looking at business and blinds you to the next stage of success. Companies at stage III understand the Demand and then work to find the Supply.  It’s a nuance but a very important nuance that would drive big change in how a successful company in this vertical operates. This required the company to track where buyers transact, what kind of properties they were interested in, what range of pricing, how much construction they were willing to do, how much money they were willing to bring to the closing table, how often they purchased properties etc.…. It also required the company to hire a sales team to constantly speak to those buyers.  It also required the company to market to find new buyers that may be interested in future transactions.  All programmatically done with marketing automation, a tightly coupled high end CRM and a new buyers marketplace portal built on Heroku (yes, another Salesforce.com platform).

How hard will it be for you to get your new company to operate like one of the sophisticated players in your vertical?  What KPI’s do they care about and how do those differ from the KPI’s your team currently monitors?  Figuring this out, acting on it and having it pivot the company’s business practices may be one of the keys to your success.

Action #5 – You should also now understand your customers inhibitors of purchasing—It’s now time to remove those barriers and if possible, create symbiotic revenue streams and gain competitive intelligence as part of your business model

With the reference company we found that the 2 biggest inhibiters to a wholesale buyer purchasing a property from the assignment inventory was:

  1. How much room was in the deal for the buyer to make money—hence we were transparent with our math (sales price + repairs = ARV)
  2. How much money the buyer had to bring to the closing table—hence we started a lending business (symbiotic revenue stream). 

This new lending business would also provide a great of intel into how the market is working in general given the buyers were also getting loans to purchase other competitor’s properties.

What are your company’s biggest inhibitors to purchasing your products/services? Could you be in the business of solving for those bottlenecks? If you were in that business, how much competitive intel would that provide you on your market?

(Bonus) Action #6 – Remove the bad apples, stop doing things you shouldn’t be doing, double down on the things that are beginning to work

You may be able to do this earlier, and it may be a necessary action to contain costs in order to reinvest in change.  Just be consistent in your communication with the organization and be transparent with what you are changing and why.  By removing bad apples, I mean people.  Once you start performing the bad apples likely weed themselves out versus need to be told to go…  Especially if you are leveraging SCRUM to manage your new business.  

In the referenced company—many of the low performers left on their own and new people with a growth-oriented outlook joined the company and those new high performers naturally made everyone else want to perform at their very best.   I don’t know if the referenced company will ever be a growth company, but we did provide the co-founders a foundation for them to build a growth-oriented company.   My fear for them is that poor leadership led them to this place and if they don’t get this piece right, they won’t exist in a couple years.   

In Summary

Every company is different and has its own challenges.  You would not be there if it wasn’t for leadership and management challenges that probably caused many other issues limiting stability and scalability. Your mission is to quickly fix the leadership void and then start managing the change required to gain stability and scale. Never forget, leaders deal with management shortfalls. Good luck!

Bitcoin Technical Analysis Doesn’t Make Sense To Me

I see a lot of people still speculating on Bitcoin using “technical indicators” and talking about “support levels” and throwing around charts based on things like the “Elliott Wave analysis”. This just doesn’t make sense to me… I don’t believe you can analyze Bitcoin like equity or a fiat currency (yet). We are way too early to use such an analysis. Bitcoin’s maturity is like gold during Emperor Augustus’s reign (30 B.C.) where he set the price of gold at 45 coins to the pound.

Bitcoin today is essentially using 1 token for both rewarding the supply side and the demand side (to consume the service). For a crypto economy (the network) to work it may ultimately require 2 tokens (an “asset token” for the supply side and a “payment token” for the demand side) –much like there is in today’s fiat economy.

Bitcoin’s 1 token approach, in theory,  is great because for the supply side to provide its service it has to take payment in a combined token, so it has to be in the user’s hands for them to consume the service, so this creates the pressure to sell the combined token as the network grows. Everyone in a crypto network gets to participate from the value created instead of just one segment.  The net result is that a user can’t be a passive accumulator of capital, they must be active for the economy to work. But unfortunately making users investors is asking them to understand the infrastructure. Theoretically, it would be great if users had skin in the game because they would have an emotional connection to the infrastructure–But that’s not realistic or scalable. Power users can participate, but it’s a choice.

