“Ask me anything: The answer is a robot! …I’m a roboticist.” -Dr. Rodney Brooks

2012/10/15 Leave a comment

On Friday, I had the pleasure of attending Rodney Brooks’ first public talk on the Baxter robot, “A New Class of Industrial Robots.”  Although, there wasn’t a great deal of new technical information available beyond what the barrage of press exclusives has already announced, it was a fascinating look at the thought process that went into building the Baxter.  I’ll attempt to share some of the ideas that he shared at Carnegie Mellon to best of my deficient note taking abilities.  You can can also watch the video here.

My general impression is that the Baxter is a real product.  That’s really exciting to see in robotics!  We don’t get true products all that often.  I mean this robot can be used by people who cannot code and don’t know how to do math.  You can use a Baxter at a basic level just by pressing some buttons and moving the Baxter’s arms.  A ‘power user’ might use the menu system to enable (or more likely disable) features that make the Baxter so easy to use.  A forthcoming software development kit will let the robotics engineers tinker if they like.  The overall impression I got however is that the Baxter is a not a fundamental breakthrough so much as a breakthrough product.  It is designed around a specific set of user needs, responds to their preferences, and doesn’t attempt to do everything.  I could see how it might delight people who need a box packed or something sorted.

Another interesting aspect of the Baxter is how it takes an alternative design approach to current industrial robots.  The Baxter focuses on tasks that have some degree of compliance.  Most industrial robots are focused on precision.  It will be interesting to see how these two classes of robots end up interacting, competing, and complementing one another.

ReThink has an ambition to bring back a lot of manufacturing value to the United States.  The idea that much of the drudgery in a factory can be completed at an all in cost of $3/hr definitely puts the economic rationale for taking production offshore into question.  We all know that there are tremendous efficiencies achieve from having production close the large markets and design centers, this will make it possible to further substitute capital for the lowest skill labor and create many more valuable manufacturing jobs in the United States.

“Advanced Manufacturing doesn’t mean manufacturing advanced stuff.”  Dr. Brooks pointed out that although employment in manufacturing has remained stable or declined over the last several decades, the output of American manufacturing has been on a nearly uninterrupted increase.  This has been driven, in part, by a march up the value chain into business to business and complex products.  Dr. Brooks hope that the Baxter will let us look at having

Why isn’t Baxter mobile?  First, Baxter doesn’t need to be mobile to fulfill its intended function and adding mobility probably would add cost and complexity that the customers don’t require.  Baxter can be moved on casters easily by a worker, but it doesn’t need to move on its own for most applications.  Second, Dr. Brooks’ non-compete agreement with iRobot prevented him from working on mobile robotics until recently.  Maybe, we’ll see a mobile Baxter soon.

Finally, I’m really curious to see how the end effector strategy plays out.  ReThink  is going to publish an interface that includes mechanical, electrical, and software specifications.  Currently they provide an end effector that appears to be only a two finger gripper that can be customized for size to some degree.  I’m curious if there will be a lot of end effectors that come out and to what extent the Baxter and ROS become a platform for further innovation in robotics.

The Baxter was designed in conscious analogy to the PC.  Will it usher in a new age of robotics the way the PC did?  From a business perspective will Baxter-type platforms become commoditized and can ReThink retain its edge?   Dr. Brooks was refreshingly humble about the future, but it was clear that he is optimistic and willing to learn more from the market for this disruptive product.

If you’re going to RoboBusiness have fun at the public unveiling of the robot!

Filed under Start-ups, System Development Tagged with , , , , , , , , , , , , , , ,

We need horizontal migration for robotics

2012/10/11 Leave a comment

Despite the tremendous potential for robotics to transform people’s lives, robotics is not nearly as widespread as information technology.   Traditionally this has been ascribed to the high capital costs of starting a robotics company, but this explanation does not bear scrutiny[i].  More realistic explanations for the lack of proliferation of robotics are that management in most robotics companies cannot effectively match customer development and product development cycles, and robotic solutions are not easily ported from one industry to another.

The lack of synchronization between product and customer development leads to a much slower and more expensive development cycle than in software based businesses. This is not an inherent problem of robotics, but a product of the management practices employed in robotics versus software businesses.  Better management is already leading to falling iteration cycle times.  Many of the leading robotics firms on the West Coast have cycle times that are within a factor of 2 or 3 of software best practice.

