The 2015 Fintech Headline “RIP Bitcoin and XBRL, Incumbency Wins”

I promised myself no New Year prognostication posts, but I could not resist this one.

There is too much gloomy Eeyore talk about disruptive innovation.

Headline # 1:

Bitcoin price is down, mining is too expensive, big bad guys will gang up in a 51% attack to steal the last few ornaments from the burning building.

Headline # 2:

The US Senate will overturn the XBRL Mandate, despite pathetic pleas to #SaveXBRL.

Phew, thank goodness that is over! Stop this crazy innovation express, I want to get off at a familiar station.

I think both gloomy tales are wrong. However nor do I think it will be a “snapback rally” where 2015 suddenly makes all the problems in Bitcoin and XBRL go away.

I stick by my Bitcoin price prediction for 2015 that it will be….boring.

The Bitcoin price won’t be much different as we enter 2016. It wont crash to the floor. Nor will it be an amazing speculative win. Bitcoin price will behave more like a…currency. Which is of course good news for anybody building products and services around Bitcoin.

Nor do I think there will be a collapse of the Bitcoin mining industry or a 51% attack.

Bitcoin in 2015 will be a boring “muddle through” story.

The price will be stable. More transactions will happen off chain through services such as Coinbase and Bitpay. Interested parties with a lot at stake (Big VC and the ventures they invest in) will donate resources to help Bitcoin mining economics/safety in the same way that Big IT donate to open source. More complex transactions will happen in Sidechains and Alt Coin based platforms such as Ethereum.

In short:

Bitcoin in 2015 will be….drum roll please….BORING

The XBRL story will be more interesting, except that it won’t be televised and few people will be interested.

XBRL will suffer a near death experience in 2015, but will emerge stronger and start to change the world, but nobody will notice.

The US Senate will shoot the US Capital Markets in the foot by overturning the XBRL Mandate (first for small companies). There is no big money rooting for XBRL and no populist groundswell and politicians do not understand the potential benefits of XBRL to small business.

The headlines after that will be “RIP XBRL, we hardly knew ye”.    

Then XBRL will emerge stronger. The reason I say this with such confidence is that the two alternatives are less plausible:

  • We all give up on the idea that financial reporting to investors and regulators should be machine-readable. That is as implausible as going back to licking stamps to send somebody a message.
  • A better standard than XBRL emerges. That is like expecting Esperanto to triumph over English. XBRL problems are minor to be fixed and plenty of people and firms have the skills and motivation to do this.

Can XBRL survive without the SEC Mandate? Now we are into the realms of speculation, but I think something like this will happen:

  • In some niche market, Small Cap CFOs recognize the discoverability power of XBRL and implement it even though there is no mandate to do so.

Count me an optimist. I think both Bitcoin and XBRL will be good for business and prosperity (albeit very bad for some incumbent businesses) and therefore the RIP headlines will be wrong.

Happy New Year!

Four Pivot Gates That Unicorns Pass Through

This is a “bonus chapterette” from my book Mindshare to Marketshare.

Think of these Four Gates like a funnel, with lots at the top and very few at the bottom (just like a sale funnel):

  • Gate #1: Conceptual Clarity.

  • Gate #2: Prove the Concept.

  • Gate #3: Scale within Niche.

  • Gate #4: Expand and Dominate.

It takes totally different skills to go through each of these four gates. Few founders have all the four different skills needed, which is why so many ventures fail as they attempt to pass through these gates. Even harder is the fact that the skills, techniques and attitudes that make you successful going through one gate are exactly the opposite of the skills, techniques and attitudes that make you successful going through the next gate.

Each gate requires a wrenching pivot.

This is like a ski slalom race where you have to change from downhill to snowboard to telemark as you go through each gate.

There is an exit opportunity from Gate # 2 onwards.

Gate #1: Conceptual Clarity.

This is the “fit to the future” phase. This is where you have a vision of “a world where….”. From this you have a mission for the venture along the lines of “in this future world, we will…”. Finally, you have a strategy, as in “we will do this by….”

