Category Archives: New Social Age

New Peer-to-peer Lender Enters Space.

RainFin: latest entry into peer-to-peer lending – but, in South Africa.

RainFin intends to disrupt South Africa’s financial services sector by allowing credit-worthy South Africans to engage in peer-to-peer lending, cutting out banks in the process and offering higher returns to lenders and better interest rates to borrowers.

Sean Emery, cofounder and CEO of RainFin, says the company’s online platform links people who need to borrow money with people who have money to lend. He says borrowers can access funds at lower interest rates and with better terms and conditions than they could through a bank.

Emery says borrowers may be able to get interest rates as low as half of those offered by traditional banks. Lenders, meanwhile, can achieve “superior returns” on money they loan to others. He calls it “social lending”, and it fits well with American models that are rolling out this year, in advance of the JOBS act and attendant CrowdFunding bill, though Emery contends social-lending is different.

Lending is making the wrong people rich and the wrong people poor,” says Emery. There’s an important distinction between “CrowdFunding” and “social lending”, he says. The latter is a subset of the former and sees a group of people engaging in transactions while sidestepping traditional intermediaries rather than pooling resources to create a product or fund an event.

In order to use RainFin, consumers must be older than 18 and resident in South Africa. The site employs a thorough credit vetting process, after which borrowers can apply for loans of between R1 000 ($123 US) and R75000 ($9,191 US) using the RainFin marketplace.

These are small, short-term loans. Borrowers can specify the loan amount, the maximum interest they are willing to pay and the loan duration they prefer. The maximum repayment period is one year.

Individual lenders, meanwhile, can invest between R100 ($12 US) and R500000 ($61.275 US) in the service and spread it across numerous loans. Investors are not obliged to lend to groups or individuals, and have access to anonymous credit risk information based on factors such as age, gender, location and credit score.

RainFin earns a percentage-based transactional fee on every loan that takes place. Emery says this makes the costs of the platform “completely transparent” to its users. There is a 2% origination fee charged to the borrower and a 1% fee to lender for managing the transaction. Thus, the service takes 3% of a transaction’s value, added to it.

“We believe that consumers have an opportunity to take back some of the power they have given to banks, benefitting each other rather than large institutions in the process.”

Emery says RainFin intends to add other products to its offering, including financing for small and medium-sized businesses and mortgages in coming months.

The service is aimed at two types of borrowers. The first are highly creditworthy borrowers who want a better return on investment than they get currently.

The second is the first-time borrower or a borrower that is shunned by the formal banking sector because of their age — whether too young or too old — or because they are freelancers, students or entrepreneurs.

At launch, the service is designed to handle up to 100,000 users. Emery says there are no plans to launch the service outside South Africa on account of the banking regulation complexities that it would entail. The service doesn’t require a banking license because it doesn’t take deposits.

“In the same way a real estate agent isn’t a bank, we aren’t either. We don’t take deposits and reinvest them for profit; we merely facilitate the moving of money between people,” says Emery.

Co-founder Hannes van der Merwe says RainFin is not a micro-lender. “We are not trying to extract as much money out of you as we can.” He says one of the challenges the service faced was designing a process that would allow users to engage in a legally binding contract online.

Lenders stipulate the interest rate they are prepared to accept and, in the case of two or more lenders offering the same rate, the first to bid on a loan request wins it. The service warns lenders if it appears a lender is taking on too much of a loan and inadequately spreading their risk on the service.

Van der Merwe says lenders can be kept up to date on new loans coming into the marketplace via Web feeds. Alternatively, the service includes an automatic “bid agent” that will bid on loans that meet specific criteria or notify the lender via e-mail.

Emery says the bulk of the service’s marketing will be done online, as that is where its audience is. “We are focused on using the mediums in which we operate so online, mobile and social networks to start with,” he says.

RainFin is funded by SA capital and went live on Tuesday.


Crowdfunding Update.

David Drake of LDJ Capital and TheSohoLoft.com continues today with his sixth article on his series regarding CrowdFunding for equity solutions, reprinted here with his permission.

Perhaps it was no surprise when Mary Schapiro, Chair of the Securities and Exchange Commission, told a House subcommittee that the Securities and Exchange Commission will not meet the July 4, 2012 deadline imposed under the JOBS Act to implement rules for lifting the general solicitation ban under Regulation 506, Section D (advertising rules).

Ms. Schapiro explained to the House Committee on Oversight and Government Reform on June 28, 2012 that the JOBS Act mandates that the SEC create rules that will require issuers to verify that they are accepting investments only from accredited investors who are responding to a general advertisement. Creating such rules are difficult and will require more time. “We want to create something that is workable and usable,” she said. The SEC Chair expects that general solicitation rules will be issued “this summer.”

The SEC’s commitment to provide general solicitation rules this summer is encouraging and badly needed. Representative Patrick McHenry probably summed up the urgency for the rules the best by advising Ms. Schapiro: “Entrepreneurs are waiting and we urge you to move forward with that.”

