Category Archives: Finance

Who’s Funding Your ProcureTech Vendor?

This question is more important now than ever! Not only is the RCD (Relative Corporate Debt) of many FinTech companies too high right now (See: Calculating RCD), signalling a decline in customer service and potential abandonment, if not outright vendor failure down the road, but the ongoing viability of many VC and PE firms, or at least their ability to support their investments, is also in question.

Many firms are too heavy on AI plays that are still losing as much as $4 (or more) for every $1 of revenue they take in, requiring massive ongoing investments to maintain. Even big PE funds only have so much cash to burn, and the only way they can do this is to liquidate assets and holdings if they can, or, in the worst case, simply write off losses (and associated future costs) of those holdings they can’t liquidate.

Softbank’s end-of-year investment in OpenAI really puts this into perspective, as chronicled by Mr. Klein of Curiouser.AI and Berkley in this LinkedIn post.

As far as I am concerned, this is bad news for any of SoftBank’s FinTech holdings that may require funding in the next few years, and a warning to make sure you don’t select / continue / depend on any of their FinTech holdings where they have a large or majority stake until verifying those holdings are profitable and likely to stay that way! (Now, SoftBank has traditionally had very good investment chops, so it’s likely the majority of holdings are profitable …)

However, they aren’t the only firm making huge over-investments in AI and weighting the portfolio down with companies that might never see a profit. This means that this warning also applies to many other Tech investment funds, starting with Thrive, Dragoneer, Altimeter, and Coatue who also have large stakes in OpenAI. They could all end up in the position where they are going to have to sell off / dump assets to maintain the ridiculous losses OpenAI is seeing, and any holdings not performing well will likely be the first to go / get dropped. (Remember that the average age of the first three of these groups is 15 years, and they are [becoming] modern SaaS/AI heavy, whereas Softbank Capital has been investing for 30 years, and is a lot more diversified. Softbank may be able to weather a complete crash in OpenAI valuation if it occurs. But these other firms may not!)

But, as we noted, the real warning is not for SoftBank or these other mega funds (in the significant 8 and 9 digit range) that have funds to weather a storm. It is for the smaller funds, especially those less than 1 Billion, that are too AI heavy.

As a result, when selecting any FinTech platform, you need look at the portfolio of any investment player with a substantial majority stake. If a large segment of the portfolio of a significant/majority investor is “AI” companies losing money hand over fist, then the vendor of that FinTech platform cannot be considered a stable vendor if it is not profitable. This is because you can’t count on the fund having the resources to support the vendor to profitability, even if vendor is a fund darling. This is the case even if the RCD calculation looks good! A lot of the smaller funds can’t afford an AI crash given the AI-heavy focus of their SaaS portfolio.

(Face it. An AI crash is coming. Too much valuation against too little return, and investors only have so much patience. The only thing we don’t know is how severe the crash is going to end up being. Is it going to be a minor drop across the tech markets or a major crash like the 2008 housing crash or the 1999/2000 dot com crash?)

Financial Business Risk Prioritizes Supply Chain Vulnerabilities …

… but it does not identify those vulnerabilities, although it can tell you where to start looking. So while an article in the SCMR last year provided a good overview on how to evaluate, and quantify, supplier risk, the title was misleading when it said they were calculating business risk to identify supply chain vulnerabilities.

The article, which described an approach by the authors to find a way to improve the evaluation of risk impact on a business, culminated in four main findings. The approach, which looked at the total financial impact a supplier failure would have, yielded two findings that we’ve known for over a decade, ever since Resilinc pioneered the approach of assessing the financial risk associated with a supplier failure (based on mapping where all of their parts are used and which of those are single source)

  • procurement spend with a supplier is NOT correlated with the financial risk of a supplier
  • part standardization can increase business risk impact

As well as two insights that are rather new:

  • procurement spend is not correlated with the revenue of the company (the Resilinc model could have shown this, but they did not focus on this or collect those metrics last time SI was made aware of their methodology)
  • true high-risk impact suppliers are a substantially smaller amount of spend than an organization might think; in the authors’ study, they represented only 28% of total spend (whereas most companies will highlight the high spend suppliers as high risk and identify the suppliers that represent almost 3 quarters of spend, or 73% in this study)

The reason for this is that they linked all of the organization’s data sources that contained information related to the BoM for each SKU, the revenue for each SKU, and the suppliers for each BOM. By creating a network of connections between components, products, and suppliers, and identifying single source parts, the link between the criticality of a supplier and the revenue became clear. Consider the supplier who supplies that custom control chip for the fuel injection management, cruise control, or even for the monitoring of the tire pressure. If they were to fail, the absence of a single, $10, custom control chip can bring down a multi-million dollar production line, and close down an entire production plant, as the recent semiconductor shortage did to many plants during COVID. Given that these were being put into $10,000 to $100,000 cars, these suppliers would never have blipped on a spend-based risk assessment. And this is just one example.

