Curated Insights 2019.09.27

Why these two innovations in artificial intelligence are so important: Eye on A.I.

The first item was news that a Hong Kong-based biotechnology startup, InSilico Medicine, working with researchers from the University of Toronto, had used machine learning to create a potential new drug to prevent tissue scarring. What’s eye-popping here is the timescale: just 46 days from molecular design to animal testing in mice. Considering that, on average, it takes more than a decade and costs $350 million to $2.7 billion to bring a new drug to market, depending on which study one believes, the potential impact on the pharmaceutical industry is huge.

What’s also interesting here is that InSilico used reinforcement learning, an A.I. technique that hasn’t yet impacted business much. Reinforcement learning is notable because it doesn’t require the vast pools of structured, historical data that other A.I. methods do. Here researchers used reinforcement learning to rapidly design 30,000 new molecules and then narrow them down to six, which were synthesized and further tested in the lab. Look for more A.I. breakthroughs like this to start upending the balance of power between biotech startups and Big Pharma.

The second piece of underappreciated news is that researchers at DeepMind, the London A.I. shop owned by Google parent Alphabet, and Imperial College London, successfully used a deep neural network to find more precise answers to quantum mechanical problems. That’s basically the physics that underpins all of chemistry.

To date, the only element for which we can completely solve the underlying quantum equations is the simplest, hydrogen, which has just one proton and one electron. For every other element, we rely on approximations. Get better approximations, and you potentially get new chemistry – and that means new materials. Think room temperature superconductors or new kinds of batteries that will vastly extend the range of electric vehicles. DeepMind’s A.I.-powered approximations were in some cases almost an order of magnitude better than previous methods. If you’re Dow or DuPont, or Formosa Plastics or LG Chem, that sort of advantage could be worth billions.

Why prescription drugs cost so much more in America

All over the world, drugmakers are granted time-limited monopolies — in the form of patents — to encourage innovation. But America is one of the only countries that does not combine this carrot with the stick of price controls. The US government’s refusal to negotiate prices has contributed to spiralling healthcare costs which, said billionaire investor Warren Buffett last year, act “as a hungry tapeworm on the American economy”. Medical bills are the primary reason why Americans go bankrupt. Employers foot much of the bill for the majority of health-insurance plans for working-age adults, creating a huge cost for business.

Other drugs are more innovative — and their development undeniably expensive. According to Tufts University, the average is $2.6bn per drug, up 145 per cent in the past 10 years. Most drug candidates fail; those that do make it to later stages must go through expensive clinical trials. In support of the drug companies’ argument, one 2015 study found that for every extra $2.5bn a company made in sales, it produced one extra drug.

Robot pilot that can grab the flight controls gets its plane licence

A recent conversion of US military F-16 fighter jets into drones cost more than a million dollars each. ROBOpilot can be inserted into any aircraft and just as easily removed afterwards to return it to human-controlled operation.

“It looks like an impressive achievement in terms of robotics,” says Louise Dennis at the University of Liverpool. “Unlike an autopilot which has direct access to the controls and sensors, the robot is in the place of a human pilot and has to physically work the controls and reads the dials.” The makers suggest that ROBOpilot will be useful for tasks including transporting cargo, “entry into hazardous environments”, and intelligence, surveillance and reconnaissance missions.

Entrepreneurs hope microbes hold the key to a food revolution
A taxonomy of moats

Curated Insights 2019.09.20

The financial Turing test

Imagine we could simulate the universe where each time you are born to different set of parents with a different genetic makeup. Sometimes you are born a man. Sometimes you are born a woman. Sometimes black. Sometimes white. Sometimes smart. Sometimes not. Etcetera etcetera. What would you do to have the highest probability of becoming financially secure regardless of your background?

If you wanted to re-state this question more simply, it is: How do you get rich without getting lucky?


Product-user fit comes before product-market fit

The jump from product-user fit to product-market fit is no trivial leap. Skipping what to focus on during the product-user fit stage and prematurely racing to spark the market adoption can actually decelerate your path to product-market fit. Forcing growth on a product that isn’t yet ready for broader adoption will not ultimately convert to a market of highly retained, happy users. And if you don’t listen to the early power users closely enough, you may never discover the insights that get you to a world-class product.

Power users are the biggest sign of product-user fit. Making the leap from product-user fit to product-market fit is about listening to these users to evolve your product to attract more users. When exploring products that have only been in market for a short amount of time, the behavior of power users is often more interesting and important than any aggregate metrics. If the goal is to “make something people want,” then continuously talking to and observing early power users is the only way to really understand what drives both user retention and non-user activation.

5 reasons to consider buying Berkshire Hathaway

First, we think Berkshire’s broad diversification provides the company with additional opportunities and helps to minimize losses during market and/or economic downturns. Berkshire remains a broadly diversified conglomerate run on a completely decentralized basis, with a collection of moaty businesses operating in industries ranging from property-casualty insurance to railroad transportation, utilities and pipelines, and manufacturing, service, and retailing. The economic moats of these operating subsidiaries are built primarily on cost advantage, efficient scale, and intangible assets, with some of these businesses being uniquely advantaged as well by their ability to essentially operate as private companies under the Berkshire umbrella. The operating subsidiaries also benefit from being part of the parent company’s strong balance sheet, diverse income statement, and larger consolidated tax return.

Berkshire’s unique business model has historically allowed the company to–without incurring taxes or much in the way of other costs–move large amounts of capital from businesses that have limited incremental investment opportunities into other subsidiaries that potentially have more advantageous investment options (or put the capital to work in publicly traded securities). The managers of Berkshire’s operating subsidiaries are encouraged to make decisions based on the long-term health and success of the business, rather than adhering to the short-termism that tends to prevail among many publicly traded companies. Another big advantage that comes from operating under the Berkshire umbrella is the benefit that comes with diversification not only within the company’s insurance operations, but also within the organization as a whole. In most periods, it is not unusual to see weakness in one aspect of Berkshire’s operations being offset by the results from another or from the rest of the organization.


We can be weird, or it can be public

WeWork seems to be facing the traditional tradeoff: Stay private, keep control, but lose access to billions of dollars of funding, or go public, raise unlimited money, and have to act normal. If it does either of those things, that will mark a sort of end of an era. At the height of the unicorn boom, big tech companies could stay private without giving up the benefits of being public, or they could go public without taking on the burdens of being public. Now they might have to make hard choices again.

Shopify is now a major player in e-commerce. Here’s how it happened, according to the COO

Over the years, we’ve also realized as we grow bigger, we have incredible economy of scale. If you were to aggregate all our U.S. stores [customers’ sales volume] we would be the third-largest online retailer in the U.S. Amazon is first, eBay second, and Shopify is a very close third. What that means is when we go to the payment companies, when we go to the shipping companies or go to anyone, we negotiate on behalf of more than 800,000 merchants. Instead of keeping the economies of scale for ourselves, we distribute [the benefits] to the small businesses. I think that’s why we have been really successful.


The foodoo economics of meal delivery

The newbies, born more recently, have turned a once-tidy business into a food fight. They include listed firms such as Meituan of China and Delivery Hero of Germany, Uber Eats (part of Uber), Ele.me (owned by China’s Alibaba), and privately held DoorDash, based in San Francisco, and Deliveroo, from London. For most of them, delivery is their core business, so they share their cut of the bill with riders as well as restaurants. This substantially broadens the market to restaurants offering everything from steak to Hawaiian poké bowls. But margins suffer. Funded largely by venture capital, they have thrown subsidies at customers, forcing their veteran rivals onto the defensive. To catch up, the veterans are investing in advertising and delivery networks—at a big cost. This week Grubhub and Just Eat reported slumping earnings, and Takeaway mounting losses, as they spent heavily to fend off the upstarts.

The only mouthwatering aspect of the delivery business is its potential size. According to Bernstein, a brokerage, almost a third of the global restaurant industry is made up of home delivery, takeaway and drive-throughs, which could be worth $1trn by 2023. In 2018 delivery amounted to $161bn, leaving plenty of room for online firms to expand; the seven largest increased revenues by an average of 58%. Their businesses support the trend of 20- and 30-somethings to live alone or in shared accommodation, with less time and inclination to cook. In China, by far the biggest market for food delivery, one-third of people told a survey that they would be prepared to rent a flat without a kitchen because of the convenience of delivery. Delivery also fits neatly with the gig-economy zeitgeist, alongside ride-hailing firms such as Uber, Lyft and China’s Didi.

Moreover, potential growth may be overstated. Subsidies make true demand hard to gauge. When delivery charges and service fees eventually rise, which they will have to if profits are to materialise, some customers may flee. In the meantime, cheap money lets firms undercut rivals but distorts incentives. The war of attrition could get even worse if giants like Amazon muscle in, as it has tried to do by buying a stake in Deliveroo (the deal is stalled at present because of antitrust concerns). Alibaba, Amazon’s Chinese counterpart, uses Ele.me as a loss leader helping drive traffic to its profitable e-commerce sites.