As the SEC develops rules for general solicitations, issuers must understand that they will need to move cautiously if the plan to use general advertisement to solicit offerings. The JOBS Acts require that issuers verify that they are accepting investments only from accredited investors under the SEC Act. The SEC rules ultimately will determine what verification process is needed and whether any safe harbors are available. We suggest that issuers looking forward to make general solicitations stay apprised of developments as the SEC formulates its rules, so that issuers are prepared to move forward when the rules go public.

The Securities & Exchange Act in 1933 required that only accredited investors could be solicited for investments and non-accredited investors could not be unless they had an exemption through Reg A, Reg D, a Direct Public Offering or a registered security being traded on an exchange.

Under the 1933 Act, the accredited investor was considered someone who made $200,000 per year the previous 2 years and expected to make $200,000 the following year or a couple making $300,000.  Under a later amendment adopted in 1982, another criteria that would allow you to qualify as an accredited and sophisticated investor would be that you had a net worth of $1,000,000.

While the Dodd Frank Act was under consideration, the SEC pushed for a high net worth amount for an accredited investor. This was highly opposed and removed. What was accomplished out of the Dodd Frank Act was:

a) The equity of your primary home would not count towards your net worth.

b) Debt surpassing your equity would count against your net worth.

c) The equity in your summer / vacation / secondary home would count towards your net worth.

The Dodd Frank Act also prohibited the SEC from adjusting the net-worth threshold for a natural person for four years.

If you take inflation into consideration, the $200,000 per year salary in 1982 would be the equivalent of approximately $1,000,000 today, and the net worth requirement set in 1982 would represent a net worth of approximately $10,000,000 today. Wow, that would not leave many people to invest. Another argument would be that are only rich people entitled to invest in private and exciting deals? Are the select few that made money on Facebook the only ones to ‘give it’ to the less rich?

Granted, $200,000 makes you rich today but I was alluding to the rich just like their counter parts in 1933. Remember, the SEC 1933 & 1934 Act was created to protect the non-accredited investors from fleecing but also to assure that they did not leverage their home 99% and spend all their money on stocks that would not only be worthless but put them jobless and homeless. The 1929 crash that led to the great depression was extreme.

While the status quo remains for determining the financial threshold of an accredited investor, a fundamental change is approaching on solicitation. Currently, any issuer intending to rely on Rule 506 of Regulation D cannot engage in any general solicitation or advertising to attract investors. The Jumpstart Our Business Startups Act (JOBS Act) directs the SEC to remove this prohibition, which the SEC expects to implement during the summer of 2012.

Here is a little history on the non-solicitation rule. Be reminded that there was no TV or internet in 1933. The ban on solicitation to non-accredited investors forced brokers and companies to only talk to ‘rich’ people for investments, that is, the accredited investors. The JOBS Act asked the SEC change the writing in 90 days – that is July 4th, 2012 – Independence day – at which point advertising online, via email to millions or on TV would allow you to advertise you wanted capital for your stock to the general public.

Note, you still could only take money from accredited investors but the monumental change is that you can freely advertise wildly. Yet again, you would lose your exemption status under Reg D 506 if you took one single non-accredited investor and they decided to sue you later for loss of capital — a rare occasion but a legal premise that may hold true. So, will this amendment be implemented by July 4th and we will see media go bananas with everyone with their mother advertising stocks of private companies you can buy?

No, the SEC will not allow such madness as they will implement a safe harbor to assure that the ‘accreditation” of an investor through this means is verifiable and not necessarily just self-monitored by the issuer.

David Drake is a founding board member of CFIRA. Crowdfund Intermediary Regulatory Advocates, or CFIRA, was established following the signing of the Jumpstart Our Business Startups (JOBS) Act. CFIRA is an organization formed by the CrowdFunding industry’s leading platforms and experts. The group will work with the Securities & Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and other affected governmental and quasi-governmental entities to help establish industry standards and best practices. For more information, visit http://www.CFIRA.org. Connect with TheSohoLoft at facebook.com/TheSohoLoft and sign up for newsletters at www.thesoholoft.com, or contact Donna Smith, Communications Manager, for more information at 212.845.9652 or via email at donna@LDJCapital.com.


Peer-to-peer Lending Update.

It’s time for an update on peer-to-peer lending and social finance.

Years ago, clipping coupons from bonds was the province and passion of people in retirement. Today, a tidal wave of aging boomers want income, but traditional sources basically suck. Ten-year ­Treasury’s yield 1.6%. Safe-money bank CDs? 0.5%. Investment-grade corporate bonds are delivering 3.2%.

So retiring boomers are seeking alternatives. That’s why dividend stocks and annuities are very popular. But, there’s another cool source of high yield investments that are rapidly growing in popularity. Peer-to-peer lending, or making personal loans via the Internet, using websites like LendingClub.com and Prosper.com, have proven to represent a new and attractive asset class for a broad range of investors.

       

They have been around for 6 years and have had some bumps, including weathering a financial crisis and the current recession, peer-to-peer (P2P) lending has earned its place on an income investor’s menu.

The basic premise of these bank disintermediaries is that they harness the networking power of the Web to match people who have excess cash, with people in need of it, or those who simply want to do things like refinance credit card debt.

The key to its success has been how the sites have managed the inherent riskiness of unsecured personal loans. Believe it or not, it is now possible to earn yields of 6% or more, making relatively safe loans to complete strangers.