But it is an example that demonstrates the blind spots companies have with respect to small and specialized suppliers that aren’t in the top 80% of spend but yet supply sole-sourced and/or custom parts or products. This means that when doing a risk assessment, it’s not just risky suppliers or risky supply chains that need to be assessed, it’s any supplier that supplies something that isn’t easily replaced by another source should something happen to the current supplier. The risk could be low that they will fail, and lower still that you couldn’t quickly modify a design to use an alternative, but you don’t know until you assess. And that assessment must be revenue and criticality based, not spend based. Spending $100M with a steel supplier to acquire the raw material for a frame assembly makes the supplier strategic, but doesn’t make using that supplier super risky when all their competitors offer the same grades of steel. But if you need a custom chip for that car, power transformer, etc., and you currently only have one supplier to supply it, then that supplier, no matter how stable and how low-risk its profile looks, is a risk even if it only gets one hundredth of the spend. And you need to determine if it has any vulnerabilities and, if so, monitor them so you won’t be surprised by a sudden failure.

M&A Mania is Coming Again … but will it be the same as last time?

the doctor agrees with THE PROPHET that M&A in Procurement, Supply Chain and Finance Tech is Back On For Q4 and 2025, because M&A Mania is part and parcel with the The Marketplace Madness that the doctor told you is coming back in May. The only question is, will this M&A cycle look like the last few during Covid (when every investment firm had to have an online collaboration platform, since they couldn’t do business in person, and an online e-Payment FinTech solution, since they still needed to make, and most importantly receive, payments) and in the late 2010s when companies were getting scooped up left, right, and centre. It was kind of like that first year in Chemistry where you were told to look to your left, look to your right, and look in the mirror and realize that only one of you would survive the end of the course (except the odds had worsened and there was only a 1/6 chance that any of you would be left standing at the end of the M&A cycle and less than a 1/9 chance that more than one of you would be left standing).

But first, let’s review THE PROPHET‘s reasons why:

Reduced interest rate climate coming
Not necessarily in your country, but in the US and a few other major investment markets, and for global funds, that’s enough.
Valuations back up (including a recent one)
the doctor is seeing a bit of this beyond just over-hyped fake-take and (now failing daily) Gen-AI, which indicates a return to value for real solution capability that solves real problems, and not just glam UX or tech buzzwords, could soon be coming.
Dry powder is the size of an ammo depot
And this is a rather conservative estimate. Broaden your definition of our Source-to-Pay space, and it could go well beyond the 666 providers in the mega-map.
Constrained target/asset pool to pursue
Too many providers not focussed on Gen-AI bullcr@p were not (well) funded and in need of funding to grow and too many providers who raised too much on Gen-AI bullcr@p blew too much on failed dev and marketing and need someone to infuse them with fresh funding while taking in the reigns and refocussing them on core problems.
No clear leader in many markets
Even if you constrain by target enterprise size, vertical groupings, and module, you’re usually looking at over a dozen vendors. Too many. By core module alone, you’re usually looking at over eighty (80) potential providers.
Counter-cyclical sector defensibility as a hedge
Most definitely. the doctor has always said the best time to develop/expand is on the verge of a coming financial or supply chain crisis, and it’s even better if it corresponds with the end of a hype-cycle (when everyone realizes that grandiose claims are just that, claims, and usually not realized and it’s time to return to the next generation of tried and true technology).
Times of increasing global uncertainty favours supply chain, supply and supplier risk management
Yes, and this will be constant for years. The outsourcing crisis the doctor and a handful of others have been predicting for over a decade (which is why he was telling you to near-source and home-source in the late 2000s) materialized during COVID, anti-globalization is at a high not seen in the remembered lifetime of most of the global population (and increasing by the day), we likely haven’t been this close to World War III since the cuban missile crisis of 1962 (since the Soviet radar malfunction of 1983 was caught by an alert Soviet air defence forces officer) putting global political tensions at a near all time high since World War II, ever increasing natural disasters and supply shortages are escalating costs at levels of inflation not seen since the 1970s, and in some markets, since the late 1920s (and the Depression era), and it’s just doom and gloom all around. Only our space has the tech to combat this.
Corporate spend flowing into tech, not new jobs
This is unfortunately true since

  • most executives don’t realize that tech only increases productivity and success in the hands of a human, it doesn’t replace them (since Aritificial Idiocy can’t even replace real idiocy, how can you expect it to replace Human Intelligence [HI!])
  • big companies don’t like high fixed costs, and the see people has the highest fixed cost
  • the dream of the new robber baron billionaires is to replace people with machines, which they think will help them realize their vision of constantly increasing profits from constantly increasing revenue (from a workforce that never needs to take a break) at a constantly declining cost to serve (not possible, but that’s their dream)
Nearly all big tech firms (ERP, business applications and stack) aside from SAP have not made any material moves yet — and will need to at some point
You can’t wait for a lumbering giant … by the time they buy someone, it’s ready for sunset. Remember IBM and Emptoris? A sad end to the APE circus! That means that the time to strike as an investor is before they awake!