The more fundamental problem in robotics is that robotic solutions are not easily ported from one industry to another.  Solutions tend not to be universal but rather quite tailored to specific industries.  As a result, successful robotics firms tend to think of themselves as serving specific industries and being participants in that industry rather than having a core technological competence.

Take the example of Automated Healthcare, one of the first substantial out-of-factory robotics acquisitions.  In the 1990s, it developed a solution for automating pharmacy operations at hospitals to reduce labor and more importantly theft and errors in the pharmacy.  Although, their solutions was loosely based on handling of computer tape media, they did not view themselves as a material handling and storage provider, they came to view themselves as providers of drug distribution solutions—while this is certainly a valid business direction—the acquisition by McKesson ensured that their great success in drug distribution would likely stay in that industry.  I’m not suggesting that McKesson took a technology that was ready to jump industries and didn’t take it across industries.  However, once a technology finds a home in a giant healthcare company it is going to developed to serve the interests of the parent company, not the interests of the robotics community at large.

Contrast this with solution providers for information technology.  Ten years prior to the start of Automated Healthcare, Oracle was being started as a relational database company.  Oracle did not stay fixed on any particular industrial niche, but rather became a database solutions provider to practically every industry that uses databases.  This portability allowed Oracle to grow to a thousand times the size of Automated Healthcare, even though material handling probably generates as much revenue as do relational databases.   The sad part is that the acquisition of Kiva Systems by Amazon indicates that this trend robotics material handling solutions being aligned to particular industries is likely to continue.

ReThink’s Baxter may point at a broadening of robotics to serve several sub-segments of manufacturing.  I hope that Baxter can also become the mail clerk in an office and serve lunch in the cafeteria.  Once we get to that point, our industry will really start to take off.  My suspicion is that there are enabling technologies and infrastructure that we haven’t developed yet to do this.  A truly universal dispatching system and some other key enabling technologies are likely to have to fall in place before this happens.  I hope to devote a future post to what those key enabling technologies and infrastructure pieces are.

Filed under Commentary, Public Companies, Start-ups, System Development

Guess that’s not happening…

2012/10/10 Leave a comment

So I wonder how the EADS shareholders feel about taking a hit for a merger that never happened.  Oddly enough, it seems like the German government is actually looking out for shareholders in blocking the deal.  Most analysts couldn’t figure out why they were trying to do this.   EADS / Airbus does well enough on its own when not making blunders like the A380.  BAE does well on its own because it has access to the U.S. defense market in a way that a partially government owned continental firm would never have (see: tanker competition; see also: special alliance).  I’m still puzzled by the logic of this.

There are great mergers out there in our field.  Pittsburgh robotics firm RedZone has gone on acquisition kick and bought up companies that provide software and solutions for larger diameter pipes to build a complete sewer solution.  iRobot has bought Evolution Robotics when it seems like someone else’s mousetrap had some cool features.  Both of these create value for the company and have clear economic rationales underlying them.

Let’s hope that robotics can keep our business combinations on the path to having economic rationale.

Filed under Aircraft, Commentary, Public Companies Tagged with , , , , , , , ,

Speaking of management destroying value: EADS & BAE

2012/09/13 Leave a comment

Might be getting a little out of my wheelhouse today, but BAE and EADS are both unmanned aircraft manufacturers, if relatively small time players thus far.  News of their merger is HUGE in the defense world.  But take a look at what their stock prices are doing (EPA:EAD) and (LON:BA).

With almost a day to digest the announcement, it looks like BAE’s stock price has settled about 2-3% higher (or almost within the range of previous variation) after some initial shenanigans, but EADS’s stock is down about 15%.   The market does not look favorably on this merger.  This is a reasonably common pattern to see the acquiring company’s stock tank, but still I think that it provides a strong comment to those wringing their hands about America’s so-called decline in aerospace.

It appears that the A380 has been a commercial disaster and that being a Western defense contractor without reliable access to the U.S. market (however unjustified the tanker competition rules may be) is not a good idea.  I’m not sure that tying up with BAE will magically fix these problems–though if they really can eliminate €1B / year in overhead, there might be something to do.

However, it seems that the real shortage for creating value is management attention.  I’m not sure how becoming bigger and cutting more overhead is really going to change things at the new B/EADS.  Maybe if they focused on opening European airspace to unmanned aircraft faster than the U.S. is doing and came out with cheap and innovative products with broad military and commercial applicability…  nevermind.