Los Angeles financial advisor Brendan Ross committed $300,000 of his own money to Lending Club in early 2011. Based on his quarterly interest payments he claims he has accrued about $40,000 in income to date. Annual yield: 10.2%.

“I’d been tracking the P2P space pretty much since the inception,” Ross says. “I was waiting to feel like its loan underwriting model had matured.”

San Francisco’s Lending Club is the largest P2P lender, followed by its crosstown rival Prosper. And, there are several other, specialized sites (like iPeopleFINANCE) who offer a lending model that is different than the securitized model of Lending Club and Prosper. These offer a direct lending model where an investor chooses one individual borrower based on an affinity profile and makes a small, short term loan where the investor can earn higher interest rates, yet still be able to enjoy mitigated risk.  Lending Club and Prosper have loaned a total of more than $1 billion since inception, in 112,000 loans.

Lending Club currently issues about $45 million in loans a month versus Prosper’s $13 million per month. Prosper ran afoul of the SEC in 2008 and temporarily shut down to “revamp its risk-assessment model” which is corporate code for getting into SEC compliance.

At Lending Club, after a quick registration you can sort through hundreds of potential loans. Each loan has its own risk rating, term (either 36 or 60 months) and rate of return.

Loans with the highest rating—based on the borrower’s FICO score and some additional analysis—pay in the 5% to 9% range—about the same as junk bonds. Interest rates on riskier loans range as high as 31%. Both companies also offer diversified funds of aggregated loans and IRA options.

Lending Club and Prosper vet thousands of loan applications, whittling down the pool to only those borrowers the company deems least likely to default. Renaud Laplanche, cofounder and CEO of Lending Club says his firm declines about 90% of all borrower applications, focusing on the 10% of borrowers with the best credit. Which makes them essentially, banks.

Of course, defaults do happen. Lending Club’s top-rated three-year loans expect a default rate of around 1.4%, and the riskiest loans, offering rates as high as 25%, have a 9.8% default rate. By contrast junk bonds have an average default rate of 1.9%.

It’s prudent to opt for the pools of hundreds of P2P loans both sites offer. That’s how advisor Ross is earning 10%, despite a handful of defaults on direct loans he made, because his defaults were offset by his performing loans. With the emerging market lenders like iPeopleFINANCE, the investor cannot hedge his risk in the same way, but due to iPeople’s proprietary credit scoring algorithm, an additional 20% of applicants get funded, and get a higher credit rating than their FICO scores would yield from the big-3 credit bureaus.

Additionally, iPeople insures that each borrower has in place a free, pre-paid, re-loadable debit card that receives a direct deposit with each paycheck that guarantees the loan payment, so the risk of default is very low. iPeople is targeted to young Gen-Yers and to returning Vets from Iraq and Afghanistan. Both of these groups have had little opportunity to establish credit, prefer a more cash-oriented lifestyle, and seek relationships with non-traditional banks. iPeople offers a suite of mobile cash applications tied to the debit card, that can be downloaded to smart phones, and can efficiently deliver banking services to customers 24 hours a day, 7 days a week, wherever they may be.

John Mack, former chairman of Morgan Stanley, is a convert to P2P lending. After committing several million of his own capital to such loans, he joined Lending Club’s board in April, lending a strong measure of credibility to the space.

Of course, a couple of former Wells Fargo executives have joined iPeople’s board as well, sending strong messages to the markets that peer-to-peer lending is here to stay.


Pennsylvania Fearmongers Attack Crowdfunding.

Hopping Mad as Commissioners Go Over the Line.

This is a re-post by David Drake of LDJ Capital & The Soho Loft.

A shocking press release hit the net last week, purportedly from the Pennsylvania Securities Commission. The link to the “advisory” goes to http://www.psc.state.pa.us, but that site doesn’t seem to host a copy. Even so, if the press release is accurate, it amounts to an unfair characterization of the JOBS Act and new Crowdfunding regulations.

Crowdfunding under the Act is portrayed as creating a Wild West style free-for-all that will attract fraud and con artists of all stripes. They cite the current lack of hard and fast rules to govern the sector and then assume no rules will be in place before next year’s launch. That’s nuts.

Here’s a typical quote:

Commissioner Steven Irwin summarized, “The way the new law was written, it’s pretty much ‘Buyer beware.'” He added, “It’s not that we don’t need new incentives to attract more investments in startup companies. It’s just that the lax oversight implicit in the new law is likely to attract people trying to game the system and scam people out of their hard-earned money.”

Excuse me?  RocketHub has had zero fraud incidents since launch in 2009. 

The plain fact is that we do need a new structure to help start-ups. Crowdfunding and micro-financing is an ideal way for new investors to participate and energize our sluggish economy. Small entrepreneurs find themselves shut out of the game. A game that already has its critics.

Take a look at the analysis of VC opportunities as they exist now – you have the WSJ exposing a scheme where GP’s rake in the major profits while late-comers to an investment bear the burden of more risk and lower rewards.

A history of overblowing risks!

It seems the PASC takes their watchdog role very seriously. They did a similar warning back in 2010, only then it was another piece of federal legislation: PA Regulators Warn: Investor Scams, Like Flu Virus, Will Mutate to Adapt to New Federal Financial Reform Bill. Here are some of the entries on their top ten list of investment traps then: ETFs, forex, gold and precious metals, “green” investments, and oil and gas.

