Podcast Transcript
Brian Kenny: During the height of the Roman Republic, the state contracted with private companies to perform many public services. Like modern day corporations, these government contractors, called publicani, issued investment shares called particula, the equivalent of today's over-the-counter shares. Every Roman citizen was invited to participate, and many saw it as their civic duty to invest in the empire they so loved.
Today, we'll hear from Professor Luis Viceira about his case entitled LOYAL3: Own What You Love. I'm your host, Brian Kenny, and you're listening to Cold Call.
Professor Viceira teaches MBA, doctoral students, and executives at Harvard Business School. He's a financial economist, whose research focuses on investment management and capital markets. Luis, welcome.
Luis Viceira: Thank you so much.
Kenny: As I read this case, I thought this is my opportunity to get rich. I'm going to go to LOYAL3 and I'm going to begin investing. I learned a lot from reading this case. Maybe you can start just by setting the case up for us. Who's the protagonist? What's the scenario that the case begins with?
Viceira: The case starts by looking at the currency of the company. One of the founders of the company, Barry Schneider, is thinking what to do after taking the company to some initial and very significant successes. LOYAL3 is based on the initial vision of one of the founders, Stephen Klein, who's an HBS graduate. He actually developed that vision when he was a student here at HBS. He had this idea of thinking about what he calls the connective owner, or the affinity investor, which is this idea that shareholders make better customers. He wanted to take that into a business model. The initial idea of LOYAL3 was actually to provide the consumers to be shareholders in a way that was cost effective for the small investors, the small consumers.
Kenny: Regular people.
Viceira: People like you and me, essentially. That's how they started. Soon afterwards, Barry Schneider joins the company and they develop that vision and do something a little bit different, sort of like a twist that proved to be quite successful for this company initially, which is, “Why don't we think about bringing IPOs to the small consumer and investor?” Barry and Stephen had this idea that, “Why don't we make those shares available to smaller investors who might be actually very interested in acquiring shares of companies they love, and what would it take to do that?” The case leads the reader through what it takes to do that. It's not simple at all. It takes a lot of convincing, a lot of persuasion. Also to be able to do this takes a lot of actual technical expertise.
Kenny: What prompted you to write the case? Why were you interested in this particular company and this topic?
Viceira: I have been interested lately, and I think there are a lot of students on campus interested in the so-called fintech businesses. These are new businesses that are emerging. They are trying to merge technology with investment management services and banking services. In a way, they're trying to disrupt those industries with new businesses models that are very based on technology. They tend to be outside the mainstream of what those businesses are, like banks and asset management firms. They are also looking into demographics that probably have been ignored by those firms. Specifically, they might have been looking at—like in the case of LOYAL3—generally investors who have no access to IPOs, who generally have not been paid attention by big, large brokerage firms or asset management firms. Yet, these demographics are the savers of the future. They are accumulating assets and they are eager to find things that attract them. They tend to be different behavior as consumers, but we are discovering they also have different behavior and taste as investors as well.
Kenny: I wanted to talk about the IPO product in particular, because this is one that I felt was a true differentiator for them. You go into very good detail in the case about how the IPO process works. LOYAL3 chose to take a pretty interesting strategy when they approached Wall Street about how they would be able to integrate into the IPO process. Can you talk about their approach?
Viceira: I guess the best way to describe it is how Barry Schneider, the CEO of the company, describes the process, which is democratizing Wall Street from within. They are trying to find a place and do it, but they understand they need to play by the rules. The IPO process, a process that is highly regulative, highly controlled by the ICC. Without ICC support, you would never be able to do this. There's no point in trying to completely break with the industry. It is more about how do we work with the industry to actually make those IPOs accessible to smaller investors.
Kenny: They even talk in the case about how disruptive innovation isn't the right approach to take here. It's almost like they're disruptors in disguise to some extent. They know the system and they know how to make it work and how to find their way in.
Viceira: They are disruptive in the ways they need to be disruptive. There's certain ways where breaking down would basically shut them off completely from the process because the ICC—one of their jobs is to have investor protection. You could think how something like this might not actually end up protecting investors. They need to work with the ICC. They understood that from day one. They were quite successful in doing that.
Kenny: You give an example in the case, I think it was Barry who brought it up, about Jim Koch and Boston Beer and the way that he approached it. Can you describe what Jim did?
