Predicting Success | Mike Kwantinetz

About Mike Kwatinetz

Mike Kwatinetz is a founding General Partner with Azure Capital Partners where he specializes in software and related infrastructure technologies. His current board memberships are Chairish, Education.com, Julep, JumpStart, Le Tote, Medsphere, Open Road and Silkroad and he led Azure’s investment in FilterEasy, Maker Media, Coffee Meets Bagel, Sprinklr and Tripping. He also served on the boards of Bill Me Later (acquired by eBay), BlogHer (acquired by SheKnows),Cooking.com (acquired by Target), Rooftop Media(acquired by Amazon.com), TripIt (acquired by Concur), TopTier (acquired by SAP), Wildseed(acquired by AOL), Prospect Park, and Woodbury Computer Associates (acquired by JWP). Other representative investments include VMware(acquired by EMC). Mike’s blog, SoundBytes II, is a continuation of his widely read technology investment strategy newsletter.

Prior to Azure, Mike was Group Head of Technology Research, a Managing Director and the senior software and hardware analyst at several major investment banks, including Credit Suisse First Boston, Deutsche Bank Securities and PaineWebber. Mike was also a senior research analyst at Sanford Bernstein & Co.

Prior to his career in technology research, Mike was CEO of Woodbury Computer Associates, a software products and consulting firm, which resulted in a 160x cash-on-cash return.

Mike, prior to Azure, has provided research coverage and strategic advice to numerous technology companies and has consistently been viewed as a top resource on many, including Microsoft, Compaq, Dell, Apple, Hewlett Packard, VA Linux and Gateway. His coverage universe also included e-business software and internet devices and infrastructure. His theories on the shift of industry control to Microsoft and Intel, “The 4th Wave of the Web,” the advantages of Linux, and the need for PC vendors to go “Beyond the Box” were considered agenda setting for the investment community and contributed to his upgrade of Apple to a “Buy” in 1999. He was top-ranked by Institutional Investor in PC Hardware and ranked second in PC Software and was the only sell-side analyst to ever be top three rated in both software and hardware, doing so for six straight years before leaving to form Azure in early 2000. In 1997 and 1998, Mike was rated Institutional Investor’s No.1 Large-Cap “Home-Run Hitter” for stock selection among all Wall Street analysts and remained among the Top 5 in 1999. Furthermore, Reuters and the Wall Street Journal have selected him as the No.1 PC analyst.

Mike received his M.A. and Ph.D. degrees in Mathematical Modeling from the University of California Berkeley and his M.B.A. in Finance & Accounting from New York University. He sat on the Financial Accounting Standards Board (FASB) advisory committee for a number of years. He is also author of “The Big Tech Score,” published by John Wiley & Sons.

 

Interview Transcript:

Alan
Welcome back. I’m visiting here today with Mike Kwantinetz. And, Mike, welcome to today’s show.

Mike
Thank you. I’m glad to be here.

Alan
So Mike, for the listeners, can you give us some background of your path? And how you got to where you are today?

Mike
So I come from a lower middle class family. My father was an immigrant and couldn’t even graduate high school because he had work. So we’re the first generation that went to college. You know, my brother and myself. My sister didn’t. Very fortunate in there were so many great schools, I got to go to that were supplemented by the government. Stuyvesant High School, which is one of the great high schools in the country, just got rated number three, and 47% of the people there are sub income, Brooklyn College, then University of California, Berkeley, and then I did an MBA at NYU. So quite a bit there. I think you left you have a PhD and a PhD in mathematics. From cow. Yeah. And that qualified me for very little. So I went to work for Ernst and Young, and I enjoyed working there. And that launched me to get recruited to be CEO of a startup, we did pretty well sold after a public company. When my time was up for the contract I agreed to with the company went to Wall Street. And I had very good success on Wall Street. So I think I’m the only one ever to be top ranked. And you know, what the top three ranked in hardware and software in the same year, and I did it the last seven years I was there. And that was as an analyst as an analyst. So it’s ours first in hardware, second, and software. And institutional investors even picked me as the number one stock picker across all of Wall Street. So and that was just I was lucky, I was following Dell and Microsoft and like them, so that that mattered a lot. And then a group of us decided to leave and start our venture firm, Azure capital, and Frank Quattrone, who I was worth working with, and I ran the research for him. He asked, Why are you leaving, I said, I think the market is going to blow up. This was in early 2000. And this is going to be a search for who to blame. And I don’t want to be here. When that happens. It’s my guy. And he said, You’re out of your mind. And then he went through all that BS because he was an innocent guy, and they just wanted a high profile guy to go after.