There has been a lot of fruitless debate about whether concept or execution is more important. This debate is silly, because you must have both. A bad concept that is brilliantly executed will be nothing more than a tough uphill slog with relatively little reward at the top if you get there. On the other hand, a brilliant concept with weak execution is nothing more than “woulda, coulda, shoulda”.

Conceptual clarity must address these 4 dimensions:

  • Huge market. A small niche might make for a great venture that can be bootstrapped or flipped, but Unicorns need massive markets.
  • Massive disruption hitting that market. This is the kind of disruption that creates an existential threat to the major players in the market – think of Skype vs telephone companies or Google vs traditional advertising or AirBnB vs traditional hotels. If it is not disruption of that scale, the existing vendors will add the features they need to stay competitive (“adding that feature” may mean acquiring your venture, so this is fine for ventures that will be acquired before they go through all these gates).
  • You have a 10x proposition. You have to be 10x better or faster or cheaper than the incumbents. That seems like a high bar, but it needs to be this big to overcome the start-up risk that you are asking customers to take. Tactically you may start by offering say 3X knowing that as the technology rolls onwards you have much more in reserve, but you must see where that 10x is coming from.
  • Timing. Research across hundreds of startups shows that timing matters more than team or funding or anything else.  The world has seen lots of brilliant ideas that were ahead of their time. They could not be executed at the time. Think of Leonard Da Vinci’s inventions. Or more pragmatically today, think of brilliant concepts that just needed bandwidth at mass scale. Or imagine Lending Club before the Global Financial Crisis. You must have a crystal clear point of view on “why now”.

Here are the two things you do NOT need to have at this stage:

  • A strategy that seems viable to most people. Most great ventures look totally ridiculous to most sensible people in their founding days. You do need a couple of smart people to believe in the strategy, whether they be co-founders or investors. But get comfortable with the fact that most people think you are crazy (unless you actually are crazy, there will be times when you doubt yourself and when you think most people are right).
  • Any proof that any of the three things on that checklist are true. Anybody who asks for proof at this stage does not know how this works and does not deserve to be your partner.

Many great entrepreneurs have conceptual clarity but are weak at articulating it, or too busy executing on the next phase. At this stage nobody cares about your concept. Only after you have passed the next gate does anybody care.

There is no exit opportunity at this Gate.

Gate #2: Prove the Concept.

This is the “fit to today’s market” phase. This is also what VCs call “traction”.

This where you focus on the immediate needs of customers who are ready to make a commitment now, leaving out all the futuristic, big picture stuff which would only scare potential customers.

This usually means you seed the market and prove the value proposition in a tiny little niche; at launch all the market will see and all the entrepreneur is thinking about is that tiny niche.

However, somewhere in the back of their mind, the great entrepreneurs carry a conceptual vision that is a lot bigger than the immediate solution that they offer to get through Gate # 2.

Many entrepreneurs stumble at this point because they are not consciously making the transition from thinking about the future to executing on the present. The future that you envisage may or may not come to pass. If it does, you may strike gold. However that won’t help you get traction with customers today. All they are concerned about is problems they have today. Your customers maybe happy to “shoot the breeze” about the future, but they will only spend their money and/or attention on problems that they have right now.

That almost certainly means you get traction in a niche that is tiny compared to the big vision in your concept. This process of digging deep into a niche and focussing 100% on the present day needs is a vital step in turning dreams into reality. It is also 100% opposite to what you do to get through Gate #1.

In enterprise software, getting through Gate #2 means getting the first three paying reference customers. This is a tough job because most customers prefer to wait until you have these three references before committing; one way to drive enterprise software founders crazy is to ask them about this chicken and egg problem. These need to be real enterprise-wide deployments with customers paying 6 figures. A few logos of customers deploying the software in one small area and paying a few thousand dollars won’t make the grade. Lots of enterprise software ventures reach this stage and become cash flow positive without raising any VC, but then stumble at the next Gate.

In consumer or media ventures, getting through Gate #2 means month to month growth rates in attention. I am using the word attention because the specific metrics such as page views, uniques, downloads, active users tend to change a lot as people “game” the old metrics.

At Gate # 2, you typically have three opportunities:

1. The exit opportunity is typically Acquire-Hire. You have some value, but it is very little.

2. A Series A VC round.

3. Grow from revenues (slower than 2 but gives you more control).

You have to assess this based on your age, motivation, connections and the strength of your concept and the offers you are getting.

