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The Hutch Report

The Digital Marketing Mix

By | Business, Marketing

The new economy and our increasing digitised world seems to have outmoded many classical business concepts. What seemed logical from a business standpoint in the traditional sense now seems less logical from the digital point of view. Should businesses be thinking about tossing out all these old concepts that make less sense and start thinking fresh from a digital sense? Then again, has the digital hype become so great that we forget that most of the world’s economy still runs in a traditional sense and that we should merely be thinking about adapting concepts to digital models instead of having them replaced?

A real digital economy is one that is purely digital, such as information that is produced digitally, marketed digitally,  distributed digitally and sold digitally. With this definition we are able to quantify what percentage of the economy is in fact digital, which is in fact still a small portion. We know that the greater economy does not function in pure digital form, although the hype would lead you to believe this is so. If you purchase a bar of soap through a website, it may have been marketed and sold through the website but the bar of soap is still a physical object. This means that it must be produced in a factory, stored in a warehouse, and distributed to the end customer by physical means. So what we have is essentially a hybrid where the digital tools have replaced certain traditional means of doing business but not all (I don’t think you will ever see the day where we wash ourselves with digital soap).

With this in mind, businesses should be thinking about which digital processes occupy their activity chains and determine how traditional concepts can be modified to suit them, instead of rethinking the wheel and replacing them completely. As an example, we looked at effective marketing strategies in the traditional sense to see how they can be modified to accommodate the digital extension of business.

We start by looking at traditional marketing and the obvious place to begin when thinking about effective marketing strategies is the consumer. Every company’s reason for being is based on satisfying the customers wants and needs with the firm’s products and services in order to generate profits (we will not consider non-profit organisations here).

Consumers tastes vary greatly, which makes it extremely difficult for any one company to serve everybody (although Amazon is sure giving it a good try). In order to make sense of all the consumer variablities in the market, the first task at hand is to separate the market in to homogeneous segments. This way companies can better identify and analyze what really makes them tick. They will do this by asking such questions as what problems are the potential customers having that we may be able to solve better than others? Who else is experiencing these kinds of problems?

Once this is done then the company will attempt to align what it is offering with what the consumer wants or needs. Hopefully they do that properly and the segment becomes profitable for them.

In order to do that, they position four classic strategies in a way that will address the consumers wants and needs correctly and convert that into profitable sales. These classic strategies have come to be known as the “Marketing Mix” and they include: Product strategy, Pricing strategy, Distribution strategy and Promotional strategy.

Product strategy: This includes decisions about the product and its uses, packaging, branding, trademarks, as a few examples.

Pricing strategy: This includes the challenge of setting a justified and profitable price point.

Distribution strategy: This includes the selection and management of marketing distribution channels and the physical movement of goods from manufacturing to the end consumer.

Promotional strategy: This includes personal selling, advertising, publicity and sales promotion tools such as brochures.

In order to provide a simple example of this mix we will take a look at Ferrari Cars. Product strategy – they are a luxury item, therefore they are branded as such. Details of the product are all of the highest quality. The name represents luxury and automobile craftsmanship at its finest. Pricing strategy – because the product is represented as high quality and requires expensive quality materials to produce, the price point represents this fact and retails from between $188,000 and $400,000. Distribution strategy – Ferrari cars will only be sold in exclusive dealerships seeing that they cater to a very select market, and such a luxury goods consumer would accept the fact that there is not a Ferrari dealership on every street corner. Promotional strategy – their promotional strategy has to represent their product so you won’t find any flyers in your mailbox advertising “20% off if you purchase a Ferrari before Friday.”

So now, in the hybrid digital world what has drastically changed for Ferrari? The product is still a luxury car. The pricing strategy hasn’t changed to reflect that. That is to say, you are not going to get 20% off of a Ferrari if you purchase it online. The distribution strategy doesn’t change because the physical object still goes through the distributor channel to the end consumer. Essentially, we can say that the promotional strategy has changed. Instead of a nice glossy brochure (which they still have) you can get all the information you need online. The website looks high end but today you can have a luxurious looking website and sell inexpensive chocolate bars. Communication has not changed much although you get the advantage of more means of communication but so does everybody. In any case if you are going to purchase a car for $200,000 you probably want to speak directly to the seller.

What about the pure digital world? This is where the modifications have to take place because the lines become blurred.

Product strategy – This becomes a content strategy which means we are speaking about a digital good such as a book, piece of software, application etc. Product strategy can now become a bit more difficult, especially if you are thinking of branding yourself as a luxury digital product. Does this category even exist?

Pricing strategy – Because of the digital world businesses have now gained efficiencies and are given additional margin to work with so they can play with price a bit more depending on who they are selling to and what their competitors are doing.

Distribution strategy – In digital form we have the whole world at our doorstep. The strategy becomes which distribution channel to use, YouTube? Website? Instragram? or simply email?

Promotional stategy – The digital promotional strategy can still employ traditional tools such as radio/podcasts, Television, Billboards, Magazines etc. or it can be purely digital using such tools as Twitter, a myriad of websites to advertise on, Facebook, Google adwords, Instagram, YouTube or simply your own website. However, here we see that the lines can become blurred because now your distribution channel also doubles as your promotional channel.

Therefore, businesses have to take special care in thinking about how they position themselves in the new economy and what strategies they use. The most important aspect, which many businesses forget is the customer. If your segment market is 50 – 60 year olds then you have to communicate to them in the proper way and through the proper channels. This segment is not a big user of Snap Chat or Instagram so you have to change accordingly.

So, regardless of whether your product is physical or digital, there are some fundamental questions that businesses should not forget to ask;

Who are my customers? (How old are they? What is their profession? etc.)

Where are they located? (in the digital world, an Italian may be visiting your site, are you selling to them? If you are there are a number of cultural issues to consider).

What need, want or problem are we solving for them? (So many companies are in the “build it and they will come” frame of mind. A nice to have product is very difficult to sell).

Providing something of value that somebody is willing to pay for has not changed for thousands of years. The new economy and digital world does not change that fact. There are numerous articles outlining all kinds of traditional marketing strategies and digital strategies which are valid, however, many often still forget the reason for being in business and that is to satisfy a need. If your business concentrates on the end customer and how his or her needs are being fulfilled by your business, and work backward from there, the chances of success will increase regardless of if your product/service is physical or digital.

The “Follow Back” Button on Twitter – Who Benefits?

By | Business, Marketing, Psychology

John Harper lives in Pine Village, Indiana.  It is a beautiful little town with lots of friendly folk who are always willing to help their neighbors or visitors in need. The population is only 217 so John knows just about everybody in town and everybody knows John.

John works at a local factory and although he enjoys his job and being with his fellow workers John has always had dreams of having a bit more. He has always had the desire to be an entrepreneur and reap the financial rewards of being his own boss. After years of being at the factory, one day the opportunity presented itself. John jumped at the chance, left his job and set his plan to put his dreams in action.

John took his savings and started a small business selling jean jackets. John stated, “I mean, everybody wears them around here, what better business to start!” He opened his shop on the main street of town. Soon everybody knew about John’s shop and was stopping by to say hello. They, of course, wanted to help out the best they could so they purchased something from John. Right off the bat, the shop was doing great sales. Jean jackets were popular in Indiana since there were a lot of farmers and that is what they like to wear. Most people in the town could be seen wearing John’s jean jackets.

After a few weeks, sales suddenly slowed to a drip. After a quick analysis of the situation John suddenly realized the problem. The main reason was that jean jackets are quite durable. Once you purchase one you can wear if for quite a while before it wears out and needs replacing. Remember the population of Pine Village was only 217 so John quickly realised he needed to go outside of Pine Village and even Indiana if he wanted to seize the chance of selling more jean jackets and grow his business.

John came to the brilliant idea of sending out a flyer with a bold message saying, “I will come to see your shop, if you come and see mine.” John thought that if these shop owners came to visit they would see the quality of John’s Jean Jackets and want to buy them. John sent this out to jewellery stores, grocery stores, hobby stores, banks, lawyers offices etc. He sent the flyers out to every business he could think of.

