Heads I Win, Tails You Lose ... Caveat Emptor.

In the recent Facebook IPO debacle, the role that Morgan Stanley and other underwriters have played is a curious one. (See Morgan Stanley made money on Facebook share drop).

As a routine procedure, it seems that the underwriters typically get to buy an additional number of shares from the company offering stock to the public.

"Investment bankers typically sell 15% more shares in an IPO than they actually have. ... Included in every IPO deal is an agreement that gives underwriters the ability to buy more stock from the company at a slight discount to the IPO price. So if the price rises after the offering, the underwriters can buy the shares from the company that they have promised to other investors, but don't actually have, and book a small profit. ... In effect, the underwriters were short the stock. ..."

So far, so good. Underwriters, in effect, have a call option on the stock.

However, in the case of the Facebook IPO, the stock tanked on the 2nd and 3rd days, ending below the IPO price. So, what did Morgan Stanley do? It bought shares from the open market, and not from Facebook, and sold them at the IPO price to investors — many of them retail — at the IPO price and, of course, pocketed the difference.

Thus, whether or not Facebook stock rose or fell after the opening price on IPO day, Morgan Stanley and other underwriters were already set to make money. Beautiful! The underwriters could not lose either way.

This episode reminds me of "Heads I win, Tails you lose." The underwriters, it seems, get to play this game.

Is this fair capitalism? Caveat Emptor.

Choice of Commencement Speakers.

WISHING ALL GRADUATES EVERYWHERE

The choice of a commencement speaker in American Universities is based quite frequently on worldly accomplishments, rather than being based solely on formal, university-centric, accomplishments. It is as it should be: Even the purpose of formal education is to assist the graduates in helping the world along anyway.

Years ago, we heard Steve Jobs giving a moving commencement speech for Stanford students in 2005. The latest example in 2012: Nipun Mehta, Founder Of Service Space, Delivers Inspiring Graduation Speech To Students At The University Of Pennsylvania. Neither of these have earned PhDs, but both have exhibited a lot of unconventional thinking.









Some additional googling takes us to an interesting TEDx talk by Nipun Mehta on YouTube: TEDxBerkeley - Nipun Mehta - Designing For Generosity.

If you, as a reader, is a recent graduate, I hope this blog post will help you derive inspiration from these two.

Odds of Winning a Silicon Valley Jackpot.

The recently announced acquisition of Instagram by Facebook has evoked an article with this title:

$1 Billion Start-Up Jackpot: The Behind-The-Scenes Winners At Instagram. 

Clearly, some form of a product that appeals to the billions of netizens is the prerequisite for such a jackpot.

However, here's a little tongue-in-cheek way of analyzing for the odds.

Now, if you are an engineer with all the right personal ingredients to create a startup, you'd do well to consider the following facts:

1. The odds of someone's winning MEGA Millions jackpot, which reached recently as high as $640 million, is 1 in 176 million, according to California Lottery web site.
2. The odds of someone's winning the smaller SuperLotto Plus jackpot is 1 in 41 million, also according to California Lottery web site.
3. The San Francisco Bay Area, of which Silicon Valley is a part, would rank first [in the United States] with 387,000 high-tech jobs.

Now, what are the odds of an engineer's succeeding in Silicon Valley? Consider this:

If the general odds of meeting another engineer with complementary characteristics is 1 in 10 million¹, the availability of a pool of 387,000 of them makes the probability of 1 among those to be your startup partner to be 0.0387, or 1 in 25. If you don't want to admit that all of the Bay Area's 387,000 can be Mark Zuckerbergs², you can narrow the field to Google alumni, Facebook alumni, etc. to, let us say, 10,000. Finding your entrepreneurial partner from among these 10,000, you get the odds of 1 in 1,000. Further, if you feel that you can only really pick one from a very small pool of an elite 100 in Silicon Valley, then the odds turn into 100/10,000,000, or 1 in 100,000.

While the foregoing is a highly simplified model of how one goes about creating startups, one thing is certainly clear:

As a brilliant engineer, you have good odds of finding an entrepreneurial partner to succeed in Silicon Valley.

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¹According to the 2010 census, Bay Area population is considered to be 7,150,739.

²You can substitute your favorite entrepreneur here, e.g., Google CEO Larry Page, Salesforce.com's CEO Marc Benioff, ...

Whither Agile Methodology?

Agile methodology has been in use in many corporations around the globe. Perhaps the best example of the results of this methodology is the mindboggling frequency with which newer versions of browsers are being made available. (For example, in just over three years, Google Chrome has been released in 18 major versions, not to speak of many more minor versions: Today, it is 18.0.1025.151 m).

In What Agile Teams Think of Agile Principles (subscription), Laurie Williams describes some research she conducted recently that reassures us that the original 12 principles of Agile Manifesto, crafted about 10 years ago, are still very much valid among agile practitioners. Here is an excerpt from the conclusions of that article:

The authors of the Agile Manifesto and the original 12 principles spelled out the essence of the agile trend that has transformed the software industry over more than a dozen years. That is, they nailed it.

This reassurance is valuable because there are still pockets of developer groups that are still uncertain as to whether to embrace Agile methodology.