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Why Alphabet’s Acquisition of Fitbit Is a Master Move

By Tom Taulli

Earlier in the week, there was lots of buzz that Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) would acquire Fitbit (NYSE:FIT), whose shares spiked more than 15% today on the news (the main report came from Reuters). While such rumors often fizzle, this one certainly did not. Today the announcement hit the wires: Google has agreed to shell out $2.1 billion for the company. All in all, I think the deal is a spot on — and should be a catalyst for Google stock.

True, it’s still relatively small, as Alphabet’s market cap is a whopping $870 billion. Yet, Fit is likely going to provide quite a bit of leverage. Let’s face it, Google has tried to get a piece of the wearables market with its Wear OS. However, there has been little progress so far.

How Fitbit Benefits Google Stock

So with Fit, Google will have about 6% of the global market (this is based on data from IDC). This will definitely be a good launching pad. According to Fitbit CEO and co-founder James Park: “Google is an ideal partner to advance our mission. With Google’s resources and global platform, Fitbit will be able to accelerate innovation in the wearables category, scale faster, and make health even more accessible to everyone. I could not be more excited for what lies ahead.”

But perhaps the biggest benefit — in terms of the impact on Google stock — would be the healthcare opportunity. During the past few years, Fitbit has gotten traction with striking deals with health plans. The company has also been working hard to get FDA approvals.

Oh, and yes, there is the treasure trove of data, which extends 10-plus years. Note that Google is a global leader in AI and this technology will likely prove extremely useful in transforming the healthcare industry. As CEO Sundar Pichai noted on the latest earnings call, the company continues to push the boundaries of innovation, such as with the creation of a new kind of neural network that improves web services as well as breakthroughs in quantum computing.

But the fast-growing cloud business should also be a driver for Google stock when it comes to healthcare. In September, the company announced a partnership with the Mayo Clinic to help with clinical experiences, diagnosis and research.

“Since Google has numerous health initiatives at present, those should complement what Fitbit brings to the table,” said James Cassel, who is the chairman and co-founder of investment banking firm Cassel Salpeter & Co. (in an email interview). “Access to the installed base could be very helpful to Google’s healthcare initiative Project Baseline – a partnership with Duke University School of Medicine, Stanford Medicine and the American Heart Association – as well as other health-centric projects they are working on. Access to big data is crucial for the future of healthcare and Fitbit has access to a lot of information.”

Bottom Line on the Alphabet Stock Price

The wearables market is simply too large for Google to ignore. For example, as seen with Apple’s (NASDAQ:AAPL) latest earnings report, the category is quite lucrative and a source of strong growth.

The company’s assortment of products — like the Watch, HomePod smart speaker and AirPods — generated revenues of $6.5 billion in the latest quarter, up 54% on a year-over-year basis (this is nearly as much as the Mac business!) In fact, AAPL has gotten traction with its Watch in deals with United Health (NYSE:UNH) and CVS (NYSE:CVS).

True, Fitbit has its issues. Growth has been lagging and the competition has remained intense. But again, Google should be an ideal partner — which should allow for a classic win-win partnership.

Click here to view the PDF.

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Alphabet’s Acquisition of Fitbit is a Case of Perfect Timing

By Chris Markoch

On Friday, the markets waited in anticipation as trading on Fitbit (NYSE:FIT) stock was paused. Shortly after the markets opened, the news broke that Alphabet will buy Fitbit for $2.1 billion. Shares of FIT soared 15% after the announcement. Alphabet stock is up about 3.5% in mid-day trading. Although this news was being telegraphed for several days, the timing of the announcement was perfectly timed as investors are looking to capitalize on new trends in the tech sector.

The wearables market is taking off

There are many reasons why this acquisition makes sense for Alphabet. One of the primary issues is related to the growth in the wearables category. Once thought an ill-fated fashion trend, Apple (NASDAQ:AAPL) showed in its earnings report on October 30 that demand for wearables is growing. Apple reported an eye-popping 54.4% year-over-year increase in revenue from wearables. This means that Apple’s wearables market, which has only been around since 2015, has a bigger share of Apple’s bottom line than the iPad.

It was not immediately clear how much of the $6.5 billion number was tied to the Apple Watch. However, Apple’s wearables market is made up of two product lines: the Apple Watch and its AirPods line. So it’s reasonable to assume that the Apple Watch was a significant part of this growth. Apple did say that three out of four Apple Watch purchases were made by new consumers.

It won’t be known for several years if this kind of growth is sustainable. But for now, Apple looks to be successfully making in-roads within its iOS ecosystem. Instead of users choosing either an iPhone or an Apple Watch, they’re starting to say “why not both”?

Can Alphabet take a bite out of Apple’s momentum?

Alphabet has been trying to get into the wearables category with its Wear OS. But the company has struggled to get traction. The acquisition of Fitbit immediately gives Alphabet access to approximately 6% of the global market. While that number may not make Apple quiver anytime soon, it’s enough to get attention.