Untangling the threads: Stitch Fix is a bargain

There have been numerous ecommerce 2.0 flameouts over the past decade (e.g. Gilt Groupe, Fab.com, Birchbox, Shoedazzle, Beachmint, One Kings Lane). Venture capitalists flocked to these businesses due to large addressable markets and strong top-line growth. To be fair, there have been some big winners (e.g. Wayfair) which can justify the VC game. But as Bill Gurley points out, innovations around pricing or distribution — think flash sales and subscriptions in a box — don’t represent core differentiation or sustainable competitive advantages. Additionally, these startups had access to hundreds of millions of VC funding and therefore weren’t forced to prove out the unit economics before scaling rapidly.

Are Airbnb investors destroying Europe’s cultural capitals?

The definitive story of how a controversial Florida businessman blew up MoviePass and burned hundreds of millions

Farnsworth’s pitch to MoviePass: $25 million for 51% of the company, two seats on the five-member board, and a promise to drop the monthly subscription price, temporarily, from $50 to $9.95, with the goal of hitting 100,000 subscribers. If all went well, the next step would be taking MoviePass public. But Farnsworth’s plan worried Spikes; to him, $10 a month was too low. At that price MoviePass would start losing money when a subscriber used the service more than once a month.

In the US, the average price for a movie ticket is about $9; if a customer ordered a ticket every day for a month (the maximum the MoviePass plan allowed), it would cost MoviePass about $270, of which the subscriber’s fee would cover just $10. But in July 2017, the MoviePass board agreed to the deal. And on August 15, the price drop went into effect. Thanks to word-of-mouth buzz and press attention, within two days subscriptions jumped from about 20,000 to 100,000. MoviePass had transformed from a scrappy startup trying to keep the lights on to a disrupter in the making.

But Spikes saw a looming disaster. The company was overwhelmed by its overnight success and couldn’t keep up with demand. A quarter-million new subscribers were signing up every month, and MoviePass customer-service lines were flooded with complaints from people who had been waiting weeks for their cards. MoviePass had lowballed the number of cards it would need after the price drop. It got to a point where the vendor making the MoviePass cards didn’t have enough plastic and had to call on its competitors to fulfill all the card orders. “We all knew we were selling something we couldn’t deliver on,” one former staffer said.

Pat Dorsey: Never put any moat on a pedestal

The same way you evaluate any other business, which is trying to think about the present value of future cash flows. This is an area where the world has changed pretty significantly over the past couple of decades because, 30 years ago, most investments were done via the balance sheet. They were investments in buildings, in factories, in railroads, in locomotives and all those came out of the balance sheet. Today, a lot of investment happens out of the income statement. If you are a software company, and you are acquiring new customers, who might have a nine to 10-year lifespan with the business, that comes out of sales and marketing, and so that depresses your current margins.

But it seems insensible to me to argue that I should not invest in a customer who could be with me for 10 years and who will pay me 3% more every year as I raise prices. Why is that not just as valuable an investment as a machine that will wear out in 10 years? One is an appreciating asset and the other is a depreciating asset. The former — the customer — comes by way of investing through the income statement and depresses current margins. As for buying the machine, it is just a capital expenditure. If you have a business that is re-investing heavily today, a software company or an Amazon for example, you have to think about the incremental unit economics. How much does it cost to acquire each customer and how much value do they deliver over some span of time, and then try to think about what does this business look like at steady state, say in a five or 10-year timeframe. You know what margins it will have once the investment slows down and then you discount those cash flows back to the present.

So far, Uber and Lyft have competed very heavily on price. That was evident in both of their IPO filings, they have been trying to undercut each other on price, which is not the sign of a healthy competitive dynamic that’s going to result in great return for shareholders. Maybe that will change, I don’t know. But, when I see two big companies trying to basically undercut each other on price and, it’s not really clear who is going to win, I’d rather just stay on the sidelines and watch. One of the most important things for an investor to do is to maximise return on time. By analysing Uber and Lyft, we probably aren’t going to get a lot of advantage, because everybody and their mother is trying to have an opinion on these things, and it’s just not clear how the competitive dynamics will pan out long term. So we’ve spent literally zero time on them!

A lot of it comes down to the unit economics of the business. Boeing and Airbus need to absorb a lot of fixed costs. Building an aircraft factory, investing and designing a new aircraft, requires a lot of very high fixed costs, and so they need to absorb that. And so, each incremental plane sold is very important to both companies. So they need to take market share from each other. Whereas for Visa and Mastercard, their fixed cost for the payment networks, those costs were sunk decades ago. Their network is there. It exists. So there’s no incentive to compete on price, because they don’t have the same economics of cost absorption.

When to sell and when a moat is weakening are really two different questions. But I would say, the biggest signal that a moat is weakening is the lack of pricing power. If a business historically had been able to raise prices and is no longer able to raise prices, that generally indicates that its competitive advantage is weakening or disappearing.

Howard Stern is getting ripped off

Take a look at Joe Rogan, who currently has the most popular talk show podcast with over 200 million downloads per month. This number comes from Joe himself¹, but let’s assume he was exaggerating and it’s only 100 million downloads per month.

Assuming he sells ads at a low $18 CPM (cost per thousand listeners) and sells out his ad spots, he’s making approximately $64mm in annual revenue. If he’s on the higher end, at $50 CPM, he could be making as much as $240mm per year². The only factor that would change this is how many free ads Joe gives to companies that he has a personal equity stake in (like Onnit, the supplement brand he co-owns).

That means that Joe makes somewhere between $64-$240 million per year in revenue from his podcast advertising alone—and that’s handicapping his audience by half what he claims to have. That number also doesn’t include any additional revenue generated from his wildly popular YouTube channel, which has over 6 million subscribers.

Based on existing advertising revenues alone, Joe Rogan could easily be worth over a billion dollars, even if he doesn’t realize it. If estimates are correct, he owns a business that produces somewhere in the neighborhood of $60-$235 million/year in profit and is likely growing at 30–50% annually (assuming his audience is growing alongside the podcast ecosystem)³. If it were publicly traded, his podcasting business could easily fetch a valuation in the billions.

Even the small stresses of daily life can hurt your health, but attitude can make a difference

When people talk about harmful stress — the kind that can affect health — they usually point to big, life-changing events, such as the death of a loved one. A growing body of research suggests that minor, everyday stress — caused by flight delays, traffic jams, cellphones that run out of battery during an important call, etc. — can harm health, too, and even shorten life spans.

Curated Insights 2019.08.23

The WeWork IPO

Given this vision, WeWork’s massive losses are, at least in theory, justifiable. The implication of creating a company that absorbs all of the fixed costs in order to offer a variable cost service to other companies is massive amounts of up-front investment. Just as Amazon needed to first build out data centers and buy servers before it could sell storage and compute, WeWork needs to build out offices spaces before it can sell desktops or conference rooms. In other words, it would be strange if WeWork were not losing lots of money, particularly given its expansion rate.

What is useful is considering these two graphics together: over 300 locations — more than half — are in the money-losing part of the second graph, which helps explain why WeWork’s expenses are nearly double its revenue; should the company stop opening locations, it seems reasonable to expect that gap to close rapidly. Still, it is doubtful that WeWork will slow the rate with which is opens locations given the company’s view of its total addressable market.

The sheer scale of this ambition again calls back to AWS. It was in 2013 that Amazon’s management first stated that AWS could end up being the company’s biggest business; at that time AWS provided a mere 4% of Amazon’s revenue (but 33% of the profit). In 2018, though, AWS had grown by over 1000% and was up to 11% of Amazon’s revenue (and 59% of the profit), and that share is very much expected to grow, even as AWS faces a competitor in Microsoft Azure that is growing even faster, in large part because existing enterprises are moving to the cloud, not just startups.

WeWork, meanwhile, using its expansive definition of its addressable market, claims that it has realized only 0.2% of their total opportunity globally, and 0.6% of their opportunity in their ten largest cities. To be fair, one may be skeptical that existing enterprises in particular will be hesitant to turn over management of their existing offices to WeWork, which would dramatically curtail the opportunity; on the other hand, large enterprises now make up 40% of WeWork’s revenue (and rising), and more importantly, WeWork doesn’t have any significant competition.

In short, there is a case that WeWork is both a symptom of software-eating-the-world, as well as an enabler and driver of the same, which would mean the company would still have access to the capital it needs even in a recession. Investors would just have to accept the fact they will have absolutely no impact on how it is used, and that, beyond the sky-high valuation and the real concerns about a duration mismatch in a recession, is a very good reason to stay away.

