From Uber to Equity Crowdfunding, to BitCoin and Brexit, current events are rocking the global financial spectrum. With all of these changes, there can be no question that a new "wave" of “net-enomics” is here.
The "crowd" has spoken and has declared a firm intention to take matters into their own hands- literally. In the past 10 years, we’ve seen the creation of the world’s largest taxi service with nothing more than some mobile phones; an entirely new and virtual form of currency; and the transformation of the global hotel industry through a website that allows individual proprietors to become mini hoteliers in nearly every corner of the planet. These three developments have disrupted and redefined the economy as we know it.
In light of this paradigm shift, how should investors, P2P lenders and, yes, even the bankers and investment bankers, start measuring value? If you’re like me, you’ve been watching the evolution of the economics of the last decade and a half with your head bouncing up and down like a bobble head doll.
Not because the NBMAs "No Business Model Apps" have lured in billions - yet to provide a return on investment. But, because the firms that started with a solid idea of how to monetize - without "traditional" assets, have killed it.
Recently, I picked up the book “The End of Accounting” by Baruch Lev and Fung Gu, which makes the case to set a new formula for GAAP "Generally Accepted Accounting Principles".
Lev and Gu argue that today, we must set aside Industrial Revolution ideals and standards of what accounting fundamentals are, based on age old terms like FF&E (Furniture, Fixtures and Equipment). They continue that it is necessary to establish a more realistic view of financing for the internet, Cloud and the new age of tech, as all companies must now, in one way or another operate and create value today.
Indeed, we have an entirely new model to account for . As an entrepreneur who has created a business that generates more revenues from SaaS and PaaS than from REO "Real estate owned" assets, I have had this argument with bankers and accountants for years. And, by and large, I have been falling on deaf ears. Thankfully, these insights of Lev and Gu show that models from SaaS to PaaS , to what hasn’t even hit the common vernacular (just yet) – the Programmable.Cloud-- extends well beyond NBMAs (No Business Model Apps) that have been created over the past 15 years.
We are talking about financial measurements on the companies that actually create and generate critical services, serious revenues and functions essential to the business operations of today. But who don't fit into the "box" of GAAP. As an entrepreneur, who a couple of decades ago was out looking for a job, when the corporate recruiter I met said "Tim, you don't fit into anyone's box, so you should just keep creating your own..." I believe, as do these authors, that if we don't change our “box” of accounting, emerging economies, not so entrenched in the ways of banking and building balance sheets, as the Western World, will see more disruption to the banking and financial systems than Brexit or Lehman ever have provided. It may be slower, and we may absorb it, globally in more digestible chunks than the fire hose economics of these giants, but it will nevertheless shake the underpinnings of those institutional players who don't recognize the trends.
I call this, for bankers who are lenders, the "Seven Cs". Pssst… Guys, you're missing two Cs in the classic Five Cs of credit (Character; Capacity; Capital; Collateral; Conditions). It’s time to add two more Cs: Cloud and Crowd. Say it with me now, Character, Capacity, Capital Collateral, Conditions, Cloud, Crowd. It’s a mouthful, but it’s worth taking the time to get it right.
As Lev and Gu’s "The End of Accounting" astutely points out, it’s time to give serious valuation attention to a new set of acronyms that extend beyond GAAP, FF&E, G&A. Accounting that can ‘account’ for how SaaS, PaaS, IaaS and the power of revenues generated by this new era of NACs 'New Asset Companies' that provide critical and in demand business services, consumer driven business models, and that generate real revenues, is just good sense.
Equity Crowdfunding, peer to peer lending, all forms of ‘the sharing economy’ are on the rise and show no sign of slowing down. Ultimately, companies like these are re-shaping fundamental industries. The trend, that started in finance, is expanding daily in industries such as healthcare, education and critical infrastructure services. Cloud businesses are the new "utility companies" . And it's not just the guys providing the servers - like Amazon and Microsoft. It's the little guys delivering the use of these tools to real businesses who have real customers.
These are the NEW Generally Accepted Asset Providers - call this GAAP 2.0 - add in the extra 2 C's - and bingo, you have a model for the companies that don’t fit yesterday’s GAAP “Generally Accepted Accounting Principles” version 1.0.
The bankers and business analysts who get on board with the Seven Cs of Credit and Investment will build new business solutions - and will grow profitably.
"The End of Accounting" will either help streamline this model and incorporate it into established business models, or we will see The End of Banking as we know it.