It seems their motto is, “panic first.” And that may be their charge. After all, as a state run commission, they should have one eye on regulations and another looking out for scofflaws. But this latest hit piece goes too far.

Of course there needs to be rule-making to regulate the Crowdfunding market. Everyone agrees on that.

Of course disclosure and investor protections have to be front and center.

And read what Pennsylvania Securities Commission Chairman Robert Lam had to say in their Spring Bulletin: “The Internet is a powerhouse, and maybe – just maybe – Crowdfunding will be a good thing once it matures and we have some ground rules in place.” Somehow Mr. Lam moved from cautious optimism to fear monger – while the rules are still being written at the SEC. At the risk of being repetitive – That’s nuts.

Our real concern isn’t about one small department in one state. Our concern is that this mischaracterization of Crowdfunding will catch on without those in authority positions doing their homework. Crowdfunding is worthwhile and it offers something no other framework can – access to funding for those too small to interest VC players.

Good ideas and good companies deserve a chance to present their case to the public, and the public deserves a chance to reap the rewards.

A turf war between federal and state regulators shouldn’t have the ability to libel an entire market. Should it?

One editorial comment: The very essence of crowdfunding, aka the crowd, is the built-in protector acting on behalf of all the investors, aka the crowd. The crowd will quickly, in fact virtually instantly, call out the fraudsters and the system gamers before any crowdfunded offering gets off the ground. Um, that is the whole idea behind crowds.

So, my question is, would you rather place your $100 in the hands of a Wall Street banker to invest in, I dunno, Proctor and Gamble? Or, would you rather place it in the hands of the next Facebook, with the support of 1,999 others (aka a crowd)?


Collaborative Consumption!

And, now for something completely different.

Collaborative Consumption is a phenomenon that describes a lifestyle generally associated with the Gen-Y population and has grown out of an ethos of sharing, a sense of community, and a sensibility around reuse, recycling and conservation.

The resulting economic model (and you all know how I love economic models) is based on buying, selling, sharing, swapping, bartering, trading or renting access to previously owned products. Technology and peer communities are enabling these old market behaviors to be reinvented in ways and on a scale never possible before.

From enormous marketplaces such as eBay and Craigslist, to peer-to-peer marketplaces such as Tradepal, Fiverr, emerging sectors such as social lending (Zopa), peer-to-peer travel (CouchSurfing, Airbnb and Onefinestay), peer-to-peer experiences (GuideHop), event ticket sharing (unseat.me) and car sharing (Zipcar or peer-to-peer RelayRides), Collaborative Consumption is disrupting outdated modes of business and reinventing not just what people consume but how they consume it. Collaborative Consumption is sort-of the opposite of Conspicuous Consumption, where instead of choosing to drive a new BMW, the status achievement is more associated with driving a used 1970s Volvo.

Collaborative Consumption sites are proliferating on the web, with new platforms announcing their launches on almost a daily basis. These platforms are pioneering new spaces, and while they are all tapping into the Gen-Y zeitgeist, they press human behaviors to such an extent that they are all experiencing a certain amount of initial resistance due largely to inertia.

Getting people to try an idea that might be perceived as ‘risky’, like sharing your home with a stranger, is difficult to actually accomplish over the web.

This foray into the world of Collaborative Consumption raises interesting behavioral and technical questions.  How do we use technologies to enable trust between strangers? Is it even possible? What’s the best approach for building critical mass?  How do we know when and how to scale? How do we design a user experience that gets to the essence of what people want? How do we build a trusted brand in the community?

Almost all Collaborative Consumption marketplaces depend on matching what people want with what other people have. Obviously, this raises the issue of building a critical mass of inventory (users, products or services) on both the supply and demand sides of the equation, but which side should one focus on first?

Many of these sites seem to lean on the supply-side in order to create a sufficient number of choices to both entice and retain users who are shopping for stuff. Easy to talk about, but hard to do.

One of the not so obvious pitfalls is to try and be everything to everybody, which will usually result in chaos. It is far better to limit the number of choice variables while you build up a controlled market of supply and demand. If you were offering ridesharing services, you may initially limit your offering to certain streets and routes and only during certain hours of the day. Known commute corridors during peak commute times for instance.

If you were offering to match up weekend accommodations, you might limit the locations to areas within walking distance of common tourist attractions in a given city. Or, near main subway or bus stops that serve the entire city.

This is why these marketplaces happen mostly on a local or neighborhood level, as people share working spaces (for example, on Citizen Space or Hub Culture), gardens (Landshare),experiences (GuideHop) or parking spots (on ParkatmyHouse). However, Collaborative lifestyle sharing is beginning to happen on a global scale, too, through activities such as peer-to-peer lending (on platforms like Zopa and Lending Club) and the rapidly growing peer-to-peer travel (on Airbnb and Roomorama).

In order to build a community of trust that will engender sharing and overcome the barriers associated questions like “do I really want to share my apartment with a stranger?”, successful sites will have reached out to their target community during launch and asked what the community wants the site to do and what they would like to see when they engaged. This is the first step in building a brand within the community that will support growth and expansion, based on complete transparency and honest communication.