After a few days some replys came trickling in. “Sure John, come and check out our shop and we will come and check out yours.” You see, these stores were thinking, “If John comes to visit our shop he is going to see our quality products and services and buy from us.” Soon John was spending most of his time visiting fish stores, furniture stores, gift shops etc. In return, these people came to visit John’s shop.  There was one big problem. John didn’t need any furniture or gifts so he never purchased anything from the shops that he visited.

John’s shop in return got lots of visitors from the fish guy, the bank clerk, the grocery clerk etc. However, there was another problem. None of the visitors bought anything from John’s shop. They liked it, and sometimes complimented him on it but there were no purchases. John began to get worried because in spite of the shop being so popular and having people come and go all day long, there were no sales. Eventually John did get a couple of sales from a few farmers that lived a few hours away in another county but nothing that could help sustain the business.

After a year, John’s store had thousands and thousands of followers but no sales. John didn’t purchase from anybody else because he had no money left seeing that his business was not doing well.

After wasting all his time and effort visiting other stores outside of town and entertaining those that came to visit him John eventually went into bankruptcy. The store was hugely popular but couldn’t make a dime. John ended back at the factory.

A few months later, all the guys at the factory started opening up Twitter accounts, as Twitter started to become hugely popular, so John did the same so he could stay in contact with all his pals. As he read his Twitter feed from day to day he decided to follow a few other accounts of people that he admired in addition to some news feeds that he found interesting.

Then one day a strange thing happened. John began to have a bunch of people follow him with the request that John follow them back. John shut down his computer and began to laugh. He realised his time might be better spent hanging with the local town folk.

The Hutch Report

2017 Wealth Management Review

By | Business, Economics, Money

At the beginning of 2017, The Hutch Report completed a “Smart Money” analysis to highlight how the smart money was looking at the markets for 2017 and beyond. It was meant to provide a high level overview based on an aggregated synthesis of the macro views of the world’s Top 50 largest wealth management institutions.

Now we are looking back on all the forecasts made by these “Smart Money” managers and institutions to see how accurate they were in predicting the future or if they were just exhibiting an “Illusion of Understanding.”

Central Banks and Monetary Policy

Federal Open Market Committee (FED) 

The consensus (40%) of wealth management firms predicted two hikes in 2017 of 25 bps each hike which would bring the Fed Funds target rate to 1.25%. Roughly 8% predicted three rate hikes. No precise forecasts were provided as to how much or when but of the wealth management institution outlooks reviewed, they all indicated an expectation that Central Bank monetary stimulus policies (eg. quantitative easing) would start to weaken.

On December 12-13 the Fed raised rates for a third time. Only 8% of our wealth management professionals got it right.

The FOMC did announce a tapering plan at the September 2017 meeting and have started in October by letting $10B in bonds mature each month and will slowly increase that number to $50B. As a reminder, in 2008 the FED balance sheet was $800B. It is now at about $4.50T as a result of QE.

European Central Bank (ECB) 

Taper would commence second half of 2017. One dissenter stated the ECB would be unable to discontinue QE.

The ECB did not make any rate changes for overnight credit in 2017 and that rate remains at 0.00%. They did not commence tapering in 2017. However, they did signal in October of this year that they would start tapering in 2018 by cutting in half the monthly purchases from the current rate of €60B to €30B.

The People’s Bank of China (PBOC)

The PBOC will continue to stimulate demand through adjustments of the reserve requirement ratio (the amount of money that the banks must hold as reserves).

In September of 2017 the POBC announced that in 2018 the reserve requirement ratio would be lowered for certain banks from 200 bps to 150 bps. In return for the reduction the banks must meet certain requirements for lending to small business, agricultural sectors, entrepreneurship and education.

Changing of the Guard

The next two years, 2018 and 2019, we will see some changes to the heads of some of the world’s most influential central banks.

Most people are by now well aware that in February 2018, Yellen’s term as Chair of the FOMC expires and Trump has nominated Fed Governor Jerome Powell as the next Fed chair. The post of the Fed chair is subject to Senate confirmation. The Senate Banking Committee has approved Jerome Powell which clears the way for the Senate confirmation vote.

At the Bank of Japan the current Governor is Haruhiko Kuroda and his term will be expiring in April 2018. Current headlines indicate that there is a strong likelihood that his term will be renewed as the Japanese government has expressed satisfaction with the BOJ’s policies under Kuroda.

In 2019, the terms for Mark Carney at Bank of England (BOE) and for Mario Draghi at the European Central Bank (ECB) will expire. Due to the bylaws of the ECB which state that the term of the ECB presidency is for an eight-year non-renewable term the ECB has to find a new president and it cannot be Draghi. It remains to be seen what will happen with the BOE Governorship as Carney has been seen as a strong leader.

Governments and Fiscal Policy

The EU

The consensus for 2017 was that the EU would experience a modest recovery but mitigated by concern, seen to be short term, on political risks due to rising anti-EU and populist sentiment but that this would be limited and most likely would not extend past the UK.

The EU economy so far has actually exceeded forecasts with real GDP growth expected to be 2.2% for the year compared with earlier forecasts of 1.7%.

Everyone was waiting with baited breath to see if populism and a BREXIT, separatist, type mindset would spread via the 2017 elections in 2017 in Europe – specifically in the Netherlands, the France and Germany. However, that did not come to pass and more centrist candidates won those elections. However, this did not mean that the populist and separatist parties went away. Even though Merkel won in Germany for a fourth term, the far-right, anti-immigration party in Germany, the AFD, won seats in the Bundestag with an historic breakthrough for the party and it is the first time in 60 years that an explicitly nationalist party sits in the Bundestag.

Meanwhile in Spain, there was a big push for Catalonia to separate from Spain. While the independence movement was effectively stifled the issue is far from being resolved as manifested by pro-independence parties renewing their majority in the Catalan parliament in the regional elections just held at the end of the year on December 21.

USA

The consensus for 2017 was that the deflationary policies of the incoming administration with Republican majority in both houses of congress, will be positive in the short term for US equities (promises of tax cuts, repatriation of foreign US earnings and higher public spending plus a pledge to invest over $1 T in US infrastructure) Caution for the longer term with potentially greater inflationary pressure and the impact of populist and protectionist ideals.

During the course of the year and up until December, the Trump administration had not succeeded in passing any legislation. This caused some doubt during the year whether the administration would be able to succeed with the measures they had promised. The Trump administration finally did succeed in passing a much contested tax reform bill which was approved by the senate in December and then passed into law and signed by Trump on December 22. Much debate is still raging on whether the new tax bill, which among other sweeping changes cuts corporate taxes from 35% to 20%,  will be effective in repatriating corporate money back into the US and whether this will translate to investment by those corporations into the US economy.

With regards to other campaign promises, notably the border wall, while many prototypes have been proposed there is still no clarity on how the wall will be paid for or what the next steps really are. Meanwhile the $1 Trillion in infrastructure spending does not have any more clarity either. In October of the year, Trump pivoted from a stance pushing for private investment and is now looking towards the treasury which would possibly imply further borrowing and using proceeds from taxes on gas.

Emerging Markets

Despite concern on a potentially rising USD along with interest rates which would negatively impact  emerging markets, especially countries with a majority of their exports to the US like like Brazil and Mexico, the wealth managers were still predicting higher GDP growth in BRIC countries in 2017.

The final GDP rates are not yet available for 2017 however so far it can be said that: Brazil has exhibited modest GDP growth so far this year and slightly surpassed initial forecasts, while   Mexico, which started off the year well in the first half of the year has not faired so well in the second half of the year due to disruptions from two earthquakes, subdued consumer spending and inflation. NAFTA negotiations are still continuing with the US and are expected to continue in 2018.

Japan

The majority of wealth managers estimated that Trump policies would help drive up the USD and provide a tailwind to Japanese fiscal policy would also weaken the Yen which in turn would strengthen the Japanese economy in 2017.

Despite a stronger Yen against the USD, Japan saw stellar export performance, supporting manufacturing activity, as highlighted by December’s PMI figure, which hit a nearly four-year high. Investment also benefited from resilient global growth, with business confidence in Q4 climbing to an over one-decade high. So the Japanese economy strengthened but not for the reason’s outlined by the wealth institutions.

Inflation Outlook

The view was that Inflation would increase slightly in developed markets and despite the big question mark whether the central banks would be able to keep inflation in check following the massive reflationary measures they have taken the consensus seemed to be that inflation would be kept in check.

