Before getting down to business I would like to introduce myself. My name is Andreas Lindblom and I’m invited as a guest writer to share with you the interesting world of Hedge Funds and how their presence might be applied to start-ups.

Starting off, defining Hedge Funds might be a good idea as many still don’t really know what constitutes a Hedge Fund.
Hedge Funds “are not regulated by the SEC, meaning that they are not required to disclose all financial statements and are allowed to engage in selling short” (Lindblom, pg. 1). This is, of course, an oversimplified statement that would cause many Hedge Fund experts so shiver, but for this article, Hedge Funds are like Mutual Funds, apart from the mentioned fact that they are not regulated by the SEC and that they can be involved in selling short. These differences are immense as they cause potential gains to sky rocket. With this, the volatility of the investment also rises, thus potential losses could be devastating for a start-up. There are additional criteria related to Hedge Funds, but those will be discussed later on.

When researching risk-adjusted returns, one should use use several models so that all factors are accounted for and also focus on models that use multiple factors to calculate returns. Such factors could be ‘Fama and French’ or Carhart’s four-factor model, compared to CAPM which assumes perfect market efficiency and also restricts you with certain limitations.

Using these models to analyze risk-adjusted return, my research found that Hedge Funds outperform the market almost exclusively (as seen on the efficient frontier below) which implies that the choice of investing in Hedge Funds should be an easy choice? Well, here’s comes the additional criterion to investing in Hedge Funds. “In order to invest in a Hedge Fund [the investor needs] $5 million in capital to invest, and…a sophisticated understanding of the financial markets. [Hedge Funds] also accept funds from institutions such as pension funds that have at least $25 million in capital available” (Lindblom, pg. 5). ‘The cream of the crop’ may claim that this is good because it creates an exclusive investment market or a ‘playground’ rather where they are not restricted by the SEC. Given that Hedge Funds can sell short, many of them are levered, thus potential losses could shake the financial waters of the US significantly and affect other, rather than just those investing in that particular fund. Due to this, many ‘regular’ investors and analysts oppose Hedge Funds because as seen at the end of the 1990’s where the LTCM (Long-term Capital Management) Fund crashed, requiring all major Investment Banks to bail them out.

Well, maybe it’s time to start applying what we know to start-ups. Management of a start-up could have many difference mentalities. Maybe they are risk aversive or risk-takers. The size of capital available to invest may differ, and so on.
Investing in Hedge Funds could provide a company with major returns but, of course, also higher volatility. The size of a start-up is significant due to the $5 mn. investment requirement. For a start-up, where the first year determines the future of the entire business, investing in Hedge Funds provides volatility you’d much rather avoid and investing in Mutual Funds or simple CDs may be a better choice due to its lower volatility (note: investing in CDs requires you to ‘lock’ your funds which decreases the liquidity of your funds significantly).
Personally, I would invest extra capital in R&D for a start-up due to the importance of keeping your customer base after, if surviving, the first year.

For further information, read my research on “Risk-adjusted return of Hedge Funds.”

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If you’ve followed the posts on the blog since we started, you might recall that we filled out our Article of Incorporation for LLC about 3 weeks ago. Well, we still haven’t received any papers back yet. The Secretary of State haven’t even deposited the check yet. This is kind of annoying.

Anyhow, this doesn’t stop us from working on our product, and it’s just that it would feel much better to have the formal paper-works done so I can start moving on with the remaining administrative tasks that requires this paper.

Except for this, we’re moving forward with our development according to our time-line.

(In the scope of this article, I assume a typical office-environment that include standard PCs running Microsoft Windows with Microsoft Office.)

Everyone knows that buying software can be really expensive, and I can see why both private users and businesses sometimes use illegal copies of software. However, I can also see why software is expensive. Software companies put plenty of money both into R&D and into marketing. Both sides have good arguments: users of pirated software claim that they would buy the software if it wasn’t that expensive, and the producers claim that if it wasn’t for piracy, they could lower their prices.

Anyhow, I’m not gonna tell you who’s right and who’s wrong, I’m simply going to give you another option. Here’s a little question for you: Do you have to use the same software as ‘everybody else’, or are you brave enough to think outside of the box?

If you’re one of the people who would consider themselves ‘brave enough’, I have a little surprise for you; you can save between $1,264.97 to $1,284.97 per computer in lowered licensing costs, and you don’t even have to switch away from Windows (if you don’t want to).

So what is the secret? Nothing new really, but surprisingly few companies realize this. By using alternative softwares, these large savings can be achieved without really losing anything.

