Governance Needed for Initial Coin Offerings

Traditional board-like governance can provide credibility for companies raising capital via ICOs.

The market for initial coin offerings (ICOs) is booming. The latest example is Telegram’s plans to attract US$1.2 billion in funding. With all the hype, there is surprisingly little said about the importance of ICO governance. The problems of governance are not unique to Telegram; they apply to any company that wants to attract investors’ money.

The wild swings in the value of cryptocurrencies and the lack of official recognition for them suggest that ICOs are riskier that investing in the stock market’s initial public offerings (IPOs). However, both IPOs and ICOs are subject to the same principal-agent problem: The agent (e.g. issuing company) makes decisions on behalf of principals (e.g. investors in tokens). The agent’s interests might not always be aligned with those of the principals. For example, should the founding team increase its compensation or invest funds in ecosystem growth? In an ICO, investors buy virtual tokens, but they cannot be considered company shareholders in a conventional sense. ICOs are not regulated. But token investors contribute their capital to the company’s operations. Hence, investors should be entitled to at least some mechanisms that would align their interests with those of the management team.

One solution for the ICO issuers could be to create a board of directors. Just like in the non-cryptoworld, the board should consist of individuals who ensure that the company works in the interests of token holders. Where should companies find directors? One option could be token-curated registries. To simplify, imagine a platform where potential directors submit their profiles to be considered by the broad community as a “qualified ICO director”. To post their profile, these individuals also put a significant monetary deposit. Individuals deemed by community members to have good potential director qualifications get on the list and get their money back. Those who are not chosen, lose their deposit. Companies that plan ICOs could draw directors from these lists.

Conventional boards can disagree with the CEOs and even replace them. This would be difficult to implement in the cryptoworld (e.g. it is hard to think that any board can replace Telegram’s founder Pavel Durov), but the board should be able to publicly object to the company’s strategy and/or value-creation approach. One can envision an open registry that gathers directors’ votes on the company’s plans. The investors would see an aggregate index of the extent to which directors agree with the founders. Investors could then take notice of variations in this index and react by buying or selling tokens. If the board mostly agrees that the founding team continues to act in the interests of the investors, this could help to boost the token price. Directors could identify themselves with unique IDs and their votes made visible to all.

Follow the money

Normally boards have an audit committee which validates the company’s accounts. Blockchain technology should help facilitate this committee’s work. If one can trace how the money is spent on blockchain across different accounts, then one should also be able to trace how the company spends the money it collects from token sales. I am not sure how much disclosure of the company’s financials is necessary, but those who put their money into the company ought to know whether the value of their tokens is justified. Just like in a conventional annual report, token owners ought to know what their company’s costs and revenues are, where they come from and how they evolve over time. And the board should validate these results by public votes.

Most of the ICOs already have “advisors”, i.e. individuals with some credentials in the cryptoworld (and beyond) whose reputation could suffer if the company goes under. But reputational penalties in case of company failure are unlikely to be enough: The interests of directors should be very strongly aligned with the company’s long-term health. For example, the directors should get all their compensation in the form of tokens with a delayed maturity (e.g. every 12 months). Essentially these compensation tokens could be released via smart contracts, unlocking value for directors upon attainment of previously agreed milestones. If the tokens become worthless within 12 months, newly allocated tokens should be worthless too.

A recent idea by Vitalik Buterin, the creator of Ethereum, is to improve the ICO funding model by incorporating elements of decentralised autonomous organisations (DAOs). After an ICO, investors’ money goes into a smart contract (called DAICO) controlled by token holders, ideally, the investors themselves. At certain intervals after the ICO, the investors can be asked whether they are willing to release a new pool of funds from the contract to the development team, subject to the achievement of certain milestones. One can imagine a variation of DAICO in which only company directors are authorised to initiate such polls.

Leaders of some companies that now plan their ICOs have a disdain for any form of authority and think of an ICO as a way to quickly crowdfund capital. However, the board should be more than a vehicle to run a company; it should also be a mechanism of oversight. The pioneering leaders who create board-like governance mechanisms prior to launching ICOs will be sending a signal of their quality to the investors that would be difficult for a lower-quality company to replicate. After all, trust is and will always be the most important currency in either physical or digital world. Even for Telegram.