Higher inflation was forecasted in Asia due to less Asian central bank intervention.

For the developed markets, the wealth institutions basically got this one correct in their outlooks for 2017. The inflation rate in both the US and Europe increased the most in the first half of the year and is still trending slightly higher than it was at the beginning of the year. Concerning inflation in Asia, directionally the wealth management outlook for 2017 was correct. Whether or not the reasoning was correct is another story. The theory was that inflation would be higher due to less central bank intervention than in developed markets. This is a subject worthy of debate and whether or not less intervention is even true. For example, the Chinese central bank, the People’s Bank of Chine (PBOC), is suspected to have intervened several times in 2017 in order to keep the yuan propped up.

Bonds

The historical experiment of quantitative easing in the US, Europe and Japan has seen unprecedented buying of bonds, driving yields down to historic lows. However, with the European Central Bank (ECB) and Bank of Japan (BOJ) running out of bonds to buy and facing the unintended adverse consequences of negative rates (for banks and insurers), 2017 was seen to be the final year for quantitative easing and negative rates. It was believed that political resistance to fiscal expansion would weaken, particularly in Japan. Therefore, the consensus was that there would be nowhere for yields to go but up.

The yields on the US 10yr began the year at 2.45%, however, despite 3 rate increases from the Fed, the 10yr yield spent most of the year lower, closing at 2.405%, going against the consensus view of higher yields.

The Eurozone 10yr government benchmark yield began the year at 0.86%. It spent most of the year above this rate and closed the year at 1.05%. German 10yr yield began at 0.189% and finished at 0.427%. When referring to the Euro Zone the consensus got it right.

Japan continues to confuse many. In July, The Bank of Japan offered to buy an unlimited amount of JGBs, as it sought to put a lid on domestic interest rates pushed higher by the broad sell-off in developed market bonds. JGB 10yr yield began the year at 0.046% and finished at 0.048%, essentially staying flat.

Equities

In regards to public equity, a large majority, nearly 85%, of those with a positive outlook on equities were positive on headroom in the US equity market.  Following the US equities market there was no other region or country for which the reports reviewed indicated a majority positive outlook in general for equities, however, close to 50% were favorable on Japan, followed in this order, by Europe, Emerging Markets and then Asia.

The cap-weighted S&P 500 gained 19.42% on the year, whereas the average stock in the index was up less than that at just over 18%. Regardless, 85% of the smart money managers were correct in forecasting higher equities for 2017.

Close behind, the Japanese Nikkei gained 19.10%, where only close to 50% envisioned such a strong performance.

The Euro Stoxx 600 index closed up roughly 7%.

Currencies

There was a clear and overwhelming agreement that the new Trump administration policies would be bullish for the US dollar. In addition to the US government policies, it was also believed that the Federal Reserve would begin to increase interest rates, which would in turn also be bullish for the US dollar.  Where there was lack of vision was to how high the US dollar would rise, but it was expected to rise throughout the year of 2017.

The view regarding the Chinese Yuan (also recognized as the Renminbi) was that it would remain weak against the USD for some time. However, the majority was expecting the Yen to depreciate further against the US dollar into late 2017.

There were a number of elections coming up in Europe and that was expected to increase risk and put downward pressure on the Euro. The expectation was that it would reach parity with the US dollar.

Not everything worked out as neatly as planned by our smart money managers. 2017 was a nasty combination of buy-the-rumor-sell-the-news for the Greenback. Action on Fed tightening and fiscal reform, more weight on disappointing data versus upbeat results, and the “Trump effect” left the US dollar sliding for most of the year.

The 2016 close for the EURUSD cross was 1.0517, however the close of 1.2004 destroyed the dreams of all those banking on parity.

The USDCNY cross began the year at 6.96 and ended at 6.50. The US dollar’s unforeseen slide  helped to bump up the Yuan against the USD going against the view of a weaker Chinese Yuan for the year.

Last but not least, the US dollar lost 3.69% to the Japanese Yen, going against the majority view that the Yen would continue to depreciate against the US dollar in 2017

Commodities

80% of the researched wealth institutions believed that the commodity cycle had based and was set to recover, however, the market structure remained a challenge and fundamentals across many raw materials continued to point to concerns of an oversupply. For this reason, there was not an overly bullish view on commodities but a wait and see neutral one.

Concerning Oil, we found a range of forecasts from $45 to $65 a barrel with no clear majority on any one price point. Oil started the year at $52.46, fell to as much as $42 and rebounded to end the year at roughly $60 a barrel.

There was no clear agreement when it came to Gold, however, as the majority linked the performance of gold to the USD, and that same majority expected the USD to rise (indicating Gold would fall, or stay range bound at best) were all off the mark. Gold ended up roughly 13% beginning the year at $1,150oz and ending the year at roughly $1,306oz.

New Alternative Investments

What a difference a year makes! Bitcoin was a curiosity at most at the beginning of the year, however its stubbornness to sell off for any extended period, while it continued its meteoric rise, forced wealth managers to take notice.

It began the year at roughly $984 and continued to rise to $19,211 before rounding out the year at $12,610, beating any other asset class (although the debate is still raging about whether or not Bitcoin is an asset or other). Regardless, Bitcoin is now something to be reckoned with and will not be taken so frivolously as it was in the beginning of the year.

Along with the rise of Bitcoin came a host of other Alt coins and ICOs (initial coin offerings), however, as far as professional money managers are concerned, Bitcoin is the main act for the moment until proven otherwise.

We also mentioned Bitgold in our report which was the idea of a cryptocurrency backed by the equivalent amount of gold. It was believed that this would stabilize the volatility seen in pure cryptocurrencies and provide them with an air of respectability. However, it is still too early to know if this will take hold and for the moment this concept is not really of interest to the professional investment manager.

Our special report on Gold Backed Cryptocurrencies supported this lack of interest as we researched all the principle players in the area, large and small and found them largely lacking in many areas.

In Conclusion

2017 was not an easy year for our wealth management institutions in many respects. There were no great winners or losers.

Will 2018 prove to be any easier? We don’t know, but if the smart money is having such a difficult time making sense of all these moving pieces you can bet that the dumb money is at a complete disadvantage (unless they bought and held Bitcoin, which currently would make them look like the smart money….for the moment).

A principle lesson to be learned is that all these forecasts that appear in these glossy yearly outlook reports, quarterly reports, weekly reports and minute by minute reports that continue throughout the year on your local financial media networks, by all these institutions that manage the largest fortunes are just that, forecasts.

Everybody speaks in their best interests which makes following these prognostications and forecasts all the much more difficult and more often than not puts you, as an investor, at a disadvantage because you are more likely than not to be buying from those who are selling (which happen to be the same people which have advised you to buy). Therefore, don’t listen to the smart money, follow the smart money.

The Hutch Report

Perfection Marketing

By | Business, Marketing

Our digital economy along with the proliferation of social media has brought about some very powerful channels of communication. In spite of all of the benefits of these channels they have also managed to magnify a darkside.  There is a form of marketing that we like to call “Perfection Marketing.” This applies to presenting your product or service to be something that it is not, or otherwise said marketing perfection.  The whole foundation of marketing is how to take your product and present it to the consuming public in the best way possible, in the hopes they will purchase it.  Although the presentation of perfection has existed for some time, the platform of social media has expanded its reach and speed of delivery. Not only do companies fight to claim their positions of perfection, but so do many of the participants in social media.

Companies use perfection marketing strategies in various ways. One way is through “puffery.” Puffery is characterized by exaggeration and hyperbole. “The best hamburger in the world” is an example of an exagerrated claim that would not be taken seriously by any reasonable individual. Advertisers use exaggeration and hyperbole to get people’s attention and make their message memorable. Because the claims in puffery are obviously exaggerated, and because exaggeration works to get people’s attention, puffery is an accepted advertising technique. These claims are subjective and a matter of opinion, therefore, they can’t be measured, so they are not challenged. Claims such as “The Best,” “The Tastiest,” “The Freshest,” “The Fastest,” or “The Smartest,” are used freely. These superlatives project the idea of perfection. Sometimes companies may push the boundary of puffery, which leads to deception. This is illegal and can be challenged. Irregardless, the intention remains the same, to position the product or service as something much greater than it is.