Alan
So is there a capital when you said in there, how many came with you?

Mike
Well, there were four of us who started and very stable 15 years same for guys. And then one of the guys left a year ago to go back to Wall Street. So same three partners, who started it. And we also brought with us a few other people. And we’ve been very stable. So even our assistants, we have two assistants. They’ve been with us since the first year. And our Financial Group, CFO is with us now for about seven years. And it’s a family type thing. And you know, we’re doing well, so everybody’s enjoying it.

Alan
Now is it? Typically early stage is it for managed account, what is your target market?

Mike
We raise funds, and we’re investing out of fund three now. And we invest in post seed stage. And, and a rounds is where we first come in to companies. We try to help the companies a lot. We have a number of ways, which we do that. And we have events that helped them as well. Like we have a CEO day where we attract about 60 different large corporates and investment banks. And all of us CEOs come and we have great speakers at it. And you’re like the chairman of Microsoft, the CEO of Citrix, you know, and so on. And then the big thing in that day is we arranged one on one speed one on one meetings between our CEOs and corporates and investment banks that are there. And last year, we did about 241 on ones. So Wow. So it was quite a bit is that eight or nine per person, company that our company.

Alan
In the so the typical font size in arrays is how much?

Mike
Well we are targeting around 120 $5 million funds. Our first fund was a lot larger and it really is too large for this style of investing.

Alan
I visit here today with Mike Kwantinetz and we’ll be right back after these messages.

Alan
Welcome back and visiting here today with Mike Kwantinetz He is the founder of Azur capital. And, Mike, in the first break, we’re talking about, you know, your timeline, your history, we left off with the question, where are we at? In the industry today, the state of the industry?

Mike
Yeah, the industry goes through cycles, and you have to reel me in, everyone has to realize that, and the cycles are too much money comes in, valuations get very high for private, you know, people get psyched up. And then there’s some kind of correction, and we had a correction in 2001, we had a correction in 2009, after the correction, it’s actually a very good time to invest. We’re at a pretty high value now, for a lot of companies. And what we try to be, we’ve pushed into post seed, because there’s so much seed money now. So many companies are getting funded at the beginning. And then a lot of them can’t find money. Before they’re a they’re not ready for an a round, and they can’t find money. So we found that that’s a hole in the market right now. And, you know, supply and demand works well, if you find good holes in the market, you get better companies that reasonable valuation, I think there’s going to be more falling out of companies that have been funded to grow unprofitably forever. And I don’t know which ones for sure. I mentioned a few in my top 10 of 2017. And, and the reason is that business models don’t work. So it’s a very interesting time in the industry, because there’s so much creativity, I get really excited by the entrepreneurs we meet. And we see over, you know, we get over 1000 a year that we have opportunities, we invest in about one out of 100. So there are a lot of great entrepreneurs, great companies that don’t meet the cut, because the somebody’s a little better in our opinion. And so you, you’re finding that about 65% of companies that are seed funded, can’t get another round of funding. So there’s a big drop out, right. And then there’s some that get anointed, and probably get over funded, and are often spending a little wildly. So one of my predictions way back when I was on Wall Street, was I was not a fan of sun. And I kept expecting sun to roll over. And what happened was, and the reason was that the the value proposition they offered was not a good one, that you would paying three times as much for the same value as a Wintel server. And but in 2099 2000, profitability didn’t matter to anybody spend wildly, so Sun stayed up there until the market correction, and then sun went down really fast. So you have some things like that going on now. And, you know, I think there’ll be more of the so called unicorns that, you know, fall off. But there’s a lot of really legitimate ones. And we’re in a transition that’s exciting. The web is offering tremendous opportunity. And analysis of data is just so important now, and robotics is another interesting area that’s, you know, taking place. And I personally, you know, out of Azure have been investing in more in the E commerce space. Just because I think we’re early in the transition. And the old line is not adapting. Well.