In the real world, the users of a system don’t want to take any risk.  For example, when you get into a taxi in NYC you don’t have to worry if Uber is going to have any impact on the value of your taxi medallion.  Humans don’t want to think about the risk of ordering pizza with tokens that may eventually be worth millions of dollars.  It’s just simpler for human nature. The 2 tokens must be separate because the transaction velocity of capital is very low, and the transaction velocity of a currency is very high so as an economy grows exchanging gold or land (a barter system) is just not going to work. So, we need currency (separate from capital) to accelerate economic growth. Reminder: Capital appreciates with economic growth (it’s scarcer) and currency depreciates with economic growth when we print more of it to keep up with inflation to keep prices stable.

Unfortunately, without good governance, this leads to an economy where the people who acquired the asset tokens early become increasingly concentrated over time as the economy grows.  Governance is how do we manage, control and manipulate the data to find a single source of truth.

So, it’s early.  Real early.  To determine value this early you need to keep an eye on the layers and how capital/currency, supply/demand are interacting and most importantly how governance is evolving between layers (one example, how to fund the development of the base chain) across each base layer currency.  …And in the end, the base layer (the store of value) will become a commodity and a lot of the value moves up the crypto stack (so why waste any time doing old school chart analysis on a layer that will eventually become a commodity—that is if it is successful at all—and given the power of Central Banks that may also be questionable…).

Governance – The Future

“Governance comprises all of the processes of governing – whether undertaken by the government of a state, by a market or by a network – over a social system (family, tribe, formal or informal organization, a territory or across territories) and whether through the laws, norms, power or language of an organized society. ….” – WikiPedia.com

Technology changes everything… and you can’t stop it.  

Technology is mostly good yet sometimes bad but you can’t stop progress. Technology enables better health outcomes, it allows people to be more informed and better educated, it allows for easier and more affordable communication, it allows for automation and productivity increases… (the list is long) but just as important technology can produce negative unexpected outcomes. 

Technology’s unexpected negative outcomes in the past had less potential to harm society than what is upon us today and in the near future. In the past technology disintermediated companies… In the future, technology has the opportunity to disintermediate society-hence, GOVERNANCE IS THE FUTURE <<–hint, hint, entrepreneurs there is a business opportunity here.

Governance – The Past

Up to today, governance frameworks that have had an impact on how technology is used have mostly been left up to industry groups with some government oversight and mostly due to data security concerns (PCI-DSS, HIPAA, NERC, FISMA etc..) but now countries are mandating good governance as well (GDPR being one example) primarily due to privacy.  Farther down in the technology stack there are many governance organization – you can find that lineage here for the Internet as an example. However, there is little from these past frameworks that can prepare us for the future and unfortunately, our governing body (US Congress) is ill-prepared for the job but I do think we will be OK because of the governance vacuum will create an opportunity for entrepreneurs to fill.

Something Fundamentally Changed – Every Company Is Now A Technology Company

Up to now, technology has been thought of as an enabler of productivity… a driver of capitalism… but unfortunately, many companies still believe their IT team is responsible for technology.  Many still believe their executives need to understand technology but it’s their IT teams job to enable it and Securities job to lock it down… they still believe their exec’s jobs are revenue & profit (selling more widgets, increasing the margin of the widgets they sell and finding new widgets to sell) … but something fundamentally changed–Every company is now a tech company (here) (here) (here) – Disintermediation due to technology hasn’t (and will not) stop.  The power of data required good CEO’s to turn their companies into technology companies–but ready for this: now you may become irrelevant because of what you do… or how you are structured to perform what you do…

Artificial Intelligence/Machine Learning/Robotics is here now and will drive a wrecking ball through some major job categories. Blockchain-Cryptocurrency economics’ will change how companies are built and how value moves between entities. CRISPR-CAS9 will produce incredible healthcare outcomes and quantum computing presents unimagined breakthroughs.  These technologies are more powerful than anything society has ever witnessed.  