“If you look for perfection, you’ll never be content.” — Leo Tolstoy

In addition to descriptions and messages, it is very apparent in illustrations and photos. Very rarely do products represent in real life what we have been lead to believe from photos in magazines. Restaurants and Cosmetics companies are probably the biggest perpetrators of this strategy.  Along with the tagline “The Perfect Cup of Coffee,” you will be presented an image of what somebody believes to be a perfect cup of coffee (and before you have even tasted it, the idea as been imprinted upon your brain). Cosmetics companies reinforce this idea of flawlesness and perfection with the publication of every beauty magazine.  So much so that in 2016, Americans spent more than 15 billion dollars on combined surgical and nonsurgical procedures for the first time ever.

The Hutch Report Cosmetic Surgery

Just about everything we see in the media is in some way fake: Photos of bodies, women’s, men’s or other, packs of gum, new cars, cell phones, bottles of beer, bread, apples, iPhones, everything. There is constant societal pressure to adhere to this idea of perfection. Any advertising product that appears in the media has been meticulously lit, retouched, and airbrushed. Have you EVER ordered a McDonald’s Big Mac and received anything that ever came close to resembling what you have seen in their advertisements? That hamburger does not exist; it’s a fake, idealized, made-up image of someone’s imagined idea of the perfect hamburger.

However, this manipulation seems to work, because perfection somehow lies in the human character and we tend to try and move towards it. So we get sucked into thinking we can be perfect, which unfortunately for many ends up causing great disillusionment and pain.  Social media has exacerbated this by providing a greater distribution platform and tools that allow anybody to photoshop anything, including themselves and present to the world. In addition, they use it as a weapon against others.

The idea of perfection has in fact become the image of a sad world.  The more I think about it the more I start to dislike the idea of perfection. Stop and think about what it would really mean to be perfect. The idea of perfection insinuates that there is nothing better.  There will be no more improvement or discovery. It is the best that you will ever get. It is the be-all and end-all. It is the example that everything else in its class is to be compared against.  Nothing will ever surpass it.  After all, how could you surpass perfection?  If you could, it would imply that perfection didn’t exist in the first place.  It sounds pretty sad, knowing that nothing would ever be better again than what you know now.

The truth is that perfection is essentially a myth. No one has ever seen perfection in any form, and if they think they have, it would be very difficult to prove its validity. In reality perfection can never exist. For something to be truly perfect, the whole world would have to agree on that fact and every other competitor would have to be accounted for.  I doubt you could even get everybody to agree that the sun will come up tomorrow.  There will always be someone that will disagree. We all see things differently; therefore, one person’s idea of imagined perfection would only be their own, and just that, imagined. It is therefore a MYTH.  This is the main reason companies can get away with puffery.

So what does a perfectionist even look like? To start, being defensive is a trait of perfection.  If you are criticized and you don’t like it, it is because criticism means imperfection on some level.  So you naturally defend against it. Are you obsessed with failure? Do you always focus on what is not working? Are you all or nothing? Meaning, if something doesn’t work for you then you quit it immediately. We are, in fact, conditioned to be perfect. Think about our society.  Who has ever rewarded failure? We always reward the results. We never reward the journey, the attempt to at least try something new.

The signs of this conditioning and constant manipulation are everywhere in society and are having detrimental effects. Psychologically, it is self-destructive trying to measure up to what others see as perfection.   This is particularly apparent in Woman’s magazine ads. It is all or nothing, either I look like that or I am inferior. It is not surprising that one falls into a spiral of self doubt and depression when they come to the realization of how far off they are from the mark.

Is there a way out of this downward spiral? Yes, there is. The first step is accepting the idea of perfection as a myth. We are not perfect and never will be. But rest assured, nobody else on this planet will be perfect either and it is that diversity that makes it a great place to be. Stop focusing on the ends and more on the means. Be an individual, unique from everyone else, as everyone is. Being unique is your greatest asset. Nobody else in the world is like you. Show it and use it to your advantage.

The second step is to focus on excellence rather than the idea of perfection. Excellence is the quality of being outstanding or extremely good. Someone who strives for excellence and not perfection is someone who is open and welcoming to suggestions.  A person working towards excellence enjoys the process of moving forward, including the failures that come with the journey.  They are constantly learning and getting better by way of those failures. You can always be better tomorrow than you were today. That alone is an uplifting thought. A person striving for excellence is realistic and understands what reality really looks like, including the hamburger, and they certainly don’t give up on the journey, because the journey is the greatest part of the experience that last a lifetime!

The Hutch Report

Computer Generated Headlines – Read All About It!

By | Business, Money, Technology

Everybody seems to be lacking time in what we call the New Economy.  In the past few years there has been a wave of innovation in order to address this. There are now more productivity tools and apps on the market than ever before. We have tools to help us stay focused better, improve our channels of communication with friends and co-workers, create projects easier, take better notes, keep your notes better organized, or how to identify distractions in your life so you can cut them out.  All these tools are meant to save you time out of your busy day to do the things you love. Still, nobody seems to be finding that time.

In addition to a lack of time, we need to deal with the massive amounts of information that we are presented with on a daily basis. We spoke about this here (The Hutch Report). There are thousands and thousands of articles being produced and published every minute and there is just not enough time in the day to read them all, along with all our other activities. In order to filter out all the noise we skimm through the headlines hoping to gain an understanding of the big picture.  The Skimm, (https://www.theskimm.com) does just that by providing editorial contents and headlines targeted to women.  Authors and publishers know this so it is imperative that they create the perfect headline that will catch the reader’s eye, also known as click bait, and hopefully tweak their attention enough to where they read the full article.

But wait, this is the New Economy and anything that can be automated and made more productive will be. This includes headlines. I discovered this quite by accident well before there was a New Economy, smartphones or social media.

When I began getting interested in the financial markets I used to spend a lot of time reading all kinds of newspaper articles.  I rarely missed the Wall Street Journal’s daily overview of the previous day’s market action. As time went on I started to notice that there was one headline that would pop up extremely often, “The Dow ends lower on profit taking.”  I didn’t understand the meaning of the headline. How would the writer of the article even know that this was profit taking? When I took losses on my investments, headlines such as that began to get me annoyed.  I thought to myself, “Doesn’t the Dow ever end lower because investors have been forced to take losses?”

I paid more attention to the wording of these headlines and as I did I started to see more and more contradictions.  I found it curious that no matter what the financial markets did, all these newspaper journalists seemed to have an understanding as to why it was, and managed to encapsulate that in a pithy headline. I began to question the validity of the information I was consuming.

One day by chance I met someone who was working for the Dow Jones Newswire.  I jumped at the opportunity to gain more insight as to how these journalists managed to analyze the day’s activities on the financial markets and identify the catalyst for their movement in such a short amount of time.

The representative from Dow Jones Newswire told me that the markets were constantly changing so it was far more convenient to have the computers generate the headlines.  I learned that they have a database of headlines that are related to any general world news events that may be happening during the day. This could be anything from a company takeover, to gold going up, to gold going down, to oil going up, or to the rumblings of war in the Middle East. For example, if the market drops off the open and oil has gone up, the morning headlines may read, “Dow falls on higher oil prices”. During the day, however, it is not uncommon to have the market reverse and end the day up.  The headlines would then read, “Dow rises on higher oil prices.” These are the contradictions that I recognised that began to show up daily.

This was a revelation because I now understood that the headlines I was reading were actually completely arbitrary and computer generated. In my mind, this reduced  their “news” value to essentially zero because it was not providing me with the big picture overview I wanted.

From the time of my discovery that the Dow Jones Newswire was using a headline generator, the amount of content being produced has gone up exponentially. The ability to make sense of it by way of new technologies such as artificial intelligence has in turn become much more sophisticated. A North Carolina-based startup named, Automated Insights, founded in 2007 and backed by the Associated Press, Samsung and Steve Case built technology to automatically take raw data and translate it into narratives that look like they’ve been written by a human. It uses a technology called Wordsmith to generate stories. Typically, Automated Insights works with large customers to create the templates that the Wordsmith software fills in. The company claimed it was producing hundreds of millions of pieces of content for customers that included Yahoo and Microsoft.

