Before joining my current company I worked a couple of years for a cruise liner. When I started, my boss explained to me how great of a business it was. Demand for cruises was steadily increasing every year and was forecasted to increase even more by the newly minted Chinese and Brazilian middle class; offer, on the other side, was severely constrained because the are only three places in the world where you can build a cruise ship. It is one of the few things Chinese did not manage to copy do yet. If you want to enter the business, first delivery that you can take, provided the shipyard accept your order, is like 2030. For your first ship. Because in this game, you either go big or go home.
I saw it as a very capital intensive, cyclical business. If you are the owner, you can enjoy multiple years where profits rain, funded by banks that take your ships as collateral (these companies are leveraged like cray cray); if you are an employee, in the good years you get your salary, and in the bad year you get fired. It is like if the owner is selling an option to the employee, keeping all the upside for himself and leaving the downside to the workers.
The risk I was thinking was a normal recession, in my mind I was agreeing with my boss about the long term prospects; if scaled enough, this was a business that survived terrorist attacks, homicides, shipwrecks, social media fails…and a lot of disease outbreaks…until now. Working on the financial market side of the business, sometimes I was wondering what would have been the black swan that could take the sector down…
If they paid me a bonus, a.k.a. letting me join of the upside, I would have most probably stayed, or at least not pursue another job so frantically (so why did you go there in the first place, the smarter of you are asking themselves? It is a story for another day). For sure, I did not see the COVID-19 coming, nor I had a plan for the business to survive it.
The coronavirus is a business disruptor can be considered very exceptional, while is not. What is not exceptional is the fact that every business will face a disruptor that threaten its viability once, or if they do not go bust, more than once. Think about Kodak and the digital camera, or Nokia and the Iphone, or common sense and Trump.
What are the implications for investors? When I started investing in start-ups with Seedrs, my focal point was the idea behind the company, the problem they are trying to solve: I was investing in the business. The more I read about start-ups, the more I realise that the concept often pushed by the media “Jason Calacanis – early investor in Uber” is wrong: Jason did not invest in Uber, he invested in Travis Kalanick. The early version of Uber he invested in has (almost) anything to do with the Uber we know now; the concept of ridesharing was invented by the guys at Lyft…there wouldn’t probably be a Uber if the founder did not pushed so much to have Travis as CEO from the start.
Netflix changed its business model three times already: started as a Blockbuster competitor, pivot into a streaming service, pivot again into a content creator company. If you invested in the early Netflix, you will be dead like Blockbuster; if you invested in Reed Hastings, you would have done pretty good by now.
“if you invested 10k in Amazon in 1994” you would have a book e-store with a lousy website
If you invested in Bezos, well you get the point. As chronicled in the book “The Upstarts“, when Paul Graham (co-founder of Y Combinator) met the Airbnb founders he said “the idea is terrible,” but he liked them and offered them a spot in his program because they “won’t die” and are “very imaginative.”
The younger the company, the higher the chance it will face an issue that will threaten its existence. The execution of the original idea, the pivots, the resilience of the people in the C-suite are aspects that are far more important for the success of a company than its initial mission. The not so clear problem (at least for me) with Seedrs and its competitors is that you have an efficient, especially in terms of time, access to the business idea but not that much to the people behind it. I think to have success in this game you have to develop a process to effectively address this issue.
A lot of emphasis in the public imaginary is given to the age of the founder, the younger the better, while data demonstrate there is a kind of ‘sweet spot’ around 40: young enough to have the energy to complete this sort of ironman but experienced enough to be able to effectively run a business. More often than not, they are not the type of person you would choose as a friend: not all jerks are great CEOs but great CEOs are jerks. It is hard to give money to someone you do not like. These are quite simple proxies, more difficult is to say, for example, if someone that failed in the past has more or less chances to have success in the future. I did zero formal research on this, the only ideas I have comes from books I read on tangent topics, probably something I will try to deep dive in the future.
The topic is relevant for equity investors as well: Warren Buffett, just to pick a random name, has put a lot of importance on the managers of the businesses he acquired, leaving them at the helm after he became the owner. It represent less of a risk here because normally the Board of a company should have all the incentives to hire the best CEO (easier said than done).
What I am reading now:
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