Filed under Aircraft, Public Companies

Why American women are too smart to become robotics engineers

2012/09/03 2 Comments

The lack of women in robotics is quite palpable.  I’m not going to quote statistics about the lack of women in robotics because the readers of this blog have been in robotics engineering shops and have eyes—it is that bad.  This is a loss for all of us.  Not only do the women in robotics often have a disproportionate impact, but also the missing women are indicative of a deeper cultural problem that hurts both male and female participants in our industry.

Beyond the issues of opportunity, fairness, and attracting the best and brightest in our field, a lack of women is an indicator of a deep seated cultural problem that is impairing our efforts to make the world a better place.  This insular culture, which robotics shares with many other engineering-centric industries, harms and alienates many men too.  The lack of women in robotics should be viewed as a flashing red warning light of a much deeper problem that affects everyone, rather than just a women’s problem.

Another Knowledge Industry Grapples With A Similar Challenge

While I was at Deloitte, the firm was endlessly bragging about its Women’s Initiate, they called WIN.  Before the turn of the millennium, the partners realized that they had a problem.  At all the ‘working’ ranks of the firm, Deloitte was doing a great job hiring and retaining talented people of both genders.  However, when it came to senior managers and partner level positions, the women all disappeared.

What Deloitte discovered when they looked into this problem was not discrimination.  The problem was that all the top women that the firm wanted to promote were leaving, even though they were being offered the same deal as the men.  Becoming a partner or principal at Deloitte today is arduous, but before WIN it was grueling and brutal.  Basically, becoming principal at Deloitte requires a huge commitment to have consulting be one’s life, but before WIN there was pretty much one way this commitment could look.  Women knew what was required and were more than capable, but they were saying, ‘Screw this, I don’t want to put up with your abuse just to sit at the top of the pyramid and perpetuate it, I want a family (or an impact in the world, or a life).’   So they were leaving the firm.

Deloitte took a hard look at the firm and decided that the path to becoming partner was counterproductively rigid.  They launched WIN and made the workplace much more humane for everyone.  The firm started retaining more talented women and they have thousands of women principals today.  But more interestingly, they also started retaining more of the talented men who had been leaving too, but ‘just weren’t cut out for consulting.’  Deloitte fervently believes—and their impressive growth in the last decade testifies—that they created a much more effective organization.

What had showed up as a women’s problem was actually a firm-wide culture problem.  It turned out that many more men were willing to compromise their performance and risk losing their marriages, families, and personal lives over the firm’s culture problem.   There was nothing ‘wrong’ with the women, nothing they needed to be taught or given to help them get ahead.  They were just not willing to put up with such an unnecessarily inhumane system, while many men were willing to live with it.  As a result, the firm got sub-optimal performance.

The question that Deloitte should have been asking was not, ‘What’s wrong with our women that they’re not making partner?’  Or even, ‘What’s wrong with our men that they don’t help the women make partner,’ it was really, ‘What’s wrong with our men that they’re willing to make partner under sweatshop working conditions?’   I fear that we’re at a similar impasse with respect to the engineering fields.

The Deeper Cultural Problem In Robotics Engineering

Isn’t it odd that we don’t need to make a special effort to interest women in law, accounting, medicine, or the like?  These fields have similar intellectual requirements and levels of drudgery to engineering.  Yet despite comparatively massive efforts to interest women in engineering, they are not entering the field in anything like the numbers we would expect.  And why are American students—including men—not enrolling in engineering fields at the rate that foreign students do?

There is strong social signaling in undergraduate schools that discourages most women and many men from even attempting the study of engineering.  Perhaps they realize that getting an engineering degree can be a long, unrewarding slog when compared to the experience that most undergraduates have.  Perhaps, they have a sense this narrow technical view is carried on beyond undergraduate.  I do not believe that being willing put up with this kind of experience is necessary, and is perhaps counterproductive, to being a great robotics engineer.

Engineering courses are used to screen out anyone who is not willing to devote long hours studying tough courses that do not reward students just for their interest in the subject.  Those who are considering law, business, or medicine as an alternative career may not want to risk their GPAs even trying engineering courses.   No one would bother becoming a robotics engineer unless she had an innate sense that she had a special calling in robotics.  This sense of calling is common among the engineering superstars, both male and female.  Though the current method of engineering education may be adequate for the superstars, this method of education likely alienates many people who could make great contributions to engineering.