In future blog posts, I will address the growth of the Collaborative Consumption online markets and the specific issues of critical mass, scale, user experience, trust and branding in detail. If you are interested in this topic and learning more, please drop a line to steve@ipeoplefinance.com. I am really interested in hearing about your experiences with peer-to-peer sites. Thanks.


The Wrong Day to Quit Sniffing Glue or to Make Your IPO Debut.

And now, with permission from my buddy Dara Albright, Founder of NowStreet Journal, we have her insight to the FB IPO:

Some call it a cultural phenomenon. Others label it a colossal waste of time. No matter the sentiment, all attention was on Facebook’s IPO entrance on Friday. Well, except for NASDAQ, who was too focused on repairing its malfunctioning technology, oh, and the European Union, who was busy worrying about its looming financial collapse.

Instead of skyrocketing, as was widely predicted among analysts on the Street, Facebook closed up a mere $0.23 cents, not even gaining 1%. News circulated during the day that even Facebook’s bankers had to jump in and support the stock from breaking its offering price. A far cry from LinkedIn’s IPO entrance, almost exactly one year ago, which nearly tripled its offering price during its first trading day.

The most anticipated IPO of the decade and largest technology offering in history had a less than stellar IPO debut. Yikes. What does this say about America’s capital markets? What does this mean for its economic future?

If we’ve learned anything today, it’s that timing is everything and no one, not even Wall Street’s finest, can predict the ideal day to go public. Sometimes you just “pick the wrong day to quit amphetamines”. But, bankers can sometimes price an offering correctly. And this was one of those times. Had Facebook’s stock price shot through the roof, Friday’s headlines would have read something like, “Once Again Wall Street Bankers Underprice a Deal & Screw the Issuer”.

Facebook’s underwriters should be commended. But I do not want to give them too much praise for fear it will go to their heads and result in the creation of yet another destructive derivatives product. “There’s no reason to become alarmed, and we hope you’ll enjoy the rest of your flight. By the way, is there anyone on board who knows how to fly a plane?” Sorry, once you start quoting the movie, “Airplane”, it is almost impossible to stop.

Facebook’s lackluster IPO performance also affirmed what we all know but most don’t like to confront – the public markets are significantly broken. It is challenging for companies to thrive in a trader-centric marketplace where fundamentals are rendered practically meaningless and company stock prices are at the mercy of extraneous events. Last week, Europe sneezed and Facebook caught the flu.

Unfortunately for Facebook, not too many traders came to the realization that Europe’s bleak financial future and rising unemployment actually benefit Facebook’s business. Look how many more jobless people will now have time for Facebooking. Does anyone see the irony here?

Facebook, say goodbye to the autonomy of the private markets. Now, instead of being valued on your own merits, you’ll be assessed based on the accomplishments and failures of those who have nothing to do with you, subject to the second-by-second mood swings of those judging you. Welcome to public market hell where you will now be viewed as a ticker symbol as opposed to the global innovator you are.

Don’t worry, “FB”, many considered the IPO of “GOOG” to have been a great disappointment too. Contrary to “GOOG”, at least you were not forced to slash the price and size of your offering. And remember Webvan’s hot IPO? Its stock price more than doubled during its first trading day. Perspective.

So just where was Facebook’s aftermarket love on Friday? This leads me to the final and most important lesson of the day. Even the most grandiose of companies have trouble thriving in a marketplace that lacks the aftermarket support derived from long-term investors who are more interested in funding companies rather than trading tickers. These long-term investors are a company’s clients, its customers, its users, its partners and its supporters. In Facebook’s case, they are the 900 million across the globe sharing updates, photos and videos every day. If each user bought just one share of FB, it would equate to $34.2 billion in pent up demand.

I don’t doubt that Facebook will ultimately achieve success in the public markets. It is one of maybe a handful of companies on the planet, including AAPL and GOOG, who can provide its own aftermarket support by harnessing the crowd. According to Gene Massey, CEO of MediaShares and leading expert in Direct Registration methods, “Once Facebook has been public for 12 months, it can offer a direct stock purchase option to its massive user base. By doing so, it will not only gain stock support, but Facebook will also add valuable shareholder demographics to its existing database enabling it to become the world’s most powerful marketing and fulfillment company in history.”

Unfortunately, the vast majority of companies entering the treacherous public markets do not have a support group of 900 million. Unless something is done to fix the aftermarket deficit, more and more publicly traded companies will find themselves dying a slow painful death. This will only result in additional long-term investors fleeing the public markets in search of greater stock appreciation.

The fact is the mass exodus has already begun. The fastest growing companies no longer reside on NASDAQ. They are found in the rapidly expanding marketplace for private company stock (PCM).

Facebook has inspired a new generation of social businesses poised to capitalize off its extraordinary media platform. Many of these micro and small cap companies are already enjoying spectacular revenue growth. Historically, most of these companies would have been public at this point in their life cycle, creating wealth for public market investors. However, it makes no fiscal sense for these companies to be public today.