Pershing Square on Berkshire Hathaway

Berkshire’s primary asset is the world’s largest insurance business, which we estimate represents nearly half of Berkshire’s intrinsic value. In its primary insurance segment, Berkshire focuses on the reinsurance and auto insurance segments. In reinsurance, Berkshire’s strong competitive advantages are derived from its enormous capital base, efficient underwriting (a quick yes or no), ineffable trustworthiness, and its focus on long-term economics rather than short-term accounting profits, all of which allows the company to often be the only insurer capable of and willing to insure extremely large and/or unusual, bespoke insurance policies. We believe that Berkshire’s reinsurance business, operating primarily through National Indemnity and General Re, is uniquely positioned to serve its clients’ needs to protect against the increasing frequency and growing severity of catastrophic losses. In auto insurance, Berkshire subsidiary GEICO operates a low-cost direct sales model which provides car owners with lower prices than competitors that rely on a traditional agent-based sales approach. GEICO’s low cost, high quality service model has enabled it to consistently gain market share for decades. The enduring competitive advantages of Berkshire’s insurance businesses have allowed it to consistently grow its float (the net premiums received held on Berkshire’s balance sheet that will be used to pay for expected losses in the often distant future) at a higher rate and a lower cost than its peers. While Mr. Buffett is best known as a great investor, he should perhaps also be considered the world’s greatest insurance company architect and CEO because the returns Berkshire has achieved on investment would not be nearly as good without the material benefits it has realized by financing these investments with lowcost insurance float.

For more than the last decade, Berkshire has grown its float at an 8% compounded annual growth rate while achieving a negative 2% average cost of float due to its profitable insurance underwriting, while incurring an underwriting loss in only one out of the last 15 years. These are extraordinary results particularly when compared with the substantial majority of insurance companies which lose money in their insurance operations and are only profitable after including investment returns. Furthermore, we believe that Berkshire’s cost of float will remain stable or even decline as its fastest growing insurance businesses (GEICO and BH Primary) have a lower cost of float than the company’s overall average. Since the end of 2007, we estimate that Berkshire has averaged a nearly 7% annual rate of return on its insurance investment portfolio while holding an average of 20% of its portfolio in cash. Berkshire has been able to produce investment returns that significantly exceed its insurance company peers as the combination of the company’s long-duration float and significant shareholders’ equity allow it to invest the substantial majority of its insurance assets in publicly traded equities, while its peers are limited to invest primarily in fixed-income securities. We believe these structural competitive advantages of Berkshire’s insurance business are enduring and will likely further expand. Berkshire also owns a collection of high-quality, non-insurance businesses, which include market-leading industrial businesses, the largest of which are the Burlington Northern Santa Fe railroad and Precision Castparts, an aerospace metal parts manufacturer. While Berkshire’s non-insurance portfolio is comprised of highly diversified businesses that have been acquired during the last 50 or so years, we estimate that the portfolio derives more than 50% of its earnings from its largest three businesses: Burlington Northern (>30%), Precision Castparts (~10%), and regulated utilities (~10%).

While we have utilized a number of different approaches to our valuation of Berkshire, we believe it is perhaps easiest to understand the company’s attractive valuation by estimating Berkshire’s underlying economic earnings power, and comparing the company’s price-earnings multiple to other businesses of similar quality and earnings growth rate. Using this approach, we believe that Berkshire currently trades at only 14 times our estimate of next 12 months’ economic earnings per share (excluding the amortization of acquired intangibles), assuming a normalized rate of return of 7% on its insurance investment portfolio. While generating a 7% return on such a large amount of investment assets is not a given—particularly in an extraordinarily low-rate environment—we believe that Berkshire’s ability to invest the substantial majority of its insurance assets in equity and equity-like instruments and hold them for the long term makes this a reasonable assumption. Based on these assumptions, we believe that Berkshire’s valuation is extremely low compared to businesses of similar quality and growth characteristics.

WeWTF

The last round $47 billion “valuation” is an illusion. SoftBank invested at this valuation with a “pref,” meaning their money is the first money out, limiting the downside. The suckers, idiots, CNBC viewers, great Americans, and people trying to feel young again who buy on the first trade — or after — don’t have this downside protection. Similar to the DJIA, last-round private valuations are harmful metrics that create the illusion of prosperity. The bankers (JPM and Goldman) stand to register $122 million in fees flinging feces at retail investors visiting the unicorn zoo. Any equity analyst who endorses this stock above a $10 billion valuation is lying, stupid, or both.


The dating business is IAC’s best asset — and its greatest challenge

Match is among IAC’s greatest hits. The stock has nearly doubled this year alone, thanks largely to soaring Tinder membership. IAC sold a portion of Match in a 2015 IPO at $12. The stock is now $85, and IAC’s Match stake is worth close to $19 billion. It accounts for more than 90% of IAC’s current $21 billion market value.

This month, Levin and IAC disclosed a solution to the Match problem. The company is considering distributing Match shares to its shareholders in a tax-free transaction. And IAC is thinking about a similar handoff of its 84% stake in ANGI Homeservices (ANGI). That operation is a $4.3 billion market-cap business that IAC created in 2017 by acquiring publicly traded Angie’s List and merging it with IAC-owned HomeAdvisor.


How big stars maximise their take from tours

Historically, tours were loss-leaders used to promote albums. As revenues from recorded music have collapsed and productions have become increasingly elaborate to draw the crowds, ticket prices have risen steeply. The cost of a concert ticket in America increased by 190% between 1996 and 2018, compared with 59% for overall consumer prices. But as the continued success of scalpers demonstrates, they are still far below the market-clearing price.

How aggressively cute toys for adults became a $686 million business

Funko Pops are now available from 25,000 retail brands worldwide, from Walmart to Amazon to Hot Topic and even, somewhat bizarrely, Foot Locker. In 2018, the company’s net sales increased 33 percent to $686.1 million, with figurines accounting for 82 percent of all sales. After the company released its Q2 earnings report in early August, declaring that sales up are 38 percent compared to this time last year, CEO Brian Mariotti called his company “recession proof.”

Collectors like Jack make up 36 percent of Funko’s customers, while 31 percent are “occasional buyers.” Wilkinson says Funko Pops appeal to both markets because of the “science of cute” behind the figurines’ design.

Funko now has more than 1,000 licensed properties, from the Avengers to the Golden Girls, Fortnite to Flash Gordon, Stranger Things to The Office. “Evergreen and classic” properties like Harry Potter, Star Wars, and Disney make up nearly half of all Funko Pop sales, but the company is seemingly constantly procuring new, unexpected licenses, from drag queens to food mascots to NASCAR drivers.

A May 2019 investor presentation from the company boasts that a Pop can be designed and submitted to a licensor in 24 hours, molded into a prototype in 45 days, and “sourced from Asian facilities while maintaining quality control” in just 15 days. Funko also prides itself on its low production costs — each new figure costs between $5,000 and $7,500 to develop.

Is it possible, then, that Funko will run out of things to Pop? At present, the company’s profits continue to climb, from $98 million gross profit in 2015 (when Funko had just 205 active properties) to $258 million in 2018. History has shown us that collectibles tend to decline in popularity, and it is possible that Funko Pops could go the way of the Beanie Baby. Yet at present, there are more than enough fans keeping the company in business.

To encourage collectors, Funko uses many tried-and-tested market tricks, like releasing toys exclusive to certain locations (Mr. Rogers is exclusive to Barnes & Noble) and producing limited-edition runs (only 480 holographic Darth Mauls were released at San Diego Comic-Con in 2012). Yet the company doesn’t just rely on people like Jack and Tristan. A third of all customers are only occasional buyers, and the customer base appears to be a diverse set of people with a diverse range of fandoms. In 2018, no single property made up more than 6 percent of purchases; Pops related to new theatrical releases encompassed 20 percent of sales, TV show-related Pops accounted for 16 percent, and gaming Pops made up 17 percent. There is a roughly equal gender split in customers (51 percent women to 49 percent men), and last year, international sales grew 57 percent.

Interestingly, Funko’s average customer is 35 years old — two years younger than Jack, who says his date recovered from seeing his spare room. “The rest of the night went very well and we went on several more dates,” he said. Although it ultimately didn’t work out with her, Jack says his “crazy room of Funko Pops” didn’t have “too much influence on it either way.”


Move over Lego: The next big collectable toy powerhouse is here

Collectibles are a $200 billion market on their own, and video games are on pace to be a $300 billion industry by 2025. And Funko sits right in the middle of it all.