We now realize that training medical residents more than 80 hours a week is not productive—engineering isn’t different.  Silicon Valley is starting to see sunlight, humane schedules, leadership opportunities, and pleasant workplaces that promote social interaction as the minimum conditions for engineering productivity.  Colleges such as Olin which have experimented with new (read more people centered) ways of teaching engineering have seen many women enroll.  These are all signs that there is another way to do engineering.  We are starting to see that engineering can be altered to treat engineers and students like social beings, without sacrificing technical rigor.

By attracting people to engineering who are sensitive to the way that others treat them, we will also attract people who are sensitive to their colleagues, customers, and business partners.  Without these engineers who understand their impact on others, engineering will forever be solving the wrong problem.  Engineering education and culture are far too important to all our futures to be left only to left-brained males.  If we let engineering be a secret club that no woman without an extreme commitment would want to join, we will fail to harness engineering’s full potential to improve our society.

 

Avenues for further investigation:

How can robotics companies accelerate the production of an inclusive engineer culture?

What benefits and employee flexibilities have measureable results on engineering output?

How concentrated among the ‘usual suspects’ schools is robotics engineering hiring?

Does hiring outside of the engineering department’s immediate network improve or degrade performance of the engineering organization?

Do robotics engineering organizations with more women tend to do better?  (Hypothesis:  There is positive correlation, but not to be confused with causation.)

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If robotics aren’t inherently capital intensive, does management in robotics just suck? Yes. Here’s why…

2012/09/03 3 Comments

Image: Fairchild Semiconductor Successor Companies
Source: Steve Blank’s Testimony to House Science Committee

I was harassing my asset management friends to get them to help me develop the synthetic short instrument I want to put into the robotic stock tracker and we started discussing capital use in robotics.    Their question, was, “Okay,  if robotics are not inherently capital intensive, why does it take more money to get a robotics company up and running?  Isn’t that initial expense an inherent characteristic of the robotics industry?”

In a word, no.  The fundamental problem with robotics companies is that management doesn’t have a well developed process for synchronizing customer and product development to use Steve Blank’s terminology.  Or put another way, a lot of robotics companies spend a fortune on unnecessary engineering when they frankly suck at discovering what customers want.  iRobot has a whole museum dedicated to their market failures.  I contend that much of this engineering effort is not necessary to development of viable robotic businesses–this same learning could be done with vastly less expense.

Much of this problem comes from the difficulty of porting over rapid-cycle software development best practices for discovery of true customer needs.  Most of our hardware development methodology comes from environments where customer needs are relatively well understood and engineering improvements require a lot of time.  Robotics companies still have engineering cycle times (the amount of time to go through the engineering build, test, analyze, decide cycle) that are much longer than pure software companies at least 3 times longer and often much more as best as I can estimate from anecdotal evidence.  Companies are very reluctant to reveal this information, so my estimate may be off by several factors, but it is clearly much longer for robotics companies.

I believe that we in the robotics industry need to tailor the customer and product development methodologies to the peculiar challenges of robotics.  We will need to reduce cycle times of engineering teams down closer to software levels.  3D printing and continuing improvements in supply chain should make this feasible.  Management should make it a priority and a reality, and be willing to incur some expenses to do so.  Even more, management needs to do a lot of work to reduce market risk much earlier in the product development cycle.

iRobot’s museum show that it is proceeding to engineering while far too much of what is required to make a viable commercial product remains unknown.  This isn’t to pick on iRobot, they may be among the  best in the industry, but it is just to show that even the most advanced practitioners in our industry are not very good at understanding customers compared to other industries.  Yes, for some customers, such as the government, just doing research can be a viable business model, but this won’t grow the industry.  We need to develop ways to reduce market risk and we need to get good enough that we’re showing the software industry how they could learn about customers more and code less.

I don’t propose to give a complete answer on how to do this here, but it is clear that there is more than one path to reduce market risk in a product.  Both Intuitive Surgical and Liquid Robotics seem to have taken the approach of building a robot that is so awesome and widely applicable that it will find a use even if it isn’t in the application that management originally intended.  Other robotics companies, like Kiva Systems and RedZone (since Eric Close took over), seem to have taken a more traditional minimally viable product approach and iterated upon the original product.  Both strategies appear to win in certain circumstances and companies that took the opposite approach in the same markets failed.   How do we distinguish which set of market and technical circumstances we find ourselves in?