  • How CRISPR-Cas9 will change the world (here).
  • How Artificial Intelligence will change the world (here).
  • How Blockchain-Cryptocurrency will change the world (here). Corp structure (here).

Governance – The Future

“The real problem of humanity: we have paleolithic emotions; medieval institutions; and god-like technology… and it is terrifically dangerous, and it is now approaching a point of crisis overall.” – E. O. Wilson

Governance in healthcare is more straight-forward (although poorly executed many times in the US). The impact on healthcare in general from CRISPR-Cas9 is already being examined and regulated across the world. (here) (here) (here) (here) (here) (here).  However, some countries may be getting out ahead and teaching the rest of society about the need for a global view of governance in regards to gene editing.

The governance of Artificial Intelligence has been more challenging as there is not a great framework to call upon. (here) (here). AI as it relates to justice, data quality and autonomy involve identifying answers to questions surrounding the safety of AI, what legal and institutional structures need to be involved, control and access to personal data, and what role moral and ethical intuitions play when interacting with AI. When a citizen’s life can be shaped by algorithms who is in control of monitoring those that created the algorithms and the outcomes of such algorithms? In the past, we’ve seen machine learning racially profile bias, unfairly deny individuals for loans, and incorrectly identify basic information about users. The development of AI governance will help determine how best to handle scenarios where AI-based decisions are unjust or contradict human rights.

Cryptocurrency was born out of anarchistic libertarianism but fundamentally has the opportunity to re-shape how companies are built in the future, how securities are traded and how money moves. It is now a question of ‘when’ versus ‘if’ given the worldwide momentum of Bitcoin, Ethereum, XRP, EOS, and others (including layer 2 solutions and DApps). No, I’m not referring to SEC regulation–I’m referring to how governance frameworks play out for different levels of the stack (some examples are mapped out in this paper). However, as this progress shakes out governance will be the key to ensuring we manage the disintermediation in a way that doesn’t wreck economies.

‘The problem is that currency and capital respond differently to economic growth. Capital appreciates with economic growth and currency depreciates with economic growth as an economy grows.  Inflation is commonly thought of as the printing of new money but really it increases in prices over time as a result of economic growth. Capital as an asset type appreciates as the economy grows and is more scarce than currency.  We print more currency to keep up with inflation to ensure stable prices hence it depreciates with economic growth over time. What happens over time is that capital becomes more concentrated and we have a lot of people living their lives in currency and only a few living their lives in capital.   In crypto if we combine these into a single asset (Bitcoin) we don’t get the same income inequality or wealth inequality however by separating the access token (work token) from the currency token we risk the people who acquired the asset tokens early on may become concentrated over time as the economy grows.‘ – great A16z podcast on the subject

More notes to come…

Members of Congress–Watch @AOC and Learn…

I read this @USAtoday story and had to laugh “The House Democratic Policy and Communications Committee is hosting a session Thursday morning with Ocasio-Cortez of New York (@AOC – 2.42 million followers) and Rep. Jim Himes of Connecticut (@jahimes – 76,500 followers) ‘on the most effective ways to engage constituents on Twitter and the importance of digital storytelling.’”  

Members of Congress, it’s not about how to use Twitter, it’s about how to lead! 

I’m center-right politically, and I don’t agree with some of @AOC’s views on issues, however, I do have a great deal of respect for her leadership abilities.

As a side note, I don’t disagree with what Himes is quoted as saying, “The older generation of members and senators is pretty clueless on the social media platforms”.  Just review the senate’s embarrassing questions at the Zuckerberg hearing and you will see plenty of “clueless” senators … However, Congress is totally missing the point in regard to @AOC’s momentum and it will bite each of them during their next election cycle if they don’t wake up—The point is @AOC is showing leadership—watch and learn!

Congress–your constituents are people… not objects!