This is a repost from my INSEAD Knowledge article: 

https://knowledge.insead.edu/blog/insead-blog/governance-needed-for-initial-coin-offerings-8556

When Others Mine Bitcoin, You Can Make Money on Its Ecosystem

What is a similarity between a Bitcoin day trader or an Etherium miner of the 21^st century and a Californian gold digger in the 19^th century? 

The answer is that they are both looking for gold—digital or physical. Another similarity is that their exploits will benefit the ecosystem of providers of complementary products or services. During the Gold Rush period, Levi Strauss made money selling jeans to the gold diggers. Jeans were a piece of a gold digger's ecosystem at that time. Today, wallets to store coins or computer chips which solve math problems play the same role as the jeans back then.

Making complementary products can be a way to benefit from someone’s risk-taking. The value of complements frequently rises with the value of the products that they are supporting. 

Take the crypto-wallet Ledger Nano S. This is a USB-like device with a cryptographic protection that allows the owner to store digital currencies off-line without the risk of hackers stealing the funds from an online wallet. 

One could have ordered this product in November 2017 in France for the price of 60 euros. By the end of December 2017, the price was 80 euros and then the Ledger Wallet, the company that makes this device, even stopped shipping until March 2018. It simply ran out of stock. Ebay.fr now has these wallets on sale for 400 euros, although Amazon now sells them for 199 euros. By the time you read this post, the price can be different.

Clearly, many people bought a lot of digital gold (silver or "dogcoin") during the bit- and alt-coin trading frenzy over the Christmas break. Fearful of the hacker attacks, the owners of the digital currency started to look for a secure way to store them, and the stock of the Ledger Nano S was gone. If the price of crypto-currencies goes up or down, the maker of the wallet will still make money because people will need to store their more (or less) valuable coins somewhere.

Nvidia is another case in point. Its share price is up over 200% since last year. A large part of this growth can be explained by the market for its graphics processing unit chips, which were used by the “miners” to run the operations that generate the digital currencies. In other words, Nvidia benefited from the fact that people were not using its chips to play video games, they were using the chips to mine digital gold. A perfect parallel to Levi Strauss.

Complements help avoid the pain

In general, the best strategy to piggyback on a new ecosystem is to build a complementary product or service. The complements have to address a user pain point. For example, the Ledger Nano S addresses the pain point related to storing cryptocurrencies. Levi Strauss addressed the pain point of gold diggers who couldn’t find pants sturdy enough to withstand the stress of hard physical labour.

How do you know which pain point to address? Become a core product customer and observe your own pain points. As they’re likely to be shared by other users, it can give you ideas for what the market may need. If you discover multiple pain points, these can be addressed during the product iteration process. The more pain points your product or service addresses, the more likely it is to be taken up by customers.

Beware of creating your own pain points, however. The navigation system of the Ledger Nano S only has a basic LCD screen and two buttons, which makes it painful to enter passwords or security phrases. The company recognised that pain point and has now launched Ledger Blue, an iPad-like device with a touch screen. This creates a nice set of a low-cost product (for price-conscious customers who don’t mind the two buttons) and a differentiated product (for those willing to pay more for ease of input). 

Despite the volatility of the crypto-currencies, there is a non-zero probability that some of them are here to stay. What their price will be in 12 months is anybody’s guess. Could be big, coule be close to zero. But what is more or less certain is that there was a lot of money made last year not on buying and selling digital coins, but rather on the making of complementary products to them. 

Use Virtual Reality and Pokemons to Increase Customer Loyalty

Digital transformation doesn’t touch only companies in the U.S. or Western Europe. Many Russian firms made efforts to incorporate digital into their business models. Take Sberbank, for example. This is the largest universal bank in the country with approximately 330 000 employees, $39.2 Billion market cap and close to 17000 branch offices. It now has over 30 million active users of online banking system Sberbank Online, 18 million active users of Sberbank Online App for smartphones and over 90000 ATMs and self-service kiosks.

Being a universal bank in Russia means that you have to serve very diverse customer groups—from senior citizens-- who want interaction with a human customer service representatives and are not comfortable with the technology -- to digital natives who want mobile banking without much human interaction.