This interplay between technical and market risk and how it applies to robotics management is only beginning to be understood.  Few people have proposed measurable distinctions that would allow management to make decisions about what risks to accept and what risks to mitigate before committing capital to a project.  This area of research more than any other will unlock the potential for robotics to become the next tech boom.

Filed under Commentary, Finance, Public Companies, Start-ups

Marketing 3.0: Puffery so extreme it is unreadable

2012/09/02 Leave a comment

I recently had the misfortune of reading a 20 page excerpt of Philip Kotler’s Marketing 3.0.   You’d have to pay me far more than my standard hourly rate to induce me to read more of it.

Kotler is one of the most famous marketing professors at any business school.  His text book Marketing Management is not only in the standard today (the 14th edition is on my shelf for instance), but was also the text book of many of today’s marketing professors when they first studied marketing.  If this man is the academic standard bearer for marketing, I’m starting to understand why people have such a low opinion of marketing.  Current thought about marketing, by marketing’s most famous experts, tends not to be rigorous or practical.

Apparently, this begins with a lack of understanding of what marketing is for.

In Part III, we share their thoughts on several key implementations of Marketing 3.0 for solving global issues such as wellness, poverty, and environmental sustainability and how corporations can contribute by implementing the human-centric business model.

I’m as much a believer that corporations can change the world as anyone, but marketing as a discipline discovers and stimulates demand.  Period, full stop.  Corporations can have a good effect on society and have done a great deal to improve the human condition.  I’m  glad that marketers slinging sugar water or floor wax can feel good about themselves, but for those of us in emerging industries that really will change the world, we need our marketers to have a laser focus.

The confusion continues when he discusses actual products.  Apart from shameless promotion of S.C. Johnson (Kotler is the S.C. Johnson and Son, Professor of Marketing) he seems to be quite confused about the real market drivers of products.  He goes on at length about Timberland’s social responsibility program.  I don’t know if this had any impact on Timberland–perhaps it did.  However, I’ve never heard anything about this, but I have seen tons of earned media for Timberland based on catering to gangters, rappers, and wannabes. Nary a word about this.  I’ve seen maybe 1-2 actual outdoorsmen wear Timberlands in my life, but hundreds if not thousands of wannabe toughs wearing them–admittedly not a scientific survey, but it is at least more than anecdote.   You know what would be useful in this discussion?  Data!  Kotler and his co-authors do not provide that though.

If you’re interested in creating demand for specific robotic products, please skip Kotler and his disciples.  You would be far better served to read someone who comes out of the start-up world and has a rigorous, measurement driven approach to marketing.   Steve Blank, Eric Ries, and Geoffrey Moore all tackle marketing challenges in a much more practical and implementable fashion.  They are also concerned primarily with keeping businesses that really do have the potential to change the world in business long enough for them to do that.  To them, marketing doesn’t need to be a special calling with magic thinking about how the discipline is going to change the world.  To them, marketing needs to fulfill its business function, discovering and creating demand, at a minimum of cost and as quickly as possible.

No finance or operations professional would tout finance or operations 3.0 as being fundamentally different from all that came before it.  These disciplines have highly measurable results in the world that they can easily explain to stakeholders outside the discipline that take the time to understand.  Marketing should be no different–be very wary of anyone who says that it is about the human spirit.

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Four Steps to the Epiphany: the Moby Dick of start-up books

2012/08/29 1 Comment

Image: Front Cover; Source: Amazon

If your experience of Moby Dick was that you were constantly aware that you were reading one of the best books of all time that was opening your mind to new ideas if only you could keep your eyes open, you understand.  Four Steps to the Epiphany is the great white whale of start-up books for a reason.  Although it is not nearly as easy to read as his disciple Eric Ries’s more famous book, The Lean Start-up, it is much more systematic.  This books has some profound insights about understanding why some start-ups can do it one way and others need to do it completely opposite.