After the announcement, Fitbit CEO James Park said, “Google is an ideal partner to advance our mission. With Google’s resources and global platform, Fitbit will be able to accelerate innovation in the wearables category, scale faster and make health even more accessible to everyone.”

That last part, making health accessible, is one of the keys to this announcement. When devices like the Fitbit and Apple Watch were introduced, the ultimate question that had to be asked was the why. It was simple enough to see what the device did, but why was that important.

But wearables, like Amazon’s (NASDAQ:AMZN) Alexa and the Google Assistant are ideas that were ahead of their time. By this I mean they had to be created  as a vessel to open up the possibilities. Among those possibilities is the ability of these devices to collect data. And there is almost no other industry that offers greater possibilities for the use of big data than healthcare. That’s   where Alphabet comes in. As the global leader in artificial intelligence (AI), they are an ideal partner to make use of the vast amounts of data Fitbit has gathered over 10 years.

Fitbit has been making deals with health care plans and working to get FDA approvals. All of which complements work that Alphabet has already been doing, says James Cassel, chairman and co-founder of investment banking firm Cassel Salpeter & Co. In an email interview, Cassel said of the partnership, “Since Google has numerous health initiatives at present, those should complement what Fitbit brings to the table. Access to the installed base could be very helpful to Google’s healthcare initiative Project Baseline … as well as other health-centric projects they are working on.”

Is this deal a slam dunk for investors?

Investors will be cautiously optimistic about the opportunities this deal presents. With a market cap of $870 billion, the $2.1 billion acquisition wouldn’t seem like a huge expense for Alphabet. But FIT will still be leverage on Alphabet’s balance sheet. And there will certainly be more costs as the companies integrate.

However, like the wearables category in general, this is probably a case where the partnership has to come before the profit. Separately, Fitbit has struggled with increasing competition in the wearables category. And Alphabet has struggled to get its own line of wearables off the ground. Together, this looks like a marriage of two strengths.

Click here to view the PDF.

Why Alphabet’s Acquisition of Fitbit Is a Master Move

By Tom Taulli

Granted, it would be a small deal. Yet it would still have lots of leverage.

Earlier in the week, there was lots of buzz that Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) would acquire Fitbit (NYSE:FIT), whose shares spiked more than 15% today on the news (the main report came from Reuters). While such rumors often fizzle, this one certainly did not. Today the announcement hit the wires: Google has agreed to shell out $2.1 billion for the company. All in all, I think the deal is a spot on — and should be a catalyst for Google stock.

True, it’s still relatively small, as Alphabet’s market cap is a whopping $870 billion. Yet, Fit is likely going to provide quite a bit of leverage. Let’s face it, Google has tried to get a piece of the wearables market with its Wear OS. However, there has been little progress so far.

How Fitbit Benefits Google Stock

So with Fit, Google will have about 6% of the global market (this is based on data from IDC). This will definitely be a good launching pad. According to Fitbit CEO and co-founder James Park: “Google is an ideal partner to advance our mission. With Google’s resources and global platform, Fitbit will be able to accelerate innovation in the wearables category, scale faster, and make health even more accessible to everyone. I could not be more excited for what lies ahead.”

But perhaps the biggest benefit — in terms of the impact on Google stock — would be the healthcare opportunity. During the past few years, Fitbit has gotten traction with striking deals with health plans. The company has also been working hard to get FDA approvals.

Oh, and yes, there is the treasure trove of data, which extends 10-plus years. Note that Google is a global leader in AI and this technology will likely prove extremely useful in transforming the healthcare industry. As CEO Sundar Pichai noted on the latest earnings call, the company continues to push the boundaries of innovation, such as with the creation of a new kind of neural network that improves web services as well as breakthroughs in quantum computing.

But the fast-growing cloud business should also be a driver for Google stock when it comes to healthcare. In September, the company announced a partnership with the Mayo Clinic to help with clinical experiences, diagnosis and research.

“Since Google has numerous health initiatives at present, those should complement what Fitbit brings to the table,” said James Cassel, who is the chairman and co-founder of investment banking firm Cassel Salpeter & Co. (in an email interview). “Access to the installed base could be very helpful to Google’s healthcare initiative Project Baseline – a partnership with Duke University School of Medicine, Stanford Medicine and the American Heart Association – as well as other health-centric projects they are working on. Access to big data is crucial for the future of healthcare and Fitbit has access to a lot of information.”

Bottom Line on the Alphabet Stock Price

The wearables market is simply too large for Google to ignore. For example, as seen with Apple’s (NASDAQ:AAPL) latest earnings report, the category is quite lucrative and a source of strong growth.

The company’s assortment of products — like the Watch, HomePod smart speaker and AirPods — generated revenues of $6.5 billion in the latest quarter, up 54% on a year-over-year basis (this is nearly as much as the Mac business!) In fact, AAPL has gotten traction with its Watch in deals with United Health (NYSE:UNH) and CVS (NYSE:CVS).

True, Fitbit has its issues. Growth has been lagging and the competition has remained intense. But again, Google should be an ideal partner — which should allow for a classic win-win partnership.

Click here to view the PDF.