Funko is very good at what it does; its revenue and fanbase is proof of that. But when Microsoft reached out about a video game collaboration, there were all sorts of new questions on Funko and Microsoft’s part because Funko wasn’t just an aesthetic anymore; it had to be interactive for the first time. And interactive is tricky. It forces designers to decide, how does a Funko walk? How does a Funko fight? Can a Funko bleed? (No, by the way, they can’t).


The real story of Supreme

Twenty-five years later, as fads (like televised street luge) have fallen by the wayside, Supreme remains a skate brand—a purveyor of all the hard and soft goods one needs for the sport. But it is something much more than that, too. Since its beginning, in 1994, Supreme has slowly worked its way to the very center of culture and fashion. Or more accurately, culture and fashion have reconfigured themselves around Supreme. Supreme’s clothing and accessories sell out instantly, and the brand has become a fashion-world collaborator of the highest caliber with projects now under way with designers high (Comme des Garçons, Undercover) and low (Hanes, Champion). Though the particulars of the privately held company’s business are undisclosed, a $500 million investment in 2017 from the multinational private equity firm the Carlyle Group, for a 50 percent stake, put Supreme’s valuation at $1 billion.

The formula for success—for building a brand that lasts for 25 years—sounds simple enough: Create a high-quality product that will last a long time, sell it for an accessible price, and make people desperately want to buy it. But executing such a plan is far trickier. And in figuring out how to thrive according to strict adherence to its own highly specific principles and logic, Supreme has, deliberately or not, re-arranged the alignment of the entire fashion industry.

Powerful as Supreme has become as a trendsetter, the company is still fiercely committed to its own novel approach. Supreme didn’t launch a website until 2006. It was purposefully late to Instagram, too. Outside of Japanese fashion magazines and downtown NYC wheat-paste poster campaigns, Supreme’s only real marketing efforts are made in the skate world. Conveniently, marketing to skaters is likely the best way for Supreme to market to the fashion world. In other words, the fact that Supreme doesn’t pander to the fashion industry only makes its allure more powerful.

ETF fear mongering myths

Even if every ETF investor wanted to sell (which would never happen), remember that ETFs only own approximately 6% of the stock market and 1% of the bond market.

Curated Insights 2019.08.16

The arc of collaboration

As the ecosystem of specialized SaaS apps and workflows continues to mature, messaging becomes a place of last resort. When things are running smoothly, work happens in the apps built to produce them. And collaboration happens within them. Going to slack is increasingly a channel of last resort, for when there’s no established workflow of what to do. And as these functional apps evolve, there are fewer and fewer exceptions that need Slack. In fact, a sign of a maturing company is one that progressively removes the need to use Slack for more and more situations.

And core Dropbox is not a solution to this. People store their documents in it. But they had to use email and other messaging apps to tell their co-workers which document to check out and what they needed help with. Dropbox understands this concern. It’s what’s driven their numerous forays into owning the workflows and communication channels themselves. With Carousel, Mailbox, and their new desktop apps all working to own that. However, there are constraints to owning the workflow when your fundamental atomic unit is documents. And they never quite owned the communication channels.

Slack is not air traffic control that coordinates everything. It’s 911 for when everything falls apart. Every slack message about a new document your feedback is wanted on or coordinating about what a design should look like is a failing of process or tools. Slack is exception handling. When there’s no other way to make sure someone sees and update, or knows context, Slack is the 911 that can be used.

And as Figma expands into plugins, the ecosystem will continue to solve for more and more of the needs and exceptions. Over time, our workflows align with our functional flows. And collaboration is no exception. And Figma is not alone. More and more apps in all categories understand that collaboration should and must be built in as a first party if they want to best serve their customers. Notion, Airtable, etc all understand this. The feedback loops of collaboration get so short that they become part of the productivity loop.

Disruption: Finding the right balance in confinement care

Unlike 28 Days, Pantang Plus has 150 confinement therapists (aged between 25 and 60) working directly with the start-up. The company had to recruit a workforce of that size after they were challenged to do so. “During MaGIC’s accelerator programme in 2016, we could only handle four therapists at a time. But after that, we were tasked to take in 100 of them. So by word of mouth, we managed to recruit 102 therapists,” says Zamzana, adding that Pantang Plus also received a RM30,000 grant to kick off its business.

When orders started pouring in, the company needed to process the transactions quickly. It was difficult as it had to accommodate massage bookings, process quotations, confirm orders and send out therapists. After enlisting Hisamudin, a former systems engineer who had sold his media start-up, she managed to expedite the processes. The duo were coached to focus on a certain segment and they chose the affluent and urban market.

According to Hisamudin, by tapping this particular segment, they get fewer customers but each of them is more lucrative. The company managed to grow its business from 20 bookings in 2016 (which work out to about RM43,347 in sales) to 156 bookings (RM418,540) last year. Since its debut, the company has paid out about RM280,000 to therapists.

Before the online platform was set up, there was a lot of back and forth with the customers and building trust was not difficult, says Zamzana. But now that a lot of the processes are automated, she has noticed that customers are more hesitant and apprehensive about the services it offers. “So, I created a standard operating procedure (SOP) where we meet with customers for personalised consultation sessions so we can manage their expectations,” she says.

There is also an SOP for customers to protect the therapists. “There have been cases where they were mistreated, paid unfairly or were told to do all sorts of things beyond their job scope. The SOP lays out the conditions that govern the packages that are subscribed to. So, I take full responsibility if the customer is not satisfied or if the therapist is mistreated,” says Zamzana.

Hisamudin says the company is constantly improving the platform to automate the back-end process for both the customer and therapist. “We also plan to automate the payment gateway so we don’t have to check whether we have received payments from customers, which can be tedious,” he adds.

WeWork’s S-1: some quick observations

In connection with this offering, Rebekah and Adam are dedicating additional resources to amplify the positive global impact of our organisation. This effort is designed to enable us to scale our social and global impact as the Company grows. Rebekah and Adam Neumann have pledged $1 billion to fund charitable causes. To fulfil this pledge, Rebekah and Adam will contribute cash and equity to charitable causes within the 10 years following this offering. Their first contribution aids in the conservation of over 20 million acres of intact tropical forest, including the region pictured on the final page of this prospectus. To evidence their commitment to charitable causes and to ensure this commitment is meaningful, if Adam and Rebekah have not contributed at least $1 billion to charitable causes as of the ten-year anniversary of the closing date of this offering, holders of all of the Company’s high-vote stock will only be entitled to ten votes per share instead of twenty votes per share.

Adam currently has a line of credit of up to $500 million with UBS AG, Stamford Branch, JPMorgan Chase Bank, N.A. and Credit Suisse AG, New York Branch, of which approximately $380 million principal amount was outstanding as of July 31, 2019. The line of credit is secured by a pledge of approximately [blank] shares of our Class B common stock beneficially owned by Adam. In addition, JPMorgan Chase Bank, N.A. has made loans and extended credit to Adam totalling $97.5 million across a variety of lending products, including mortgages secured by personal property. None of these other lending products are secured by a pledge of any of Adam’s shares of capital stock in the Company.

Asset managers with $74 trillion on brink of historic shakeout

In this new environment, the beneficiaries have been the world’s largest asset managers, who are wielding far more influence and increasingly attracting a larger share of investor money. They’ve been able to take advantage of their size to keep overall expenses down and help make up for lower fees. Crucially, they’re also the most likely to be offering both passive investments as well as actively managed funds. That means the biggest firms are just getting bigger: The two largest U.S. indexing titans—BlackRock Inc. and Vanguard—oversee combined assets of around $12 trillion this year, up from less than $8 trillion just five years ago.

Fidelity Investments once boasted the world’s largest mutual fund. But the Fidelity Magellan Fund that stock-picking star Lynch propelled from a $20 million offering into a multibillion-dollar behemoth is not even in the world’s top 25 mutual funds today, according to Morningstar. In a sign of the times, only three of the top 10 funds worldwide are actively managed funds, Morningstar data show.

Europe’s fund industry has remained fragmented, in part, because it’s dominated by divisions of banks and the link hasn’t been an advantage as the financial firms focused less on building their fund units and more on averting crisis after crisis.

The booming, ethically dubious business of food delivery

In 2020, more than half of restaurant spending is projected to be “off premise”—not inside a restaurant. In other words, spending on deliveries, drive-throughs, and takeaway meals will soon overtake dining inside restaurants, for the first time on record. According to the investment group Cowen and Company, off-premise spending will account for as much as 80 percent of the industry’s growth in the next five years.


How the supermarket helped America win the Cold War

Between 1946 and 1954 in the U.S., the share of food bought in supermarkets rose from 28 percent to 48 percent. By 1963, that number had risen to nearly 70 percent. A&P had so much market power that the Department of Justice went after it for anticompetitive practices. This was an interesting development, considering that the U.S. Government played such a significant role in the creation of supermarkets in the first place.

