A SCVA Investment Thesis. Congratulations! Barbara Gray and Brady Capital

Figure1-Performance-vs-Benchmarks-11-13

At various times on this blog and in the ebook I have thanked my MBA classmates and professors. Way back in 2007, they let my interests in social capital invade every conversation and assignment.

In one such case, in our Portfolio Management course, I persuaded my group to adopt a Social Capital Value Add investment thesis. We ended up being over weighted in banks because of the deep data that these companies have on the life cycle of consumers. But we did not have a lot of data to go on and it was a six week experiment. We were outperformed by at least half of our competitors.

Nevertheless, there is a difference between a weak thesis and poor execution. So I am pleased to share this update from Barbara Gray and Brady Capital.

On November 15th last year, we launched our Customer Value Index 200 (CVI 200), a research-based analysis, based on my social capital investment thesis, that provides investors with exposure to the top 10% of North American-listed companies with a market capitalization over $1 billion that score the highest in terms of competitive strength, social attributes, and authentic core values.

.. the CVI 200 (www.cvi200.com) came in with stellar performance in its first year – rising by 41.3% compared to the 32.1% gain in the S&P 500 over this period – an outperformance of 920 basis points. And as shown in Figure 1, the CVI 200 shone against the resource-laden Canadian S&P/TSX Index, which gained only a paltry 12.7%, outperforming it by 2,880 basis points.

To be clear CVI does not employ SCVA’s valuation method, but it is nevertheless, trying to focus on the same drivers and defenders of value.

See the full update here. Congratulations Barbara and Brady Capital!

A Different Road to Social Capital

This post originally appears on the Brady Capital Research blog, posted by Barbara Gray, CFA.

PREFACE: Here is the back story of how I arrived at the Social Capital Value Add thesis - by trying to make sense of my experiences as the CEO of social media network startup and then cobbling together an academic “bricolage”.

Barbara Gray, CFA - August 16, 2012 - Just over a month ago, I received the following tweet from an individual named Michael Cayley (@memeticbrand): “@barbcfa great post hope you visit socialcapitalvalueadd.com would like to talk to you”. As I don’t receive many direct tweets (I only started tweeting last Fall), I was intrigued and after checking out his website, I looked up Michael’s profile on LinkedIn and sent him the following message:

Hi Michael – thanks for reaching out to me on Twitter. Wow! It is amazing what a small world it is. I would love to talk with you about your Social Capital Value Add thesis – you were way ahead of the curve coming up with it back in 2007! I am an Equity Analyst and developed my social capital investment thesis back in 2010 after attending SXSW Interactive and #140 Conf in NY and realizing the impact social media would have on companies’ risk/growth profiles and thus valuation. I would be happy to share my Social Capital article (just published in Intellectual Asset Management magazine) with you. I look forward to discussing social capital with you. – Barbara

I think this really illustrates the thesis I presented in my recent research report on LinkedIn titled: “LinkedIn: Disrupting By the “Power of We””: how LinkedIn’s power to create both bonding and bridging capital for its members provides it with a distinct competitive advantage over leading social networking platforms such as Facebook and Twitter. As the nature of Facebook’s social network is based on bonding capital (i.e. formation of strong ties) with families and friends, it did not play any role in connecting Michael and I as we are not related and do not move in the same social circles. What is interesting is that Michael made the initial contact with me through Twitter, whose network is based on bridging capital (i.e. formation of weak ties) as it allows its members to “follow” anyone they want. However, Twitter’s platform does not facilitate trust, as it does not provide the means to access the competence or character of its members. For that, I turned to LinkedIn as it provided me with transparency into Michael’s credibility in terms of his:

1. Competence (a quick glance at his Professional Profile revealed that he is a fellow Canadian, worked for over a decade in various marketing and product development roles, achieved his MBA in Marketing/Finance In 2008, and is an entrepreneur as he founded Social Capital Value Add in 2007 and Cdling Capital Services in 2009).

2. Character (his 500 plus connections gives me comfort in the integrity of the information he disclosed in his Professional Profile and if I wanted to check his intent, I could call up one of my former investment banking colleagues from Toronto who is a mutual connection).