Some enterprise software vendors that make it to Gate # 2 get acquired for their R&D value with a bit of credit for the quality of your customer relationships. If you raised VC, the acquisition value will be a disappointment to investors. As VCs usually get liquidation preference, this will be an even bigger disappointment to founders and management. If you bootstrapped to Gate # 2, the value you will get from the trade sale will still be life-changing as you don’t have to share the spoils with VC. However the big money, the fame and fortune, is reserved for those who make it to Gate # 3. One way to look at this is, don’t raise VC unless you are determined to make it past Gate # 3.

Consumer ventures can exit for great multiples at Gate # 2 without revenue as deals like Instagram and WhatsApp show. However these deals are the exception that prove the rule. It only ends that way if you get massive growth in attention at a time when a big acquirer is facing massive disruption (think Facebook facing disruption from mobile and thus paying a big premium for both Instagram and WhatsApp). Fortunes are lost trying to emulate this when those rare stars are not aligned.

Gate #3: Scale within niche.

This is the “make it work as a business” phase. This is the point where you will need the skils and techniques that I describe in Mindshare to Marketshare. You will need to scale your sales and marketing with replicable processes without losing the passion and creativity that got you to this Gate.

For consumer web ventures, the big obstacle at this Gate is proving a scalable and profitable revenue model. There are now trade offs and conflicts to be managed between the needs of free users and the different needs of paying customers (e.g. advertisers) and that is often hard for the entrepreneur who won in the last Gate through their self-proclaimed single focus on user experience.

Businesses that make it through this phase are “in the catbird seat”. You have a profitable, scalable model that you can grow with internal resources as long as you like. You will be fending off acquisition offers all the time, both from financial buyers (private equity funds) as well as strategic buyers. You get to choose when and who you sell to. Or you may choose to go all the way to Gate # 4.

Gate #4: Expand and Dominate.

This is the post IPO sustainable public company phase.

The “expand and dominate” Gate #4 is about getting back to that original founding conceptual clarity, of realizing the big picture potential. All the long years of the earlier Gates are simply laying the groundwork to make this possible. This is another wrenching pivot. The skills, techniques and attitudes that got you through Gate # 3 are all about focussing on a niche, constraining ambitions for the future while concentrating on the immediate opportunities. If you have done a good job in the transition through Gate # 3, you will be able to leave the quarter by quarter growth to a highly competent team. That frees the founder CEO to focus on expanding into adjacent markets and dominating the market. Dominate may sound harsh to some ears, but it is what public market investors expect, that is what the high valuations given to fast growth tech companies are based on.

Entrepreneurs that make it through Gate # 2 get the opportunity to exit and that can be a good result if they have bootstrapped to that point. Entrepreneurs that make it through Gate # 3 get the opportunity to exit and that is a good result for founders, management (this is when those stock options become life-changing) as well as any investors who are fortunate enough to be along for the ride. Gate # 4 is for Unicorns with fame as well as fortune (founder faces on the front page and on TV).

The Silicon Valley VC orthodoxy for a long time was that no founder has the right profile to make it through all the 4 Gates. Therefore VCs have usually tried to either sell the business at each of these Gates or find professional management to replace the founder CEO. (I refer to the Founder CEO as the key, because even though there are often co-founders, there is usually one of them who emerges as the leader). That conventional wisdom is being seriously questioned today as we witness the failure of “professional managers” from big companies to drive the growth of start-ups. When you look at the really great success stories, you tend to see one highly charged entrepreneur who takes it all the way through these 4 Gates – think of Gates, Ellison, Page, Zuckerberg, Bezos, Jobs, Benioff. Their ability to pivot and personally change at each of these Gates is the story of their success. It would be crazy to see these entrepreneurs in their founding days and envisage them as the CEO of a multi-billion $ publicly traded company, yet some of them actually do that.

The current VC fund structure, with its need for exits to return money to the Limited Partners, is not conducive to backing entrepreneurs all the way through these four Gates. So we are likely to see some innovation in this area as the rewards for backing entrepreneurs through all four gates is very big.

