Curated Insights 2019.06.14

A conversation with Scott Kupor of Andreessen Horowitz, author and speaker at Lean Startup Conference 2019

I’m pretty sure this is not a fundable idea, but here goes! I’ve long been interested in health and, in particular, the role of food choices in determining health. I also believe that if people understood what was in fact healthy – not an easy task given the difficulty in producing scientifically rigorous studies on nutrition – and if they had the luxury of time to prepare healthy meals, they would in fact do so. We’ve certainly made progress over the last twenty or so years in addressing some of these challenges – there are more restaurants that do more to cater to the health-informed and of course we have the plethora of ingredient and meal home delivery services.

But what I think is missing is the perfect substitute for a home cooked meal that caters precisely to the ingredients/nutritional needs of the individual. I’d love to be able to order a meal that incorporates the precise ingredients I want and is made from the precise recipe I provide – just as I would do if I had the time (and patience) to do it on my own. This of course is probably why this will never work as a business – I’m not sure mass customization works economically. But, I am fascinated by the new “cloud kitchens” type models that are being formed and am hopeful that maybe they will crack the code on this.

Meatless future or vegan delusions? The Beyond Meat valuation

In 2018, the meatless meat market had sales of $1-$5 billion, depending on how broadly you define meatless markets and the geographies that you look at. Defined as meatless meats, i.e., the products that Beyond Meat and Impossible Foods offer, it is closer to the lower end of the range, but inclusive of other meat alternatives (tofu, tempeh etc.) is at the upper end. No matter which end of the range you go with, it is small relative to the overall meat market that is in excess of $250 billion, just in the US, and closer to a trillion, if you expand it globally, in 2018. In fact, while the meat market has seen slow growth in the US and Europe, with a shift from beef to chicken, the global meat market has been growing, as increasing affluence in Asia, in general, and China, in particular, has increased meat consumption, Depending on your perspective on Beyond Meats, that can be bad news or good news, since it can be taken by detractors as a sign that the overall market for meatless meats is not very big and by optimists that there is plenty of room to grow.

The big question that we face is in estimating how much the shift towards vegan and vegetarian diets will continue, driven by health reasons or environmental concern (or guilt). There is also a question of whether some governments may accelerate the shift away from meat-based diets, with policies and subsidies. Given this uncertainty, it is not surprising that the forecasts for the size of the meatless meat market vary widely across forecasters. While they all agree that the market will grow, they disagree about the end number, with forecasts for 2023 ranging from $5 billion at the low end to $8 billion at the other extreme. Beyond Meat, in its prospectus, uses the expansion of non-dairy milk(soy, flax, almond mild) in the milk market as its basis, to estimate the market for meatless meat to be $35 billion in the long term.

The wealth detective who finds the hidden money of the super rich

The top 0.1% of taxpayers (170,000 families) control 20% of American wealth, the highest share since 1929.

The top 1% control 39% of U.S. wealth, and the bottom 90% have only 26%.

The bottom half of Americans combined have a negative net worth.

Curated Insights 2019.04.05

The risk of low growth stocks: Heighten risk to the best companies

Most simply, ROIC measures how many incremental dollars of earnings a company earns by reinvesting their earnings. As a simple illustration, a company with an average 10% ROIC needs to invest 50% of their earnings to grow 5% (10%*50%=5%). A company with a 50% ROIC only needs to reinvest 10% of earnings to grow 5% (50%*10%=5%). In the former case, $0.50 of every dollar of earnings is not needed to fund growth, while in the latter case $0.90 is not needed to fund growth. This means that the higher ROIC company will generate 80% more free cash flow than the average ROIC company making the company 80% more valuable. This is why we focus on ROIC in our analysis. High ROIC businesses are significantly more valuable than average ROIC companies even when they produce the same level of growth.

Sony’s streaming service Crackle sells majority stake to Chicken Soup for the Soul

The transfer of ownership for Crackle, however, arrives at a time when ad-free streaming services like this are seeing newfound interest, with Amazon’s launch of IMDb’s FreeDive, Roku’s The Roku Channel, Walmart’s Vudu, Viacom’s new addition Pluto, Tubi and others now making gains.