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Why Alphabet’s Acquisition of Fitbit Is a Master Move

By Tom Taulli

Earlier in the week, there was lots of buzz that Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) would acquire Fitbit (NYSE:FIT), whose shares spiked more than 15% today on the news (the main report came from Reuters). While such rumors often fizzle, this one certainly did not. Today the announcement hit the wires: Google has agreed to shell out $2.1 billion for the company. All in all, I think the deal is a spot on — and should be a catalyst for Google stock.

True, it’s still relatively small, as Alphabet’s market cap is a whopping $870 billion. Yet, Fit is likely going to provide quite a bit of leverage. Let’s face it, Google has tried to get a piece of the wearables market with its Wear OS. However, there has been little progress so far.

How Fitbit Benefits Google Stock

So with Fit, Google will have about 6% of the global market (this is based on data from IDC). This will definitely be a good launching pad. According to Fitbit CEO and co-founder James Park: “Google is an ideal partner to advance our mission. With Google’s resources and global platform, Fitbit will be able to accelerate innovation in the wearables category, scale faster, and make health even more accessible to everyone. I could not be more excited for what lies ahead.”

But perhaps the biggest benefit — in terms of the impact on Google stock — would be the healthcare opportunity. During the past few years, Fitbit has gotten traction with striking deals with health plans. The company has also been working hard to get FDA approvals.

Oh, and yes, there is the treasure trove of data, which extends 10-plus years. Note that Google is a global leader in AI and this technology will likely prove extremely useful in transforming the healthcare industry. As CEO Sundar Pichai noted on the latest earnings call, the company continues to push the boundaries of innovation, such as with the creation of a new kind of neural network that improves web services as well as breakthroughs in quantum computing.

But the fast-growing cloud business should also be a driver for Google stock when it comes to healthcare. In September, the company announced a partnership with the Mayo Clinic to help with clinical experiences, diagnosis and research.

“Since Google has numerous health initiatives at present, those should complement what Fitbit brings to the table,” said James Cassel, who is the chairman and co-founder of investment banking firm Cassel Salpeter & Co. (in an email interview). “Access to the installed base could be very helpful to Google’s healthcare initiative Project Baseline – a partnership with Duke University School of Medicine, Stanford Medicine and the American Heart Association – as well as other health-centric projects they are working on. Access to big data is crucial for the future of healthcare and Fitbit has access to a lot of information.”

Bottom Line on the Alphabet Stock Price

The wearables market is simply too large for Google to ignore. For example, as seen with Apple’s (NASDAQ:AAPL) latest earnings report, the category is quite lucrative and a source of strong growth.

The company’s assortment of products — like the Watch, HomePod smart speaker and AirPods — generated revenues of $6.5 billion in the latest quarter, up 54% on a year-over-year basis (this is nearly as much as the Mac business!) In fact, AAPL has gotten traction with its Watch in deals with United Health (NYSE:UNH) and CVS (NYSE:CVS).

True, Fitbit has its issues. Growth has been lagging and the competition has remained intense. But again, Google should be an ideal partner — which should allow for a classic win-win partnership.

Click here to view the PDF.

The value of guidance: Find the right mentor now

By James S. Cassel

The adage “No man is an island” applies as readily to small or middle-market businesses as it does to an individual — perhaps even more so. According to a 2018 survey by SCORE, the network of volunteer business mentors, mentored businesses are 12% more likely to remain in business after one year, compared to the national average. In terms of revenue, businesses that sought guidance saw a “seven to eight-fold increase compared to those who were not mentored.”

If a small or middle-market business is to get ahead in a competitive environment, it should become familiarized with the wide range of resources that provide quality business mentoring and senior-level advice. These run the gamut from business coaches and advisory boards to formal boards of directors.

Depending on the type of mentoring engaged and the experience and skill set of the mentor, the benefits of receiving guidance cover a broad spectrum from obtaining direction on high-level matters such as strategic planning, to enhancing employee satisfaction.

Business operators can gain invaluable expert advice, tapping into the experience of others and harnessing a wealth of well-honed know-how. Unbiased and frank opinions — which can be hard to elicit from people on your payroll — are also available through mentoring, coaches or advisors, as are the diverse perspectives and innovative ideas essential for a company to stay relevant.

Hard as it can be for some corporate egos to digest, good advisors can teach you things you didn’t know, be a sounding board and expand your knowledge base. They act as an objective source with no dog in the hunt. If a company isn’t committed to learning and being innovative, it’s only a matter of time before it starts slipping behind more zealous competitors.

Mentoring is also a means to expand your network, gaining contacts and opening doors which might otherwise stay locked.

When selecting the business advisors most appropriate for your business, consider whether formal or informal, or a mix of the two, is the best fit.

A board of directors, for example, is a governing body that can provide high- level direction and advice as well as set policy, but this is a formal arrangement and you will have to answer to them. If you prefer a more informal, flexible approach, an advisory board can provide advice about achieving immediate business goals and on issues happening on an operational level.