@AOC is listening and talking to people—Twitter is just one of her preferred communication tools.  Here is the point–Many of today’s politicians tend to treat constituents as ‘objects‘ versus ‘people’ with hopes, dreams, and pains. Remember back when Bill Clinton engaged with a person directly at a 1992 town hall meeting—he talked with people. @AOC resonates because she is having a conversation with ‘people’.

Members of Congress–stop labeling people (i.e.  ‘deplorables’, ‘Trump’s base’, ‘the Democrats’, ‘the Republicans’, ‘Men’, ‘Women’, ‘Black’, ‘White’, ‘Hispanic’, ‘LGBTQ’ etc..), fight for what you believe is right for your ‘people’.

Congress—we don’t want ‘managers’ we want ‘leaders’

Management’ is about systems, processes, policies, and resources (what all those federally appointed officials manage daily…) but ‘leadership’ is about vision, inspiration, values, and people.  Leaders deal with management short-falls– Basically, leadership is required when the systems and process do not work…. Leadership is required when the policies are not applicable or do not exist… Leadership is required when there are not enough resources to accomplish the task…

In 2019, being an effective member of Congress requires you to have an open dialog with people, take a stand on issues you believe in, simplify complicated subjects and educate others, build consensus regardless of party and admit when you are wrong (and don’t take credit when you are right).

Regardless if you agree with @AOC or not… learn from her because she is showing you what we expect from members of Congress in 2019.

The 2020 Healthcare Debate

There is going to be a lot of debate over the next 2 years about healthcare and moving to a single-payer system.  Democrats are talking about “Socialized Medicine”… Republicans are talking about “Free Market Healthcare”–as an example, here is a good article that articulates a good one-sided argument without many deep recommendations.  …But what are the facts?

I’m building the following notes to start capturing data to help me formulate my opinion on the subject. I’ll use a “5 Whys” strategy to think through the issues.

5 Whys is an iterative interrogative technique used to explore the cause-and-effect relationships underlying a particular problem. The primary goal of the technique is to determine the root cause of a problem by repeating the question “Why?”. Each answer forms the basis of the next question. The “5” in the name derives from an anecdotal observation on the number of iterations needed to resolve the problem.

Let’s review the facts:

  • The United States has the poorest population health outcomes. For example, we had the lowest life expectancy (78.8 years compared with a mean of 81.7 years).
  • If you compare the U.S. to the top 11 other countries in the world we are out of balance:

You can validate these figures here:

https://www.commonwealthfund.org/sites/default/files/documents/___media_files_publications_in_the_literature_2018_mar_papanicolas_hlt_care_spending_us_other_countries_jama_03_13_2018_itl.pdf

We know a “free market” healthcare system won’t work for a simple economic reason: Healthcare demand will always outstrip supply and this imbalance will always create a wide (and ever-widening) economic gulf.   However, we don’t have a “free market” system today—we have a mix… We have a Medicare, Medicaid, VA, Fed / DoD, and Indian Health Services System… we have the so-called “free market” system primarily sponsored by employers and then we have the 10s of millions of un (or under) insured citizens…

So, what are our goals:

  • Provide great healthcare
  • Cover everyone
  • Deal with preexisting conditions

Wait! What about being the leading innovator in healthcare? What about driving more of the conversation away from “sick care” and really toward “health care” – that’s going to require entrepreneurism and a free market to innovate and capitalism to support… The reality is that this isn’t an easy fix… it’s quite complicated and anyone involved in the argument needs to know the details.

So what are the “5 Whys” of the healthcare debate?

The first two “Whys” are easy…

  • We know that the United States spend 17.8% of GDP ($9,403 per person) on healthcare when Canada, Germany, Australia, the U.K, Japan, Sweden, France, the Netherlands, Switzerland, and Denmark spend 11.5% and all have better overall outcomes (i.e. life expectancy as an example). Why?
  • We know from the JAMA study mentioned above the high U.S. spend is because Physicians earn more in the U.S., Administrative costs are higher in the U.S., and general prices for pharmaceuticals, procedures, and tests (example: MRI) are higher in the U.S..  Why?