As part of the deal, Sony will contribute to the new venture its U.S. assets, including the Crackle brand, user base and ad rep business, according to The Hollywood Reporter. It also will license to Crackle Plus movies and TV shows from the Sony Pictures Entertainment library, as well as Crackle’s original programming, like its shows “Start Up” and “The Oath,” for example.

CSS Entertainment will bring six of its ad-supported networks — including Popcornflix, Popcornflix Kids, Popcornflix Comedy, Frightpix, Espanolflix and Truli, plus its subscription service Pivotshare — to Crackle Plus.

The combination will lead Crackle Plus to become one of the largest ad-supported video-on-demand platforms in the U.S., the companies claim, with nearly 10 million monthly active users and 26 million registered users. The new service will also have access to more than 38,000 combined hours of programming, more than 90 content partnerships and more than 100 networks.

Andreessen Horowitz is blowing up the venture capital model (again)

So Andreessen Horowitz spent the spring embarking on one of its more disagreeable moves so far: The firm renounced its VC exemptions and registered as a financial advisor, with paperwork completed in March. It’s a costly, painful move that requires hiring compliance officers, audits for each employee and a ban on its investors talking up the portfolio or fund performance in public—even on its own podcast. The benefit: The firm’s partners can share deals freely again, with a real estate expert tag-teaming a deal with a crypto expert on, say, a blockchain startup for home buying, Haun says.

And it’ll come in handy when the firm announces a new growth fund—expected to close in the coming weeks, a source says—that will add a fresh $2 billion to $2.5 billion for its newest partner, David George, to invest across the portfolio and in other larger, high-growth companies. Under the new rules, that fund will be able to buy up shares from founders and early investors—or trade public stocks. Along with a fund announced last year that connects African-American leaders to startups, the new growth fund will give Andreessen Horowitz four specialized funds, with more potentially to follow.

Curated Insights 2018.11.30

What’s next for marketplace startups? Reinventing the $10 trillion service economy, that’s what.

The service economy lags behind: while services make up 69% of national consumer spending, the Bureau of Economic Analysis estimated that just 7% of services were primarily digital, meaning they utilized internet to conduct transactions.

In the a16z portfolio, Honor is building a managed marketplace for in-home care, and interviews and screens every care professional before they are onboarded and provides new customers with a Care Advisor to design a personalized care plan. Opendoor is a managed marketplace that creates a radically different experience for buying and selling a home. When a customer wants to sell their home, Opendoor actually buys the home, performs maintenance, markets the home, and finds the next buyer. Contrast this with the traditional experience of selling a home, where there is the hassle of repairs, listing, showings, and potentially months of uncertainty.

Managed marketplaces like Honor and Opendoor take on steps of the value chain that platforms traditionally left to customers or providers, such as vetting supply. Customers place their trust in the platform, rather than the counterparty of the transaction. To compensate for heavier operational costs, it’s common for managed marketplaces to actually dictate pricing for services and charge a higher take rate than less-managed marketplace models.

The last twenty years saw the explosion of a number of services coming online, from transportation to food delivery to home services, as well as an evolution of marketplace models from listings to full-stack, managed marketplaces. The next twenty years will be about the harder opportunities that software hasn’t yet infiltrated–those filled with technological, operational, and regulatory hurdles–where there is room to have massive impact on the quality and convenience of consumers’ everyday lives.

The services sector represents two-thirds of US consumer spending and employs 80% of the workforce. The companies that reinvent various service categories can improve both consumers’ and professionals’ lives–by creating more jobs and income, providing more flexible work arrangements, and improving consumer access and lowering cost.

Country stock markets as a percent of world

Keyence’s miraculous margins

The outsourcing reduces capital expenditure costs, and the associated depreciation, as there’s no machinery to purchase. It is also said to help Keyence to retain its valuable intellectual property. Suppliers, according to Morten Paulsen, Head of Research at CLSA Japan, have no visibility on how the respective pieces of the product puzzle fit together.