Elderly customers (i.e. 60 year old +) represent a large proportion of the bank’s clients. These customers don’t use Internet banking and even have trouble using self-service terminals in the branch offices to pay utility bills. How to make sure that the bank’s staff is always willing to help the elderly to navigate the terminals? One can run customer satisfaction surveys or develop KPIs for serving elderly clients and reprimand employees who are not helpful. Alternatively, one can work on improving the staff’s empathy with the elderly so that the associates are willing to assist without specific KPIs or a fear of reprimand from the top management.

To address this issue, Sberbank has developed a powerful virtual reality tool called Empathy for its staff. With a use of headphones and Samsung VR headset, a young branch associate can actually “become” an elderly client of her own bank. The bank worked with a team of psychologists and doctors to understand how a seventy-year-old person may perceive the world, given his (or her) poor health condition and declining motoric skills. When inside the program, you have the visual and sensory experience of an elderly person. You have to orient yourself inside the bank’s branch office, seek advice from a not-very-friendly Sberbank associate, figure out how to punch the numbers on the self-service payment kiosk. At the same time, you battle blurry vision (due to eye disease), noise in the years (due to high blood pressure), hands that lost their dexterity (due to arthritis) and occasional bumps into younger customers who don’t understand why you stand in the middle of the branch looking for help. The experience is extremely powerful and helps branch office employees to develop empathy towards seniors’ frequent inability to understand the technology and they become more willing to help. As a positive side effect, this experience helps young bank associates to feel more empathy for their own elderly relatives as well.

What about younger customers who tend to think of Sberbank as a boring place where their grandparents go to open savings accounts and pay their bills? Russia now has a few brunch-less banks targeting digital natives and Sberbank needs to change its perception of being a traditional bank in the eyes of this customer group. 2016 was a year of Pokemon Go and a small team of Sberbank’s executives decided to use the game to attract millennials to its branch offices. In 3 days, the team created a new insurance product called “Sberbank Go”. Every Russian citizen who hunted for Pokemons could sign up for insurance that covers medical costs in case of an accident. That is, if you walk into a street lamp pole while looking for Pikachu and hurt your leg, Sberbank insurance will help you pay your medical bill. In addition, Sberbank put Pokestops inside some of its branch offices to attract virtual eggs and Poke Balls. This helped game’s fans to capture more Pokemon if they visited Sberbank.

While this initiative sounds a bit silly, the objectives were very serious: increase awareness among the younger customers about the bank’s insurance products, its loyalty program and mobile payment solutions. The project was run in 27 branch offices across Russia. The results were very good. There was huge buzz in the Russian social networks about the campaign and the TV channels run stories about it. This was free publicity. At the end, 130 million individuals have heard about the initiative, journalists and bloggers wrote about 10 000 articles, the dedicated website (SberbankGo.ru) received 70 000 visits and the bank issued 6500 insurance policies to customers with the average age of 24 years old. In addition, 12 out of 27 branch offices with Pokestops experienced visible increase in physical traffic during the month of July, i.e. the period when traffic normally decreases due to the vacation lull.

How to make your company more open to digital transformation? Sberbank’s answer lies in raising awareness of opportunities among senior executives and empowering lower level employees. The bank’s CEO German Gref and his top management team became aware of the Virtual Reality’s potential to teach empathy while visiting the Virtual Human Interaction Lab in Stanford University. The CEO and his team realized the importance of agile approach in developing new products, and they created the organizational culture inside Sberbank that allows for small scale experimentation. This helped the emergence of SberbankGo and many similar digital initiatives. Ultimately, the embrace of digital technologies helps the bank to better service the elderly while appearing hip to the young. 

Shorter version of this article was published in French by Les Echos 

Why Aren’t Automakers Embracing Digital Business Models?

Below is my most recent post on Harvard Business Review:

BMW is one of the best car makers on the planet. It is also thinking seriously about what digital transformation means for the car business.

Its cars now have Connected Drive, a platform that allows drivers to purchase apps for traffic, messaging, and for starting the the engine from a distance. The new BMW is also packed with electronics that allow the user to experience different driving modes, from sporty to gas-saving, substantially changing the feeling of driving the car.

And yet BMW is still not making full use of digital business strategy – nor are any other car makers.

Consider: BMW charges €360 to unlock the ability to access the apps on the Connected Drive. Some apps (e.g. Remote Services) cost €80 and others (e.g. Real Time Traffic Information) can be rented for €45 over 6 months. If one spends a hefty amount of money on a new car, paying €80 or €45 for an app doesn’t seem too expensive, but needing to pay €360 to just activate the ability to download the apps seems totally wrong.