Wibbitz is an AI-driven production software that USA Today has used to create short videos. It can condense news articles into a script, string together a selection of images or video footage, and even add narration with a synthesised newscaster voice.

The large media companies are using all options to become more efficient and more profitable. So now, not only are headlines computer generated but we are moving into an age where complete articles will be written by computers.

As explained in his book “The End of Big”, Nicco Mele explains that it is not all doom and gloom for the future of journalism and journalists. Much of the fact finding mission is now going direct by way of user generated media. The proliferation of blogs and other small grassroots news and opinion Web sites are undercutting the current economic model of news by fragmenting audiences. A segment of the market, such as, The Skimm, is making an effort to “Humanise” headlines and provide the reader with as much information as possible in an efficient manner.

The big challenge facing us now is that as these computer algorithms get more sophisticated, it is getting more and more difficult to identify what is computer generated and what is human generated. If your goal is to be more productive and save time by glancing over headlines in order to understand the big picture, you may be putting yourself at a disadvantage as these headlines may not be providing you the complete picture. Your best bet is to carefully choose your information sources, and that includes companies that propose to summarize the daily news for you, such as Bit·of·News. But beware!  Bit·of·News is powered by PyTeaser, a news summary algorithm that ranks sentences in a news article according to how relevant they are. The top 5 sentences are used to form a “summary”.

In the end, you may find yourself reading a computer generated summary of a computer generated headline that has been constructed from a computer generated article. Although, for the moment as far as I know, the one thing that is not yet computer generated is the actual event being written about!

The Hutch Report

The Business of Vanity

By | Beauty, Business, Health, Technology

The rapid pace of technical advancements these days is mind boggling. It seems that only weeks go by before yesterday’s new innovation is already leapfrogged by another taking its place. We are seeing the proliferation of self driving cars, virtual reality, smarter and smarter robots, new forms of digital currency, a public ledger called the blockchain that threatens to disrupt a number of industries, or new modes of transportation such as the Hyper-loop which promises to transport people across large distances in a fraction of the time that we are now accustomed.

The workforce is clearly getting worried, as they have a right to be. Large numbers of labourers have already been replaced by an army of robots in Amazon’s vast distribution centers. More and more, machines are replacing order takers at fast food chains such as McDonalds and Burger King, not to mention numerous others. Machines are getting so good that clients that call into customer support services at Airline companies, don’t even realise that many times they are speaking to a computer.

Should the self driving automobile revolution take hold, what will happen to the thousands and thousands of taxi drivers, bus drivers, or dare I say it, Uber drivers? If blockchain smart contracts become as fullproof as they are made out to be, what will happen to the legal system, or the intellectual property system workforce. After all, if what is written into a blockchain becomes full taper proof evidence of ownership then what will be the use of that copyright lawyer you always needed to call on?

Whether we like it or not change is upon us. Change has always been upon us and always will.  The history of mankind is a story board of evolution and innovation. It is wash, rinse and repeat. The car took out the hoarse and carriage. Television pushed out the radio. The Internet has been pushing them both out. Just in the past 25 years we have seen the revolutionary impact of computers, smart phones and telecommunications and the Internet. We have seen the combustible engine being slowly replaced by battery powered vehicles. So as a workforce are we forced into the constant threat of thinking our industry could be disrupted any time, no matter what industry we find ourselves in?

Not so fast!

There is one area that has stayed pretty much the same for centuries and for that reason will not likely see much of a disruption. I am talking about anything that is associated with Vanity. Since the dawn of time there has been a demand for any hygiene services or any service that will help you look good. These industries include, Haircuts / Hairstyling, Nail care, Body hair removal, Makeup and numerous others.

The occupation of hairdressing dates back thousands of years. There have been discoveries of ancient art drawings and paintings depicting people working on another person’s hair. There is evidence of ancient hairstyling as Assyrian kings and other nobles had their hair curled with heated iron bars. In Africa, it was believed in some cultures that a person’s spirit occupied his or her hair, giving hairdressers high status within these communities. The Greek writers Aristophanes and Homer both mention hairdressing in their writings.

The status of hairdressing encouraged many to develop their skills, and close relationships were built between hairdressers and their clients. Hours would be spent washing, combing, oiling, styling and ornamenting their hair. Men would work specifically on men, and women on other women. Before a master hairdresser died, they would give their combs and tools to a chosen successor during a special ceremony.

Ancient Babylonian men manicured and colored their nails using kohl, with different colors representing different classes. Cleopatra and Queen Nefertiti popularized the manicure by rubbing their hands in rich oils and staining their nails using henna. Like the Chinese royals who came before them, both male and female members of the Ming Dynasty had perfectly manicured, talon-like nails. To add a tint, they mixed together egg whites, wax, vegetable dyes, and other materials to create different color varnishes ranging from dark red to black.

The two forms of body hair removal that have been around for centuries is Depilation and Epilation. Depilation is the removal of the part of the hair above the surface of the skin. The Egyptians may have been the forerunners of many beauty rituals but they invested the most time into hair removal. During the Roman Empire, the lack of body hair was considered a sign of the classes.

The need to go down to the local barber for a shave has a long history.  In ancient Egyptian culture, barbers were highly respected individuals. Priests and men of medicine are the earliest recorded examples of barbers. Men in Ancient Greece would have their beards, hair, and fingernails trimmed and styled by the κουρεύς (cureus), in an agora (market place) which also served as a social gathering for debates and gossip. Barbering was introduced to Rome by the Greek colonies in Sicily in 296 BC, and barber shops quickly became very popular centres for daily news and gossip.

Although technological advances have led to better tools and methods for improving these various services, the actual services themselves have stayed much as they were in ancient times. If you wanted to get your haircut in order to look good for your date with a Greek Godess, you would make your way down to the local qualified barber to help you out.

The constant in all of these vanity services has been that of socialising and human contact. Even today, a barber, hairstylist or manicurist will lend you their ear for a little chat while they get the job done. It is hard to imagine, although some try, a world where there is no longer socializing. A machine cuts your hair, does your nails, or an epilation. Humans are social beings and need to socialize therefore all services that are based on social interaction are likely to have a long and prosperous future ahead.

The Hutch Report

The Illusion of Understanding

By | Business, Economics, Psychology

How is it that no matter how much any financial market goes up or down during the day, somebody has an answer as to why? Financial markets are made up of millions of participants making large numbers of investment decisions at any one time. In addition, we now have a large number of computers that have been programmed to trade at incredibly high speeds, even up to the milisecond, and they are making millions of these trades a day. Yet somehow financial media commentators and self proclaimed experts are able to define what it all means, all within the constraints of a 3 minute clip. There are 3 possible explanations why.

I read once where a CNBC regular guest financial commentator disclosed that any guest invited onto the show was not allowed to say “they didn’t know” as an answer to why something was occuring. It was explained that these people were portrayed as experts, and experts were not allowed to not know a fact. If they presented themselves in such a way, they would not be invited back. Since being on television can be great exposure for the individual or the company they work for, they would simply do what was asked of them. You may also have noticed that during times of advancing markets, the financial media programs tend to have a long list of guests that are bullish the markets. In times of declining markets, the long list of guests will be bearish the markets. This will help to reinforce the proper bias regarding explanations for the current state of the market.

The second possible explanation is that the comments reflect the personal motives of these guests. Many of the guests are fund managers or traders and have ulterior motives as to why they see the markets in a certain way. If they, or their employers, happen to manage a large portfolio and are fully invested, it is probably not in their best interest to tell the concerned public that the current markets are unstable and not the smartest place to invest their money. Therefore, they will provide views that support their current positions regardless of whether or not their views explain the questions asked. Since the financial media will present bullish guests during advancing markets it is rare that you will find many with contrarian views and if there are they are most likely supporting their own interests also.

There is also a third possible explanation. There is the possiblity that these experts are victims of “the illusion of understanding,” or known in psychology as the illusion of explanatory depth (IOED).  The illusion of understanding is where people feel they understand the world with far greater detail, coherence, and depth than they really do. They only realise the illusory nature of this belief when they attempt to explain a fact. Opinionated guests on financial media are normally allotted no more than 3 minutes to give their views. For this reason there is hardly enough time to delve into the subject matter in any great detail to where the viewer may become aware that these guests are not able to fully explain themselves. Therefore, they give the illusion of understanding but it is far from clear if they actually do understand the issues they are discussing.

