Tuesday, September 29, 2020

So what does a VC think about when they invest?

If you want to understand how a VC thinks about - and what he looks to invest in .... read the below article on John Henderson 

VC’s are looking to invest in  “Babe Ruth’s home run” And to do that you need to invest in a product or service that addresses an enormous market.

The best VCs swing hard, and either hit big or miss big. You can't have grand slams without a lot of strikeouts.


How to hit home runs: 


I swing as hard as I can, and I try to swing right through the ball... The harder you grip the bat, the more you can swing it through the ball, and the farther the ball will go. I swing big, with everything I've got. I hit big or I miss big."

— Babe Ruth


It reminds me of Tim Draper’s comment - that his biggest failures have been in what he has not invested in. If he has a 30pc success rate - he is so far ahead of the game ..... and whose to know where that “home run” is going to come from?

Who would’ve picked a search engine called “Google” when Yahoo was around? Or invested in this dude with. Funny name that had a concept called “the Facebook”?

Be sure to read this article below  - and click the links and read or listen to those articles! 

Thanks John!!





I was struck by a comment from Reed Hastings (founder of Netflix ) on his book tour for No Rules Rules:


“Typically, venture capitalists say that you want to go after the largest market possible. I’ve always thought that’s crazy because you can’t defend it …. I have always thought you want to go after the smallest market possible that can hold your 5- to 10-year growth ambitions.”


For reference, Netflix’s market cap at the time of writing is $212bn - suggestive of a decent sized market…

And Reed is right. Venture capitalists, myself included, have an obsessive focus on large market opportunities. It is a near canonical law in VC that they are a necessity. 


Indeed, Sequoia Capital, arguably the world’s best venture firm, built its investment approach on a focus on large market opportunities to the exclusion of much else. 


The reason for this is that the returns from a venture fund portfolio invariably follow a power law distribution. To outperform their peers, venture funds need their best companies to deliver huge returns. The best company in a “good” fund will typically deliver ±20X cash on cash, with that multiple increasing to almost 70X in a “great” fund.


But I’m starting to wonder if we overestimate our ability to size a future market. I cut my teeth at The Boston Consulting Group and have always considered my ability to understand the structure, dynamics and scale of a market to be a key strength that I bring to the investment decision table.


Is that all bullshit?


At AirTree, we recently passed on a company that we liked on the basis that it would be unlikely to achieve a billion dollar outcome in its current market. 


Was this the right call? 


More specifically, how confident can we be in deeming this an unlikely outcome?


This question led me to go back through past investment papers I’ve written and analyses I’ve run. There is a company in our portfolio which is today worth ±$1.2bn, with real upside potential from there. When we invested 4 short years ago, I thought that, if all the stars aligned and you squinted really hard, it might get to $400m in 2022.


And it seems like I’m not the only “smart” investor to be so wildly off in my analysis as to render it a complete waste of time.

VinIyengar.jpg

Vinay Iyengar 

@VinIyengar

Incredible to look back at Bessemer's original @Shopify investment memo. The very best case scenario was a $400m exit. Today, $SHOP has a market cap of ~$110b, 275X that amount!!!


The sheer magnitude by which we often underestimate TAM for Internet businesses is astounding 

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September 24th 2020

167 Retweets829 Likes

You can find these kinds of errors all the way up the academic hierarchy. They don’t come much more credentialed in finance than NYU Stern’s Professor Aswath Damodaran. But even he famously whiffed by at least order of magnitude when he sized Uber’s addressable market at $100bn.


So what?

So am I wasting my time analysing market opportunities? Am I casually (and offensively!) labelling a swathe of companies as “lifestyle businesses” when in fact they have a far greater chance of achieving a huge outcome than I give them credit for?


I enjoyed Rory Sutherland’s quip that no sane person would have expected there was a market for Dyson. “Anyone who spends $700 on a vacuum cleaner probably employs a cleaner anyway and doesn’t do their vacuuming half the time. What the hell?” And yet James Dyson is worth $6.4bn


Perhaps Reed Hastings is right. Perhaps all that matters for a sensible venture investment is that, today, there is a tractable path for the company to grow well for 5-10 years. Ideally, in the absence of stifling competition. And perhaps any further analysis on the size of the market is a total waste of time since we can’t even predict whether Donald Trump will still be President in 35 days’ time, let alone what the world will look like a decade hence.


Gosh, that would save me a lot of time and decision-making heartache if so.


What do you think?


 Does your company  fit this mould and might make for surprisingly great venture investments?

Saturday, September 19, 2020

Superhero raises 8m from Afterpay - Fintech startup on steroids



JOHN WINTERS AND WAYNE BASKIN’s  new Startup, Superhero, has raised  $8 million from Zip shareholders Larry Diamond, Garen Azoyan and Philip Crutchfield; Afterpay founder Nick Molnar and Leon Zweir, a senior partner at law firm Arnold Block Leibler.


Relationships and who you know is so important when raising capital for Startups - Trust plays an enormous part! 


Winters - previously at Shaw and Partners, helped with  Zip’s IPO and Baskin sat on the Afterpay board for a long time. 


So what is Superhero 


Superhero is likened to  Robin Hood in the US -

It  has been under wraps for the past 2 and a half years - and intends to disrupt the online investment industry in Australia by making share trading more transparent and accessible, as well as offering a $5 flat fee. 


The $5 flat-fee brokerage, which Superhero claims to be "Australia's cheapest", also comes with free Pay ID deposit processing, meaning users can fund their account "in minutes" using their associated Pay ID email address or phone number.

Using Superhero, users can invest in ASX-listed shares, ETFs (exchange-traded funds), listed investment companies and real estate investment trusts (REITs).