If you want an even less formal but by no means less effective relationship, high-quality mentoring organizations abound. Joining Vistage Worldwide Inc., a group that provides “valuable perspectives from a trusted group of peers, professional guidance from an accomplished business leader, and deep insights from subject matter experts,” can be useful. Being selected by Endeavor, which is dedicated to matching entrepreneurs with personal mentors, is also an excellent opportunity.

One of the best mentoring organizations out there is SCORE. It offers volunteer business mentors, most of whom are retired business executives with decades of know-how, battle-tested experience and lots of time on their hands to help a fledgling business. Best of all—SCORE is free!

Other options include business coaches and one-on-one mentors who come to your business and can glean a helpful inside perspective.

Many giants in business not only benefitted from good guidance, but without it they might have fallen short. Facebook’s Mark Zuckerberg was mentored by Steve Jobs who in turn was mentored by Mike Markkula, one of the early executives at Apple. Jack Welsh at GE had acclaimed author Ram Charam as his business advisor and mentor.

At Google, executive chairman Eric Schmidt served as mentor to the then young co-founders, Larry Page and Sergey Brin. Interestingly, this mentoring relationship began when Google was already a giant and going strong—proof that expert guidance is vital at every stage of a company’s development.

Mentoring comes in many forms, but regardless of the option(s) pursued, there is no doubt that the result for a business can mean the difference between sinking or swimming. Don’t hesitate; find the right mentor now.

James S. Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle- market companies. He may be reached via email at jcassel@casselsalpeter.com or via LinkedIn at https://www.linkedin.com/in/jamesscassel.

Click here to read the PDF.

Will an MBA Help You Become an Investment Banker?

By Ilana Kowarski 

An MBA from a highly ranked business school is a major plus for aspiring investment bankers, experts say.

IF YOUR DREAM IS TO become an investment banker at a multinational bank like JPMorgan Chase & Co., then an MBA degree from a top business school may help you achieve that goal, according to experts who have been on this career path or have placed MBA students in investment banking positions.

It is possible for a student from any MBA program to become a successful investment banker, says Karin Ash, a former university career services official who spent seven years helping MBA students find investment banking jobs.

However, the most prestigious investment banking firms tend to choose the bulk of their MBA hires from highly ranked business schools, says Ash, who is now an admissions consultant with Accepted, an admissions consulting firm. “So, while any student from any school could ‘make it,’ it is easier to be noticed if you attend a highly ranked school,” she wrote in an email.

Can You Get an Investment Banking Job Without an MBA?

Current and former investment bankers acknowledge that it is possible to get a job at an investment bank without an MBA degree, and they note that investment banks often recruit analysts from prestigious undergraduate institutions. However, they warn that individuals who did not go directly from college to the investment banking industry may struggle to gain a foothold if they do not obtain an MBA.

Somebody with a business-related undergraduate degree from a college with a strong business program may not need an MBA to enter the investment banking industry, says James Cassel, chairman and co-founder of the Cassel Salpeter & Co. investment banking firm in Miami. However, for someone without an undergraduate business degree, an MBA can significantly improve the odds of getting investment banking job offers, he says.

Cassel, a former securities lawyer who transitioned from a legal career into the investment banking sector, notes that he took a nontraditional path into the industry. He says it’s more typical to enter the sector immediately after either college or business school.

The best way for college graduates who are working outside the investment banking sector to pivot into the industry is to pursue an MBA degree, says Delano Saporu, a former investment banker who is now a financial advisor and the founder of New Street Advisors Group financial advising firm in New York City.

Saporu, who earned an MBA from the University of Chicago Booth School of Business, says attending a top B-school offers abundant opportunities to network with investment bankers and meet investment banking recruiters. He adds that getting to know the “gatekeepers” of the investment banking profession makes it easier to enter the highly competitive and selective industry.

Saporu’s choice to pursue an MBA was driven by his interest in investment banking. “I just wanted more of a challenge,” he says.

What Investment Bankers Do and How Much They Earn

Unlike banks that focus on serving the general public, investment banks tend to cater to corporations and other large institutions. They help businesses, governments and other organizations raise capital through sale of stocks or bonds. They also assist with mergers and acquisitions, and they may provide money advice.

An allure of the investment banking profession is the generous compensation that investment bankers receive. Entry-level compensation often exceeds $120,000 per year when base salary and various bonuses are combined, and the pay for higher-level investment bankers is even better. Leaders at investment banking organizations, such as managing directors, may earn more than $1 million per year.

It’s important to note, however, that investment bankers typically work exceptionally long hours. In a single week, an investment banker may clock 50 to 60 hours or more, and someone with a particularly demanding job may work 80 to 100 hours.

What Is the Job Outlook for Investment Bankers?

Competition is fierce for entry-level positions in the investment banking industry, since it is a high-paying occupation and seems glamorous, experts say. In addition, there has been significant instability in the global investment banking industry since the Great Recession, which caused many investment banks to downsize and caused some – like Lehman Brothers Holdings Inc. – to collapse.