Here is where it gets complicated… We need to dig into each of these:

Physicians in the United States earn twice as much per person for health care as other wealthy countries. Why?

What could policymakers do?

  • Fund more residency slots.
  • Allow Medicare to limit the slots for certain areas of specialization to control supply and demand.
  • End the requirement mandating that foreign doctors complete a U.S. residency program and allow them to complete an equivalent residency program in another country or allow foreign-trained doctors to practice under the supervision of a U.S.-trained doctor.
  • Allow nurse practitioners to perform more procedures that they are qualified to complete.

Administrative costs are higher in the United States (we spend more on our health system’s administrative costs than anyone else in the world). Why?

  • The reliance on multiple payers (Medicare, Medicaid, and many private insurers, all who each have their own set of procedures and forms for billing and collecting payment) drives up the costs. The American health system offers a lot of choice among health plans. This all causes physicians to spend on average 3 hours per week addressing billing-related matters, medical support workers spent an additional 19 hours per week on billing-related matters, and administrators spent a total of 36 hours per week on billing and collection matters. Why?
    • We are only at the beginning of creating interoperability and data standards for healthcare.  There is a great deal that has been done and a lot on the table.  It’s a very complicated issue but well understood.  More here, here, here, here and here.

What could policymakers do?

  • Legislate strict electronic data standards (provider example) for interoperability and transparency.
  • Legislate standard electronic billing and collection policies.

General prices for pharmaceuticals, procedures & tests (example: MRI) are higher in the United States? Why?

  • Other countries negotiate with the providers and set rates that are much lower. In Canada and Britain, prices are set by the government and in Germany and Japan providers and insurers come to an agreement or the government steps in.  However, in the United States health-care providers have considerable power to set prices, and so they set them high. Why?
    • In the U.S., health care delivery and payment are fragmented, with numerous, separate negotiations between drug manufacturers and payers and complex arrangements for various federal and state health programs (more). And, in general, the U.S. allows wider latitude for monopoly pricing of brand-name drugs than other countries are willing to accept. Why?
      • Two of the most profitable (and powerful) industries in the United States are the pharmaceuticals and medical device industries.  (It is, however, true that Medicare and Medicaid negotiate prices on behalf of their members and purchase care at a substantial markdown from the commercial average prices.).  These powerful industries have pushed back on government policymakers why try to legislate setting overall spending levels for payments to providers & drug makers because it would impair their revenue and profit growth.
  • Other countries may also have policies that result in new drugs and medical technologies being adopted more gradually. (more)
  • Other countries have more friendly legal environments to challenge the validity of patents. Why is the US different?
    • This article shows how numerous patent filings (“patent thickets”) are used to drive up the costs of Humira by AbbVie Inc. in the US as an example.

What could policymakers do?

  • Begin to reverse the deregulation of the 1980s and 90’s when the governments freed hospitals and other health care providers from regulations on prices and restrictions on mergers, advertising, and other practices.  The deregulation fix (more) has led to more administration because we have kept intact the system of private health insurance – and for-profit medicine – that is likely the root of the dual problem of rising health care costs and growing complexity.
  • Create legislation to counteract patent thicket practices (note: Sen. Susan Collins of Maine has called for ways to counter such practices but there has been no policy put forward).

“How many businesses do you know that want to cut their revenue in half? That’s why the healthcare system won’t change the healthcare system.” Rick Scott – Senator from Florida

  • Let the federal government negotiate lower drug prices for Medicare beneficiaries. This would shift the U.S. policy toward a more centralized pricing system like that used in other high-income countries. Currently, the Veterans Health Administration and the Department of Defense are the only federal entities allowed to effectively negotiate directly with drug manufacturers; they pay prices that are roughly half of those paid at retail pharmacies. (more, more)  RISK: Too much legislation may make our pharmaceutical sector less attractive to investments resulting in less innovative and effective drugs in the future.

This is a work in progress so I will add more as I research and learn.