RV Capital’s view on Variable Interest Entities

The VIE structure is incredibly favourable from a Chinese perspective. Control of the companies remains in China. The contractual right to cashflow is mainly theoretical as most companies reinvest most of their earnings (which makes sense given the opportunities for growth). Finally, it aligns with the government’s legitimate aim to foster a competitive and vigorous economy that the costs of said competition are borne in part by foreign capital whilst the benefits accrue exclusively to its citizens. Why would China ever do anything to risk the VIE structure when anything that superseded it could only possibly be less favourable?


Tenure voting and rethinking what’s fair in corporate governance

Tenure-based voting would allow all shareholders to have an equal opportunity to earn a greater say in a company’s governance. All longer-term investors — with the definition of “longer term” agreed upon by the company and its shareholders — would earn more rights to weigh in on strategy and management, while shorter-term investors would simply vote with their feet by selling their shares if they aren’t aligned with that strategy. In adopting a tenure-based voting system, a company and its shareholders would need to determine the time periods associated with higher-vote stock. For example, all shares could start with one vote per share as of the acquisition date of the shares, and after, say, a two-year hold period, accrete to 1.5 votes per share, with perhaps additional votes per share for each additional holding period. If an investor were to sell her shares, the new holder of the shares would start at one vote/one share and begin a new holding period. The rules could be tailored to achieve whatever goals the shareholders have in mind, probably requiring a majority of shareholders to approve the initial plan (or any substantive modifications).

Curated Insights 2019.05.31

China, leverage, and values

This is the true war when it comes to technology: censorship versus openness, control versus creativity, and centralization versus competition. These are, of course, connected: China’s censorship is about control facilitated by centralization. That, though, should not only give Western tech companies and investors pause about China generally, but should also lead to serious introspection about the appropriate policies towards our own tech industry. Openness, creativity, and competition are just as related as their counterparts, and infringement on any one of them should be taken as a threat to all three.

Long Zillow. Short real estate agents?

Return on homes sold before interest expense (4-5% target):
$255,000 x 4% = $10,200 per house x 60,000 houses = $612 million.

Adjusted EBITDA before adjacent opportunities (2-3% target):
$255,000 x 2% = $5,100 per house x 60,000 houses = $306 million.

Their email says something like this:

Mr. Prescott,

We noticed you have looked at this house on 523 Elm St. seven times over the past month. Great news! This house just became part of our inventory😁

We are prepared to offer you $275,000 for you current house.

We will sell you 523 Elm St. for $315,000.

Since you have $100,000 of equity in your current house (they know this because they financed it), we are prepared to offer you a 15-year mortgage for $215,000 at a 3.5% interest rate.

Your TOTAL out-of-pocket expenses for this transaction will be $4,300 (people like certainty; moving will $100 dollar you to death).

In addition, here are three dates we can move you out of your current house, and into your new house.

Attached are some repairs we think this house will need and what they will cost. If you choose to go forward with any of them, we will proceed with the repairs, and the costs will be rolled into your mortgage at no additional out-of-pocket cash for you.

This offer will expire in 72 hours.

Again, your total OUT-OF-POCKET cash, should you accept this offer, will be $4,300 dollars. And not a penny more.

If you would like proceed, just click “Accept this Offer” and one of our agents will be in touch with you shortly…

Cordially,
Future Zillow

The inside story of why Amazon bought PillPack in its effort to crack the $500 billion prescription market

Spending on U.S. prescription medications is approaching $500 billion a year and growing up to 7% annually, according to IQVIA, a provider of health data. Roughly 60% of American adults have at least one chronic illness, such as heart disease, cancer or diabetes, and 40% have two or more, according to the Centers for Disease Control and Prevention.

The retail drug market for prescriptions has been dominated by large pharmacy chains, including CVS and Walgreens, and independent pharmacies, which all count on a few middlemen known as pharmacy benefit managers (PBMs) to negotiate prices, as well as a handful of large drug distributors.

Field notes: Highlights from Huawei

Huawei has about 700 mathematicians, 800 physicists, 120 chemists, six or seven thousand basic research experts, and more than 60,000 engineers. We have compiled more than 15,000 research experts to turn capital investment into knowledge. We have more than 60,000 practical personnel to develop products and turn that same knowledge back into capital [into revenue]. We have always supported scientists outside the company to conduct research.

Curated Insights 2019.05.17

Uber's biggest underestimation would be thinking its competition was just the taxi and limousine market in the U.S., a $4.2 billion opportunity. That turned out to be way too small. Instead, Uber's revised total addressable market is all vehicle and public transport trips, according to its S-1 filing. That's now a $5.7 trillion market size.

The investor who turned down Uber at a $5m valuation

In its 2010 seed round, Uber raised $1.6m according to Pitchbook, giving it a $5.4m valuation. On Friday, it closed its first day of trading publicly with a valuation of around $70bn. That was significantly below the $100bn valuation the company had recently hoped to achieve, but it still meant early investors were able to cash in on huge returns.

But he was wary. Having lived in London for many years previously, he said he knew how strong the taxi lobbies were. In Los Angeles, he knew that everyone had their own cars and never took cabs. This was clearly going to be a niche, local service for certain cities only, he thought. 

WeWork wants to become its own landlord with latest spending spree

Neumann took control of 65 percent of WeWork’s voting equity as part of a 2014 funding deal—while celebrating, he partied so hard he broke a floor-to-ceiling window in his office, according to a person familiar with the incident—and since then, he’s been known to make company-level decisions on what look, from the outside, like whims. When WeWork sold bonds for the first time a year ago, it originally planned to sell $500 million worth, but the final number was $702 million, because 702 was deemed a lucky number, a source familiar with the matter says. Neumann referred a question on the number to his general counsel, who declined to comment. It’s unclear what strategic value WeWork’s investment in an indoor wave pool company offered, but Neumann does love to surf.

Curated Insights 2019.05.10

Why you’ll never invest in the next big short

Greenblatt’s Gotham Capital funded Burry’s investment fund when he decided to quit medicine and become a full-time investor. They even took an ownership stake that was rewarded handsomely when Burry’s value investments performed well right out of the gate. But when Burry got interested in betting against the housing market in 2005-2006, Greenblatt, along with many other investors in the fund, balked.

Burry so believed in his bet against these terrible housing loans that he eventually put a gate on his fund. In hedge fund speak, this means he made it harder for his investors to withdraw capital. Greenblatt and company threatened to sue and it almost forced Burry to give up on his trade of a lifetime:

“If there was one moment I might have caved, that was it,” said Burry. “Joel was like a godfather to me—a partner in my firm, the guy that ‘discovered’ me and backed me before anyone outside my family did. I respected him and looked up to him.”

Of course, Burry was proven right. By June 2008 his fund was up nearly 500% from its inception in 2000 versus a gain of just 2% in the S&P in that time. He and his investors made out like bandits from his housing short. Greenblatt is a legend and he almost let one of the greatest trades ever made slip away because he didn’t understand it. But can you blame him?

In 2006, the S&P 500 was up more than 15% while Burry lost close to 20% because the housing market had yet to roll over. Burry was a tried and true value investor so betting against the housing market was an enormous style drift on his part. And gating your fund after a horrendous year isn’t a great signal to investors. If someone like Greenblatt nearly whiffed on the greatest trade of all-time, what chance would you have at seeing something like this through?

Burry sent an email in the fall of 2008 to some of his friends that read: “I’m selling off the positions tonight. I think I hit a breaking point. I haven’t eaten today, I’m not sleeping, I’m not talking with my kids, not talking with my wife, I’m broken.” It’s hard enough to make money when the markets are in upheaval but Burry was basically betting against the entire system here. You get the sense from reading Lewis’s book that, although they made a ton of money, the people who pulled this off didn’t delight in the situation even after being proven right. It exacted a toll on everyone involved.

To his founding investor, Gotham Capital, he shot off an unsolicited e-mail that said only, “You’re welcome.” He’d already decided to kick them out of the fund, and insist that they sell their stake in his business. When they asked him to suggest a price, he replied, “How about you keep the tens of millions you nearly prevented me from earning for you last year and we call it even?”

Larry Fink, Barclays and the deal of the decade

Mr Fink swooped. In March 2009, he began negotiating with Bob Diamond and John Varley, then president and chief executive of Barclays respectively. The $15.2bn cash-and-stock deal they announced in June transformed BlackRock into a financial services colossus and ultimately changed the shape of the global investment industry. Barclays, in turn, managed to avoid a government bailout but it has since been accused of selling its crown jewel.