In its 2019 report predicting the future of banking and capital markets, international accounting and consulting firm Deloitte had this to say about the long-term outlook for investment banks: “The global investment banking industry has yet to find its footing after the financial crisis. However, the industry seems to be inching back to normalcy, in terms of capital adequacy and profitability.”

This August, Moody’s Investors Service – a U.S. credit rating agency – downgraded its outlook for the global investment banking sector from positive to stable. Moody’s warned that global economic growth was slowing and that interests rates were low, which could result in a reduction investment banking activity during the subsequent 12 to 18 months.

“The prospects are pretty good in the investment banking industry at the moment,” Cassel wrote in an email. “However, as real signs of a recession emerge this will change. At some point, firms will slow down their hiring and start to cull their staff as business stops being as robust.”

What Type of MBA Degree Helps People Become Investment Bankers?

The prestige of an MBA program tends to have a significant influence on whether its students receive job interview invitations from investment banks, Cassel says. For individuals determined to find jobs at top-tier investment banks, Cassel says an MBA from a highly regarded B-school would be very “important and helpful.”

He says MBA grads from top-20 business schools have a significant advantage in the investment banking hiring process. “The problem is, you may get just as good an education from not-a-top-20 school, but it’s very difficult to get the entree in or to get into the hiring process unless you have that on your resume,” he says.

Cassel suggests that MBA hopefuls who are interested in investment banking choose a business school with a solid finance curriculum, plus strong courses in other disciplines. “Know more than how to crunch numbers,” Cassel says, adding that MBA students with dreams of working for investment banks should take courses in marketing, human resources and technology in addition to their finance classes.

Although it is harder for MBA students from lower-ranked business schools to start an investment banking career than students from higher-ranked MBA programs, it is possible if they reach out to alumni of their schools who work at investment banks, he adds.

“They generally can’t get you the job,” he says, “but they may get somebody to look at your resume.”

Click here to view the PDF.

Will an MBA Degree Help You Become an Investment Banker?

By IIana Kowarski

If your dream is to become an investment banker at a multinational bank like JPMorgan Chase & Co., then an MBA degree from a top business school may help you achieve that goal, according to experts who have been on this career path or have placed MBA students in investment banking positions.

It is possible for a student from any MBA program to become a successful investment banker, says Karin Ash, a former university career services official who spent seven years helping MBA students find investment banking jobs.

However, the most prestigious investment banking firms tend to choose the bulk of their MBA hires from highly ranked business schools, says Ash, who is now an admissions consultant with Accepted, an admissions consulting firm. “So, while any student from any school could ‘make it,’ it is easier to be noticed if you attend a highly ranked school,” she wrote in an email.

Can You Get an Investment Banking Job Without an MBA?

Current and former investment bankers acknowledge that it is possible to get a job at an investment bank without an MBA degree, and they note that investment banks often recruit analysts from prestigious undergraduate institutions. However, they warn that individuals who did not go directly from college to the investment banking industry may struggle to gain a foothold if they do not obtain an MBA.

Somebody with a business-related undergraduate degree from a college with a strong business program may not need an MBA to enter the investment banking industry, says James Cassel, chairman and co-founder of the Cassel Salpeter & Co. investment banking firm in Miami. However, for someone without an undergraduate business degree, an MBA can significantly improve the odds of getting investment banking job offers, he says.

Cassel, a former securities lawyer who transitioned from a legal career into the investment banking sector, notes that he took a non-traditional path into the industry. He says it’s more typical to enter the sector immediately after either college or business school.

The best way for college graduates who are working outside the investment banking sector to pivot into the industry is to pursue an MBA degree, says Delano Saporu, a former investment banker who is now a financial advisor and the founder of New Street Advisors Group financial advising firm in New York City.

Saporu, who earned an MBA from the University of Chicago Booth School of Business, says attending a top B-school offers abundant opportunities to network with investment bankers and meet investment banking recruiters. He adds that getting to know the “gatekeepers” of the investment banking profession makes it easier to enter the highly competitive and selective industry.

Saporu’s choice to pursue an MBA was driven by his interest in investment banking. “I just wanted more of a challenge,” he says.

What Investment Bankers Do and How Much They Earn

Unlike banks that focus on serving the general public, investment banks tend to cater to corporations and other large institutions. They help businesses, governments and other organizations raise capital through sale of stocks or bonds. They also assist with mergers and acquisitions, and they may provide money advice.

An allure of the investment banking profession is the generous compensation that investment bankers receive. Entry-level compensation often exceeds $120,000 per year when base salary and various bonuses are combined, and the pay for higher-level investment bankers is even better. Leaders at investment banking organizations, such as managing directors, may earn more than $1 million per year.

It’s important to note, however, that investment bankers typically work exceptionally long hours. In a single week, an investment banker may clock 50 to 60 hours or more, and someone with a particularly demanding job may work 80 to 100 hours.

What Is the Job Outlook for Investment Bankers?

Competition is fierce for entry-level positions in the investment banking industry, since it is a high-paying occupation and seems glamorous, experts say. In addition, there has been significant instability in the global investment banking industry since the Great Recession, which caused many investment banks to downsize and caused some — like Lehman Brothers Holdings Inc. — to collapse.