Instead of abstracting and generalizing the insights, Blank focuses on the issues of managing under extreme uncertainty in their native context.  He tackles every aspect of the non-engineering side of the business.  Most of the book is about how to systematically eliminate the market risk for your product, this will be somewhat familiar to you if you’ve read the Lean Start-up.  However, seeing the original idea and seeing it laid out in full detail, in the context it originally sprang from adds a lot of richness and practicality to the idea.  Blank devotes a good deal of time to understanding how to make technology push and market pull work together.  He covers when to go for broke spending money to enter a market and when to hold back and let the customers come to you.  Most importantly, this comes with some practical steps to discover when to do each.  He even covers how to start converting to mature company once you’ve almost made it.

Much like Melville, Steve Blank will say something really profound and insightful, then launch into a description of whaling–er, uh–start-up processes that are needed to implement that idea.  This can make the book a tough slog, because reading a process description around bed time can definitely have soporific effect.  However, this tough slog is absolutely worth it if your a practitioner in the world of technology start-ups.  You can’t hand it to your cousin that works at a big company and expect him to read it.  This is meant for the start-up community.  If you are a start-up practitioner, get this book and make yourself read it.   You will not be disappointed.  I expect my copy to become much more dog-eared than it already is before it gets confiscated for some future company museum.

So how does this relate to robotics…

Reading this book will further persuade you that many if not most management teams of robotics companies don’t have a clue.  You’ll even be able to look at robotics success stories and realize–wow–compared to software our industry’s state of management practice is pretty dismal.  Many successful robotics companies just fell bass-ackwards into their success.  Many were product driven companies to a fault that were able to expensively keep trying until they finally hit a success.  This is not the same thing as systematically eliminating and consciously balancing market versus technical risk to produce the greatest chance of creating successful business that uses robotic technology to make money and make the world a better place.

We’ve got a long way to go as an industry.  Luckily, now that we know that there’s nothing inherently ‘capital intensive’ about the robotics industry we can start addressing why we have so often screwed it up before.

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Newsflash: Business School Professors Wrong, Delaware is Not Always the Answer

2012/08/27 1 Comment

I’m working on incorporating a start-up and I discovered something very interesting, Delaware is NOT necessarily the best place for initial incorporation of your start-up.   If you are profitable, public corporation, Delaware is almost a no brainer.  However, there is no tax liability associated with moving to Delaware and most start-ups are not profitable or public.

Being incorporated in Delaware adds complexity and several fees and expenses that you might not incur when incorporating in your home state.  Especially if your state follows the model corporation act, you might consider incorporating there.  If you are not profitable, the corporate income tax rate of your state is irrelevant, you save a bunch of fees, the complexity of having registered agents, and having to qualify as a foreign corporation in your state.

The advantages of being in Delaware are in legal provisions that only apply once you have many classes of stock, the taxes on profits once you have them, and the power of officers and directors, particularly once the corporation is public.  None of these matter if you are pre-seed stage and may not matter at all until an IPO.  If the VCs demand that you be a Delaware corporation, okay, no big deal it can get done in less time than it will take them to finish their paperwork, but in the meantime, you’ve saved some money and most importantly some headaches of dealing with a state that is constantly trying to put its hand in your pocket.

I had been told by several entrepreneurship professors that Delaware is the only choice for incorporation of a start-up.   I was surprised to learn that this is not necessarily the case.  Others seem to think so as well.  Pass it on and consult with your counsel to  make a decision that is right for your circumstances.

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Is a dollar worth a dollar on a tech company’s balance sheet?

2012/08/21 1 Comment

Previously, dear reader, you and I have discovered that robotics companies are firmly entrenched in the knowledge economy and their assets look like other knowledge economy companies’s assets.  Robotics companies only hold only a limited amount of real assets but lots of financial assets.

As a related question, what is the value of the cash (and financial assets) on the balance sheet to investors?  There might be several issues with holding so much cash.  Particularly, money in a company should be employed making more money, ‘earning or returning’ as the saying goes.   Are there valid reasons to hold so much cash?  And if so, how should we value the cash that knowledge economy companies hold?

Cash Is King! (Or at least a founding father)

Bottom line up-front:  Valuations are always wrong.  What’s interesting is how they are wrong.  Assuming a dollar is worth a dollar is as good a rule as any, but is almost always wrong.  Nobody is really sure which way (too much or too little) it is wrong.  Below, is an elaboration of some of the issues with valuing cash which may come into play when valuing particular companies.  (And you thought that at least cash of all things had a fixed value  —  don’t we all wish!)