By contacting Michael via LinkedIn, as opposed to just email, I made it easy for him, in turn, to assess my credibility so he could decide if it was worth investing his time and effort to engage with me. He did – so we then exchanged email addresses, I sent him my Social Capital article, and we set up a time to talk via Skype. It’s interesting as at the end of the day, I think social media only gets you so far – to build a real relationship with someone you need to engage with them off-line – first email, then by phone, and then hopefully in person.

If you have any interest at all in social capital, I encourage you to read Michael’s absolutely brilliant ebook (and keep in mind, I have read over 75 business strategy business books the past two years so I don’t use that term loosely) titled “Follow the Yellow Brick Road: Introducing Social Capital Value Add”. What I find fascinating is how we developed very similar theses on social capital – yet at different points in time and in different ways. Michael researched and formulated his Social Capital Value Add thesis by taking an academic approach as he studied the research done by social capital pioneers as part of his MBA back in 2007 and 2008.

Ironically, I wasn’t even aware of the existence of the concept of social capital when I published my first paper “Social Media: An Exposing Disruptive Force – Look for Companies with “Heart” and “Soul” But Beware of “Empty Shells”” back in January 2011. It wasn’t until I read the fascinating book “Firms of Endearment” in the Spring of 2011 that I became aware of the concept of stakeholder equity. This made me realize how social media is leading to the creation of a new form of appreciating equity as Facebook, Twitter, and LinkedIn are global, dynamic, 24/7 social exchanges that I believe essentially convert a company’s stakeholder relationships into highly liquid assets and/or liabilities. At first, I thought of using the term “social equity” (equity = assets less liabilities) but that seemed too socialist. So I decided to use the term “social capital” instead and titled my November 2011 research report: “Social Capital: A New Strategic Play for Investors – Look for Companies with Heart and Soul”.

My basic investment thesis is that social media empowers individuals and is ushering in the Social Era, which will lead to a structural change in companies’ underlying risk and growth profiles and will accelerate their value creation/erosion process. This sentiment is echoed by Michael who states that “broadband internet connections have empowered individuals, making them the most disruptive and intense form of media (i.e. the Individual as Medium); there are implications throughout the corporate ecosystem”. I believe the companies that are best positioned in the Social Era are those with heart and soul as they will be able to use social media to capitalize on their strong and authentic stakeholder relationships to leverage the high level of enthusiasm and deep psychological attachment to the company’s brand and greater purpose. This is consistent with Michael’s thesis of how the symbolic brand is being replaced by the memetic brand (i.e. a company with “heart and soul” that stands for something) as companies can only “activate IAM (Individual as Medium) through social networks to achieve maximum reach and that activation is a function of social capital”. Like myself, he also predicts that the leading source of corporate value will shift from brand to social capital.

Michael’s book opened my eyes to a whole academic body of research that explores the concept of social networks and social capital… I just downloaded Ronald Burt’s book “Structural Holes: The Social Structure of Competition” – it was published in 1995 so it will be interesting to delve into it to see if it provides any further insights. And perhaps one day, the investment community will start to embrace our concept of social capital as the new driver of corporate value.

Disclosure: I have a LONG position in LinkedIn Corporation (LNKD-NYSE).

Cdling: principles of Social Capital Value Add applied

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Last week we poked up our heads to make an alpha release of our Cdling Scores. With the chart available at that link, you can quickly and easily see that Jason Calacanis has great instincts when it comes to assembling a diverse judging panel of established investors, Founders and influential analysts.

The same applies to helping investors in Ontario or the UK or Germany or NYC or Chicago or Asia or anywhere … build trust faster with investors in Silicon Valley.  Cdling Scores tell you a lot about a player in innovation at a glance.

Folks who took the time to check out the chart were galvanized by the insight.

Pulitzer prize winning Forbes journalist George Anders ask us to use Cdling Scores to compare the existing influence of the PayPalMafia with the emerging Facebook Friends.  With this kind of insight, the PayPalers can make better decisions about who they might co-invest with from the Facebook folks to help insure that they keep getting chances to get in on the best deals and have the best connections to help their existing portfolio of startups succeed.

We are grateful to Christine Wong at ITCanada for writing about what we are doing in an informed and entertaining way. And to her Associate Editor Brian Jackson for understanding that even when you are introducing a way for everyone to win, it is really, really hard to get folks to support a new approach.

Mark Fidelman hits the nail on the head

I just came across this post by Mark Fidelman. It is the best illustration of Social Capital Value Add that I have ever seen.