A fact, event or situation that is observed to exist is also known as phenomena. According to R. A. Wilson and F. C. Keil., in their paper, The Shadows and Shallows of Explanation, 1998, we all encounter a vast number of phenomena on a daily basis but only possess a superficial level of understanding of most of these phenomena . In addition to a limited understanding of many everyday domains, people lack an understanding of their own understanding and tend to believe that they are much more skilled in a variety of domains than they actually are (Dunning, Johnson, Ehrlinger, & Kruger, 2003).

Stav Atir and David Dunning of Cornell University, along with Emily Rosenzweig of Tulane University designed a series of experiments testing people’s self-perceived knowledge, comparing it to their actual expertise. The researchers tested 100 individuals, who perceived themselves to be experts in personal finance. They were asked to rate their knowledge of particular financial terms which included three made-up terms (pre-rated stocks, fixed-rate deduction, and annualised credit). They found that 93 per cent of participants claimed knowledge of at least one of those three terms. Stav Atir explained, “The more people believed they knew about finances in general, the more likely they were to over claim knowledge of the fictitious financial terms.” It appears that self-perceived expertise causes people to think they know more than they really do.

These findings are of course not limited to the field of finance alone. They are present in all areas. For example, people may know that a door lock works by inserting a key and turning it, which causes the lock to unlock. This understanding may lead people to believe that they know how a lock works, even though they lack an understanding of the detailed internal mechanisms of the lock. The same can be said regarding everybody’s favorite gadget, the smartphone. The fact that people can download applications, modify the smartphone settings to change the background or a ringtone may give many the impression that they understand how the smartphone works, yet their true understanding of these incredible little computational devices are incredibly shallow.

Charlie Munger, the billionaire business partner of Warren Buffett explained it brilliantly at the USC Law School Commencement speech in 2007:

“I frequently tell the apocryphal story about how Max Planck, after he won the Nobel Prize, went around Germany giving the same standard lecture on the new quantum mechanics. Over time, his chauffeur memorized the lecture and said, “Would you mind, Professor Planck, because it’s so boring to stay in our routine, if I gave the lecture in Munich and you just sat in front wearing my chauffeur’s hat?” Planck said, “Why not?” And the chauffeur got up and gave this long lecture on quantum mechanics. After which a physics professor stood up and asked a perfectly ghastly question. The speaker said, “Well I’m surprised that in an advanced city like Munich I get such an elementary question. I’m going to ask my chauffeur to reply.”

Munger told this story in order to highlight the difference between real knowledge (as was the case with Max Planck) and fake knowledge, or the illusion of understanding (as was the case with the chauffeur).

Max Planck

So how are we able to even identify the difference between having real knowledge and our illusion of having real knowledge? How are we able to identify our own limitations or illusions of understanding? A solution was provided by and practised by the great physicist Richard Feynman.

Feynman believed that understanding something is not just about working through advanced mathematics. One must also have a notion that is intuitive enough to explain to an audience that cannot follow the detailed derivation. In other words if you can’t explain it in simple terms then you don’t know it well enough.

Explanations can be useful in helping people to evaluate their own comprehension. When people attempt to generate an explanation for a phenomenon, they not only learn what they know but also become aware of “gaps” in their understanding: those parts of the explanation that are difficult or impossible to generate (Keil, Rozenblit, & Mills, 2004). That is, people are often unaware of what they do not know until they try to explain it.

The Feynman technique of learning was laid out clearly in James Gleick’s 1993 biography, “Genius: The Life and Science of Richard Feynman.”

  1. Pick a topic you want to understand and start studying it. Write down everything you know about the topic on a notebook page, and add to that page every time you learn something new about it.
  2. Pretend to teach your topic to a classroom. Make sure you’re able to explain the topic in simple terms.
  3. Go back to the books when you get stuck. The gaps in your knowledge should be obvious. Revisit problem areas until you can explain the topic fully.
  4. Simplify and use analogies. Repeat the process while simplifying your language and connecting facts with analogies to help strengthen your understanding.

When referring back to the financial media we can now ask ourselves, “how much information that we are provided is actually real knowledge?” The answer, particularly in the case of journalism, is not always so evident as there are many participants with real knowledge, yet they are often concealed by a large number of so called “chauffeurs.”

The founders of RealVision Television recognised this. They realised limitations of a three minute soundbite on the current financial media programs and the tendency for many guests to present the illusion of understanding. So they launched a platform where the guests are given as long as an hour to discuss various financial subjects in detail. Many of their guests use the freedom of the platform to admit they do not always know why certain things are as they are. They do this because they are asked to explain their views and provide educated insights, which often have limitations. This is refreshing because we are not confronted with the illusion of understanding but the quest for understanding and in turn we are presented with a wealth of real knowledge.

Only by forcing yourself to explain does it become apparent how little you understand. Practicing explanations is the best way to fill your information gaps and also the key to form the kinds of memory you need to perform later and avoid presenting the illusion of understanding.

The Hutch Report

The Virtual Reality…Reality!

By | Business, Technology

The Hutch Report produced two reports on virtual reality. One dealing with the technology of virtual reality and another one specific to its use in the real estate industry.

At the time of researching these papers it was difficult to get to specifics amongst the amount of hype in the air.  Most articles were dealing with what was to come, how big the market was going to be, how everything was going to be virtual reality.

We wanted to check in to see what the current environment is like.

The best place to start is with the leading headset, Oculus, which Facebook bought three years ago for as much as $3 billion. Facebook has been apparently silent about shipment numbers, but several people familiar with Oculus said that fewer than a quarter million Rift headsets were sold during their first year on the market. When queried by CNET, Facebook declined to comment on Rift sales.

This past February, Facebook decided to remove their VR demo stations from hundreds of Best Buy stores. Some shops were going days without giving a single demo of the Oculus Rift headset.

Since then there have been a number of price reductions by Oculus and its competitors however it is unclear how these price changes may have boosted sales.

Recently, Nokia announced that it would cease building its pricey OZO virtual reality cameras after finding that the VR market was developing “slower than expected”. They will be laying off up to 310 people as part of the move.

Premium content owners and other content creators are currently still experimenting with the medium, but there can’t be an expectation of ROI at this time. Poor video quality is already a leading contributor to subscriber churn. Imagine how consumers would feel if they were paying for VR video content and the experience was laggy and pixilated, and sucked up all their bandwidth?

For virtual reality to really materialise for the masses all the pieces need to be in place. There is no use in having harware developed if nobody is producing the content. If the visuals don’t add up to an exceptional viewing experience then consumers become immeditately disillusioned. If that happens, content producers pull back and don’t make the investments which leaves the hardward producers out in the cold.

Virtual reality has long overpromised and under-delivered. With its origins in the gaming world (Sega VR were present in amusement arcades 20-plus years ago), virtual reality resurfaced a few years later in the 3D world of Linden Labs’ Second Life, then basically disappeared until Oculus Rift. Since then there have been some impressive improvements, yet market acceptance has been slow. Today, VR is just a $7.2 billion-a-year industry. This is mainly attributed to the fact that most equipment is cumbersome to wear, a lousy visual experience, and easily induces nausea. A reflection of that was seen recently as Oculus made a change to their return policies making it easier for consumers with buyers remorse to get their money back.

Many VR insiders have been citing the hype cycle graph from Gartner Research. They are using this as evidence that everything’s fine. The graph shows that new technology normally enters a “trough of disillusionment” after a period of inflated expectations. VR is seen as currently in or emerging from its trough of disillusionment, and if it follows the graph it’ll soon move onto the “slope of enlightenment” where the technology matures and then it’ll hit mainstream adoption. Perhaps a principle issue here is that over the years, virtual reality, as well as 3D have visited this trough of disillusionment many times before.

The Hutch Report Hype Cycle

Technology holds many promises for many industries so it is too early to start calling for the demise of virtual reality.  In the end, the consumer will be the judge. If there is not enough percieved value, there will be no market. If the market just isn’t there, investment will dry up and there will be less innovation and fewer products.