These private companies are all thriving, in part, because their investors consist of long-term shareholders who believe in their products, their businesses and their visions. Don’t all companies deserve the right to attract investors whose interests are more aligned with their own? Shouldn’t all investors have the opportunity to invest prior to a company’s greatest growth spurt? Shouldn’t all investors have the freedom to invest their own money as they see fit?

224 days, 16 hours, 38 minutes, 16 seconds until the democratization of the US capital markets.


We Don’t Need No Education!

 

We don’t need no education

We don’t need no thought control

No dark sarcasm in the classroom

Teachers leave them kids alone

Hey! Teachers! Leave them kids alone!

All in all it’s just another brick in the wall.

All in all you’re just another brick in the wall.

I just watched 60 minutes. They did a couple of segments that were interesting, not so much in what was revealed, but rather in the apparent unintended irony of airing both segments on the same program.

We had on the one hand, a piece about Peter Thiel’s Fellowship Program, which awards $100,000 to applicants who compete for one of twenty such scholarships each year, in order to pursue their dream over a two year period. This often requires that applicants drop out of school to focus full time on their aspiration.

On the other hand, we saw a segment devoted to the world tour of one of my rock idols, Roger Waters, as he and his fellow musicians (not including any members of Pink Floyd) re-construct his monumental opus, The Wall, in a grand, operatic, concert-style production. This tour is essentially about performing a double album that was first recorded on vinyl 33 years ago. Roger is the lyricist, bass player, and creative force behind the legendary rock band Pink Floyd.

The Wall has its roots in Roger’s non-relationship with his biological father and describes the process by which he begins to build a mental wall between himself and the rest of the world, so that he can live in a constant, alienated equilibrium, free from life’s emotional troubles. Every incident that causes him pain is yet another brick in his ever-growing wall: a fatherless childhood, a domineering mother, an out-of-touch education system bent on producing compliant cogs in the societal wheel, a government that treats its citizens like chess pieces, the superficiality of stardom, an estranged marriage, even the very drugs he turns to in order to find release.

The wonderful hook between this story and Peter Thiel’s Fellowship Program is the reality of an out-of-touch education system bent on producing compliant cogs in the societal wheel, even in that pre-historic era of 1979.

Morley Safer’s generally combative and disrespectful interview of Thiel, promotes the idea that Thiel is quirky, cavalier and out of touch with reality. His plan is characterized as paying college students to develop their promising concepts instead of attending to school. And, of course Morley misses the whole connection between The Wall and a Fellowship Program that is designed to put an end to educational snobbery, enormous wastes of money and time, with nothing to show for it at the end. Now, I have nothing against old guys or the wisdom of age, but whose boat would you hitch a ride in, Safer’s or Thiel’s? 

Thiel’s critics include Vivek Wadhwa, a self-important, and successful bureaucrat-entrepreneur* turned professor who teaches at Duke and Stanford, who told Safer, “Peter Thiel has made so much money that he is out of touch with the real world. He doesn’t understand how important education is for the masses.”

“What I worry about is a message that’s getting out there to America that it’s okay to drop out of school, that you don’t have to get college. Absolutely dead wrong.”

What I think this says about Vivek Wadhwa, is that he is more worried about his career as a college professor, than he is about young entrepreneurs’ ability to follow their dreams.

Every college student interviewed for the program said essentially the same thing, “Yes, we are being challenged at school, but not in ways we want to be.”

Thiel is best known as a co-founder of PayPal. He is also the Silicon Valley investor and entrepreneur who made early stage investments in companies such as Facebook, LinkedIn, and Yelp. Now he’s investing in college students, awarding fellowships of $100,000 each to youth under 20 years old, essentially encouraging them to drop out of college to become entrepreneurs. See >>> http://thielfoundation.org/index.php?option=com_content&id=22

In tonight’s interview, Thiel tells Safer that his program is a viable alternative to what he sees as a largely ineffective university system where costs far outweigh benefits. It’s not for everybody, but if a young person is excited about creating something, she should have an avenue to go and do that.

“We have a bubble in education, like we had a bubble in housing…everybody believed you had to have a house, they’d pay whatever it took,” says Thiel. “Today, everybody believes that we need to go to college, and people will pay — whatever it takes.”

While he acknowledges that college degrees are necessary for those careers requiring a formal credential, like doctors, lawyers, accountants, etc., he also notes that a college degree is not necessary to land a high-paying job. “There are all sorts of vocational careers that pay extremely well today, so the average plumber makes as much as the average doctor,” Thiel tells Safer. I think some guy named Obama just said the same thing.

And, to his critics who say that most of his fellows will fail, Thiel says, “Sure. That’s possible. But, they will be so much better off having gone through the experience, and better prepared for the next one. In any case, they can also return to college if they find that the entrepreneurial life isn’t what they thought or hoped it would be.” (Roughly what I think he said)

This of course, reminds me of Sal Khan, who I wrote about in an earlier blog, who believes he can transform education worldwide, and his approach is now being tested in American schools. Along the way, the former hedge fund analyst has won the support of Google Chairman Eric Schmidt and Microsoft co-founder Bill Gates, who calls Khan “a teacher of the world.” He has revolutionized classroom teaching in Los Altos and Palo Alto, California. See https://isellerfinance.wordpress.com/2012/03/12/dont-all-fifth-graders-know-calculus/

What is heartening to me is that these little steps forward have the support of many of the giants in my industry, and almost every day, I run across an event or story that suggests we are moving to the Startup University state faster than I would have ever hoped or imagined. And, that is a really great thing.