Alan
Yeah, known as said, it’s a lot of companies that it’s like moving a big battleship, it’s it’s trying to get them over.

Mike
And, you know, like, if you’re Macy’s, you can’t keep closing stores into profitability. At a certain point, you have to fix the problem. Yeah. And you know, if you’re reluctant to change, you’re never going to fix the problem. So yeah, you’ll survive another 1015 years, but eventually you’re going to be serious, you know, and so you have to adapt. Walmart has had a lot of trouble competing with Amazon. And, you know, when they bought jet, I think they overpaid tremendously, but they are desperate to try to figure out how to compete online. And maybe they got some strength out of that. i It’s hard for me to tell. But I think that was a diving save for the investors in jet.

Alan
So that leads to the next question that when you’re looking at a company, and you’re deciding, do I go into this company or not? What do you look for? What are the key attributes?

Mike
Yeah, so first of all, the team is paramount, a great team can move the ship. And if they’ve made some mistakes, they can fix them. So that’s the most important thing. But you want a large market opportunity. And so we assess that. And it may be an existing market that’s ripe for change, or it could be a new market that we see developing. You also want a winning business model. I think we’re unusual. As a firm in that we pay a lot of attention to business model. And the business model means what is the long term gross margin going to be? How does that compare it? And what’s the lifetime value of a customer? And how does that compare to the cost of acquiring the customer. And if that ratio isn’t right, then the company’s going to be in trouble at some point in time, it can keep losing money, and maybe it’s gets financed. But at some point, you have to figure out a way to make money. So, so we look at those things, and you know, and we look at a potential operating margin, and then do they have some kind of competitive advantage that’ll allow them to, you know, do well, compared to existing players, or new players who tried to copy them?

Alan
I’m visiting here today with Mike Kwantinetz. And I need to take a quick break. And we’ll be right back after these messages. And when we come back, I want to, I want to get into the predictions that you’re looking at for the futures you as you see it. So thanks.

Alan
Welcome back, convinced here today with Mike botnets. And Mike, before the break, we we talked about delving into your your predictions for 2017 that you do quite a bit of blogging in this area. So what do you see happening in the public sector?

Mike
Yeah, so when I do these predictions, a few of them are stock picks for the year. And I’ve been fortunate in that they’ve worked out pretty well, I’ve only had one wrong over four years. And that was a slight down in it. And the others have been going up on average about 60%. And so this year, the three stock picks are Tesla, Facebook, and Amazon. They were already up a bit, you know, early in the year. And each one has meets the criteria I spoke about earlier in a great management lodge market. And a very interesting business model. In Tesla’s case, what’s interesting, a lot of people focus on Tesla’s beak and focus on the car itself. And you know, the car is way ahead of the competition in terms of the electric aspects of it, as well as the automated features in it. So all this discussion of Google and others for automated car, it’s only one company that really has an automated car in the market. And that’s Tesla. And, you know, they’ll keep improving it. Other companies have announced that in 2000 22,021, they’ll have an automated car. And there’s been about a dozen that have said that. But the other part of Tesla is the business model. They have eliminated dealerships. They basically have what I call a guide store. So the stores that they open up, don’t have inventory. A guide store is a store that doesn’t have inventory, it allows you to see the product, check it out, and then buy it online. And that’s what Tesla is. Now, because they have a guide store rather than a dealership with a couple of 100 cars on the lot. They have a very small footprint that they need. That small footprint means they could be in the Stanford Mall. They could be in other malls, they can be in high density shopping areas. No other car company can do that. It also means that they control the customer experience. No other car company controls the customer experience, and it’s a much better customer experience. It also means for servicing the car they can consolidate into individual areas. So they can have 10 Different guide stores and one place where you do your your maintenance of the car. Very efficient business model like Dell. They don’t produce a product until it’s already been bought, and you buy exactly what you want, you don’t buy what the dealer has on the lot with all kinds of stuff on it that you don’t want. You decide what you want, that’s what you buy, you wait to get it, and Tesla doesn’t carry inventory. So very different model.