• Open Office – The alternative Office-suite.
• You don’t need to pay for Microsoft’s over-priced Office software. Open Office offers you the about the same possibilities as Microsoft Office, but for the great price of $0. Sure, I admit it, there are some few functionalities in Microsoft Office that Open Office lacks, but they are really not that many. I’ve personally used Open Office for the past 5 years or so, both professionally and in school, and still have not found any reason to switch back.
• Features: Open Office offers you the same features as Microsoft Office. That means: a Word-processor, a Spreadsheet application, Presentation software, and a database application.
• Drawbacks: As far as I see it, none really. Open Office can import and export files to Microsoft Office, and the person on the other side won’t even know the difference. The only drawback that I can possibly think of would be if you are a high-end power user of Microsoft Office and use tons of macros and similar features. In that unusual case there might be some problems. However, if you’re just an average Office-user, there’s really no problem to switch. Chances are that you can barely tell the difference.
• Price you save: $419.99 for Microsoft Office 2003 Small Business to $439.99 for Micrsoft Office 2003 Professional

• Thunderbird – The alternative e-mail client.
• The price you save by using Thunderbird will be related to two things. First, you don’t need Microsoft Outlook (which comes with Microsoft Office). Second, you don’t need to worry that much about viruses. Surprisingly few people out in the business world realize that the main reason why viruses are such a big threat to them is because of two things; they use Microsoft Office (and Outlook), and they use Microsoft Windows. The fact that you need Windows might be something you cannot do much about due to special applications etc. But you can change your e-mail client and Office suite. The reason why the combination of Microsoft Office (with Outlook) and Windows is such a dangerous combination is that it is heaven for a virus- or spyware-creator. Both Microsoft Office and Windows are filled with bugs that make it very easy for malicious softwares to flourish.
• Drawbacks: Thunderbird is not a calendar application. This is simply a e-mail software, not a complete solution for both contacts, calendar and e-mail.
• Price you save: $0, but expect far fewer headaches and reduced amount of viruses, so you do save something.

• Firefox – The alternative Web-browser.
• The reason again for switching over from Microsoft Internet Explorer is primarily security. More and more users switch to avoid all pop-up windows and spyware that usually goes hand-in-hand with using Internet Explorer. I’ve had plenty of first-hand experience of this. A couple of weekends a go I had to go through 20-some PCs to clean them from spyware. They all were running Internet Explorer, and the users complained about decreased performance. After removing all the spyware, installing Firefox (and removing all icons to Internet Explorer), I haven’t had a single complaint.
• Drawbacks: The only drawback would be that some certain web-pages won’t display properly in Firefox. However, that’s because of the fact that the web-designer didn’t follow the standards that are defined by the W3C for proper HTML (see our article Why Your Site Should be Multi-platform for more details about this issue).
• Price you save: $0, but you will be able to surf the web with less worries and more efficiently. And you do save money in reduced maintenance costs.

• The Gimp – The alternative graphics software.
• The Gimp is a great tool for image manipulation. Some people even argue that it’s more powerful than Adobe’s Photoshop. I wouldn’t go that far, but I would say that it is certainly good enough for any average graphic designer who only does simple web-graphics or similar jobs. I use The Gimp for all my graphic needs, which include web-design, image optimization etc.
• Features: Pretty much all you would require from this kind of software. You can import and export files to work with Photoshop without any problem if you need to do so.
• Drawbacks: Honestly, it’s not as powerful as Photoshop and it doesn’t have all the features of Photoshop.
• Price you save: $599 for a copy of Adobe Photoshop CS 2.0

• ClamAV – The alternative Anti-virus software.
• They say the only certain things in life are death and taxes. Well, the only certain thing in Windows is viruses. You will, sooner or later, be confronted with viruses (whether you know it or not). A anti-virus software is really something you need.
• Features: Search and remove viruses. Simple as that. Not as fancy as many of the other anti-virus applications, but it does get the job done.
• Drawbacks: Just like I said above, it’s not as fancy as the other ones, so if you’re looking for eye-candy, this is probably not what you’re looking for. The software doesn’t come with features like anti-phishing and anti-spyware, but since we’re running Firefox instead now, that threat-level is significantly reduced. Since Firefox both comes with built in anti-phishing and spyware-protection, we can still sleep well at night.
• Price you save: $244.99 for a copy of Norton Internet Security.

So what is the conclusion to draw from this article? My purpose for this article wasn’t to make you implement all the changes that I suggested in the article (but if you’re considering doing so, that’s great). My reason was simply to open your eyes. Just because ‘everybody else’ uses some software doesn’t mean that it’s the best possible software on the market. Sure, people might look at you funny when you suggest to switch away from the industry-standard, but that doesn’t mean that you’re wrong. A couple of hundred years ago the smartest people on earth thought that the Earth was flat, and everybody who argued the opposite was accused of being crazy. Sometimes being different is not all that bad. Personally I’d rather spend the money I saved on licensing costs on a new server or something that will actually make a difference.

If you have any comments or feedback, don’t hesitate to make your voice heard. I’d love to hear what you have to say.

I have recently had the peculiar experience of trying to hire software developers. I have read resumes, posted on different job boards, talked to people live and by phone.

The funny thing is that I have had to reject almost every single applicant.

You might say that perhaps I was too demanding. That’s certainly possible, but I don’t think that’s the case. The only thing I was looking for was the ability to independently solve simple programming problems. If I had lowered my requirements any further I don’t know what I’d be hiring but certainly it wouldn’t be software developers.

After having read dozens of resumes I felt confident in the abilities of a few candidates. They all had the right keywords in their resumes. They all had valuable real life experience. They all had been able to keep a job for more than a year. They had good educations.