Contrast this with the approach taken by Apple. Making money on complementary products is one of the features of Apple’s business model. How does the model work? You sell the hardware and then you sell low priced apps (some of them are even free) to increase the value of the hardware. The apps represent a complement to a car and the Connected Drive is a store to sell complements, but why does the user need to pay to enter the store?

Imagine buying an iPad (especially in the early days of this product) and then having to pay €100 (or even €50) to access the App Store. This would have been a serious barrier. Following Apple’s logic would encourage BMW to make Connected Drive free, something that would make sense given the low marginal cost to BMW of doing so. The bigger lesson here is that you should always allow the customer a free entry into your digital store and then charge small amounts for the products sold there.

Here’s another way digital business principles might play out differently for BMW and other carmakers: renting engine capacity.

If you look under the hood of BMW’s Series-3 vehicles, for example, you can get horse power of either 110, 150, or 190, depending on whether you’ve purchased a 316, a 318, or a 320. However, you might be surprised to learn that BMW uses the same 4-cylinder engine in all 3 models, except the electronic components don’t allow the engine that is sold in the less expensive model to get to the higher levels of horse power.

Why couldn’t the company make a car that allows a driver to either upgrade or rent the engine power? Say you buy a 318 model with 150 horsepower for casual driving, but then you rent the 190 HP to go on a road trip? Alternatively, could you buy a car with 150 HP but after a 3-year period pay to unlock additional horsepower permanently? If the hardware is an issue, this unlocking could happen in a dealership.

We see these free-premium-rent models all the time in other digital businesses. When you download a fitness app, for example, you can try a free version first, and then can pay to unlock premium functionality later on. Or you can rent some functionality, such as a €9.99 a month subscription to an app that gives you a personalized training program.

When I talk to auto industry executives, the reason why they don’t want to systematically offer engine upgrades is that they want the customers to sell their old car and buy a new, more powerful car. Fair enough. But they may be missing out on both new customers and new revenue opportunities. Clearly, when commuting to work or driving in the French countryside, one doesn’t need 190 horsepower engine (not only because of the high fuel consumption, but because of the high probability of getting a speeding ticket). But on a vacation to Germany, where there are no speed limits on the autobahns, 190 horsepower could come in handy. As the car already has the different driving modes that are controlled electronically, it seems that the HP control is also possible.

There are also possibilities for automakers like BMW to combine user data, software upgrades, and digital business models to “nudge” customers to try new features they’ve not used before. Consider that your Connected Drive apps might know that you’re planning an upcoming trip to Cote d’Azur, where the speed limit is 130 kilometres per hour. The car itself could ask you if you’d like to implement a temporary, over-the-air engine upgrade.  Perhaps automakers could even offer a “vacation bundle” – additional traffic, weather, and events information along with an engine upgrade that lasts the length of your trip.

Tesla does now offer a self-proclaimed “ludicrous” mode upgrade to Model S that allows reducing the acceleration time of your car by 10%, and you don’t need to sell your old Tesla to get this upgrade. However, Tesla still asks you to buy the upgrade (about $10,000), not to rent it, although the rental of additional power should be at least technologically feasible.

Clearly, the makers of physical products (like cars or home appliances) understand that digital convergence is the next frontier. However, they often don’t look carefully or creatively at the business models this might inspire. The physical asset itself is just the beginning

How does your Company Measure up to the Talent Factories in the Luxury Industry?

I just published an article in Harvard Business Review on the best practices of talent management in the luxury goods industry. Below is a small excerpt, and you can read more by following the link below. HBR allows to read up to 5 articles, like mine, for free!

"Fifty years ago fashion and luxury goods were all about family businesses and entrepreneurial designers. Today most of the world’s leading brands and labels belong to one of a few groups, of which the biggest by revenue is LVMH, the owner of Moët & Chandon and Louis Vuitton. Two other groups—Richemont, the owner of Cartier and Chloé, and Kering (formerly PPR), which owns Gucci and Saint Laurent—give LVMH fierce competition.

When we analyzed the drivers of performance for more than 350 fashion houses from 2000 to 2010, we found that producing successful, creative fashion collections was positively correlated with being part of a business group. On average, retailers and wholesalers of high-end clothing judged collections made by group-affiliated brands to be three times as creative as collections made by independent competitors.