It still focuses on the grand influencer - but it captures the value impact.  And Mark does point out that there are a number of factors that impact the increase in value, including I suggest the value of the whole community that Robert Scoble fosters.

Why Every Company Needs a Robert Scoble on Seek Omega

http://www.seekomega.com/2011/01/why-every-company-needs-a-robert-scoble-infographic/

3 Economies of Online Currency: money, reputation and attention

I think we are doing some ground breaking work with Cdling, coming up with our “seeds” monetary system.

I have been doing some related reading this evening.

When I read this post by Alistair Croll, it prompted me to get off my duff and actually post something here again, so I think that is a huge endorsement.

Check it out:

The Three Economies of Online Currency.

Check out Digital Tonto

Greg Satell has a blog called Digital Tonto that I recommend.

Here is a sample post that caught my attention:

How Social Network Analysis Solves Real World Problems.

I hope that everyone had an awesome summer.

I am working hard on cdling.com, which I think of an application of Social Capital Value Add.  And we definitely believe that SNA will deliver great insights to the investor and start-up communities that we serve.

Social Media for Government Conference, Toronto

Thank you to the organisers of the Social Media for Government Conference in Toronto this week for inviting me to kick things off by leading a three hour workshop.  Thanks also to the folks who attended.  Here are my slides:

It was an interesting challenge to lead an “Introduction” to Social Media. Two years ago when I led a similar workshop in Ottawa, 90% of the room would have had mostly fear and virtually no personal exposure in using social media. This morning, only 10% of the room would have fit this description, yet feedback was that the definitions and strategic frameworks that we went through together were still useful in helping participants process their experiences and adjust their traditional notions of brand and communications for the network era.

For the last 30 minutes we went through this “map” that was developed by Jody Radzik at the Institute for the Future. I did not set out to deliver a full understanding of each of the 13 trends in Government 2.0 that are highlighted during this time (impossible) but this piece is the best that I have seen that encapsulates the overall context of changes shaping up. I asked participants to share a project that they are envisioning or initiative that they have read about that prompted them to decide to come to a conference like this. While this map is a projection out to 2020, we were able to quickly establish that in all of these areas, the future is already here, it is just unevenly distributed.

Collaborative Consumption by Rachel Botsman & Roo Rogers

Entertaining video here and their Booktracker campaign is an interesting memetic approach.

Eric Berlow: How complexity leads to simplicity

The Corporate Spark

Thank you to Social Capital Blog and @peterwmcmahon for bringing Frank Koller’s first book to our attention.  I am looking forward to giving a read.

Here is the Wall Street Journal’s review of Spark. How Old-Fashioned Values Drive a Twenty-First Century Corporation:Lessons from Lincoln Electric’s Unique Guaranteed Employment Program.

The Social Capital Blog and WSJ reviews focus on the issue of guaranteed employment because that is the tack that Koller has taken with the book.  But guaranteed employment is just one of James Lincoln’s four organizational pillars that remain in place to this day.

The others were a management advisory board made up of employee representatives; wages based on piecework, so that the quality and quantity of individual workers’ output can be monitored; and annual performance-based bonuses.

Here is the quote from Lincoln that inspired Koller to explore this story:

“The only way we’ll have any kind of widespread job security in today’s business environment is if we change our thinking as to what makes good management.

Instead of praising corporations that downsize, we need to look at their actions as admissions of failure.

We don’t need layoffs - we need creativity.”

It is easy enough to see why Koller has headed in the direction of job security and guaranteed employment, but I wonder if he zeros in on the wrong point.

It seems to me that Lincoln took his strategy to develop trust with workers.  The most important elements of the quote in my opinion are not the reference to job security but the call for a “change in thinking” and recognition that trust is a critical prerequisite to the organizational creativity needed to maintain sustainable competitive success.

In other words …

We must manage to optimize our enterprises for social capital to thrive in

the new economic model.

I am not interested in reading Koller out of nostalgia for “Old Fashion Values”.  I find it easier to relate to James Lincoln as a visionary, ahead of his time … which explains why so few have followed his example.

My interest in reading Koller’s Spark comes from the opportunity to learn more about experiments in maximizing corporate social capital.

On the other hand, if we need to look at Lincoln as a throw back to mystic better times to sell entrenched aging management, I am all in.