In one stroke the purchase made BlackRock the world’s largest fund manager, with $2.8tn in assets. Ten years on, it oversees $6.5tn and has a market value of more than $74bn. More importantly, it ensured the company, which was then best known as an active fixed income manager, had a large foothold in part of the asset management industry known as passive investing. BGI, through its iShares brand, was a leader in exchange traded funds, where funds passively track an index of shares instead of making active bets on stock prices of different companies. Since 2009, assets managed in ETFs globally have ballooned from just over $1tn to a record $5.4tn.

Barclays secured a 19.9 per cent BlackRock stake as part of the BGI deal, which was valued at $13.5bn when announced but rose to $15.2bn when it completed six months after a 62 per cent surge in BlackRock shares. “Selling that stake in 2012 turned out to be a bad move,” said Mr Weight. The divergence in fortunes of the respective shareholders has been stark. BlackRock has outperformed Barclays by 470 per cent in common currency terms since the BGI deal. During the decade Barclays shares have dropped more than 40 per cent, while BlackRock is up 160 per cent.

Curated Insights 2019.03.15

Buying into the timeshares Hilton Grand Vacations, Wyndham Destinations, and Marriott Vacations Worldwide

All of the timeshare companies offer some form of financing; in general, they offer consumer loans at low double digit interest rates. These are rather attractive loans, and they can generally be packaged up and sold into the ABS market at mid-single digit rates of returns. As of Q3’18, most of the timeshare companies had ~10% of their enterprise values invested into financing receivables that they hadn’t sold into the ABS market yet. I don’t think it’s appropriate to pull those receivable investments from the timeshare companies’ enterprise valuation calculations since they’re generally valued on an EBITDA calculation that includes earnings from those loans, but I could see an argument for why they should be deducted from their EV calculation (i.e. treated as a cash equivalent). Doing so would make the timeshare companies even cheaper.

The twenty craziest investing facts ever

Why am I using the Dow instead of the S&P 500? They’re effectively the same thing. The rolling one-year correlation since 1970 is .95.

If you had invested from 1960-1980 and beaten the market by 5% each year, you would have made less money than if you had invested from 1980-2000 and underperformed the market by 5% a year.
When you were born > almost everything else.

Dow earnings were cut in half in 1908. The index gained 46%.

Curated Insights 2018.08.17

Not enough people are paying attention to this economic trend

Haskel and Westlake outline four reasons why intangible investment behaves differently:

  • It’s a sunk cost. If your investment doesn’t pan out, you don’t have physical assets like machinery that you can sell off to recoup some of your money.
  • It tends to create spillovers that can be taken advantage of by rival companies. Uber’s biggest strength is its network of drivers, but it’s not uncommon to meet an Uber driver who also picks up rides for Lyft.
  • It’s more scalable than a physical asset. After the initial expense of the first unit, products can be replicated ad infinitum for next to nothing.
  • It’s more likely to have valuable synergies with other intangible assets. Haskel and Westlake use the iPod as an example: it combined Apple’s MP3 protocol, miniaturized hard disk design, design skills, and licensing agreements with record labels.

For example, the tools many countries use to measure intangible assets are behind the times, so they’re getting an incomplete picture of the economy. The U.S. didn’t include software in GDP calculations until 1999. Even today, GDP doesn’t count investment in things like market research, branding, and training—intangible assets that companies are spending huge amounts of money on.


How Box conquered the enterprise and became a $1.7 billion company in a decade

However, what most people failed to understand—and continue to misunderstand to this day—is that Dropbox was never launched as a competitor to Box. The use cases were completely different. Box.net and Dropbox may have shared some similar underlying technologies (and an uncomfortably similar name), but the focus of Dropbox was cloud-based file management for the consumer market. Box was focused on file sharing. By the time Dropbox launched in 2007, Box.net had already largely abandoned the consumer market in favor of the enterprise. There were other key differences between the two products, such as the necessity of installing a dedicated Dropbox directory on a user’s local machine versus Box.net’s entirely cloud-based interface. Additionally, the two companies’ target markets and business models couldn’t have been more different.

Levie knew SharePoint was Box’s biggest competitor, so he did what any inventive, irreverent entrepreneur would do—he took out a billboard advertisement on a stretch of highway on Route 101 between San Francisco and Silicon Valley. The ad promised SharePoint users that Box would pay for three months of SharePoint access if they didn’t prefer Box. In February 2009, Box went one step further in its media assault on Microsoft by erecting another billboard, this one highlighting the many aspects of SharePoint that were most unpopular among its user base.

While the enterprise market represented a unique chance for Box to pivot away from the increasingly competitive consumer market, essentially shifting the focus of the entire company was no small undertaking. Until that point, Box had used a freemium business model. This worked fine for the consumer market, but it was completely unsuitable for the enterprise. This meant Box would not only have to radically redesign its product from the ground up but also restructure its entire business model.

By acquiring Increo, Box immediately gained access to Increo’s innovative document collaboration tools. This was crucial. It wasn’t enough for Box to offer cloud-based storage or integrations with Salesforce and Office. It had to offer additional value as competing tools vied for dominance.

The consumerization of enterprise IT driven by Box and other forward-thinking companies wasn’t merely an attempt to cultivate a unique value proposition or drive adoption. It reflected much broader shifts in computing in general. The advent of Web 2.0 apps created a new design paradigm that placed emphasis on ease of use and accessibility across multiple devices over complex file management tools. Smartphones fundamentally changed the way we think of computing. For an enterprise software company like Box to be at the forefront of trends in usability was impressive.

OneCloud was an excellent example of how consumer-focused design informed Box’s broader strategy. The company had built a platform for developers in 2011 known as the Box Innovation Network, which functioned similarly to an app marketplace. OneCloud was an extension of this idea, only it was intended exclusively for mobile devices. This would later become a predictable cycle in Box’s development. New features were added to the product to meet emerging needs, and those features were presented to users in ways that directly mirrored those of consumer apps and sites.

What’s more important, however, is how well Box converted its free users to paid subscribers. Consumer apps like Evernote convert free users to paid plans at a rate of approximately 3%. Box was converting free users to paid plans at a rate closer to 8%, including major corporate customers such as Bank of New York and ambient advertising powerhouse Clear Channel. As a result, Box achieved revenues of more than $11M in 2011.

Because most of Box’s sales calls came from companies that had already been using the product, Box’s sales teams were typically able to close 60% of those deals within two weeks—an impressive figure, especially considering the often months-long sales cycles typically associated with the enterprise market.

Box has done an excellent job of not only carving out its own niche in an increasingly competitive space but also by applying design and UX principles of consumer-focused SaaS products to redefine how enterprise software looks, feels, and works. With its keen focus on usability, ease, and simplicity, Box has become a leading force in the consumerization of the enterprise and has shaped how other enterprise software companies approach their products.

Ad tech firm poised to surge 50%

Bid factoring is essentially a linear equation that enables marketers to apply multipliers to different targeting parameters. This approach makes it easier to value each user individually and dynamically, allowing marketers to more easily reach their target users. Bid factoring saved time for marketers through automation and removed the need to store tons of line item permutations, therefore lowering data storage costs.

When Green started The Trade Desk, his goal was to “build a company for the next 100 years.” He did not want to follow the same mistakes that other companies in the space made such as having a conflict of interest by being on both the buy and sell side. Green decided to build a demand side platform because he believed the demand side of the advertising transaction will always have the advantage. In advertising it will always be a buyer’s market because it is easy to add supply by having an extra impression on a web page or additional 30-second spot to a commercial break to meet increased demand. This basic economic reality means advertising supply is more elastic than demand and will forever put the buy side in the power position.

The Trade Desk would also be transparent and not charge unsustainable take rates. Green believed once the digital advertising industry matures, total transaction costs to purchase a digital ad would be $0.20-$0.30 for every $1.00 spent, with roughly $0.15-$0.20 going to the DSP and $0.05-$0.10 being split between the SSP and the ad exchange. The Trade Desk could have charged much higher take rates but decided to charge customers what it believed would be the fair end-state price for their services. While take rates could become lower as competition potentially increases, similar to what happened with discount stock brokerages, barriers to entry and the DSP’s ability to provide increasing value to advertisers overtime should preserve prices.

As the ad market has grown, the number of auctions has increased exponentially. In order for a DSP to win an auction, it now takes many more looks. For each ad campaign, costs have increased while revenues remained fairly flat, increasing operating leverage. DSPs that have half the ad spend as The Trade Desk will struggle because they will incur the same amount of expense per ad campaign but monetize less, making it much more difficult to be profitable if you are a smaller player and don’t have the scale.

Every day The Trade Desk’s customers log into their platform to use the data and analysis to value ad inventory and run marketing campaigns. Advertisers provide their customer data and publishers provide their user data, which The Trade Desk uses to help advertisers value media for their specific needs. As The Trade Desk accumulates more data over time, its insight and analysis add more value to its customers, creating a self-reinforcing virtuous cycle.