But Keyence are not the only business to run a “fabless” model. Apple, perhaps the most successful consumer brand of all time, outsources the creation of its iPhone to Taiwanese Foxconn. It reported operating margins of 26 per cent last quarter. Similarly, semiconductor designers such as Nvidia, Broadcom and Qualcomm also outsource to businesses like Taiwan Semiconductor. Their margins tend to range from 20 per cent to 40 per cent.

Keyence is also excellent at leveraging its suppliers, which it does “in a cleverer way than any other company I’ve seen”, he told us. Indeed, Keyence often has multiple suppliers manufacturing the same part, which stops one raising prices in fear of losing orders to competitors. Further to this, Keyence develops some of its manufacturing processes in house, then trains the suppliers, which means it can switch suppliers with greater ease than most if it begins to get strong armed, Paulsen argues.

What about its products? To its credit, Keyence has positioned itself right at the forefront of several key trends in an era of increasing factory automation, such as sensors which detect infinitesimal assembly-line mistakes. Customers, such as automakers — which make up roughly 25 per cent of its sales, according to Paulsen — are happy to pay top dollar for products that pay for themselves in 2 years, giving Keyence some degree of pricing power.

The reason for achieving high profitability is to maximise customer’s evaluation of products with high value added — that is, for customers, “I do not think it is expensive” and “I think it is cheap if it [our problem] can be solved” . . . As we explore the potential needs of our customers and develop them [the products] in advance, about 70 per cent of the new products of Keyence are the industry’s first and world’s first product as a result. Even in terms of management, we concentrate resources on product planning and design . . . we are trained to not only sell goods but also propose ideas that can solve customer’s problems.

Amazon, with little fanfare, emerges as an advertising giant

“The online retailer has ascended to the No. 3 spot in the U.S. digital ad market behind the dominant players, Alphabet Inc.’s Google and Facebook Inc. Though Amazon has just 4% of the market now, the company is expanding its avenues for marketers and hiring aggressively for its ad unit.

Amazon’s ad revenue is on pace to double this year, to $5.83 billion, according to eMarketer. Its ad sales are expected to jump $28.4 billion over the next five years, according to Cowen & Co.—more than the combined increases in ad revenue for all television networks globally, according to figures from media-buyer GroupM.”

Amazon’s ad business now contributes to gross profit and is expected to generate more income than its cloud business—which currently provides the bulk of its profits—as soon as 2021, according to Piper Jaffray analysts.

Amazon is expected to collect 15 cents of each new dollar spent on U.S. digital ads in 2020, up from 5 cents last year, according to an analysis of data from research firm eMarketer.

Why doctors hate their computers

This, I discovered, was the real reason the upgrade cost $1.6 billion. The software costs were under a hundred million dollars. The bulk of the expenses came from lost patient revenues and all the tech-support personnel and other people needed during the implementation phase.

Optimize your programming decisions for the 95%, not the 5%

Without having a deep understanding of what you’re developing and have put in the time to come up with good abstractions based on real experience, you’re just shooting in the dark hoping your generic user system works for all cases when you haven’t even programmed it yet for 1 use case. How is that even possible to do?

When you blindly follow what Google and other massive companies are doing, you’re optimizing for the 5% in a slightly different way. Instead of just getting your app up and running and seeing how it goes, you try to make decisions so that your application can be developed by 100 different teams sprawling across 5,000 developers. Meanwhile it’s just you developing the app by yourself in nearly all cases for new projects.

As soon as you start trying to make it work for a real application, or more specifically, your application, it all falls apart until you spend the time and really learn what it takes to scale an application (which is more than just picking tools). The companies that created these tools have put in the time over the years and have that knowledge, but that knowledge is specific to their application.

Premature optimization is the root of all evil (or at least most of it) in programming.

Optimizing for the 5% is a type of premature optimization. Maybe not so much for your development environment choices, but certainly for the other cases. Base your decisions on optimizing for the 95%, keep it simple and see how it goes. In other words, optimize when you really need to not because of “what if”.

Curated Insights 2017.07.02

Too hot to fly? Climate change may take a toll on air travel

Hotter air is thinner air, which makes it more difficult — and sometimes impossible — for planes to generate enough lift.

