Crossroads Leadership in Software
§Revisiting Crossroads Systems
Background : In a previous post on my website, I wrote about Crossroads Systems ($CRSS), describing the business a year from now after their acquisition of a community bank closes.
The pandemic provided an opportunity for Crossroads’ to distribute PPP loans, resulting in an earnings boost of $50/share (a small increase over the typical $1/share in earnings). At the time of the original write up, I did not realize that this windfall was going to happen.
Since the company has changed a bit since the original post, I decided to write up the company again , with a new outlook and analysis. Take a look!
§Crossroads Systems | Updated
Two Thoughts:
§Mandate To Rule
Every leader has the same problem, whether they realize it or not. They need to justify their leadership. Just declaring “I am your leader” will not result in anybody following you- to stay in power, you need a reason. A justification.A mandate to rule.
The Mandate of Heaven is the political philosophy that legitimized many Chinese dynasties from 1046 BC. The idea was; Heaven blesses the current king of China to rule, until natural disasters start to occur. Once these disasters start happening, the ruler loses the Mandate of Heaven, and is considered unworthy. Once the leader is largely considered unworthy, the people are allowed to overthrow the current ruler and establish a new dynasty.
What are modern equivalents of the Mandates of Heaven?
Trump seems to believe that he could rule if the U.S. economy did reasonably well. The Chinese Communist Party believes their mandate to rule comes from the continuous improvement of the entire society**.** For Saudi Arabia, it is likely the continuedcontent of the middle class that allows the current political regime to stay in power.
Who is your winning coalition? What needs to be done to keep them from overthrowing the current leadership? If you don’t know the answers to the above questions…the Bronze Age Chinese might overthrow you!
§Software Eats…Software?
The past decade has seen the rise of software companies, as they “eat the world”. Will the next decade be defined as software eating software?
It has been 3,650 days since legendary entrepreneur and investor Marc Andreesen wrote the now famous article; Why Software Is Eating the World. The article is worth a read, at least to look at the parallels between August 2011 and August 2021. If you want the short version of the article: Software businesses are either replacing the biggest companies in the world by being better at solving problems.
Today it seems obvious- Marc was right! Software did eat the world! I challenge anybody reading this to not engage with software for 10 hours straight. It’s not possible! Software is constantly shaping the world around us, engaging people so often that it is often forgotten.
However, this poses a question- has software gone too far? It seems to me that there are at least 20 quality software options for…well…anything!
When I search for “alarm” on the Appstore, I saw 39 alarm apps in a row that were rated 4+ stars. All these apps have in-app purchases as well. Who pays for an alarm when your phone has a default one that works just fine? Too many solutions for one problem!
Banking. Railroads. Oil & Gas. Bikes. All major industries go through the same cycle- initial adopters lead to a breakthrough in technology which leads to a thriving industry and eventually consolidation. With all these software solutions, will software companies stop eating the world and start eating…each other?
If the major winners in the 2010s were software companies, will the major winners in the 2020s be software companies that acquire other software companies? Is the business getting saturated? Or are software companies adding value by drilling into different niches?
RE: IPOs
How much wealth can IPO investors capture? The results of a 2020 paper show that IPOs generally do not create wealth.
Since last week’s post about Robinhood’s IPO, I have found 2 few papers on IPOs. The first is titled: Lifetime Earnings, which provides an analysis of 10,129 domestic companies who had an IPO for the years 1975-2019. The IPO price is then compared to the cumulative earnings of the company (lifetime earnings) and the value of the company if it is acquired/merged.
In the aggregate, lifetime earnings roughly equal the IPO price, which means that on average, IPOs are priced correctly. However, the average is skewed , and these results are the result of a few companies carrying the load of the others (IE Facebook and Apple). Only 8% of stocks report enough earnings to cover their IPO price. That number jumps to 32% when the stocks are acquired/merged.
The average (median) ratio of lifetime earnings per share, including terminal value, to lifetime stock market wealth created per share is 0.61 (0.47). Thus, stock price-based wealth creation significantly overstates the underlying earnings-based value added.
So what? Well, this paper shows that most IPO investors will not recuperate their investment over a multi-year period. However, there is a small cohort of IPOs that pay off big time compared to the rest of the IPOs. The best way to make money from an IPO is to buy into a company that will be acquired/merged in the next 15 years. It’s either that or find the lucky 8% of IPOs that pay back in earnings!
_If you are interested in this stuff (you nerd), then I would recommend you read the full paper or at least the abstract. I only summarized the overarching conclusion, but there is a ton of more interesting data to be taken from this paper.Here is a paper that tries to summarize several other IPO-related papers. _