Nvidia’s new Turing architecture is all about real-time ray tracing and AI

Nvidia describes the new Turing architecture as “the greatest leap since the invention of the CUDA GPU in 2006.”

“Hybrid rendering will change the industry, opening up amazing possibilities that enhance our lives with more beautiful designs, richer entertainment and more interactive experiences,” said Nvidia CEO Jensen Huang. “The arrival of real-time ray tracing is the Holy Grail of our industry.”

The new RT cores can accelerate ray tracing by up to 25 times compared to Nvidia’s Pascal architecture, and Nvidia claims 10 GigaRays a second for the maximum performance.

With NGX, Nvidia today also launched a new platform that aims to bring AI into the graphics pipelines. “NGX technology brings capabilities such as taking a standard camera feed and creating super slow motion like you’d get from a $100,000+ specialized camera,” the company explains, and also notes that filmmakers could use this technology to easily remove wires from photographs or replace missing pixels with the right background.


Tesla’s autonomous opportunity is severely underappreciated

We estimate that net revenue for autonomous platform providers – those companies that own the software technology stack for autonomous ride-hailing services – should exceed $2 trillion by 2030, roughly equal to our expectations for automaker revenue at that time. Unlike their auto-manufacturing peers, however, autonomous platform providers should see software-like margins, be less capital-intensive, and enjoy network-effect-driven regional competitive dominance. So, while autonomous platform providers may generate the same revenue as automotive manufacturers, ARK believes these providers will generate six times the operating earnings and consequently will prove to be substantially more valuable. In fact, ARK estimates autonomous platforms will be worth more than the entire $4 trillion global energy sector.

An enhanced Autopilot package with the ability to self-drive costs $5,000 upfront or $6,000 for customers who choose to wait and buy later. Payment for this feature alone can be thought of as nearly pure profit on every Tesla sold. In addition, once Tesla launches the Tesla Network, its autonomous ride-hailing network, it could collect platform fees, similar to Uber’s model today, from every autonomous ride charged to the consumer. Given a rate of $1 per mile to the end consumer and over 100,000 miles per year per vehicle, Tesla could benefit from $20,000 in high-margin platform fees per car per year. Over a five-year lifetime, a single Model 3 could generate $40,000 in net cash flow. Even investors optimistic about Tesla’s prospects project the Model 3 cash flow at $4,000 and one-time in nature. In effect, each Model 3 sale could generate 10 times more cash flow than investors currently understand.

Google’s targeted ads are coming to a billboard near you

Digital outdoor ad spending is growing at 15 percent annually, and will overtake traditional outdoor outlays by 2020, according to PwC. But Google is the 800-pound gorilla that’s not yet in the room. It would give the company another major edge over Facebook, which doesn’t have the same access to location-based mobile data.


Alibaba tweaks a controversial legal structure

There are three problems with VIEs. First, key-man risk. If the people with nominal title die, divorce or disappear, it is not certain that their heirs and successors can be bound to follow the same contracts. Second, it is not clear if the structure is even legal. China’s courts have set few reliable precedents on VIEs and the official position is one of toleration rather than approval. Third, VIEs allow China’s leading tech firms to be listed abroad, preventing mainlanders from easily owning their shares and participating in their success.

Alibaba’s proposed change is aimed at tackling the first problem, key-man risk. At the moment four of its five VIEs are nominally owned by Jack Ma, the firm’s leader, and Simon Xie, a co-founder and former employee. After the restructuring, the two men will no longer be the dominant counterparties. Instead the VIEs will be owned by two layers of holding companies, which will sign contracts with Alibaba. These holding companies will ultimately be nominally owned by a broader group of Alibaba’s senior Chinese staff. The idea is that if anyone gets run over by a bus, then the scheme will not be disrupted, because nominal control is spread among a wider group of people. The new approach is far from perfect but it is an improvement. If all goes to plan it will be completed by 2019. Other tech firms may feel pressure to follow.

$1b+ market map: The world’s 260 unicorn companies in one infographic
60+ startups disrupting IKEA in one market map

SoftBank’s Son says WeWork is his ‘next Alibaba’

It is rare for Son, who casts a wide net with his startup investments, to commit so much resources to a single company. But he said WeWork is more than just a renter of office space: it is “something completely new that uses technology to build and network communities.”

The use of shared space to forge connections is not unique to WeWork. The company’s edge lies in the steady flow of data it collects on members, which is shared with other locations and can be accessed by users of the WeWork app around the world. The idea is that more data means more innovation — a model that underlies Son’s excitement about the company.

What MoviePass can teach us about the future of subscription businesses

Pricing is so powerful that playing with it requires great skill and precision. MoviePass should have done its price experimentation at the outset and on a local basis. It could have optimized the price points and tested alternative pricing models quietly, instead of jerking millions of customers around. Even a slight tweak — such as moving to a club pricing model like Costco’s — might have solved its cash-flow problems.

These kinds of tweaks could also have enabled the company to consider regional pricing strategies, given that its cost of goods (the full price of movie tickets, which it pays theater operators) varies from $8 in Nebraska to over $15 in New York. This case is also a good reminder that the United States has local profit pools. It is silly to think that a one-size-fits-all national strategy is the right approach for a market as ethnically and economically diverse as the United States.

MoviePass failed to recognize how the behavior of superconsumers, customers who are highly engaged with a category and a brand, differs from that of average consumers — and how, if not anticipated, this difference can create problems for a company’s cost model. It can especially be a problem if the company uses a “buffet” model of fixed price and unlimited quantities, as MoviePass did.

Quantum computers today aren’t very useful. That could change

Quantum computers are, however, far more prone to errors than binary machines. Instead of using electric signals to generate a series of zeros and ones like a conventional computer, quantum computers rely on the real-world, mechanical behavior of photons, which are packets of microwave energy. The machines require a complex, multi-layered refrigeration process that brings quantum chips to a temperature just above absolute zero. By eliminating certain particles and other potential interference, the remaining photons are used to solve computational problems. The true magic of this system is how photons can become entangled and produce different but related results. Scientists only partially understand why it works the way it does.

A quantum chip doesn’t look like much with the naked eye. Through an optical microscope, though, you can see the quantum logic gate that makes everything possible. The team here is working on a process of stringing together 16-qubit chips to execute on the 128-qubit design. Essential to this is a new kind of quantum chip that communicates results in three dimensions instead of the current two, which allows Rigetti to fit the chips together like puzzle pieces and turn them into a single, more powerful computer. “What we’re working on next is something that can be scaled and tiled indefinitely,” Bestwick said.

Why the future belongs to ‘challenge-driven leaders’

The consensus view of Mr. Marchionne, relayed by hundreds of tributes, is that he possessed an unusual blend of vision, technical expertise, analytical rigor, open-mindedness and candor. The remembrances also agreed on something else: he was a bona fide eccentric. “God bless you, Sergio,” Morgan Stanley analyst Adam Jonas told Mr. Marchionne during a January conference call. “We’re never going to see anyone like you again.”

The trajectory of great ideas

“Being right is the enemy of staying right because it leads you to forget the way the world works.” – Jason Zweig. Buddhism has a concept called beginner’s mind, which is an active openness to trying new things and studying new ideas, unburdened by past preconceptions, like a beginner would. Knowing you have a competitive advantage is often the enemy of beginner’s mind, because doing well reduces the incentive to explore other ideas, especially when those ideas conflict with your proven strategy. Which is dangerous. Being locked into a single view is fatal in an economy where reversion to the mean and competition constantly dismantles old strategies.

Survivorship bias on wheels

One last thing: When it was introduced as new in 1984, the 1985 Testarossa listed for $90,000 (but dealers charged huge premiums over list due to “Ferrari fever.”) You can still find Testarossas for that original list price — meaning the net returns over 43 years has been precisely zero — before maintenance, storage and repair costs.

As a comparison, in 1985, the benchmark S&P500 was about 200, and it closed yesterday at 2,821.93. That generated an average annual return of about 8.5%, returning 1,400% price appreciation since then, and, with dividends reinvested, over 3,000% total return (in nominal terms, like the chart above, neither is adjusted for inflation).

Selecting investments after the fact is easy; ask yourself this question: What car do you want to buy as an investment for the next 34 years to be sold in 2052?


Curated Insights 2018.08.03

Once in a lifetime, if you’re lucky

Apple did it the old fashioned and the new fashioned way – great products, great marketing, incredible innovation, brilliant people, global supply chain, incessant improvements and updates, buybacks and dividends, R&D and M&A, domestic hiring and international outsourcing, wild creativity and diligent bean-counting. They had it all and used it all. It’s an amazing story. Many of us were able to be along for the ride.