I watch the ripples change their size

But never leave the stream

Of warm impermanence and

So the days float through my eyes

But still the days seem the same

And these children that you spit on

As they try to change their worlds

Are immune to your consultations

They’re quite aware of what they’re going through

 

Ch-ch-ch-ch-Changes

(Turn and face the strange)

Ch-ch-Changes

Don’t tell them to grow up and out of it

Ch-ch-ch-ch-Changes

(Turn and face the strange)

Ch-ch-Changes

Where’s your shame

You’ve left us up to our necks in it

Time may change me

But you can’t trace time

*Bureaucrat-entrepreneur: one who used the corporate capital of his employer on an internal project that was successful enough for its own application, that external applications were discovered in similar businesses and presented a commercial opportunity. Very different from, and not to be confused with a startup. In Wadhwa’s case, he began his career at the New York–based investment banking powerhouse, CS First Boston (CSFB), where he was Vice President of Information Services.  There he spearheaded the development of technology for creating computer-aided software-writing systems that was so successful that CSFB decided to spin off that business unit into its own company, Seer Technologies.  As its Executive Vice President and Chief Technology Officer, Wadhwa helped grow that fully funded startup into a $118 million publicly traded company, and leveraged that success to his current teaching roles at Duke and Stanford. Thiel or Wadhwa? You decide.


Victoria Grant Has It Right.

Victoria Grant of Cambridge, Ont. is earning a reputation as a financial pundit after her tirade against her homeland's borrowing practices went viral on YouTube.

If you feel like you are drowning in debt and there is no way out, you aren’t alone. As of April, one out of every five U.S, households owed more on their credit cards, medical bills, student loans and other un-collateralized debts than they had in assets. This, according to a University of Michigan report just released Monday.

“Some families have not been able to make substantial headway,” said Frank Stafford, an economist at the U-M Institute for Social Research and co-author of the report.

Since 2008, the only families whose savings levels have increased are those with $50,000 in savings.

Mark Zandi, chief economist for Moody’s Analytics, said the U-M results are consistent with other data showing that a large number of lower-middle income households have negative net worth.

“That is, they owe more than they own,” he said. “They are having trouble managing their debt.”

Among economic co-indicators, the U-M report revealed that many families fear more mortgage troubles ahead. About 1.7% of families surveyed in 2011 said it is “very likely or somewhat likely” that they will fall behind on their mortgage payments in the near future. Stafford said “the bad job market is definitely a factor.” The primary concern of the families surveyed was the impact of the primary income earner or their spouse losing their job or having to take a pay cut.

It’s possible, Stafford said, there will be continuing troubles for mortgages in 2013 and 2014.

Another troubling trend the report noted was that nest eggs weren’t quickly being rebuilt after families dug into savings to pay bills. Families with no savings or other liquid assets rose to 23% in 2011, up from 18.5% in 2009.

Surveyed families revealed credit card debt has increased 18%. About 10% of families in 2011 had $30,000 or more in credit card debt and other non-collateralized debts. That compares with 8.5% in 2009. The average interest rate being paid on that debt is 32%. If one were to pay $700/month on $30,000 in credit card debt and never use the card(s) again, it would take 15 years and around $110,000 to pay the debt off. Unless these families can find debt consolidation loans at 13-14%, or win the lottery, the future doesn’t look very bright.

But it is worse for the U.S. government. AKA, you and I and our tax dollars, because you know the banks will not be left holding the bag. Again.

If the survey reflects average families, then that level of credit card debt is representative of about 8 million households or $240 Billion, not quite as frightening as the $1.2 Trillion in student loans outstanding, but still a really big number. The average home value in 2011 was $164,000. The total number of foreclosures projected by the end of 2013 will be 7 million homes, or a loss in real estate mortgage loans of $918.4 Billion. It needs to be offset, by something.

It will be really interesting to see how our Congress sorts this entire mess out. If we took all three losses together, we would be looking to offset $2.3 Trillion in money squandered on loans never to be re-paid. I assume Congress will pass an extension on the carry cost of the student loans, extending the 3.2% and pushing out the increase to 6.4% until … when?

So, we all now know a little bit about how Spain and Ireland and Greece feels, to be helpless in the wake of government mishandling of their leadership responsibilities, and to be unable to assign accountability for policy outcomes. This little 12 year old Canadian girl has it right. Watch her explain here: http://www.ctv.ca/CTVNews/Canada/20120515/12-year-old-financial-pundit-becomes-You-Tube-star-120515/


High-Yellow Trash.

Now that Obama has come right out and said he supports Gay marriage, the Republican Party must be beside itself. The issues that they want to keep front and center,i.e., “Economy and Jobs under Obama’s Presidency.” have taken a back seat for at least the last couple of days and now seem destined to remain there, in the wake of related equality stories emerging everywhere.

It seems we need to discuss whether marriage has ever meant anything other than between one man and one woman. We have religious leaders reminding us that the bible has stated clearly that the definition of marriage is one man and one woman, but fail to account for the Old Testament, where it states clearly its preference for many hundreds of wives and concubines for a man and often many husbands for a woman.