The Hutch Report

What Is The New Economy?

By | Business, Cryptocurrency, Economics, Startups, Technology

We often talk about the “new economy” but it is a bit of a misnomer as it can be argued that the economy is always new. It is dynamic and always changing. In spite of that, the name has become a buzzword describing new, high-growth industries that are on the cutting edge of technology and are the driving force of economic growth.

One of the main features of the new economy is the extraordinary rate of productivity improvement. It is not just that computers and software are getting better or that communications are becoming more rapid. They are improving at sustained rates that have never been seen in the recorded economic statistics.

A large part of the new economy – particularly software – is characterized by a cost structure that is peculiar to information: it is expensive to produce but inexpensive to reproduce. Combined with the communications power of the Internet, this means that any digitized information can be reproduced and transmitted around to world in virtually limitless numbers at virtually the speed of light. These are the most powerful economies of scale known to date.

Another aspect identified with the new economy is its strong network characteristics. Networks can have powerful economic impacts in several dimensions. They have strong rates of adoption and a strong tendency toward market dominance or even monopoly.

In order to survive in the new economy it is necessary to understand the changes that are happening and embrace them. Those that resist will be left behind. We have seen it before. When the personal computer was first introduced on the market there were many that refused to adopt it. Their resistance quickly found them segregated from the rest of the market in terms of opportunities and skills.  Now we find ourselves in a world where not a day goes by where we have some kind of interaction with a computer. In fact you can’t avoid it.

To help understand some of the changes and disruptions that are happening in this new economy we look at a few below that are making the biggest impact.

The Sharing Economy

The sharing economy is thought of as an umbrella term which encapsulates a wide variety of ideas. However, there has been a lot of criticism around the idea. Critics have said that it’s not really “sharing” if people have to pay for a service. It might seem like semantics, but the implication is more communal than corporate, and in that sense, misleading. It is also known as the On-Demand Economy, or the Gig Economy. Gig Economy is a fitting term for people interested in supplementing their income by taking small, temporary side jobs. But for workers that do this full-time or even beyond, their work should certainly be considered more than a gig. Especially when companies like Lyft offer incentives to work 50 hours a week, this service has become their livelihood. Calling their work a “gig” is almost reductive.

For argument sake we define the sharing economy as a socio-economic ecosystem built around the sharing of human, physical and intellectual resources. It includes the shared creation, production, distribution, trade and consumption of goods and services by different people and organisations.

To include this in the new economy seems slightly banal considering the fact that sharing is nothing new. Giving someone a ride, having a guest in your spare room, running errands for someone, participating in a supper club—these are not revolutionary concepts. The revolutionary part is the fact that it has become part of the economic structure and for that to happen money has to change hands.

The best current examples of the “sharing economy” include the following:

Airbnb

Airbnb is an online marketplace and hospitality service, enabling people to lease or rent short-term lodging including vacation rentals, apartment rentals, homestays, hostel beds, or hotel rooms. The company does not own any lodging; it is merely a broker and receives percentage service fees (commissions) from both guests and hosts in conjunction with every booking. It has over 3,000,000 lodging listings in 65,000 cities and 191 countries, and the cost of lodging is set by the host. In short, anyone can rent a room out in their house or apartment for a fee. The impact it has had on the hotel/hospitality industry is not to be trivialised in the New economy.

Uber/Lyft/BlaBlaCar

These companies all do essentially the same thing. For consumers looking for a ride somewhere, they are a convenient, inexpensive taxi service. You can hire a private driver to pick you up and take you to your destination by means of an application installed on your smart phone. The nearest driver is often at your pickup location within minutes. Not only is this an on-demand car service, but you can even watch as your driver is en-route to come pick you up. For drivers, these companies provide allow you to be your own boss/set your own hours. Take on fares whenever you wish (work as much or as little as you desire).

Etsy

Etsy is an online buyer and seller community similar to eBay, except it focuses on hand-crafted or vintage goods. Most products sold fall into the category of arts, crafts, jewelry, paper-goods, housewares, and artisan candies or baked goods. Vintage items must be at least 20-years old to qualify and can range from costumes, clothing, jewelry, photos and housewares. In the past, most crafters and artisans sold their goods at fairs, open markets, and on consignment. While the Internet opened doors to reaching consumers beyond their local area, many craftsman didn’t want the hassle of setting up their own website, credit card processor or ecommerce platform in order to sell their goods online.  While eBay and other e-commerce DIY sites helped, Etsy provided a marketplace specifically for crafters. Etsy currently has well over 54 million users registered as members.

TaskRabbit

TaskRabbit is a marketplace that connects people who need help with something, with a network of pre-approved and background checked individuals, who have the time and skills needed to complete the listed task. The company allows people to outsource small jobs and tasks to others in their neighbourhood. Since the inception of TaskRabbit there have been numerous startups following the same model.

Where the Sharing Economy leads only time will tell. Will we live in a world of empowered entrepreneurs who enjoy professional flexibility and independence? Or will we become disenfranchised digital labourers jumping between platforms in search of the next short term gig?

Cryptocurrency

What is cryptocurrency? A Cryptocurrency is simply an online version of money, a digital asset to be precise. The name is derived from the Cryptography, which is used to encrypt transactions and control the production of the currency. It is a strictly monitored process, as it uses the Blockchain Technology.

Blockchain technology is a distributed database that is used to used to manage & maintain a growing list of data blocks, using a peer to peer network collectively. These data blocks may be situated in different locations and not connected to the same Processor. A database is a collection of records. A distributed database is one which may be located in different locations and not be attached to a common Processor – but it may be located in the same or different physical locations and dispersed over a computer network. In a Blockchain, once a piece of data is recorded, it cannot be edited or changed.

There are predictions that the underlying technology of the blockchain is going to impact our world more than the internet has. This is seen as the technology that could democratize the global financial system so everybody has equal access. The peer to peer concept allows online payments to be sent directly from one party to another without going through a financial institution, and cryptocurrencies are considered by their supporters to be a faster, cheaper and a more convenient alternative to other payment mechanisms such as sending payments via banks, transferring money via money transfer operators or buying goods and services over the internet, using a credit card. For this reason, the payments industry players are closely watching these developments, because of the ability that cryptocurrencies have to potentially disrupt and transform the existing global financial infrastructure.

As of June 25, 2017 there were approximately 900 currencies currently available with the most popular being Bitcoin and Ethereum. Yet while world economies, business and consumers have been caught up in the whirlwind of activity surrounding cryptocurrencies, the benefits and risks are still unclear and the future of any one particular cryptocurrency is not yet secured. In addition, there are a number of legal and political interpretations still developing.

Virtual Reality / Augmented Reality

This is by no means the first appearance of virtual reality. It has actually been around since the 1950’s. As technology has become more sophisticated over the years, every so often the dream of experiencing a virtual world is revisited. We are now back here again.

Virtual reality immerses a user in an imagined or replicated world (such as video games, movies, or flight simulators) or simulates presence in the real world. Examples of hardware players in virtual reality include the highly mediatised Oculus, now owned by Facebook, Sony PlayStation VR, HTC Vive, and Samsung Gear VR.

Augmented reality overlays digital imagery onto the real world. Examples of hardware players in augmented reality include Microsoft HoloLens and Google Glass.

The difference between the two is where VR uses an opaque headset (which you cannot see through) to completely immerse the user in a virutal world as opposed to AR which uses a clear headset so the users can see the real world and overlay information and imagery on to it. We recently saw an excellent example of AR with the success of the game Pokeman Go, although for various reasons its user base is in decline.

The promises of Virtual Reality to revolutionize the fields of medicine, marketing or entertainment are many yet there are also a long list of challenges before we see significant adoption. We already know that spending too much time staring at a screen can harm our vision over the long term. VR headsets are essentially a digital display mounted directly in a user’s face, raising real questions about the effects over time. Some people are also prone to nausea, dizziness and vertigo after just a little time spent in VR. For the industry, that motion sickness issue remains a largely unsolved problem.

Virtual Reality has come and gone a few times over the years and has yet to really solidify its mark on society.

