Circle of Competence Issue #79

QUOTE OF THE WEEK

"Private markets became too confident in the idea that a big fundraising round is synonymous with business success, when in fact the only guarantee that comes from raising tons of money is that someone’s investment gets diluted and a precedent hurdle is set for future rounds." - Morgan Housel

FOOD FOR THOUGHT

Neither and new, lessons from Uber and Vision Fund (Ben Thompson)

I love Ben Thompson's clarity of thought and these two paragraphs stood out to me in the above piece on Uber and Vision Fund:

"This is also a lesson for me: I started with an article that I got right, but in retrospect I was only halfway correct. Uber had a large market and there were tech-like dynamics that meant it could get a big part of that market, but margins — both reported, but especially relative to the customer transaction — still matter. I didn’t pay enough attention to them."

"Going forward I plan to be a lot more skeptical about other tech startups that interface with the real world and the attendant drag on margins that follows; I am not saying that the category isn’t viable, and technology truly makes these companies different than the incumbents in their space, but they are not necessarily tech companies either."

I've emphasized the comments about margin. It seems to me that investors unquestioningly bought the 'pure tech' narrative that's been sold about these companies without paying enough attention to the margins of the business. I wrote about WeWork and Uber in issues #72, #77 and #78, questioning their valuation based on the margins, which are a reflection of their business models. As Thompson points out above, their business models are not pure technology plays with high gross margins, but their valuations reflected hopes that they eventually would be.

Business models frame the eventual margins of the business and in turn, margins and growth dictate valuation of the business. All three must make a coherent case, and in these 'neither and new' business models, there was a clear mismatch between their business model (half-tech, half-physical services) and valuation (valued like pure tech business).

WRITTEN WORD

TOP READ: The singular Henry Singleton (Forbes 1979, h/t Neil O'Donnell)

The tech sector is over (Financial Times)

The slow burning success of Disney's Bob Iger (New York Times)

WeWork lessons that apply to lots of stuff (Morgan Housel)

Is Miami real estate about to collapse? (Adventures in Capitalism)

Are autonomous vehicles actually disruptive? (Christensen Institute, h/t Joe Koster)

SPOKEN WORD

TOP LISTEN: Bill Gurley on direct listings vs. IPOs (Invest like the Best)

Brookfield Asset Management CEO Bruce Flatt says business has been solid since Brexit (Bloomberg)