As the global climate changes, disruptions like these are likely to become more frequent, researchers say, potentially making air travel costlier and less predictable with a greater risk of injury to travelers from increased turbulence.

A no-fly window of even a few hours at a particular airport could have a ripple effect across airline operations while further squeezing airlines’ already tight profit margins.

Home Capital, WTF just Happened?

This deal bought Buffett a favour from the government for upcoming infrastructure investments. He meet with PM Trudeau and Finance Minister Morneau just before this deal.

Buffett sees a Canadian house crash coming. By taking a 38% stake in a tiny bank that he can keep capitalized through a crash, this gives him a vehicle to buy some of the larger banks if/when they run into trouble. Say housing is down 50% in Canada (which is how much I think housing drops); my personal view is that CIBC is in big trouble in that scenario. BRK, through HGC, can buy CIBC. That would be a meaningful investment, and it breaks BRK into the profitable Canadian banking oligopoly. By owning 40% of HCG, perhaps Buffett can get around any foreign ownership restrictions when looking to buy some or all of a Big 6 bank.

Rigetti Computing

But quantum computing — which unlike classical computing, is based on nature’s more complex operating system of quantum mechanics — will take the world by surprise. Even established veterans of the first few computing revolutions could be caught off guard, unable to foresee the jump from impressive demo to devastatingly impressive production machine. How so? Because it turns out that quantum computing has its own Moore’s law, and that law takes exponential scaling to a whole new level.

In the quantum hyperscaling Moore’s Law, the speed of a quantum computer is exponential in the number of coherent quantum elements or “qubits” — that is, 2^q. But successfully incorporating technological advances in using silicon technology would enable the qubits themselves to follow Moore’s law (q = 2^n)… making the resulting performance power of the quantum computer 2^2^n. This means that the performance of quantum computing is exponentially more rapid than Moore’s Law. It’s as if Moore’s law itself sped up like Moore’s law.

Morgan Stanley: Cloud computing is at ‘an inflection point’ — but how big will it get?

“That 20 percent is a very important number because if you look at other adoption cycles, whether it’s notebooks, smartphone penetration, the x86 server, even digital music and video games, when you get to that 20 percent penetration point, that curve inflects and growth accelerates.”

The real threat of artificial intelligence

Unlike the Industrial Revolution and the computer revolution, the A.I. revolution is not taking certain jobs and replacing them with other jobs.

This transformation will result in enormous profits for the companies that develop A.I., as well as for the companies that adopt it.

The solution to the problem of mass unemployment, I suspect, will involve “service jobs of love.”

…most of the money being made from artificial intelligence will go to the United States and China. A.I. is an industry in which strength begets strength…

While a large, growing population can be an economic asset, in the age of A.I. it will be an economic liability because it will comprise mostly displaced workers, not productive ones.

Ends, Means, and Antitrust

…the U.S. is primarily concerned with consumer welfare, and the primary proxy is price. In other words, as long as prices do not increase — or even better, decrease — there is, by definition, no illegal behavior.

The European Commission, on the other hand, is explicitly focused on competition: monopolistic behavior is presumed to be illegal if it restricts competitors which, in the theoretical long run, hurts consumers by restricting innovation.

Market dominance is, as such, not illegal under EU antitrust rules. However, dominant companies have a special responsibility not to abuse their powerful market position by restricting competition, either in the market where they are dominant or in separate markets. Otherwise, there would be a risk that a company once dominant in one market (even if this resulted from competition on the merits) would be able to use this market power to cement/further expand its dominance, or leverage it into separate markets…

Lessons From the Collapse of Banco Popular

Don’t trust bank stress-test results.

Regulators should require banks to maintain higher leverage ratios, another measure of capital adequacy. And yet this is a regulatory requirement the Trump administration wants to loosen.

Don’t reach for yield if you’re not ready for the risk.

Roadmap for MSCI Emerging Markets Index inclusion

China A: MSCI inclusion decision

China represents roughly 17% of global GDP, 11% of global trade, and 9% of global consumption but today comprises only a 3.5% weight in the MSCI ACWI Index