Motif Investing And The Low Cost Active Alpha Space

The general Fintech category of Personal Financial Management (PFM) has two main sub categories:

  • Tools to help you save and spend smarter. This as the personal P&L.
  • Tools to help you invest smarter. This as the personal Balance Sheet.

Within the latter, there are two main approaches:

  • Passive, Beta. This is where the likes of Wealthfront and Betterment play. They reduce the cost of asset allocation according to life-stage models (eg more bonds and less equities as you get older). You won’t get more than average returns (Beta) but it won’t cost you much in time or money to get this average.
  • Active, Alpha. Alpha is what Private Equity and Hedge Funds claim to get and why they can charge “2 and 20”  (2% of Assets Under Management and 20% of the profits that they generate).

It is not an either or choice. Most investors do both. A common strategy is the “bar bell”. One end is passive/low cost/Beta and the other end of the bar bell is the part where you apply your expertise and insight to get Alpha above average returns.

Motif Investing is one of the players in the Low Cost Active Alpha Space. They aim to help you get some of those above average returns, without having to pay 2 and 20. I think of this as tools to democratize Wall Street i.e to make it easier for Joe Q Public to make money in the capital markets.

The most disruptive player in the Low Cost Active Alpha Space (IMHO) is Angel List Syndicates.

However there are many other startups in this space, notably Covestor, Estimize, ThinkNum and StockTwits. The one I am looking at today is Motif Investing.

Motif Investing is based on the fact that many of us have insights and concepts of how the world is evolving. For most of us those insights are not easily actionable. Motif Investing is based on the idea that you can assemble a portfolio of stocks based on those concepts. I decided to test this by using an insight/concept that there is a lot of growth in emerging markets as countries pass the tipping point to a self-sustaining middle class. This is not the Unbanked/Bottom of Pyramid. Nor is it the Global 1% Ultra Luxury market. It is the cost conscious but also quality and brand conscious mainstream. This is the “Emerging Middle Class”. Whether that is a great insight/concept is not the point. The point is:

“how easily can I create a portfolio based on that Insight/Concept using Motif Investing?”

I hit a problem at step # 1. Motif Investing is only available for US Residents. Oops.

So I am reduced at this stage to other reviews such as this one.

Key takeaways:

– Motif Investing is an online broker. That makes sense. The online broking business has become a commodity race to the bottom price. So, adding tools on top makes sense.

-Motif Investing charge a flat fee of $9.95 for a Portfolio of 30 stocks or ETFs.

– They also enable a passive mode (100 Pre Selected Motif Funds).

I did not see any way for me to gain a following and make passive income from investors who want to buy exactly the same stocks as I put into my Emerging Middle Class Motif and make some fees from that. That is what both Covestor and Angel List Syndicates allows.

The disruptive technology in this space is XBRL. Widespread adoption of XBRL would make this kind of portfolio construction system trivially simple to create.

It feels like we are in the really early days of the Low Cost Active Alpha Space and that a mature offering would enable:

  • Global investors i.e not limited to US residents.
  • Global stocks (for example, my Emerging Middle Class Motif would have a lot of Indian, Chinese and Brazilian stocks).
  • The ability to short (eg to choose an overhyped sector and short all of them).

 Edit. Somebody from Motif Investing reached out to me to clarify that they do offer a way to receive income from others when they follow your strategies.  This called the Creator Royalty Program and it allows you to create a strategy or multiple strategies and offer them to our community of investors.  At any time if another customer buys or rebalances a motif you created, you receive a $1.

I don’t think $1 is enough. Angel List enables you to get carry, just like a Fund (albeit less than a Fund of course). Covestor follows the same model. That is the benchmark. The $1 model assumes a long tail of contributors that may work for something like blogging, but somebody who will put serious amounts of time and experience into creating a Motif portfolio will expect to be seriously compensated.

Klarna is Primary Fintech Innovation from Nordics

Primary innovation is doing something that has never been done before.

Most primary innovation is ridiculous and fails without anybody noticing.

Very, very rarely, primary innovation changes the world and the company that creates the innovation becomes a Unicorn.