So I administered my little litmus test. The test was to write a routine that finds the largest possible product of two numbers in an array of positive integers. I like this test because it’s just a couple of lines of code, so it shouldn’t take too long for the candidate – I don’t want to waste their time unnecessarily. At the same time there are many ways to solve the problem – some better than others.

I gave each candidate unlimited time to solve the problem. Since there weren’t any time constraints I didn’t think anyone would fail, and I expected to see excellent solutions.

What I saw was… strange. I gave the test to the people I thought were the top ten people from a set of 40-50 candidates from Silicon Valley.

Only two candidates came up with a working solution.

Even people who submitted their answers via email submitted non working solutions!

It’s not a large sample. Maybe I failed to find the top candidates out of all the applicants. But as anecdotal as it might be I am still shocked. How can highly educated software developers with many years of experience fail to write software to find the two largest numbers in a list?

What do you think? Is the educational system so horrible? Is software development fundamentally hard? Are resumes misleading? Did I just run across a bad batch?

Update 1: The cuzimatter links were updated on February 28th, 2007.

           

For an online company, a CMS is almost something required. I would go as far as saying a CMS is for an online business as a binders with indexes are to an accountant – it’s simply necessary.

However, since we’re just starting up, we still have no need for a CMS, a small blog is all we have to offer you at this point. But this doesn’t mean that we don’t have any experiences with CMSes. I have for instance been working with another company to migrate their old static (Frontpage-made) homepage into a modern CMS with a webshop.

The result? The company was extremely happy, and was surprised that I could create such complex web-page for that cost.
So what was the cost of the software? $0.

I guess you know us by now, and that you probably already figured out that I was using Open Source software for this, and that was the reason for the low cost. So what did I learn by setting up this CMS? What software did I use? What should one consider when choosing a CMS?

What software should I choose?
A good start is to surf over to Opensourcecms.com, where you will find pretty much every Open Source CMS/Blog on the market, set up in the default mode. Here you can both browse the admin- and frontend-interface. In addition to this they also have a good list of features for the different softwares.

My initial choice here was Mambo, because I liked both the front-end and back-end as well as the features.

Will my server support the software?
Most likely. Most of the more sophisticated hosts do run their servers on Apache with PHP4/5 with MySQL as the database-server. However, if your host do not run this setup, you might still be able to run the software, but you have to check the specifications on the software. Whether your server runs Linux (any distribution), FreeBSD or any other flavor of *nix, shouldn’t make any difference.

I want to set up a webshop that integrates with my CMS, what CMS should I choose?
There’re plenty of CMSes that can be set up with webshops, but I ended up choosing Mambo, because it could be easily integrated with VirtueMart, that is a sophisticated Open Source webshop.

However, I said that I initially chose Mambo. I’m currently in the stage of migrating away from it. The reason for this is that I did experience problems with the compatibility between Mambo and VirtueMart. They seem to work nicely together in general, but I’m having major problems with Firefox, which of course bothers me a lot.

The CMS I’m currently migrating to is Joomla!, which is a development of Mambo, where parts of the Mambo-development team broke away from Mambo and went their own way. Joomla! and VirtueMart are closely connected, and the VirtueMart-team recommends Joomla! rather than Mambo to run with their software.

Another reason for migrating away from Mambo is their upgrade to 4.6.x. This upgrade is a major upgrade from the previous 4.5.4-release, but it came with a big price. I’ve spent several hours trying to migrate over to the new release, but every time I ended up going back to 4.5.4 due to miscellaneous errors that occurred. In addition to this, when 4.6.0 was released as stable many people started to upgrade their sites, and most people ran into serious problems. A day or two later 4.6.0 was declared unstable. This lead many, many webmasters to spend several hours in this progress up upgrading, and finally having to give up and move back to the previous release (if they had a backup that is). I’ve read many stories in the forum from webmasters who had major downtime on their sites due to this problem. Sure everybody can make mistakes, but this was one severe mistake from the Mambo-team. If you’re trying to make a software that appears to business-clients, you simply cannot afford these kind of mistakes.

What is the major drawbacks of running Open Source CMSes?
So far, the only real problem I’ve experienced with this setup has been problems with VirtueMart. Sure, Mambo/Joomla! and VirtueMart does have a fairly steep learning curve for the average computer user, but once you understand the system it’s fairly straight-forward.

One word of warning though, don’t expect equally good forum-support for VirtueMart as in many of the other Open Source-projects. The code of VirtueMart appears to be something of a mess, where only the lead programmer knows how things really works. Their forum is filled with posts without answers, so don’t count on getting all your posts answered.

So what software would you recommend for an online business?

• Joomla!

• The CMS foundation.

• The webshop

• To make your site multi-lingual

• To handle downloads on your CMS

• If you need a forum on your CMS

I guess that’s it. That is the setup I would use if I were to set up a CMS for our company at the moment.

Stay tuned for the next part of the CMS-series. The next episode will include more in detail use of Joom!Fish as well as the migration process from Mambo to Joomla!.