Big Data

A large part of the new economy is about information. This is not only about information that we have access to but also our means of acquiring information. Organizations collect data from a variety of sources, including business transactions, social media and information from sensor or machine-to-machine data. These multiple sources makes it difficult to link, match, cleanse and transform data across systems. Data also comes in all types of formats – from structured, numeric data in traditional databases to unstructured text documents, email, video, audio, stock ticker data and financial transactions.

Big data is a term we use in the New economy that describes the large volume of data – both structured and unstructured – that inundates a business on a day-to-day basis. While the term “big data” is relatively new, the act of gathering and storing large amounts of information for eventual analysis is ages old.

The amount of data that is now being created and stored on a global level is almost inconceivable, and it just keeps growing. However, it’s not the amount of data that’s important. It’s what organizations do with the data that matters. At the moment only a small percentage of data is actually analyzed. The promise of big data in the New economy is precisely that, to gain key insights from all kinds of information in the hopes of making key discoveries.

Hyperloop

Existing conventional modes of transportation of people consists of four unique types: rail, road, water, and air. These modes of transport tend to be either relatively slow (i.e., road and water), expensive (i.e., air), or a combination of relatively slow and expensive (i.e., rail).

Enter the Hyperloop. Hyperloop is a new mode of transport that seeks to change this situation by being both fast and inexpensive for people and goods. It is unique in that it is considered an open source transportation concept. The authors encourage all members of the community to contribute to the Hyperloop design process. Iteration of the design by various individuals and groups can help bring Hyperloop from an idea to a reality.

Hyperloop consists of a low pressure tube with capsules that are transported at both low and high speeds throughout the length of the tube. The capsules are supported on a cushion of air, featuring pressurized air and aerodynamic lift. The capsules are accelerated via a magnetic linear accelerator affixed at various stations on the low pressure tube with rotors contained in each capsule. Passengers may enter and exit Hyperloop at stations located either at the ends of the tube, or branches along the tube length.

The goal is to get people from LA to SF (for example) in just about 30 minutes, which is almost three times faster than flying, while producing its own electricity from solar power, with round-trip tickets projected to cost between $40-$60.

Hyperloop One on July 12,  announced that it had conducted a successful first test of a specially designed vehicle to travel in a vacuum environment. In the test, which took place earlier this year, the company achieved controlled propulsion and levitation of a Hyperloop One vehicle at 70 mph on a 315-foot test track in the Nevada desert. The test vehicle reached nearly 2Gs of acceleration during its brief 5.3 second test run on the specially built track.

There are still a number of technical challenges to address with the Hyperloop but it is advancing. Should this project be fully realised it would revolutionise transportation in the new economy.

Artificial Intelligence

Of all the areas of the new economy artificial intelligence (AI) is, without a doubt, the most hyped and the least understood. According to technopedia the definition of AI is “a branch of computer science that aims to create intelligent machines.” More precisely, the term “artificial intelligence” is applied when a machine mimics “cognitive” functions that humans associate with other human minds, such as “learning” and “problem solving.” Otherwise said, machines that can think for themselves and make autonomous decisions and in turn learn from their decisions. All this leads to questioning to what point will machines control humans?

The machines haven’t taken over yet, however, they are seeping their way into our lives, affecting how we live, work and entertain ourselves. From voice-powered personal assistants like Siri and Alexa, to more underlying and fundamental technologies such as behavioural algorithms, suggestive searches and autonomously-powered self-driving vehicles boasting powerful predictive capabilities, there are several examples and applications of artificial intelligence in use today.

What many companies are calling AI are not truely AI. Software outputs due to an algorithm that responds based on pre-defined multi-faceted input or user behaviour can’t be considered AI.

A true artificially-intelligent system is one that can learn on its own, such as neural networks from the likes of Google’s DeepMind, which can make connections and reach meanings without relying on pre-defined behavioral algorithms. True AI can improve on past iterations, getting smarter and more aware, allowing it to enhance its capabilities and its knowledge. That will lead us to give them more responsibility, even as the risk of unintended consequences rises. We know that “to err is human,” so it is likely impossible for us to create a truly safe system.

The Hutch Report

Startups and Raising money: What is a company with no revenues worth?

By | Business, Money, Startups

Raising seed capital and figuring out company valuation is always a challenging and critical milestone in the early life of a start-up. Startups are awesome (if you are in with the right team)

You may have noticed from some of our previous posts on The Hutch Report, that we like start-ups. We have had experience in large, multi-national blue-chip companies as well as failed and even more fun, successful start-ups.

Raising money: What is a company with no revenues worth?

I am currently embarking on a new start-up in the fintech space and am confronted with having to answer this question. We are currently in the stage of seeking seed funding as well as first pilot customers and trying to do both things at the same time.

There are several challenges you can imagine for putting a value on the company. The major one being that with no revenues and no similar companies on the market, how do you value a company at this stage? Some call it art. Others try to make it a science, but if you are honest with yourself and with others you cannot claim it is a science. You can always try to justify the business value through the business plan, the potential addressable market size, and with sales + opex forecasts. Of course, you do need to calculate and prepare all of that. At the end of the day though, with just an idea, a few slide decks, some excel, and no customers and no revenues you really can’t justify anything other than whether or not your plan looks reasonable and potentially feasible. So, what does one do?

Thankfully, there are some commonly accepted principles for this stage of the game. One of the common principles is that the total of all actual seed money raised should represent 20% to 25% of the value of a company at post seed valuation. (I have actually seen amounts as low as 15% and as high as 30%).

The way we are approaching our seed raising round at the moment is as follows. We have calculated it will cost about US$ 1mm over a twelve-month period to get to our first commercial launch. We have a plan that details and maps out the specific costs. This includes development, admin fees, legal fees, as well as a shoestring budget for sales and business development. The business plan does show how quickly we can recoup this US$ 1mm in costs once we get to commercial launch and revenues. Therefore, we can clearly present where the money goes, how it will be used, the timing of when it is needed, and have reasonable calculation of the results the investment may yield. We are targeting a US$ 4mm post-money valuation with a US$ 1mm seed investment in exchange for giving up 25% of the company post-money.

Pre-money and Post-money: Valuation and Dilution

An important concept is the valuation of the company pre-money and post-money. After an investment round is completed the value of the company goes up by the size of the investment round, hence it is called the post-money valuation. So, in the example above, our company will be worth US$ 4mm once we complete our seed round. In our case, at the moment we think we may not need any additional investment after that initial round. However, let’s say that we find out that we are wrong and do need more money – perhaps to invest more in sales, marketing or additional product development. Let’s say we need US$ 2mm more to do that. Assuming we succeed in the subsequent funding round, and assuming no revenues yet, the company would then already be valued at US$ 6mm post-money valuation after this second round is completed. Dilution would occur and the initial seed investor share percent would go from 25% to 16.67%. The founder share percent would also be reduced and diluted. At the end of the day, even if I started out with 75% of one million and end up with 2% of US$ 10bn, I would be very happy. So, while dilution is, well dilution, a smaller percentage of something big can be better than a large percentage of something small.

Option Pools and Advisors

In calculating the share capital of your start-up, it is always a good idea to leave room in for option pools as well as for advisors. In order to attract top talent, you will want to be able to give them shares in the company. As many start-ups operate on a shoe string budget and are not able to pay massive salaries or benefits, offering key talent an upside in your company can go a long way to helping unleash their passion to help make the company and whole team successful. In addition to option pools for employees you will also want to keep some reserved for key folks, well connected individuals, industry thought leaders, that you may want to bring on as your board of advisors (BOA) or non-executive directors (NEDs). Typical amounts for a board of advisor role would be 0.5% to 1%. As with the initial founders and seed investors, these amounts also get diluted with each additional funding round.

If you just google “equity model calculator” you will find a lot of results on the web along with sites that generate fancy charts. However, save yourself a ton of time. Most of these sites are not so clear and kind of clunky to customize the model if you want. We have done the work and found one that answered all of our questions. In addition, it even provided a template we could customize to our specific situation. This link is shared below. Attention – just one slight thing was missing, the model does not contain entries for BOA or NED amounts, or at least it did not when we used it, however, you can easily add those in yourself just as we did.

Tool for calculating your equity cap table and post money dilution effects:

http://thedrawingboard.me/2013/11/10/model-cap-table/

Link to the Model Cap Table: http://bit.ly/1ayKk8p

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