Viceira: Well, Jim actually offered shares on Boston Beer through the beers he was selling. You would get a coupon in your pack of six bottles and say, "Send it back to the company and we'll give you shares in the IPO." You could think of that as a clunky process. You need to mail it back, you need to do quite a few things to actually end up getting the shares at the end of the day. Think about fast forwarding to a company that basically, in three clicks, you are in and you're seeing not just Boston Beer, but many other companies that might be offering IPOs through their site. It changes completely the way you think about it. The important thing about that example in the case is to see that there's interest by issuers, by companies going IPO, especially companies that talk to or they already make consumer product space to actually reach out to their most loyal customers and try to make them participate in the IPO.
Kenny: It goes back to the Roman example: if you really love this brand, now you own shares of stock and you're part of the IPO process, your level of loyalty clearly would go up. That drives the whole brand of the company, right?
Viceira: That's the whole vision of LOYAL3.
Kenny: How important is the tech part of fintech?
Viceira: The tech part actually is very important for this company. In the process, there's a stage in which, first of all, you need to express interest in acquiring shares. Of course, that might be easy for everyone to do. There is a twist in the process, which is once there is an agreement on. First of all, we start establishing the banks who are going to be underwriting the IPO. They're going to establish that range of what they think the IPO price should be, right? They go into a road show, that price get discussed with potential investors in the IPO.
Kenny: They literally go out and they talk about the business plan?
Viceira: It's a road show and all kind of things. At the end of the day, right before the IPO, there has to be an agreement on the price. They first establish a range of prices, and then the final price is established. The regulatory framework from the ICC says if the final IPO price is within that range, it's fine. We just go with that and we allocate the shares at that price. If the price happens to be outside that range, with certain limits, you need to get reconfirmation from those who are going to end up getting the shares allocated to them. Imagine reaching out to potentially millions of people, you have two hours to decide: do you want to recommit to this price? There might be, say, five hundred thousand of us, we need to get a message. We need to be able to get back and reconfirm. That requires a technology that is not easily available.
Kenny: Right. This becomes a differentiator for them.
Viceira: That becomes a differentiator for them, or they claim that to be a differentiator. That's open for discussion in the case, but certainly that's one of the ways that they describe their technological edge. They claim that most banks in Wall Street and brokers don't have the technology that will allow them to do this efficiently.
Kenny: We've seen with healthcare.gov that there can be real problems.
Viceira: It could [lead to] very big problems, right? They claim to have a platform and a technology. In fact, the case described how that was actually tested very intensively by a skeptical bank. They left quite impressed on how seamlessly that had worked. For them, one of the things that we learned from the case, in general, is trust and trustworthiness is one of the important things in every firm that deals with people's money. If you have a big failure, like the healthcare.gov, that can break trust. That might make people shy away from your model, from your business. For them, it was very important that this thing worked flawlessly. The case described how that has worked, so far, flawlessly.
Kenny: Right. Let's go back, then, to the question that's on the table for the protagonist in the beginning of the case—whether or not to continue to focus on the products that they've already built, or to think about partnerships or going international, decisions that they have to make. Have you had the protagonist come into class when you've discussed this?
Viceira: Yes. Barry Schneider was here for the first time we discussed the case. We had an opportunity to discuss the case for about an hour, and then Barry listened to us. I opened the floor for him. He had a very interesting and intense discussion with the students for about twenty minutes.
Kenny: He found it rewarding. Without giving it away, any surprises that you learned from discussing the case with the students?
Viceira: There were surprises, and I think discovered through the case discussion is given the multiplicity of things that they are doing, what is the real value added? They have the three products that they offer, and the question is: what's the value added of each one of them, how they are connected? If you're thinking about the future path that LOYAL3 should take, it's very important they understand which product might be worth investing and developing, maybe bringing it to other geographies and what it would take.
Kenny: Last question. Can you see the principal lessons from this case being applied to other industries, or is this exclusive to the fintech segment?
Viceira: Well, it applies in the sense that if you want to connect to these demographics, what does it take? I think most of these brands are actually very interested in connecting with these demographics in multiple ways, as customers, as consumers, as clients, as investors. This case, in a way, illustrates one strategy and how you go about that. I think there are lessons learned in that respect. There are lessons learned in how you think about rewarding your customers. Many firms out there are thinking about how not only to connect to these demographics, but how to reward them and what's the best way to bring loyalty? That's a constant for every brand out there. Perhaps, the third thing is, what does it mean to be a disruptor?
Kenny: Luis, thank you for joining us.
Viceira: Thank you for having me as a guest.