It also spells out very specifically that if the man refuses to care for his wives, they are free to leave, but of course, without any compensation. Clearly, this “law” wasn’t written in California. But, to be fair, the same law applies to women who refuse to care for their men. I actually think it is a Nevada law; do not get divorced in Nevada.

I guess all of these men of the cloth have chosen their own version of the bible when it comes to specific issues. And, Romney’s church? I think his own Grandfather had a few wives and Mitt, denounced this practice as barbaric, in a separate interview, forgetting apparently that his own family … oh well.

In January, a coalition of some 40 religious leaders, encompassing several faiths, released an open letter warning of the peril of legalizing same-sex unions. And this week, as we have seen, conservatives celebrated a victory in North Carolina, where voters banned same-sex unions by a 3-1 vote. Many of these voters were African-American, who generally share strong views against same-sex marriage. Bishop Harry Jackson, the African-American founder of the High Impact Leadership Coalition, says gay marriage is not a civil rights issue, but fundamentally about redefining the institution of marriage. He thinks the president has miscalculated his clout with the black faith community, which tends to skew conservative on social issues like gay marriage.

“We are concerned that this is a bridge too far. I think it will backlash on the president,” he said.

But not all black religious leaders agree. Bishop Leonard Goin, who heads a Pentecostal congregation in Philadelphia, said in published reports that although he doesn’t support the president’s views on same-sex marriage, he doesn’t think it will give black voters cause to vote against Obama in November.

The bottom line, says Tony Evans of Oak Cliff Bible Church in Dallas, is that the fight over gay marriage goes much deeper than equal rights or political maneuvering. It’s about the fundamental building blocks of the country.

I wonder whether he, like so many of his Southern brethren are referring to the similar fundamental building blocks illustrated so vividly in the history of his region’s racial past. Maybe this passage from James Lee Burke’s Half of Paradise would be a good reminder of some fundamental building blocks that his ancestors used to build the South as we know it today. The same South that just overwhelmingly passed a constitutional ban on Gay Marriage.

                 “Who are you running against?” J.P. Said.

                “Jacob Arceneaux from New Orleans,” Lathrop said. “He’s French and he’s Catholic, and he’ll take most of the parishes in the southern part of the state unless we swing them              over.”

                “How are you going to do that?”

               “Nigger politics,” Virdo Hunnicut said. “Arceneaux has a reputation as a nigger lover. He hasn’t tried to stop the nigger kids from getting in the white schools, and it’s going to hurt him.”

                “We’re running on the segregation ticket,” Lathrop said. “We’re going to show these people in southern Louisiana what will happen when Arceneaux gets in office. Their children will be mixing with the colored children, and pretty soon they won’t be able to tell one from another. The future generations will be one race of high-yellow trash.”

 

There are some of those fundamental building blocks for you. High-yellow trash. This is the actual genesis of the anti-gay-marriage vote, for those of you having trouble understanding how this can happen in a country where 50% of those polled support gay marriage. Fear and ignorance are just as frightening today as they were back in 1957. It’s the same board, just different players. But, we make progress. Sort-of.


Put A Fork In Them.

Greece is done.

The anti-austerity folks have voted, and it ain’t pretty.  The big winner of the day was the leftist anti-bailout coalition, Syriza. In the last election in 2009, it scored just 4.6%. This time it took second place with almost 17%, beating Pasok whose support base all but collapsed. This nation, punished by two years of the most drastic austerity measures in modern history, has hit out against the bailout, the political mainstream and the painful cuts that have brought Greece to its knees.

A majority has spoken and the message is clear: Rip up the “memorandum” (the bailout agreement with the IMF and the EU) read, Germany, and get rid of all immigrants. The radicals and the neo-Nazis now have the country.

So, in the next three days, the various parties have to form a new government or put on new elections and do it all over again. If anyone doesn’t see that this is a government falling into fascism without hope of civilized central discourse, then they are in denial.

And without a government in place, the next installment of Greece’s international bailout money would probably be put on hold, raising the specter of the country’s bankruptcy within weeks.

In reality, any future government here will have to – at the very least – renegotiate parts of the bailout, following the will of the majority. But the challenge will be to do so, while still ensuring Greece’s membership of the euro – something a large majority of Greeks want, according to opinion polls. That doesn’t seem possible. The opinion polls have been like this for years now, signaling a complete inability to grasp the reality of the situation. Greece needs to abide by the austerity measures of the bailout, or the Germans will withdraw and Greece will have no choice but to default and drop out of the Eurozone.

The fervor among Greeks to throw out any additional austerity measures is being fanned by  the election of France’s new Socialist President, Francois Hollande. He is openly skeptical of austerity, favoring pro-growth policies instead – the winds of change may be blowing from Paris to Athens – and may further embolden those fighting the cuts there.

Greece is where the Eurozone debt crisis began back in 2009. It remains where the problems are most acute. And now this country has been plunged into yet another period of intense instability that it – and Europe – can ill afford.

There really is no way out and the sooner Greece accepts the inevitable and cuts their losses, the better off they and the rest of Europe will be.