In its 2019 report predicting the future of banking and capital markets, international accounting and consulting firm Deloitte had this to say about the long-term outlook for investment banks: “The global investment banking industry has yet to find its footing after the financial crisis. However, the industry seems to be inching back to normalcy, in terms of capital adequacy and profitability.”

This August, Moody’s Investors Service — a U.S. credit rating agency — downgraded its outlook for the global investment banking sector from positive to stable. Moody’s warned that global economic growth was slowing and that interests rates were low, which could result in a reduction investment banking activity during the subsequent 12 to 18 months.

“The prospects are pretty good in the investment banking industry at the moment,” Cassel wrote in an email. “However, as real signs of a recession emerge this will change. At some point, firms will slow down their hiring and start to cull their staff as business stops being as robust.”

What Type of MBA Degree Helps People Become Investment Bankers?

The prestige of an MBA program tends to have a significant influence on whether its students receive job interview invitations from investment banks, Cassel says. For individuals determined to find jobs at top-tier investment banks, Cassel says an MBA from a highly regarded B-school would be very “important and helpful.”

He says MBA grads from top-20 business schools have a significant advantage in the investment banking hiring process. “The problem is, you may get just as good an education from not-a-top-20 school, but it’s very difficult to get the entree in or to get into the hiring process unless you have that on your resume,” he says.

Cassel suggests that MBA hopefuls who are interested in investment banking choose a business school with a solid finance curriculum, plus strong courses in other disciplines. “Know more than how to crunch numbers,” Cassel says, adding that MBA students with dreams of working for investment banks should take courses in marketing, human resources and technology in addition to their finance classes.

Although it is harder for MBA students from lower-ranked business schools to start an investment banking career than students from higher-ranked MBA programs, it is possible if they reach out to alumni of their schools who work at investment banks, he adds.

“They generally can’t get you the job,” he says, “but they may get somebody to look at your resume.”

Click here to view the PDF.

What early-stage companies should do when capital starts to dry up

By James S. Cassel

Capital is plentiful and the economy is humming, but don’t forget what happened in 2001 and 2008. Suddenly, companies that did not have a path to profitability in the short term were squeezed hard, often into extinction.

Venture and growth capital firms realized that the money they had committed from investors could soon dry up, so they started making tough decisions. For VCs, the lifeblood of early-stage companies, protecting only the best ventures became the mission.

As we move closer towards a possible recession, the time has come for early- stage companies to begin preparation for survival should investor capital become scarce.

What can early-stage companies do to prepare when capital starts to dry up?

The first step is a thorough review of your business model and cash projections. You should evaluate how much capital you have, how much you can preserve, and if your present capital can take you to break even, or to being cash-flow positive.

Be honest about what you see. You may discover a sale is inevitable, and if so, the earlier you start the sales process, or find a partner to help keep you afloat, the better your chances of not having to go into bankruptcy/reorganization or liquidation.

Secondly, if you expect to raise capital down the road, you may want to expedite the timing and do it now. With the economy humming, venture capital might be more available today, but as soon as a recession hits, and maybe even sooner, many will find it next to impossible to raise more capital.

You must also be careful not to let valuation be a hindrance to taking in new capital, or even to taking less of an investment than you had hoped for. A down round in terms of financing is often better than no financing.

Thirdly, you want to monitor and address your burn rate. For example, rather than reaching a milestone and then going off to raise more capital, your challenge is to develop ways to become profitable or cash-flow-positive with what you already have. By addressing this before your cash runs out, you have valuable time to begin moving towards profitability, or at least to break even in terms of cash flow. Again, long-term survival is the goal when capital starts to dry up. You’re looking for the chance to prosper later.

Now, even if you are able to raise capital, you should also have a contingency plan. Consider what happens if you don’t reach your benchmarks even with a capital infusion. You may want to allow for an earlier exit, or you may want to go to market selling your company for less than you’d hoped for.

Despite your best efforts, you may still find yourself out of capital, and if a recession hits, you’ll need to make tough choices. Maybe it will come down to deciding if you should run a sales process to at least get some value while you still can. Or, maybe it will be better to consider liquidation and get out with what you can, while you can, returning unused cash to investors. Something may be better than nothing.

Depending on your capital structure, you might have to change your original financial structure to get some relief. You may find that converting debt into equity is the smartest play, but another option might be restructuring in conjunction with offering better terms to potential investors, which might be your last-best effort to secure much-needed additional capital. Whatever move is best for you, remember to engage with an investment banker earlier in the process rather than later, as they can provide invaluable advice.

Money remains relatively accessible for early-stage companies, but it will dry up sooner than you think. Surviving a capital dry spell when you are running an emerging company means preparing early and acting quickly when the winds suddenly change.

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Why Do Investors Keep Funding Unprofitable Startups?

When I got my start in the startup world, I thought success meant becoming profitable in around five to seven years, preferably sooner. It was an assumption, and you know what they say about assumptions.