Business lessons from Rob Hayes (First Round Capital)

It is a red flag for me if the founders have 20 slides in their deck on their product and are not getting into issues like distribution, team or other parts of the business. There have been very few products that cause people to beat a path to the door of the business on their own [like Google or Facebook]. Successful companies almost always have operators running them who know how to market, sell, manage an income statement and hire.


Why do the biggest companies keep getting bigger? It’s how they spend on tech

The result is our modern economy, and the problem with such an economy is that income inequality between firms is similar to income inequality between individuals: A select few monopolize the gains, while many fall increasingly behind.

The measure of how firms spend, which Mr. Bessen calls “IT intensity,” is relevant not just in the U.S. but across 25 other countries as well, says Sara Calligaris, an economist at the Organization for Economic Cooperation and Development. When you compare the top-performing firms in any sector to their lesser competition, there’s a gap in productivity growth that continues to widen, she says. The result is, if not quite a “winner take all” economy, then at least a “winner take most” one.

What we see now is “a slowdown in what we call the ‘diffusion machine,’” says Dr. Calligaris. One explanation for how this came to be is that things have just gotten too complicated. The technologies we rely on now are massive and inextricably linked to the engineers, workers, systems and business models built around them, says Mr. Bessen. While in the past it might have been possible to license, steal or copy someone else’s technology, these days that technology can’t be separated from the systems of which it’s a part.

This seemingly insurmountable competitive advantage that comes with big companies’ IT intensity may explain the present-day mania for mergers and acquisitions, says Mr. Bessen. It may be difficult or impossible to obtain critical technologies any other way.

Everything bad about Facebook is bad for the same reason

Facebook didn’t intend for any of this to happen. It just wanted to connect people. But there is a thread running from Perkins’ death to religious violence in Myanmar and the company’s half-assed attempts at combating fake news. Facebook really is evil. Not on purpose. In the banal kind of way.

Underlying all of Facebook’s screw-ups is a bumbling obliviousness to real humans. The company’s singular focus on “connecting people” has allowed it to conquer the world, making possible the creation of a vast network of human relationships, a source of insights and eyeballs that makes advertisers and investors drool.

But the imperative to “connect people” lacks the one ingredient essential for being a good citizen: Treating individual human beings as sacrosanct. To Facebook, the world is not made up of individuals, but of connections between them.

The solution is not for Facebook to become the morality police of the internet, deciding whether each and every individual post, video, and photo should be allowed. Yet it cannot fall back on its line of being a neutral platform, equally suited to both love and hate. Arendt said that reality is always demanding the attention of our thoughts. We are always becoming aware of new facts about the world; these need to be considered and incorporated into our worldview. But she acknowledged that constantly giving into this demand would be exhausting. The difference with Eichmann was that he never gave in, because his thinking was entirely separated from reality.

The solution, then, is for Facebook to change its mindset. Until now, even Facebook’s positive steps—like taking down posts inciting violence, or temporarily banning the conspiracy theorist Alex Jones—have come not as the result of soul-searching, but of intense public pressure and PR fallout. Facebook only does the right thing when it’s forced to. Instead, it needs to be willing to sacrifice the goal of total connectedness and growth when this goal has a human cost; to create a decision-making process that requires Facebook leaders to check their instinctive technological optimism against the realities of human life.

Thinking about Facebook

If you accept that assumption, 35% EBIT margins on $97 billion in sales would equal $34 billion in operating income. Inversely, that implies more than $60 billion in expenses (COGS + OpEx). This suggests that Facebook’s run rate expenses will more than triple from 2017 to 2022. Over that same period, these assumptions would result in cumulative revenue growth of around 140%.

Let me give you one example to show just how much money we’re talking about here (over $40 billion in annual expenses). It’s assumed that Facebook will need to hire many people for its safety and security efforts. If it adds an additional 20,000 employees and pays them $200,000 each (not a bad salary!), that would cost them $4 billion a year. For some context, Facebook announced back in October that it planned on hiring an additional 10,000 safety and security personnel by the end of 2018. I’ve tried to give them plenty of room, and this still only covers roughly 10% of the incremental costs we need to account for to push operating margins to the mid-30s.

Here’s my point: I have a tough time understanding how Facebook can possibly need to spend this much money. It seems to me that this is largely a choice, not a necessity.


Apple’s stock buybacks continue to break records

No company has bought back more shares since 2012 than Apple. It has repurchased almost $220 billion of its own stock since it announced in March 2012 that it would start to buy back shares. That is roughly equivalent to the market value of Verizon Communications. Over that period, the number of Apple’s shares outstanding has dropped by just over a quarter.

Waymo’s self-driving cars are near: Meet the teen who rides one every day

Tasha Keeney, an analyst at ARK Invest, says that Waymo could choose to offer an autonomous ride-hailing service today at around 70 cents a mile—a quarter of the cost for Uber passengers in San Francisco. Over time, she says, robotaxis should get even cheaper—down to 35 cents a mile by 2020, especially if Waymo’s technology proves sturdy enough to need few human safety monitors overseeing the autonomous vehicles remotely. “You could see software-like margins,” Keeney says.

Bill Nygren market commentary | 2Q18

A closer look reveals that Gartner stock fell when management opted to substantially increase selling and marketing expenses to pursue accelerated organic growth, which in turn decreased the company’s reported earnings. The way GAAP (generally accepted accounting principles) works, because the future benefit of a marketing expense is uncertain, the cost is immediately expensed. But at a company like Gartner, these marketing expenses could easily be seen as long-term investments in company growth. That’s because a Gartner customer tends to remain with the company for a long time—a little more than six years, on average. So we adjusted the sales and marketing expenses to reflect a six-year life, just like GAAP would treat the purchase of a machine that was expected to last six years. With that one adjustment, Gartner’s expected EPS increased by almost $3. Using our adjusted earnings, which we believe reflect a more realistic view of those intangible assets, Gartner appears to be priced as just an ordinary company.

Ferrari slumps after CEO says Marchionne target is ‘aspirational’

Ferrari is banking on Camilleri getting up to speed quickly to press ahead with Marchionne’s plan. While Marchionne was planning to retire from Fiat Chrysler in 2019, he was meant to stay on at Ferrari for another five years. His succession plan was not as advanced at the Maranello-based company as it was at FCA.


WeWork is just one facet of SoftBank’s bet on real estate

If the market opportunity is big, SoftBank will typically make investments in regionally dominant companies operating in that sector. After all, if worldwide dominance is difficult to obtain for any one company, SoftBank is so big that it can take positions in the regional leaders, creating an index of companies that collectively hold a majority of market share in an emerging industry.

Heineken inks $3.1 billion deal to grow in hot China market

The deal will help Heineken gain a tighter foothold in a crowded field by leveraging China Resources Beer’s extensive distribution network, while also sharing in the returns of China’s beer market leader. China is now the second-largest premium beer market globally, and is forecast to be the biggest contributor to premium volume growth in the next five years.

Under the deal, Heineken’s operations in the country will be combined with those of China Resources Beer, and the Dutch brewer will license its brand to the Chinese partner on a long-term basis, according to company statements Friday. China Resources Beer’s parent company will acquire Heineken shares worth about 464 million euros ($538 million). Heineken will also make its global distribution channels available to China Resources’ brands including Snow, according to the statement.

Branded Worlds: how technology recentralized entertainment

There are two answers to the first question: cost and time. Maybe it’s a lot easier to shoot and edit movies/TV than it used to be, but sets, locations, actors, scripts — those are all expensive and difficult. Better amateur work is still far from professional. And while it’s true we’re seeing interesting new visual modes of storytelling, e.g. on Twitch and YouTube, it’s very rarely narrative fiction, and it’s still distributed and monetized via Twitch and YouTube, gatekeepers who implicitly (and sometimes explicitly) shape what’s popular.

More importantly, though, democratizing the means of production does not increase demand. A 10x increase in the number of TV shows, however accessible they may be, does not 10x the time any person spends watching television. For a time the “long tail” theory, that you could make a lot of money from niche audiences as long as your total accessible market grew large enough, was in vogue. This was essentially a mathematical claim, that audience demand was “fat-tailed” rather than “thin-tailed.”

China is building a very 21st century empire—one where trade and debt lead the way, not armadas and boots on the ground. If President Xi Jinping’s ambitions become a reality, Beijing will cement its position at the center of a new world economic order spanning more than half the globe. Already, China has extended its influence far beyond that of the Tang Dynasty’s golden age more than a millennium ago.
It used to be the case that active portfolio management was the default investment style. Over time, and with the help of academic finance, we have come to realize that there are other factors at work. The most obvious of which is the market factor or beta. It is this insight that underlies the rise in index investing. A trend which by all accounts is still in place.