Alan
The on test sets essentially thing of this deal was Solar City been kind of controversial people have felt is the right direction and, and and also the multiples were trades for every 10 shares of solar city goes one to Tesla. But it’s not. It’s not equal math. In other words, Tesla is trading at a premium versus solar city is lagging. What What’s your take on that? First of all that

Mike
So if you’re a company that trades at a significant premium, acquire things that don’t trade? It’s real simple. Trade a multiple of revenue, and now you’re bringing more revenue at a lower multiple than you trade that chances are, you’re gonna have the stock appreciate, I also think Solar City is in the front of, we’re gonna convert more and more to solar. Yeah, so they I think it’s a much better acquisition. By the way. The other thing that’s gonna happen is the electric companies are going to fight back, you know, like, we just put solar in the middle of putting in our house and people selling it say, Well, you sell back to the electric company zero. Electric Company keeps tweaking what they let us do. So what are you going to want to do, you’re gonna want to put panels in the house that store the technology that stores the electricity, and makes you less dependent on doing anything with the electric common guess who the lead is going to be in that Tesla. It’s, it’s really interesting, and they already have product, but it’s expensive right now, with technology, the cost comes down every year. And that’s what’s going to happen with that product. So not only are they going to sell you the solar system for your house, they were also going to sell you the storage system. And they’re also a leader in battery technology. So you know, they’re a very interesting company. And one of the reasons why I’m confident that this is going to be a big year for Tesla. And it’s unbelievably predictable. They have 400,000 model threes backward, and it’s going up every day. They’re building plants to produce 500,000 cars in 2018. How many cars do you think they’re selling in 2016?

Alan
That says something? 100,000? Yeah,

Mike
So 5x the units now the average price will be lower? Because the three, so probably three times the revenue in 18 that they have in 16? Should the stock go up off of that? I think probably and by the way, increases in revenue, drive earnings faster. So earnings will go up faster than 3x. Between now and at what do you think about Amazon? I always have loved them. As you know, we were at a meeting when we first started Azure. And we had this brilliant Advisory Board, who’s who of the industry. And at the time, Amazon stock was $5 a share. And I said why doesn’t Walmart buy Amazon? And everybody in the room but me thought they shouldn’t. And they may have messed it up if they did you know, Amazon not only has brilliance in terms of shopping, they also one other company has been able to come out of their sphere and have the best cloud offering who would have thought that would be from Amazon, that that would be driving revenue and earnings. And by the way, the efficiency of that is getting better each year. So it’s adding to the the margins are going up in their cloud or they launched the Kindle now they they own, you know, kind of ebooks. All right. They launched a subscription service for that in the first year they lost money, which is the way Amazon does it to get the market share. Now they have the market share and they’ve tightened up what they’re doing and the earnings on that it’s gonna go way up. The echo is unbelievable. In my blog, I compare the Echo to if you look at the back to five other launches, the iPod, the iPad, the iPhone, so three Apple products, but also DVD player CD players, and how did they progress from year one to year two, they all grew at least 100% And in fact all most of them grew at least 200% in the second year in the market. And by the third year in the market. They were between 300% and over 1,000% in the first year. The echo I think is a big product for them. And I think even for this Christmas, I think you’re gonna hit big numbers when they announce so so I think they have a lot of luck. Thanks for the story. But what’s interesting is they understand the consumer. And they give you an unbelievable experience as a consumer.