To be fair to me — and I love being fair to myself — the vast majority of venture-backed companies in my space were experiencing this lifecycle. First there was the seed round that catalyzed growth. Then came series A, B and C to continue scaling and ultimately reach profitability, or at least a short path to profitability.

D rounds were rare, and I haven’t heard of an E or F round. After D it seems like venture capitalists don’t bother with the alphabet anymore.

If the brand couldn’t raise funding, that was the end. Or, if the startup had plenty of investment but couldn’t pave a short path to the black somewhere between A and D, VCs would pull out and cut their losses.

Without funding, brands that still couldn’t become profitable would arrive at painful crossroads: stop growing, lay a bunch of people off or get acquired. The acquisition outcome was best, but it didn’t guarantee the company would maintain its identity or that the employees would keep their jobs. Usually the acquiring corporation hacked the startup apart and retained only the aspects they believed were most valuable.

Over and over again I saw some version of this story play out. It seemed like profitability was essential for a startup to survive past that five-to-seven-year period.

In recent years, however, I have noticed an increasing number of exceptions to this pattern. At one of the last startups I worked for, we passed our series C and were still far from being in the black.

During a company meeting, our CEO asked our CFO when we were expected to become profitable. The CFO shrugged and said he didn’t know. After the CEO pushed him a bit, he estimated it would be some time next year.

It’s been about two years since he casually threw out that figure, and the company still isn’t profitable. Recently they raised a D round, but it will most likely not be enough to push them into the black.

When I met up with some of my former co-workers for dinner a few months ago, they said the brand still wasn’t profitable, and they had no idea when it was projected to start making money. They didn’t seem worried about their job security, though.

The implication was that more money would come. There were plenty of venture capitalists out there who would fund them indefinitely. Being profitable just wasn’t the top priority.

This revelation was bewildering. What was I missing? Was I the only person who thought it was problematic for a company to rely on funding for well over seven years, perhaps 10 or more?

Fortunately I wasn’t alone. Both online and in person I connected with many colleagues who didn’t understand why some startups folded — and they lost their jobs — after failing to make money, while other brands tapped into a seemingly limitless supply of VC funding and figured out profitability at their leisure.

To get answers, I reached out to investors and other experts in the startup world. Here are the big takeaways from my conversations with them:

The Amazon Effect

For about two decades Amazon relied on investors to grow and stay in business.

“One of the main reasons for Amazon’s success was their ability to raise capital and have a story where people believed they would be profitable,” said James Cassel, Founder and Chairman of investment banking firm Cassel Salpeter & Co.

This faith ultimately paid off. In the first quarter of 2019 the e-commerce giant reported about $60 billion in net sales, and it seems like they will maintain these types of massive profits for the foreseeable future.

Now investors are betting on what they believe might be the next Amazon. To draw this comparison, almost all of my sources mentioned two names: Uber and WeWork.

Uber was founded about a decade ago, and it isn’t remotely close to being profitable. In an article for Forbes published in June, Columbia Business School professor and former Accenture partner Len Sherman wrote, “Until and unless Uber can find ways to overcome the numerous weaknesses in its business model, the company will never be profitable.”

If Uber does fix these problems, however, there is potential for investors to make a killing. Like Amazon, maybe it needs another decade.

WeWork is a similar case. Business Insider recently reported that the company lost $219,000 every hour of every day during the 12 months leading up to March. But, again, perhaps the brand needs another decade.

These indefinitely funded startups don’t need to be nearly as titanic as WeWork or Uber, though. The company I mentioned earlier — the one I worked at that is past series D now — had something like 100,000 customers by the time I left. Compare that figure to the 95 million people who used Uber in 2018.

Growth Over Profit

Investors often evaluate startups based on growth, not profitability. Even if the company is burning way too much money, building a big base of customers quickly is attractive to venture capitalists, said Alan Wink, Managing Director of Capital Markets at accounting and consulting firm EisnerAmper.

Sometimes founders need to sacrifice short-term profit for customer acquisition spend and expansion that could provide long-term profit. As long as revenue is high, they have a chance of getting more funding.

“Going for profitability too early often means limiting growth,” said Techstars Co-Founder David Cohen, who was also an early investor in Uber.

Choosing not to be profitable in favor of growth — even for many years — can be a successful strategy, so long as that profit can make a huge splash.

“Amazon is a great example of a company that reached that tipping point, and it paid off big time,” said Clearbanc Co-Founder and CEO Andrew D’Souza.

Motivations Other Than Profit

It’s common for profit to be one of the last issues investors consider. Algorithm Research Founder Ketaki Sharma claimed that, according to her analytics and experience in the business, most venture capitalists choose a startup based on their sector focus before scrutinizing the startup itself.

If an investment firm specializes in healthcare, for example, they try to completely dominate the landscape by pouring money into as many healthcare brands as possible. That way their competitors are left with a smaller slice of the pie and less potential profit. This approach can increase the valuation of their portfolios, and in the investment world this metric is often more important than profit.

Investors can still make money from unprofitable companies. VCs frequently sell shares or take part in acquisition deals.

