Back in January, Steve Harmon (arguably one of the more influential independent analysts today) published this article - 7 Key Things For Internet Value Creation. I have used his measures in the past to assess other investments I hold, and I felt it was appropriate to post it here as well. Under each of these measures, I have included my comments about how I see them relating to SEG's business model.
7 Key Things For Internet Value Creation
Date: Thu, 06 Jan 2000 00:42:10 -0800
NetStock! By Steve Harmon
chairman & CEO e-harmon.com, Inc. - Internet Investment Provider
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7 Key Things For Internet Value Creation
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Despite the mainstream belief that Internet companies are valued on a virtual basis, and in spite of the blind investing in Internet stocks that sends many of the high-speculation stocks to ridiculous highs, there is a sane way to evaluate if a Internet company of any stage has the ingredients for success.
This applies to start ups, post-IPO and technology companies that have or plan Internet ecommerce efforts. For the center of value creation is ecommerce, buying and selling. Not browsing, surfing or other recreational uses of the medium.
1) The better investments in the Internet have ecommerce as the center piece, primary markets (this includes investing as probably the best method)
Note the comment in the brackets . . . "this includes investing as probably the best method." SEG's Business to Business services could streamline the process companies will have to go through in order to source new suppliers, search for customers, make strategic investments to expand their reach around the world.
2) If not ecommerce the next best companies aggregate buyers and sellers of other products, market makers for others (this includes firms like eBay)
Aggregating buyers and sellers is what SEG's business model is all about - but on a Global scale! Their plan to become a primary referral source for brokerage houses around the world as well as finding interested investors for IPO financings is exactly what Mr. Harmon is referring to.
3) The company's marketing must be viral in nature and not just traditional. Example: ICQ (the instant message platform) won 40 million global users by the nature that to use ICQ one must encourage others to use it. That meant sending an email to someone who then downloaded ICQ and the communication channel grew biologically without a single print, radio or TV ad. HotMail also grew this way. Pagoo (which enables single-phone line homes online to know when someone is trying to call them while online) may be the next big winner here (it's still privately held).
Last night I spoke with a friend of mine who is soon leaving to go to Singapore for a three year posting. We were talking about investment opportunities in that part of the world, and when I told him about SEG's plans, his eyes lit up. He said he couldn't wait to go back to his office and tell the rest of the people in the company about this. The management in their company obviously travel extensively, and will now have a way to act on what they discover on their trips. The word of mouth about what SEG is doing will carry this throughout his office, and throughout the offices of the people they know as well. I now I plan on telling a fair number of people about this service. Several of the other companies I hold shares in aren't ones in which I would tell people that they could or should use their service or buy their products. Any investor who wants to broaden their scope could benefit from what SEG will be offering. I think the awareness through word of mouth will be tremendous.
4) The more attractive companies are based on outsourced services and not software on its own or selling software licenses. This is how DoubleClick (DCLK) and Commerce One (CMRC) have gained an edge. Earlier examples are Yahoo vs. Netscape. Yahoo is a service while Netscape was software. The irony is that Yahoo employs probably just as many software programmers as Netscape but look at the valuation gaps. Yahoo north of $100 billion vs. Netscape's sale to AOL at $10 billion. Ditto for Amazon.com. Lots of software programmers. In fact, founder Jeff Bezos has a software programming background. Its value is built on service, not software. Software enables, service creates value.
SEG has outsourced the technical services to a company who specializes in this area. This will allow SEG to focus on building the relationships, expanding their services (such as their 24 - hour customer support hot line available in multiple languages), and fine tuning their model. It will ensure that to grow exponentially and they will not be bound by having to ramp up and create a huge infrastructure to support the growth. As Mr. Harmon states . . . "Its value is built on service, not software. Software enables, Service creates value."
5) Management team must be flexible, embrace the scalable models and not solely the offline way of doing business. Offline models don't port easily to a digital environment, like square pegs in round holes. Most of the businesses on the Web are weighted too heavily to doing business the old fashioned way. That's why Fatbrain's eMatter may be more important than Amazon's paper book selling. eMatter scales digitally without paper, makes markets and is a new way of doing business for authors, readers. The new fashioned way incorporates commerce, communication, community, content, continuity.
I support Keith Massey's assessment of Mr. Toby Chu, (President & CEO) as someone who is on top of his game. I too spoke with him last week. After my discussion, I am confident that he truly understands this market and has structured his company so it can be fast, flexible, and responsive. The world is waiting for the services SEG is very soon going to provide, and Mr. Chu has stated that he plans to be the first to offer that service. His business model will allow him to quickly ramp up and expand the number of exchanges linked through this portal. In my opinion, adding a total of 40 exchanges could not be accomplished if he was using an old style business model. As a matter of fact, Mr. Chu believes that many of his potential competitors will be slowed down in their attempts to catch him as they will be attempting to do this while not giving up their old way of doing business. It is all about speed, service, and scalability - and Mr. Chu is counting on this.
6) The better Internet companies combine vision with implementation. Jerry Yang and Jeff Mallett (Yahoo's president) provide a nice example. Or Broadcom's Henry Nicholas, both visionary and implementer.
Once again, after my discussion with Mr. Chu I am confident that he knows where he is taking this company, he has built the organization he needs to in order to achieve his vision. He stated that they are on schedule. I also have to say that given the support that they have received from the major firms in Hong Kong (ICEA Capital Ltd., Tai Fook, and Taiwan Securities), you have to believe that they too feel that this man is capable of pulling it all together. After reviewing the list of all the awards and recognition he has earned in Canada and Asia prior to starting this venture, I believe that it is a safe bet that he knows how to get the job done!
7) The market for the services or goods needs to be global, dynamic, portable, and large enough to sustain at least three or four substantial firms in significant revenue and earnings potential. Firms that are able to garner market share of two or three slots should command a premium. First movers and market leaders are known by their marketshare, revenue, growth and how fast they grow.
If Stock Exchange Global (SEG) expands as fast as they have said they would then they will have a world presence in a very short period of time. Their business will be focused on Business to Consumer, Business to Business, New Issues, and Value Added services. Given the nature of what they are doing, and the connections that they have now (and will have in the future), then I see tremendous potential for expanding or spinning off successful new ventures from this core business. By being the first to market, and offering a service (which in effect offers an On-line capability to Brokerages who operated on Off-line exchanges) it opens up a huge new market which their primary competitors are not now set up to tap into. I believe that SEG's expansion plans are aggressive and bold, and if achieved then rewards for them and for us as shareholders will be substantial.
Crazy Canuck
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about us:
e-harmon.com, Inc.
the internet investment provider. Hummer Winblad Venture Partners is the primary investor in e-harmon.com, Inc. Other investors include Netscape co-founder and Internet pioneer Marc Andreessen, GeoCities founder David Bohnett, Quote.com (now part of Lycos) founder Chris Cooper, Go2Net founder and chairman Russ Horowitz, XOOM founder and NBC Internet CEO Chris Kitze, MP3.com founder and CEO Michael Robertson, On24 CEO Sharat Sharon, Infosel En Linea CEO Arturo Galvan.
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(c) 2000 e-harmon.com, Inc. The internet investment provider
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