All posts filed under “Analysis

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Key articles about the current crisis

I haven’t written much here about the current economic crisis, but it’s been affecting everyone for quite a while, now. Part of the problem I’ve seen is that there’s so much day-to-day news and analysis that it’s hard to get the kind of articles that really step back and evaluate the whole situation in context.

Perhaps it’s because 2009 just kicked off, but there have been a few recent articles that I wanted to highlight that could (should?) help everyone understand the broader problems that the economy has been facing.

“The End” – by Michael Lewis. It’s a long but very interesting article that deals with the housing bubble, how it blew up, and the people who warned of the specific dangers long before. Excellent, excellent read.

“Risk Management” – by Joe Nocera. This is an article from Sunday’s New York Times Magazine that goes deeper into the concepts of measuring risk. Specifically it gets into the “Value At Risk”, or VaR, method of measuring risk. While the model is generally good for day-to-day risk measurement, it is far from complete. Using VaR simply can’t tell you how bad it can get… and we’re seeing that how bad it can get now.

The End of the Financial World as We Know It
How to Repair a Broken Financial World – both articles by Michael Lewis and David Einhorn.
This is a two-part OpEd (no idea why they split it that way) from the New York Times. While not as good as the first two, it does take some of the lessons learned and ties them to what we can (should?) do going forward.

Letter about Madoff to the SEC – This letter was written and sent over three years ago, detailing how and why Madoff’s fund was a Ponzi scheme. No one listened or investigated deeply!

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Signs of a very weak economy, how Clare College is taking advantage

This article in the New York Times shows exactly how weak the economy has become:

In the market equivalent of shoveling cash under the mattress, hordes of buyers were so eager on Tuesday to park money in the world’s safest investment, United States government debt, that they agreed to accept a zero percent rate of return.

The news sent a sobering signal: in these troubled economic times, when people have lost vast amounts on stocks, bonds and real estate, making an investment that offers security but no gain is tantamount to coming out ahead.

[…]

Investors accepted the zero percent rate in the government’s auction Tuesday of $30 billion worth of short-term securities that mature in four weeks. Demand was so great even for no return that the government could have sold four times as much.

In addition, for a brief moment, investors were willing to take a small loss for holding another ultra-safe security, the already-issued three-month Treasury bill.

How Clare College is taking advantage of the economy

Clare College is the second-oldest College at Cambridge, having been founded nearly 700 years ago. One of the benefits of this kind of longevity is that banks are more able and willing to make loans to you.

From the student newspaper about a month ago (sorry, no link):

Clare College has borrowed £15 million to invest in the stock market. The unprecedented inflation-linked loan is due to be repaid in 2048 and the College expects to make a profit of around £36 million.

[…]

This is the first time Clare has borrowed to invest in its 700-year history. Hearn acknowledged that it was a potentially dangerous strategy, but said the forty-year time frame brought security.

“Most Colleges have a very long-term perspective, which gives them an advantage over city funds which often have a short term focus.”

Wow…

Both of these stories are just unprecedented. The economy truly is upside-down.

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Estimating 37signals revenue and general profitability

One of the all-time most popular posts on my blog is my original post where I showed how I modelled the revenue and revenue growth of 37signals. It showed a business that has made quite a bit of money in the past few years; I originally estimated revenue of $3.5million in 2007 and over $5million in 2008.

Well, it’s been nearly a year since I put up that post and based off of feedback I’ve received personally and comments on the post I decided to refine this model. My new estimates are that 37signals had revenue of over $4million in 2007 and over $8million in 2008.

Breaking down 37signals revenue by product

These are my estimates of 2008 revenue, in descending order. (Please read the initial post for more detail on how I created the model.)

  • Basecamp: $4.9million
  • Highrise: $1.9million
  • Backpack: $0.6million
  • Job/Gig Boards: $500k
  • Conferences, workshops, etc: $180k
  • Campfire: $133k
  • The Deck: $60k
  • Getting Real: $45k

Analysis

Basecamp is the 37signals product champion, and a key revenue generator. Highrise seems to be quickly gaining momentum, but facing tougher competition from entrenched CRM products. My figures for Backpack are likely a bit low after their recent multi-user update; I think that sales there have significantly increased. Campfire seems to be a minor product. The ranking of Basecamp/Highrise/Backpack is likely right, as it mirrors how they are promoted in 37signals marketing materials.

The other significant revenue source for them is the Job and Gig Boards, which I estimate to be $500k/year. The rest are fairly minor in the grand scheme of things.

Estimates on 37signals costs

37signals seems to be very generous with their 12 employees. (You can be when you’re generating over $600k in revenue per employee!) I’m guessing that between salary, perks, office space (where appropriate), payroll services, equipment, etc. that they average $150k in costs per person. I’m biasing this guess towards an overestimate, so as to be conservative in estimating profits. This is by far the biggest cost at $1.8million per year.

The other biggest cost they have is in servers/storage/etc. In April, their total costs with Amazon S3 were just $2k/month. Being conservative, I’ll guess they’re at $3k/month now, or ~$30k/year.

I believe they use Rackspace for servers. I can’t find any reliable information on Rackspace prices. But I’m going to guess that 37signals pays $30k/month with Rackspace. (If anyone has better numbers or a baseline for this, please let me know and I’ll update this post!) This is a yearly cost of $360k per year.

Guesstimate of 37signals profit

If 37signals is able to make $8million per year, with costs of just over $2million per year, it is a very good business to be in. If my figures are anywhere near correct, they make $6million in profit per year.

I titled this a guesstimate because there are just too many potential sources of error in this analysis. If any readers have any guidance, please leave a comment below or e-mail me directly.

Do you want to challenge my (revenue) assumptions?

You can download the spreadsheet I used by clicking on the icon below.

spreadsheet.png

Summary

I hope this post is useful to you. Again, if you have any better information or want to challenge my revenue or costs model, please comment below or contact me directly.

While not the biggest business, 37signals does seem to be quite a profitable one.

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Star Trek, suicide and Bush voters

I originally heard about StateStats from Fred Wilson, of A VC fame. It sounded interesting. To quote the site:

This tool shows you how popular a Google search query is in each U.S. state, giving a ranking like the one you see in the left column. It then compares this ranking with other ways of ranking states, like average income or population density, using Spearman’s rank correlation.

I first tried out things like different bands I like listening to, a comedian, and a couple of the site’s suggested searches (like yoga).

The most surprising search I made was, of all things, Star Trek. The popularity of searches in states for “star trek” correlates positively to the suicide rate of states!?! Not as strongly, it correlates to the order of states that Voted for Bush in the 2004 presidential election. See the screenshot below:

StarTrek.jpg

Even the search “depression” doesn’t correlate as strongly to suicide rates:

Depression.jpg

I would like to point out a key point the site makes about this data:

Be careful drawing conclusions from this data. For example, the fact that walmart shows a moderate correlation with “Obesity” does not imply that people who search for “walmart” are obese! It only means that states with a high obesity rate tend to have a high rate of users searching for walmart, and vice versa. You should not infer causality from this tool.

But enough of a morbid tone. As I mentioned above, you can see how the popularity of things like up-and-coming bands is concentrated geographically. Check out the chart for the band MGMT:

MGMT.jpg

(This is where I plug that my better half, LondonAnnie, graduated from Wesleyan University. The home of MGMT, Bill Belichick of the Patriots and Eric Mangini of the Jets. For a couple of years LondonAnnie helped Eric put on his family foundation’s football camp for under-privledged kids; it’s been going on since 2002!)

Finally, perhaps it’s yoga that’s really splitting the country?

Yoga.jpg