Add add the following:

  • money has been idling in these funds from lack of investment over the last couple of years (as they got antsy last year with the predicted recession and the SVB failure and the fallout of both), and their investors aren’t happy
  • many of the more progressive funds have realized that fintech is useless if there’s no money moving through it, which means you have to look for broader business solutions that can assure the flow of money as well as information
  • companies are starting to realize that ridiculous 10X, 15X, 20X valuations are a thing of the past (or at least until we get a whole new generation of freshly minted investors who didn’t bother to study their history, like the new generation of founders that didn’t study theirs) and that if you can get a solid 5X to 7X valuation (which is the most a company can expect to realize at an aggressive 40% annual growth rate, which is the most they can hope to realistically support) for tech, that’s great, and this makes acquisitions a lot more attractive than during the last cycle when you’d have to bid 10X on something that might not scale as an investor just to get invited to the table

The M&A market is returning. But there will be some differences this time. The last two times it was valuation run up until the money ran dry or there were no companies left that were worth it. This time will be more reminiscent of the first M&A Mania to hit our space in the late 2000s and it will come with a little kiss, like this:

1. Valuations will be more realistic.

As simply stated, 10X, 15X, 20X growth doesn’t happen in five years for anything but a Unicorn, and even then it’s rare, and investors aren’t going to pay this any more. That being said, they will invest for value and firms who focussed on building real solutions, not slick UX with no substance, will be valuated quite well (at first).

2. The cycle will have 3 parts.

2A. Existing Growth Opportunities

Look for PE firms to buy suites or modules that can be sold and grown stand-alone or as complementary solutions to offerings in their stable. The market for these solutions could mature quickly as the Gen-AI and intake hype cycles crash and the global situation destabilizes and risk-focussed Sourcing and Procurement become paramount. This will be done at fair to very good valuations, depending on the offering and the financial situation of the firm being acquired … those that can wait and play the field will get better valuations.

2B. Fill the Gaps

As new competitors enter the scene, existing providers with aging tech are going to want to counter them and will start buying up point-plays to fill the gaps. This will take two forms.

  1. stable, stand-alone players who can survive without investment will wait for the right offer, get a very good to great valuation, and survive relatively unscathed in personnel and offering (and will continue to be available standalone for some time)
  2. cash-crunched desperate players who won’t survive long without a cash infusion will be bought in a fire sale, folded in quickly, and only key personnel will remain

2C. Liquidation Opportunities

Everyone loves a steal, err, deal. Investors included. As companies start to run out of money left, right and centre because they were underfunded (and struggled to compete with the overfunded overhyped companies) or overfunded and burned money like it grew on Central American fruit trees that produce two healthy crops a year, investors and buyers will be looking for companies with pieces of tech they can use to enhance their offering for pennies on the dollar. These companies will be broken up across talent and technology, with the acquirer keeping only what they want.

Follow the Money — To Find the Spigots that can Turn it Off!

A recent CPO Crunch article over on Procurement Leaders said to Follow the Money as a focus on profit contribution can provide a starting point for improving supply chain transparency.

The article states that having knowledge of our suppliers is one thing, but it’s quite another to have a good understanding of who are suppliers’ suppliers are … not to mention those even further beyond and in a complex, risk-riddled world, such visibility is crucial and can bring meaningful competitive advantage.

In other words, following the money can increase profitability by allowing you to optimize the flow. Which is true, but only half the picture.

The other half is how the flow can be diverted or stopped. Two important things to remember about money flows. First, if these money flows present an opportunity for you, they present an opportunity for others. Not just outright theft of money (or product), but skimming, fraudulent billings/overpayments/handling fees (or your goods don’t move), and even fraudulent good substitution (with knockoffs). Secondly, if any input to any of these flows stops (beyond your visibility), the entire flow stops. And these flows could stop 6 levels down at the source.

For example, let’s say you are in medical device manufacturing or microwave-based manufacturing. Then you need thulium, which is one of the rarest rare earth minerals in the world. If a mine closes, even temporarily, and that mine is the only source of supply into your raw material or component supplier (that produces your enclosed radiation source or manufacturing ferrites), what do you think is going to happen? Production will stop, and your inventory will disappear. Or if you need a custom chip for the control system in your high end electric car, and the one plant currently capable of producing it experiences a fire. (This HAS happened, and chip shortages have been responsible for MULTIPLE shortages in MULTIPLE automotive lines. Just Google it.)