Being a part of a business group generates costs savings by centralizing support functions such as operations and logistics, finance, and real estate management. Another advantage of group membership is the relatively efficient internal market for capital that luxury groups provide by identifying promising brands and supporting them with the capital they need to grow. But our research suggests that the real source of the groups’ value is the way they exploit their diverse business portfolios to offer rich learning opportunities to both managers and creative talent. This is why their brands excel at design and business innovation.

To understand just how the groups developed this talent advantage, we conducted detailed case studies, which involved more than 50 in-depth interviews with senior executives. What we saw was that within their boundaries, the three groups have all created a vibrant circulation of talent that allows them to spread knowledge and best practices, despite the sometimes intense rivalry between their brands."

Click here to go to my full feature article in Harvard Business Review that details talent management practices of LVMH, Kering and Richemont . How does your company measure up to them?

Creativity in Organizations: Look at Your Network

Here is my recent video interview with Canadian Globe and Mail on creativity and networks in organizations

Philips' Alliances Will Save Your Health (and Money)

We all know that alliances with customers, competitors, and suppliers are important to any company’s ability to compete. As I write in my latest post for Harvard Business Review, that ability is compromised by the way we manage those relationships: all too often, each alliance is “owned” by one team or business unit. Thus, companies often miss out on opportunities for innovation that would result from transferring ideas and resources from small silos to other aspects of the business.

I set out in my book, Network Advantage: How to Unlock Value from Your Alliances and Partnerships, that a more holistic approach to managing alliances allows companies to create innovative new lines of business. A recent collaboration between customer relationship management and analytics company Salesforce.com and Dutch electronics giant Philips provides a case in point.

The collaboration between two companies began as a simple buyer-supplier deal: Philips used Salesforce software to enhance its customer relationships. But somewhere along the line, executives in these two companies started asking: if Salesforce knows how to manage CRM data, can it also manage the clinical data from some 190 million medical patients that are treated each year with Philips-made equipment?

The two partners have decided to build a platform to connect healthcare providers, insurance companies, and patients to deliver clinical monitoring solutions. The Philips Digital Healthsuite Platform, as it is called, will collect and analyze data drawn from medical devices to enhance clinical decision making by professionals and allow patients to take a more active role in managing their personal health.

As a first move, the partners have created two applications — “eCareCompanion” and “eCareCoordinator.” The eCareCompanion is installed on a patient’s smartphone (or tablet) and connects to their health monitoring equipment, such as weight scales, pill dispenser units, blood oxygen measurement devices, and thermometers. Imagine John, a patient with obstructive pulmonary disease, often caused by smoking. John lives at home. To monitor his condition, John’s weight, blood oxygen, and body temperature data are constantly uploaded to the platform. The eCareCoordinator then analyzes the data feed from the devices worn by the patients. If the data pattern from a particular patient becomes worrisome, the eCareCoordinator can inform a nurse, relative, or doctor.

How can Philips and Salesforce persuade hospitals to start using this platform? How can the hospitals be sure the system is reliable and can lead to tangible cost savings? This is where an alliance between Philips and Radboud University Medical Center in the Netherlands comes into play. The two partners work very closely to develop and test new equipment, including the wearable devices that can collect patent data for the Digital Healthsuite Platform. The use of these devices on Radboud’s patients helps Philips develop a business case for using them in other hospitals. Furthermore, in the process of building the wearable devices, developing the apps, and analyzing patient data, Philips, Salesforce.com, and Radboud develop valuable know-how to share with future partners who want to build their own apps or devices.

This innovation was made possible by the way Philips manages its alliances. Philips has created an Alliance Management office, made up of a small team of professionals who help Philips executives run individual alliances. The team helped negotiate the contracts with Salesforce and with Radboud Medical Center, obtained agreement on the key performance indicators, and developed tools to evaluate the partners’ perspectives on the evolution of the alliance. They also manage regular meetings in which the Philips executives in charge of the Salesforce.com alliance can learn about what is going on in the alliance with Radboud and vice versa. This helps build multi-billion market opportunities across the three partnerships.

There are two lessons here for your company. First, get more out of your alliances as drivers by thinking of them as a network. And second, build a team inside your company to manage this network, especially where knowledge and resources overlap. There is huge potential in collaborating with customers, suppliers, or even competitors.