Secondary innovation wins by giving a twist to that primary innovation. The two simple twists are:

  • Apply the primary innovation to a different country aka “concept arbitrage”. A lot of European and Asian Fintech falls into this category. This is more viable in Fintech because “bits don’t stop at borders, but money has to show its passport” (meaning that regulation is a barrier to entry).
  • Apply the primary innovation to a different domain aka the xx of yy (e.g. the “Uber or AiBnB of..). A lot of “subprime VC” goes to fund this type of secondary innovation.

Secondary innovation is a perfectly sensible way to make money. It is just not as interesting as primary innovation. It is hard to imagine creating a Unicorn with secondary innovation (but very easy to get headline valuations over $1 billion for secondary innovation).

The number of primary innovations is really limited. Maybe there are 10 in Fintech. Historically, almost all primary innovation has come from Silicon Valley.

Occasionally what appears to be secondary innovation – the small twist – is actually the game-changing innovation. For example, Angel List Syndicates could look like a small twist to the equity crowdfunding concept. I think Angel List Syndicates is actually the innovation that changes the whole asset management business.

I think Klarna is one of those few primary innovations. The fact that this primary innovation comes from Europe is significant.

The Klarna story has some “straws in the wind” that indicate something big such as:

  • The investors are top tier. Sequoia Capital has the best track record of spotting primary innovation early and Michael Moritz (who led Sequoia Capital in it’s current incarnation) chose Klarna as the only European Board to join. General Atlantic (who came in after Sequoia Capital) only buy when the financial metrics are strong. So while I don’t have access to Klarna’s financials, I assume they are strong.

So much for the straws, what about the wind?

In my book Mindshare to Marketshare (shameless promotion here), I describe turning “secret sauce” into “unfair advantage”.

Secret sauce is the primary innovation. It has to be solving a big problem/filling a real need (aka “value proposition”). In Klarna’s case, that is:

Less time/hassle buying on a mobile phone (consumer)

Less mobile shopping cart abandonment (merchant).

What Klarna offers is actually very old fashioned – buy now, we will collect money after you have the goods. It is what you do in the physical world (pay the barista only after you have your coffee). Doing that digitally means managing fraud and deadbeats (which is really what the Credit Card industry does). Klarna’s secret sauce was simply to track the user via their confirmed national identity. This is easy in a small homogenous country like Sweden. It turns out it also works in Germany (thus the Sofort experience) and I know it works in Switzerland where I live.

America is not fundamentally different, even though “homogenous” is not a normal descriptor. Social Security works as ID. ID theft is a big issue; it will be interesting to see how Klarna navigates that issue.

It is easy to conclude that the Rest (every other than Europe, America, Japan) is different. Klarna has its hands full in Europe and America for now, but they will soon have to tackle Asia. This where the Unique Identification Authority of India is significant.

Could this be the first European primary innovation that launches concept arbitrage in America? Affirm looks like a candidate. I don’t think concept arbitrage will work in this market because Klarna already has top tier American investors.

So, does this make Stockholm the Fintech Capital of the World? No, but Nordic Fintech is also well represented in Saxo Bank.

This will be my last post for this week. Happy Holidays.

Real Fintech Unicorns By Location

This will be a short post, because my definition of Unicorn is over $1 billion in realized value (in either IPO or Trade Sale) and that is a very short list. I wrote my rationale for keeping out the ones with headline valuations over $1 billion here. I then look at them by location, using 6 buckets – Silicon Valley, New York, London, Rest of Europe, Rest of America, Rest of World.

I am updating this post as I see more. Thanks for all who alerted me to ones that I missed.

Spoiler Alert: Silicon Valley is still in the lead but other centers are sharing in the spoils.

Realized over $1 billion (“the podium”)

  • Xero

Score: Silicon Valley = 1, Rest of World = 1, London = 1, New York = 1.

Will know soon (Fintech IPO watch list)

  • Prosper
  • Sofi

Score: Silicon Valley = 2

Big rounds but who knows what will happen:

  • Wonga
  • Square
  • Stripe

Score: Silicon Valley = 2, London = 1, Rest of Europe = 3.