If your only production is in a country with geopolitical instability or deteriorating relations with your country, and borders (temporarily) close, what happens? And so on. If you don’t know the myriad of ways the spigots can be turned off, it doesn’t matter how well you know, or optimize, the money flow. These days, it’s all about risk management, visibility, and quick reaction if a spigot gets turned off to get it reopened again.

Let’s Get One Thing Clear: Like All Financing, Supply Chain Financing Benefits the Lender, Not the Buyer or the Seller

While there might be arguments that some form of Supply Chain Financing (SCF) would benefit all parties in a fair world, it’s not a fair world, as it’s run by greedy capitalists, but that doesn’t mean we have to make it more unfair, or complain about laws being proposed to limit unfairness.

But that’s exactly what a recent article in the Global Trade Review on how the Supply Chain Finance Industry Hopeful EU will Soften Late Payment Rules is pointing out. The EU SCF industry is crying foul when there really is no foul.

The article, which notes that even though an EU Parliament committee is pushing for greater flexibility around the regulation on combating late payments that puts in place a stricter maximum payment term of 30 in both business-to-business (B2B) and government-to-business (G2B) transactions (versus the current 60 days), unless companies negotiate payment terms of up to 60 calendar days and both agree to those extended terms in a contract, there are some parties that are still not happy. (Even when the new regulation even allows for companies trading in “slow moving or seasonal goods” to collectively agree to extend terms up to 120 days in a contract.) (For completeness, we should also note that the forthcoming legislation will enforce accrued interest and compensation fees for all late payments.)

However, some parties believe that payment terms should be twice that as they risk restricting liquidity and interfering with companies’ contractual freedoms. The former statement (restricting liquidity) is complete and utter bullcr@p. The latter statement (restricting contractual freedoms) is a valid point if there are currently no restrictions on payment requirements in local laws, but, guess what, all contracts must adhere to the laws and directives of the countries in which the companies operate, and countries / unions have a right to modify those laws and directives over time to what they believe is in the best interest of the greater (not the lesser) good. And when a recent Taulia research report found that 51% of companies polled are typically paid late, something needs to be done.

The point being whined about … err … made is that shortening mandatory terms without agreement to 30 days and with agreement to 60 days would mean SCF lenders would see their returns slashed, and potentially remove any incentive to offer programmes in the first place. And while it’s true they would see their returns slashed from predatory lending, taking advantage of suppliers who need money now from buyers who want to keep their bank accounts as cash flush as possible (even when not necessary to meet internal operating costs), it doesn’t necessarily mean they have to see their returns slashed from a finance perspective. They could still provide suppliers with loans (at fair interest rates) secured by the equipment the supplier buys or the products produced (which they could seize if they feared lack of payment and then the buyer would have to pay the lender for the goods’ release). Or, if buyers liked unnecessarily fat bank accounts, they could lend the buyer cash with the buyer’s illiquid assets as collateral. And while this is more traditional finance, what’s wrong with that?

Allowing buyers to screw suppliers (when those buyers can afford not to) just hurts everyone in the long run. Suppliers have to borrow, usually at predatory interest rates, to make payroll, which increases their overall operating costs. In return, their costs go up on all future contracts. A buyer might squeeze out a slight gain (in its high interest investments vs. paying the supplier or in its stock price based on correlation that a higher than expected bank account is higher than expected growth), but the buyer will just end up paying more in the long term (and then passing that cost onto us consumers). And the only party winning in every transaction is the SCF vendor who gets 2% to 6% on all the short term cash it provides, which is very safe because someone’s going to take that product. And, FYI, even 2% on a 60 day term, works out to over 13% a year (because by the time the supplier submits, the SCF approves, and the money gets transferred, that’s usually at least 5 days). And the rates are only that good when the supplier has more than one SCF option. When the supplier doesn’t, it’s probably 4%, or 26%+ per year, which is likely 40% higher than the organizational credit card, and nearing predatory lending territory! And while it’s not as bad as the 40%+ some suppliers will be saddled with in hard times when all they can get is the local loan-sharks, it’s still not something we should accept.

So bravo to the EU Parliament and shame on anyone complaining about legislation mandating fair payment terms, especially to SMEs. After all, it’s not banning SCF vendors from helping them in other financing ways, or even negotiating an agreement to auto pay every 60 day invoice in 6 days (for 2% of the transaction value) when you know these suppliers are all going to have 60 days shoved down their throats by big businesses.