There are various criticisms of excess cash on the balance sheet, below are some of the most common.

1)  Holding the extra cash reduces returns, i.e. to buy into the business you have to buy a pile of cash beyond what is ‘necessary’ to run the business.  Further, the rate of return on cash has been essentially zero and certainly below inflation lately, so holding the portfolio the stock represents of a highly profitable business, plus cash must necessarily produce a lower expected return than just the business.

2)  Because of agency problems, management may be incentivized to use the cash to reduce volatility or ‘save’ the business if it falls on hard times, even if the investors could get a markedly higher rate of return in the market.  From an investor’s point of view this would be systematically wasting money.  Employees, customers, management, and trading partners might have a very different view.

3)  Holding lots of cash is said to signal that the company does not have profitable investment opportunities commensurate with the cash that it is generating and the company’s growth may slow in the future.  Further, holding lots of cash signals that you don’t know, or are ignoring, the traditional Anglo-Saxon business administration.  English speaking investors generally expect management to maximize monetary returns over the forecasting horizon and put shareholder interests ahead of all others.

Some countervailing points that you will often hear are along the following lines. 

A)  Although holding cash reduces returns, for a volatile security like a fast growing knowledge economy company, having cash on the balance sheet dramatically reduces volatility.  If investors want more exposure to the underlying business for the same initial investment, lever-up.  Since we are talking about cash holdings, buying on margin is almost a perfect antidote to management’s lackadaisical cash management policies if you feel that way.  [But seriously, who is their right mind thinks you need to lever-up when buying tech stocks?]

B)  Although management might ‘burn’ cash saving a failing business, which would be better redistributed to investors, more likely, they are going to have the flexibility to engage in acquisitions and new ventures without having to deal with the whims of the security markets.  [Has anyone seen a rational market lately?  Please let me know.]

Or has anyone read the Wall Street Journal?  Tech companies are routinely attacked for having their fixed life fund investors exit—Groupon and Facebook each got front page hatchet jobs over the past two days with nary a mention that these funds had been planning to sell now for, oh say, 8-10 years!  Talk about journalistic malpractice.  Would you want to go to the public markets in that environment?  I sure wouldn’t.  If I was management, I’d say that if investors are that irrational, I’ll keep the cash and do what they should have done with the money.

C)  Finally, although cash on hand may sometimes signal that the companies are running out of investment opportunities, it certainly signals to would be competitors that the said company is in a position to stick around for a long time and bitterly contest any erosion of their market position.  This may greatly enhance the value of the underlying business asset.

D)  This is a successful tech company.  It is run by the founders, for the founders (i.e. management).  If you don’t want the privilege of investing and taking whatever returns the founders deign to give, please step aside and allow the next investor to purchase stock.  But this isn’t really a justification.  Founders are investors too, especially once the company goes public, with theoretically the same motivations as other investors since their stake is highly liquid.

Further research on technology companies and their cash management policies should address the following issues:

I)     Are there structural reasons beyond the creation of new businesses and defense of existing businesses for technology/knowledge companies to hold lots of cash?  It does not occur to me that there is anything about a maturing knowledge business that seems to require massive amounts of cash.  Law firms and accounting firms do not seem to hold too much cash, but they are also typically private and can make much more drastic changes than public companies.

II)   Are there frictions between the interests of various classes of investors?  Particularly when there is a founder controlled/managed company, cash on the balance sheet is probably as good to them from a control perspective as cash in the bank and better from a tax perspective.  Should investment banks or others creating the classes of stock have new mechanisms to deal with this?

III)  What are the true limits on investment opportunities?  My firsthand observation has been that the greatest constraint on growth of robotics companies is management attention.  It may be that most technology companies have massively profitable investment opportunities, but management attention is engaged on current projects and hiring into the management circle is not that easy.  What is the needed resource to change this?  How can cash be used to obtain this resource?  Can it?  Is passion required?

IV)  Are there ways that management could resolve some of the market frictions that require them to hold lots of cash?  The public markets seem to mercilessly abuse tech companies—no they don’t look like utilities, but the highs and lows that they are pushed to seems unjustified—there just doesn’t seem to be enough new information about their future prospects to justify either one.  Can management take steps to make access to public markets, particularly debt markets more reliable?  Could banks make money by providing massive, typically undrawn, lines of credit that would provide much of the same protections to management?

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