Not Unicorns but nearly (over $750m) and realized:

  • Braintree $800m
  • Climate Corp $930m
  • Trusteer $900m
  • IPREO $975m

Score: Silicon Valley = 1, London = 1, Rest of America = 3

Fintech in Germany Is Quietly Big But Lacking a City Magnet

British people sometimes complain about how much London dominates the UK economy. However, when it comes to Fintech that is a huge advantage. In London it is easy to gather techies, bankers, investors and digital growth hackers all in one room.

To see the difference, travel on the Fintech City Tour through Germany. We have to go to Frankfurt (360T, Traxpay), Berlin (Mambu, Open Bank Project, Smava), Munich (Fidor, Paymill), Hamburg (Kreditech) and Gauting (SOFORT).

Fortunately I was driving the latest Mercedes on those famous Autobahns and did not have to worry about the speed cops. Actually, I traveled even faster on the digital express (plan to visit in person at a later date).

Germany has some huge advantages:

  • Big economy & German speaking neighbors in Switzerland and Austria.
  • Great engineering skills (it’s a cliché, but think how much we love our German cars).

Germany is not as big a domestic market as America (#4 in GDP ranking). However, Germany is one homogenous market, while the States in America still have a lot of local regulatory power when it comes to finance. Germany is part of the European Union, which in aggregate is a bigger market than USA and more homogenous when it comes to financial regulation (all those derided “Brussels Bureaucrats” do serve some purpose).

The German Fintech ventures are bigger than one would guess from the lack of name recognition. There are four reasons for this:

  • Many are B2B (white label), which means they don’t spend any time or money getting name recognition among consumers. For example, 360T was reported as trading $55 billion FX trades per day in March 2013.
  • The Consumer focused ones tend to stay within Germany for a long time because it is such a big domestic market. For example, SOFORT has a name that is clearly designed to resonate with German speakers and would sound strange to American ears. SOFORT grew quietly and were then acquired by Klarna (a European Fintech Unicorn that I will be covering soon).
  • Germans have a deep aversion to hype. They prefer engineering to marketing and cash to plastic. German Banks were deeply wounded by the hype and shady marketing of subprime assets; many German Fintech startups view engineering as the best way to fix the broken global financial markets.
  • Many German Fintech ventures have grown without any splashy VC funding rounds that get covered by the tech media. This is true across Europe (for example, Saxo Bank from Denmark). That makes Germany prime hunting ground for Growth Equity Funds such as Summit and General Atlantic that like to invest large amounts when a company is already well established and then help them grow as a private company.

Germany is also home to the only publicly listed VC Fund, Rocket Internet.

The lack of a major city magnet does not seem to be hurting German Fintech ventures, which are clearly doing well. Historically, it has been hard to get early stage financing in Germany, but that seems to be changing with incubators starting to appear and Rocket ready to finance high-performance teams.

We need to #SaveXBRL from being overturned

In the wake of the financial crisis in 2008, the US Government mandated machine-readable financial reports via XBRL.

That was a wonderfully progressive move that could dramatically change the efficiency and reliability of the capital markets by bringing financial reporting into the 21st century. (If you are new to XBRL, this post and it’s links will serve as a good starting point).

Now that great initiative is in danger of being overturned. This would be a terribly regressive step.  An efficient, fair capital market is key to a prosperous free enterprise society; so this matters to us all.

Which is why we need to #SaveXBRL.

This post has the story and this is the bit that matters:

“Smaller Firms Want Out
An even larger debate surrounding XBRL is taking place in Congress. Some corporations have protested to lawmakers that using the XBRL tagging system is too costly and that it puts undue burdens on smaller firms.

The legislation that addressed the issue, the Small Company Disclosure Simplification Act, was first introduced by representatives Robert Hurt (R-VA) and Terri Sewell (D-AL), and passed the House Financial Services Committee on March 14 by a vote of 51 to 5. The proposal is now part of a bill called H.R. 5405, which passed the House on September 16, requiring that the SEC exempt public companies with annual revenues under $250 million from filing their financial statements in the XBRL format for up to five years. The bill awaits a vote in the Senate.”

