An Investment Thesis For Our Time
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An Investment Thesis For Our Time
Today: Long/short, the TikTok saga continues, a checklist for strategists, America and the world, Erika Batista.
The Agenda 👇
Who wins, who loses in the transition
New TikTok twists and turns
Having a US passport these days
It takes a lot to build great companies
Erika Batista joining On Deck
🎢 Hedge Funds in the Transition
My cofounder Oussama Ammar and I have long been obsessing over the idea of a hedge fund designed to make money off the transition to the Entrepreneurial Age: invest heavily in tech companies destined to win, short exhausted incumbents about to collapse. There are many technical problems with this approach, however, including the fact that most of those stocks are not publicly traded.
I’m still honing the general thesis, though. And recently the pandemic, that great accelerator, has revealed interesting patterns. Take the case of US retail: Amazon smashing it, Shopify surfing the wave, FedEx and UPS raising prices and improving profitability, Walmart and Target somehow making it, Macy’s and J.C. Penney on the way out, and more and more robots in warehouses.
It has given me ideas about how a sector-focused hedge fund could deploy capital so as to maximize returns by using this transitional pattern. In A Thesis for Sector-Focused Hedge Funds, I lay the groundwork for future reflections on this approach—and how it could be applied in other industries, such as food, healthcare, and many others.
🇨🇳 Oracle ‘Acquiring’ TikTok 🤔
TikTok is important. It’s used by hundreds of millions of individuals, a rare, if not unique, example of a Chinese tech company that has managed to reach a global scale, overcoming cultural barriers. And it’s become the new front in the new Cold War, following an effective ban in India in the spring and a potential ban in the US if it doesn’t find an American buyer.
When I wrote about it back in August, it looked as if Microsoft would be the US company acquiring TikTok (all of it). Then, at the end of August, China issued a new obscure regulation that effectively prevents ByteDance from ceding TikTok’s most valuable asset: its algorithm. On Monday, I analyzed it as the way for Beijing to save face—which is very important in China.
But then, we learned more about what may come next. Oracle, not Microsoft, will acquire TikTok. And it might not really be an acquisition—rather, Oracle will take a stake in TikTok alongside existing ByteDance shareholders such as Sequoia Capital, and then host it on its cloud infrastructure. It might have helped that Larry Ellison, Oracle’s founder, is Trump’s top fundraiser in Silicon Valley. See this tweet 👇
✅ How To Build a Great Company
If you’re a CEO or senior executive, it’s easy to be carried away by too many concepts and categories regarding business strategy and where your company should be. I myself have worked through many of those over my years learning more about business strategy and corporate finance. I decided to use one slot in European Straits’s schedule to make a list of 10 points that I think are the most important.
One example is figuring out if your company serves customers or clients. It might be the first time you really think about the difference between the two, but it’s one of the most important distinctions in business strategy. For instance, here’s what I wrote about Justin Kan’s Atrium back in March when it announced that it was closing down:
Atrium’s problem is that it tried to treat clients as customers. The goal was to make lawyers more efficient thanks to technology, using the resulting surplus either to lower the price or to increase the margins and differentiate by adding more services.
But as is often the case in the presence of innovation, the clients didn’t play along: they kept demanding more (that’s what clients do), making it difficult to retain that surplus and use it to improve the business. And there was probably always a competitor ready to add more lawyers so as to better comply with the client’s demands, sending the bill along later.
Another thing: Where do you stand between brick & mortar and technology? Being somewhere in the middle is an amazing combination because, if done well at scale, it makes it possible to combine the best of brick & mortar (defensibility), and the best of technology (scalability). Look no further than this perfect balance between both sides if you’re still wondering why Jeff Bezos is the richest man on Earth!
🇺🇸 What Became of the US?
America has become an enigma, especially for those, like me, who have been fascinated by it for such a long time. There are geopolitical trends, starting with energy independence, that explain part of it, as does the institutional crisis revealed by Trump’s ascension to the presidency. And now, a consequence of the US falling off its pedestal and retreating within itself is that the US passport is losing some of its value.
To be fair, Americans themselves don’t care that much. Historically, the US has been the country to which you emigrate without ever turning back. Just like Vito Corleone in The Godfather II, you might return once or twice to the country of your ancestors, to visit the relatives left behind. But that’s about it, and on a day-to-day basis American society is as inward-looking as it gets.
Where it really makes a difference is for the rest of us, who have to revisit our view of the world now that it doesn’t revolve around the US anymore. Maybe emigrating to the US, let alone becoming a citizen, is less relevant now that we have an ability to connect with anyone around the globe, and gather with large groups of like-minded individuals? What do you think?
🚀 My former colleague Erika Batista, who was The Family’s very first employee back in 2013 and later joined our directorship, has just been appointed Build Partner and General Manager of On Deck in Europe.
I’m a great admirer of Erika’s and rejoice at what she’ll contribute to the amazing venture that is On Deck. Here’s where you can learn more:
About Erika and the transition she’s been up to over the past few months: Earlier this year, I made a big move.
About her joining On Deck: A sneak peek at what’s to come 🤫, introducing our first Europe-based teammate.
About On Deck itself: The long-term vision for On Deck 🚀
From Long/Short In a World Eaten by Software (April 10, 2020):
The best approach to making money off the shift from the Fordist Age to the Entrepreneurial Age might be to redeploy capital at exactly the right moment: early enough so that the assets you want to sell are still valuable in the eyes of your fellow investors; but late enough so that you can redeploy the proceeds in future winners without the risk of losing it all because you’ve bet on WeWork’s Adam Neumann.
All recent editions:
Is Being American Worth It Anymore?—for subscribers only.
China Saving Face on TikTok—for subscribers only.
A Thesis For Sector-Focused Hedge Funds—for subscribers only.
A 10-Point Checklist For Building a Great Company—for subscribers only.
What We Owe Rocket Internet—for everyone.
The Future of Consulting (Round 2)—for subscribers only.
A Primer on the Chinese Communist Party—for subscribers only.
What Determines VC Returns—for subscribers only.
The State of Value Investing—for subscribers only.
China: We All Need New Glasses—for everyone.
European Straits is now a 5-email-a-week product, and from now on all essays are subscriber-only (with rare exceptions). Join us!
From Normandy, France 🇫🇷
Nicolas
