Dumb questions to ask smart people before you invest
If the managers can’t explain the business strategy in a short elevator journey, beware.
Last week it emerged New Zealand tech company Fulcrum Hub had collapsed, taking millions of dollars of investors’ money with it.
The last shares in the business intelligence and reporting company were traded in July.
Its banker, Heartland Bank, appointed receivers to the New Zealand company in August, followed a few weeks later by the Inland Revenue Department applying to have the company wound up. God bless them. Then finally, earlier this month, the Australian business was wound up.
The company started in 2015 after being incubated in Auckland’s Foundry Innovations (which itself went into receivership two months ago, according to the New Zealand Gazette).
Fulcrum Hub had Westpac’s former chief digital officer as chief executive and a few big names as investors, including Veda boss Nerida Caesar and former Westpac head Peter Clare.
It also had serial entrepreneur Christina Domecq (founding partner of Foundry Innovations) and Andrew Robertson (former chief financial officer of Foundry Innovations) as directors.
The code at the core of Fulcrum software was developed for Westpac New Zealand and reportedly the bank remains a customer.
Fulcrum promised to fundamentally change the way organisations use data for commercial and customer gain.
A major stated benefit was enabling business data to be continuously analysed and acted on 24/365, which it noted was impossible to achieve with staff working business hours.
Such a statement is true, but meaningless. Any software can operate 24/365.
Fulcrum also promised that the reduction of time from data collation would enable companies to be more responsive and be able to activate marketing and business initiatives within the day rather than weeks or months.
Again, a meaningless statement in this context, as decision-making speed in my experience is more about leadership style than reporting software.
In early 2017, Fulcrum expanded across the Tasman and made Sydney its head office. At the time, chairwoman Cassandra Kelly was talking of further expansion into North America, noting that the business was already in the ‘‘extremely fortunate position of making money’’.
The speed with which Fulcrum went from hero to zero is a sober reminder of how lethal tech investments can be. Even with proven tech companies (which Fulcrum was most certainly not) it’s a rollercoaster ride – just take a look at the share price of Tesla or Asos, or PushPay or Xero.
There were a lot of smart people involved in Fulcrum, clearly a lot smarter than me.
But I think a key part of investing in tech companies, particularly the illiquid and privately held ones, is being prepared to ask dumb questions of apparently smart people.
I think there are a handful of dumb questions you should be prepared to continue asking until you get an understandable answer. The first is: How do they make money?
Last year, when Fulcrum moved to Australia, Kelly noted they were making money. She didn’t say how they were making money, nor how much, nor what their costs were.
The second question is: What is the total addressable market and the barriers to entry?
In the case of Fulcrum, the market size, according to Gartner, is $9 billion, which is decent. But my cursory look suggests more than 1000 players in that market, including a lot of free ones. So it’s fair to say the barriers to entry are low, which often leads to a race to the bottom in terms of charges.
A third question is about expenses: What is the culture in this area? I like tight-fisted tech businesspeople whose idea of a Friday night leer-up is a bottle of beer and 12 straws. Entrepreneurs who provide modest expense forecasts but then manage to come in below them.
Reading about the people involved in Fulcrum and their approach to expansion, it didn’t feel nearly Protestant enough for my tastes.
The fourth question is about business strategy, and particularly the competitive advantage they bring to the table.
Hoku founder Rowan Simpson has an ‘‘elevator test’’ when it comes to strategy. Could you articulate your strategy if someone asks you on the ground floor and you have until the elevator hits the 20th floor to explain it?
The formula is something like this. For (target customer) who want to be able to (customer need), the (product name) delivers (functionality or benefit), that unlike (main competitor), delivers (primary differentiation or competitive advantage).
In the case of Fulcrum I would have been interested to hear the management complete the sentence, especially the competitive advantage piece.
Finally, from an investor perspective, I always think of some advice that former AMP chief investment officer Paul Dyer gave me. Diversification is like fresh fruit, vegetables and good craft beer; you can’t have too much of it.
Investing in a single technology startup with little revenue, no profit and limited transparency is the opposite of diversity.
It’s pretty heady stuff and I’d like to think would make up less than 0.5 per cent of a person’s portfolio.
So I just hope that every person who put $100,000 into Fulcrum had another $20 million in less volatile assets.
The speed with which Fulcrum went from hero to zero is a sober reminder of how lethal tech investments can be.
Mike ‘‘MOD’’ O’Donnell is a professional director, adviser and writer. His Twitter handle is @modsta and he’s fond of putting craft beer into other people’s quotes.