Another factor is what Glimpse Group CEO Lyron Bentovim called “hype.” “Investors will invest money to have the Uber logo on their site,” he said.

When VCs are able to advertise that they work with hot brands, they gain an advantage when pursuing the next promising startup. Even if they lose money on an unprofitable but hyped startup, having such a brand in their portfolio could attract companies that ultimately turn a profit.

Recovering From the Recession

Many of the people I spoke to noted an improved economy and one of the longest bull markets in history as a factor for this increase in potentially risky investments. It doesn’t seem like a coincidence that these types of funds have flourished as we recovered from the recession of the late 2000s.

Several experts cautioned, however, that there could be another recession that would cut off access to much of this capital. These comments were in line with predictions from economists and politicians such as Elizabeth Warren.

Shouldn’t We Care More About Profit?

Just because it’s become more acceptable to deprioritize profit doesn’t mean this attitude is ideal.

“There’s this behavior pattern where people have forsaken or forgotten profitability in exchange for growth at any cost,” said Fresh Technology Chairman Matt Bodnar. “Some companies will implode, and we will look back and say that was ridiculous.”

The investor community is constantly enabling startup founders to spend irresponsibly. We shouldn’t fool ourselves into thinking growth and profitability are mutually exclusive. After all, there can only be so many Amazons.

Bio: I am the Content Marketing Manager at Public Goods and an official member of the Forbes Communications Council. I am also the author of “Teach Me How To Die,” my self-published novel about a widower who travels through the afterlife.

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A charge, a guilty plea and when victims can see money: update on a $322 million fraud

By David J. Neal

Here’s what happened recently in the multi-platform legal untangling of 1 Global Capital, the Hallandale Beach merchant cash advance business at the center of a $322 million investment fraud.

THE MONEY

A plan of liquidation for 1 Global was filed last week in federal bankruptcy court by Greenberg Traurig’s Paul Keenan, who said the investor approval vote drew 2,425 out of over 3,600 investors, the highest he’s seen in a consumer case. That plan would go into effect in mid-October. The initial distribution of $100 million to investors will be made in early November.

But that’s a pittance compared to the amount of the fraud discussed.

“There are 3,600 investors who are going to lose money,” said 1 Global Capital’s bankruptcy court-appointed independent manager James Cassel of Cassel Salpeter investment banking firm. “These are Ma-and-Pa investors who put all their money in this.”

And 1 Global’s former CEO Carl Ruderman took money out, according to documents in several cases.

In the admission of facts accompanying former 1 Global CFO Alan Heide’s guilty plea (see below), Heide says Ruderman began to use the cash coming in from new investors to pay large commissions; to pay earlier 1 Global investors, Ponzi-scheme style; to operate Ruderman’s unrelated businesses; and for Ruderman and the Ruderman family’s “lavish” lifestyle. This, while 1 Global was operating in the red.

After a judgment gained in August by the Securities and Exchange Commission, Ruderman owes $32 million in money gained fraudulently; a $15 million civil penalty; another $750,000 cash; and 50 percent equity in his Aventura Bella Vista North condominium, which online property records say he bought for $2.7 million in 1999.

Ruderman has not been charged criminally, which is why he’s referred to as “Individual No. 1” in other parties’ criminal case filings.

1 Global sold itself to investors as operating similar to a payday cash advance place, except with a customer base of small businesses. Instead of repayment in one lump sum, payments came in the form of automatic withdrawals.

Numerous lawsuits have been filed to get something out of businesses that defaulted on the cash advances.

  • Jan Atlas, a 74-year-old Fort Lauderdale attorney, has been accused of using his corporate legal skills to help Ruderman continue doing business as they were. Atlas has been charged by information with one count of securities fraud.

Ruderman and an attorney came to Atlas when questions came up about whether 1 Global was selling a security and if it needed to register an investment offering with the SEC.

The allegations in the information document say, “Atlas came to understand that (Ruderman) and Attorney No. 1 were not interested in accurate legal advice based on real facts, but instead wanted false legal cover that would advance their desired outcome and allow them to profit from 1 Global.”

So, prosecutors say, Atlas gave them what they wanted in a May 17, 2016, opinion letter in which he “intentionally made false and misleading statements” and did the same in an Aug. 25, 2016, opinion letter. And that Aug. 25 letter, the allegations say, was used by 1 Global to keep raising money under false pretenses.

An email to the Miami Herald from Atlas’ attorney, Margot Moss of Markus/Moss’ law firm, said, “Jan is a good man who had a wonderful, successful career. But like all of us, he wasn’t perfect. He has quickly accepted responsibility for his actions in this case and shown genuine remorse. He will do everything he can to make this right.”

HE’S GUILTY

  • As mentioned above, former 1 Global CFO Alan Heide has pleaded guilty to one count of conspiracy to commit securities Fraud

Heide’s admission of facts says though he knew 1 Global wasn’t profitable and knew Ruderman was misusing funds, he kept “providing false and misleading statements to investors as to the financial health of 1 Global Capital, including making statements that gave the false impression that 1 Global had an independent auditor.”

Heide will be sentenced on Dec. 13.

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