Alan
I want to jump over to new and upcoming technology. There’s something in the robotic field that you’re involved with.

Mike
Yeah, there’s a company called mega bots. And it’s a really interesting company. So they are the first company that can efficiently build a giant robot. They had their prototype robot, you know, around for the last year. And now they challenged this company in Japan that’s building a giant robot to a fight. And they are in process of completing the giant fighting robot, the robot is going to be 16 feet high, they’ll make cash, weigh 20,000 pounds, be able to fire a painful at 120 miles an hour, which is fast enough to pierce armor. And so it should be very interesting.

Alan
So are they the Robot Wars have now scaled to?

Mike
Well, all of the things you’ve looked at, have either been animations, like in Star Wars and so on? Or they’re really small robots? Yeah, you know, so this is the first time we actually are going to have a very, very large robot. Think of it as NFL meets transformers, you know, where you can have live events. But you also can have all of the licensing and things you do, because people are going to want to own little replicas of this, and so on.

Alan
So they’d be so so there’ll be teams that would actually buy the robot.

Mike
They’re going to have teams at a certain point and form a league of giant fighting robots, and they’ll own the league. And people will buy franchises in the league, you know, kind of like NFL type things. And, you know, they have to come up with all the rules of what the franchises get, and, you know, so on, but there’ll be live events, and I’m pretty sure they’ll be able to fill a stadium of 60 70,000 people pretty easily. I mean, if you think about it, people want to see combat, but they don’t want to see anybody hurt. So this is an ideal solution to get, you know, that type of experience without anyone being injured. Now, they’re piloted robots. So one of the technologies things they have to do is make sure the pilot is well protected. And pilots are inside these. Yeah, yeah. Yeah.

Alan
So what else do you see coming up?

Mike
Alright, so we have another company that’s pretty interesting called Le Tote. And it’s a, it’s a Netflix like subscription, where you pay monthly, and you get a box. And a woman goes on the site and creates a virtual closet, and puts about 80 items in they get the first box, which is three, three clothing items and two accessories, they can wear it as much as they want, when they’re done wearing it, they send it back, get the next box similar to the old Netflix model. And we then clean it and then press it and so on and use it again, you know to for someone else, this thing is taking off. It says women a tremendous amount of money. In a single year, a woman has access to 720 items. I’m sorry, they they have access to and 120 items, 120 items in a year. And they’re paying $720 for that. And normally the amount of product they have access to is 10 times what they’re paying in value. So it’s pretty and they don’t have to clean it. You know we do that. So that’s a very interesting one. It’s ramping very, very quickly. I think you’re going to hear more and more about them. We have another one called a cherish, which is a company that is a marketplace for vintage furniture and decor also doing really well. And there’s nobody quite directly competing with them. Although now they’ve launched the second product, the Casa which is competing with first dibs. A third one VITA is very interesting. What they are is a next generation ECI is the way to think about it. They allow people to design products using their technology. And they have partnerships with share now is designing products on on their site. They have fine art products and products are things like scarves, tops for women, dresses, you know and so on. And they were in some museum stores now because they can have a Van Gogh on a scarf and Ah, and and they manufacture in countries outside the US primarily, but some in the US. And again, they don’t hold inventory, they produce the order. And another one that when I say ramping fast, I’m saying over 100% of you, wow. And some of them are to 300%.

Alan
So Mike, it’s been fun having you with the Santa show person wants to follow your blog. How would they do that once more?

Mike
Google sound bites and bites V whitey. Yes. So sound bites two.com sound bites too, and you’ll find it.

Alan
We’ve been busy here today with Mike what next? And Mike, thanks for being on today’s show. And join us again here on American Dreams next week.

 

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This transcript was generated by software and may not accurately reflect exactly what was said.

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