To understand why this is the wrong way to solve a legitimate problem, travel with a financial data item through the financial reporting process:

  • Step # 1. Start as an electronic bit in an accounting/ERP system. The data is now perfectly machine-readable and gets aggregated and processed in the most efficient way.

“I will never forget talking to the CFO of one of three largest corporations in world, and he told me that the only time their numbers are on actual paper is when they send their reports to the SEC. That’s because in the corporate world, everything is electronic and digital,”

  • Step # 3. Somebody extracts the data from a PDF or HTML file and turns it back into a machine-readable bit in XBRL format. That “somebody” is probably working for an outsourcing firm that is being paid by the company doing the reporting, because they have to comply with that SEC mandate.

You can see why this song is playing to packed houses:

“release those poor small companies – the life blood of our economy – from yet another regulatory burden”.


In other words, stop demanding Step # 3. Kill off the XBRL Mandate. Return us all safely to the 20th Century. Forget that the Internet happened.

The solution is not to eliminate Step # 3. The solution is to eliminate Step # 2.

Imagine the poor overloaded folks at the SEC surrounded by piles of paper. They are dedicated, smart and hard working. They will therefore have evolved a system that sort of works – poring over individual company filings and marking something odd about a data item in a footnote with a yellow pen and then digging though a pile of documents to look on page 256 of another report (having cleverly marked the page) to correlate something odd on that other company’s filing…

Imagine if all the data was in XBRL electronic format and they could let an algorithm do the grunt work, so that they could do the higher-level work needed to catch the bad guys and maybe avoid a repeat of the financial system’s “cardiac arrest moment” in September 2008.

The algos could process thousands of companies to look for that anomaly, that weird thing that says, “something looks fishy”. The data surfaced by the algos still requires the higher-level cognitive and pattern matching skills of humans. This is about empowering the SEC staffers to be more efficient. I imagine that they would vote for this change.

The work done by SEC staffers is impossible without better systems. The devil is in the details, or to put that in financial reporting language:

“the devil is in the footnotes”

The footnotes are where a company buries that embarrassing fact that they want investors and regulators to gloss over. Scam artists use that footnote technique; that is an edge case. More normally it is used by companies to simply “accentuate the positive” while abiding by the letter of the reporting law – a kind of obfuscation through obscurity.

We want the SEC to be efficient and to catch the bad guys. Imagine a tech-empowered SEC staffer being able to check a data point across thousands of reporting firms through a single algorithm that can be continuously improved.

Saving XBRL is not just about the efficiency of the SEC and catching bad guys. The bigger issue is about making the capital markets an efficient place for small companies to raise money and for retail investors to make money. This is where the story about saving small companies from the regulatory burden is so misleading.

If you eliminated Step # 2, there is no burden, even for small companies. It is straight through processing. Eliminating Step # 2 might entail a tweak to the SEC Mandate to mandate not just human-readable conversion of XBRL to HTML but the transmission of the raw XBRL data feed. Once that mandate was in place, CFOs would call their Accounting/ERP software reps and demand XBRL built into their core systems.

So much for the burden of XBRL. Why do small public companies need XBRL?

Small public companies need XBRL for discoverability.

It is the same reason that anybody running an online site/blog wants to be discovered by Google. You want your site to be discovered.

The CEO/CFO of a small publicly listed company wants to be discovered by investors. Obscurity is their biggest enemy.

These emerging growth companies (less than $250m in annual revenues) are too small to motivate analysts to pore over their individual filings. However if all their data is machine-readable, their company can be discovered by algos looking for bargains. Those algos could be used (and written) by individual retail investors who would get a chance to discover bargains (and shortable overpriced junk) that the big firms are not tracking. Small companies raising money efficiently and individual investors making money in the stockmarket sounds like a worthwhile objective.

I was motivated to get interested in the arcane subject of XBRL thanks to a superb article by Daniel Roth in Wired from the dark days of February 2009 called:

Road Map for Financial Recovery: Radical Transparency Now!


Overturning the XBRL Mandate killed would be a huge blow to small public companies and retail investors. The reporting burden can be fixed technically. I think saving XBRL is at least as important as Net Neutrality and when the digital people arise, the politicians and regulators are forced to listen. That is why I think it is both important and feasible to #SaveXBRL