On sign-up, users also get a free 30-day trial of 'Superhero Live', which is a premium live trading platform that costs $9 a month, billed annually.


The way people approach financial management is being disrupted. There is a generational, structural shift in the way people invest - and Superhero plans to play a significant part in this disruption! 


The key is to build a massive customer base! 


Will Superhero be able to leverage on  the learnings over the journey of Afterpay and Zip to build massive customer bases?


My view is that this is a Company to watch! 


Here is David Winters chatting to Ausbiztv - 




https://www.linkedin.com/posts/ausbiztv_a-new-superhero-is-in-town-activity-6708868265302740992-WYxR



Friday, September 18, 2020

5 Ways to Identify Innovation Opportunities to Drive Business Growth





In this volatile and uncertain environment, the key to SMEs long-term viability and profitability is to undertake business innovation. Meaning, making new introductions to, and/ or improvements across the business.

Studies have shown that persistently identifying and executing on innovative opportunities results in a significant contribution and improvement to SME revenue and business growth. (Source: The Impact of Persistence Innovation on Business Growth, Office of the Chief Economist, 2018)

Michael Haynes identifies 5 ways  to innovate your own SME and drive business growth

Friday, September 04, 2020

Redbubble - benefitting from the radical change in Spending Behaviour

We are proud to have been a founding investor of Martin Hosking’s Redbubble .... whose shares have gone from 45c to $4 in 6 months - benefitting massively  as a result of changes in spending patterns and the shift to online. 



It’s taken 15 years to become an overnight success!! http://bsivc.blogspot.com/2006/06/usa-gateway-held-last-thursday-in.html?m=1


Joseph Kim of Montgomery Investment Management shares a great article sharing some Redbubble facts 



So What is Redbubble?


Redbubble is a growing online marketplace providing print-on-demand products based on user-submitted artwork.


Redbubble is an e-commerce business which provides a marketplace for independent artists to sell their designs on over 60 product offerings including stickers, T-shirts, wall-art, home décor etc to customers. The business has a global supply chain with third party manufacturers fulfilling orders which is then shipped around the world.


Redbubble has been listed since 2016 and since that time the company has experienced some short-term hiccups to its growth story – with issues ranging as widely as changes to the Google search algorithm to lower sticker purchases – which has led to a volatile share price experience for investors and questions around its longer-term potential.


Like many e-commerce businesses, COVID-19 has drastically changed the operating landscape and prospects for the business. 


The Flywheel effect 


Redbubble’s success is partly driven by the sustainability of its flywheel effect, whereby a growing community of artists fuel demand for better and more unique content. During a period of lockdown where independent artists are likely to find it more challenging to commercialise products, Redbubble has likely provided an outlet for artists to monetise their work. This has coincided with the e-commerce spike, helping to drive a significant uplift in sales.



The opportunity set for Redbubble is compelling. The business already has a global presence with its main markets being North America and Europe. 


The Redbubble Opportunity 

Should the company build a recognisable brand, the potential to be a global e-commerce marketplace for aspiring artists presents significant upside. Recent interest in both social and mainstream media point to growing brand awareness, which helps perpetuate the flywheel effects.




Source: Redbubble

It’s important to note Redbubble’s recent success has required continuous investment – not just in the website itself, but also the supply chain infrastructure with fulfillers and shippers – including product quality control. This has helped the business meet the surge in demand, while benefiting financially from the operating leverage that comes with higher sales.


The Redbubble results are compelling 


For example, at RBL’s previous sales run-rate of approximately $250-300 million, the company was largely break-even on an operating EBITDA basis, largely driven by a spike in sales during December quarter trading.


However, with the recent surge in Redbubble’s sales, the company has been able to accelerate its journey into profitability as gross margins remain largely intact (approximately 38 per cent) and paid acquisition on an incremental basis remains stable (or declines). 


This was demonstrated in its FY20 result where Redbubble’s implied Q4 Operating EBITDA of $8.6 million did not include around $20 million of “unearned revenue” (i.e. sales booked and received payment but yet to be shipped) – which would have added an additional ~$7-8 million on 40 per cent gross margins.




Joseph Kim of Montgomery’s prediction 


While RBL has clearly been a “stay-at-home” trade, we believe the business has the opportunity to emerge a longer-term structural winner from COVID-19 should it capitalise in the recent spike in user and customer interest as a result of recent lockdown measures.

Thursday, September 03, 2020

Senate Committee meets - sympathetic to Issues of the Innovators




Companies investing in R&D and Innovation - especially startups, are facing enormous hurdles and risks of failure and uncertainty. 


The last thing that they need is a possible timebomb where Government will potentially claw back incentives claimed based on uncertain legislation and lack of clarity.


The Senate this week recommended that government better clarify the eligibility of software claims under the scheme and for the government to provide clearer guidance on RDTI audits and to place limitations on the ability for the payments to be clawed back retrospectively.


“The committee believes there needs to be greater clarity around the point at which software is seen as innovation and the point at which it is not. The committee considers this additional clarification is required to clarify when and how the RDTI is applied to software development in relation to FinTech businesses to ensure genuine software creation by Australian startups is reliably supported,” 


Mick Lynch , Director of BSI innovation said that 

he was quietly optimistic based on the number of constructive suggestions made by the Senate Committee 


Another Senate committee is currently scrutinising the RDTI legislation - with the report expected after the October budget


Senator Bragg suggested that 

“If we are going to compete with Singapore and Tokyo, we first need to get our house in order at home. Much progress has been made but it’s time for some recalibration. Government should not be afraid to act like a FinTech and be iterative,”