Post Corona, From Crisis to Opportunity by Scott Galloway — Notes
By: Sohil Gupta
Tags: Corona, Tesla, Amazon, Business, Apple

Chapter 3: OTHER DISRUPTORS

The Disruptability Index

The opportunity for disruption in an industry can be correlated to a handful of factors — a disruptability index. The key signal is dramatic increase in price with no accompanying increase in value or innovation. This is also known as unearned margin. ( Example: Higher Education, Healthcare) Another factor of disruptability is a reliance on brand equity divorced from the quality of the product, its distribution, or support. Many firms and industries have fostered an adversarial relationship with consumers. Insurance, Healthcare

The Burning of the Unicorn Barn

Bill Gates was the first to prove the same person could found a company and take it to $100 billion in value. Gates grew Microsoft to $600 billion over 14 years. In 2005, we weren’t making that many more true geniuses, but available capital began to increase exponentially. VCs jockeying to fund successful founders devised term sheets that included secondary sales, two-class shareholder structures, and other founder-friendly terms.

The NASDAQ quadrupled in ten years. The sheer amount of capital meant that companies could pursue capital-driven growth strategies. That is, they could buy market share by selling at a loss, while raising subsequent rounds of capital, at increasing valuations, due to growth that was fueled by cheap capital. The number of U.S. IPOs has declined 88% from 1996 to 2016. It also takes much longer for companies to get public. The average age of a company up for IPO increased from three to eight years over the last 20 years.

ENTER THE UNICORN

Aileen Lee found 39 unicorn companies and reported that new ones came along at a rate of about 4 per year. Estimates put the number today at around 400, with 42 born in 2019 alone. Value is a function of growth and margins. As they did in the ’90s, many of today’s unicorns have deployed massive capital to achieve the former while not demonstrating the value proposition to achieve the latter.

SOFTBANK’S $100 BILLION UNICORN BUFFET

The pitch from SoftBank to entrepreneurs was simple and compelling. “You aren’t thinking big enough. We want to invest three times your planned raise, and if you don’t do a deal with us, we’ll inject these liters of growth hormone capital into your biggest competitor.” Capital is in fact a weapon in private equity, where only a few firms can bid for the truly great, proven assets with enormous cash flows. However, in venture, and growth, the secret sauce is dislocation, a market ripe for disruption, and crazy genius founders who are too stupid to know they will fail. When your ability to deploy billions into a concept becomes the priority, as it does when you have $100 billion to deploy, your returns go down. Business and trade are, despite rumors of the death of distance, a function of geography. A retail store’s profitability is correlated with proximity to HQ.

The availability of capital is not correlated with the availability of good places to invest the capital. Good investments — disruptive start-ups with the potential to grow into sustainable multibillion-dollar enterprises — will always be scarce.

YOGABABBLE

Too much capital and not enough talent is the cue for the rise of the charismatic founder. According to LinkedIn, there are more corporate comms personnel working for Bezos at Amazon (969) than journalists working for Bezos at The Washington Post (798).

THOROUGHBRED VS. UNICORN

On a per-mattress basis, Casper captures $1,362 in revenue. But it spends $761 on the mattress, $480 on sales and marketing, and an impressive $470 on administrative overhead. That’s a loss of $349 per mattress. Casper tried to wrap an undifferentiated product with aspirational associations.

When the Smoke Clears

Private investors — traditional venture capitalists, but also institutional investors whose appetite for risk has increased with their assets under management — are signing up for more and larger financing rounds, and using the public markets as an exit, instead of as a financing event. Abundant capital permits a heft of financing rounds previously only available in the public markets, and a robust secondary market provides liquidity to shareholders. A major reason we are seeing so many unicorns is companies stay private longer. This has the benefit of reduced overhead and regulatory compliance costs, as well as less scrutiny. The company captures more of the upside for its private-market backers. Another change has been the increased potential for another form of high-return exit — acquisition by one of the mega tech companies like the Four. Apple has cash worth 200 unicorns ($200 billion) on its balance sheet. Google has $120 billion. The 12 unicorns that exited in the first half of 2020 did so at a 91% premium to their last private valuation. The pandemic may birth the best-performing IPO class in several years, as the market’s valuations are based on a firm’s perceived performance 10 years ahead. The same is true of the downside: as firms that are struggling are issued a do-not-resuscitate order from the markets and are valued at their (remaining) cash flows. The cheap capital economy that offers disruptors the opportunity to pull the future forward sucks oxygen from the incumbents, who are forced to retrench (layoff, cuts in CapEx) as the new kids on the block can lean into new investments and hiring. The eight elements of the T Algorithm (rillion-dollar valuation) are as follows: Appealing to human instinct; Accelerant; Balancing growth and margins; Rundle; Vertical integration; Benjamin Button products; Visionary storytelling; Likability

Appealing to human instinct:

The brain instinct : We are constantly looking for answers to help explain our experiences and the world around us (Google). Bargains (Walmart) and rational claims (Dell, Microsoft) appeal to the brain. Margins tend to be small in brain-appealing businesses — there is one lowest price or fastest processor. The heart : We have an innate desire to connect with the people around us. Caring for those around you makes you more willing to spend. The Gut The Genitals: We are motivated to buy products and services that make us feel more successful and good-looking, so we can attract better mates. We pay irrational margins for products that improve our sex appeal. Contrast rational companies Walmart and Amazon (the brain and the gut) to Ferrari and Louboutin (the genitals).

Accelerant:

A firm that serves as an incredible springboard for a person’s career. Other than intellectual property or defensible IP, a firm’s ability to attract talented employees is one of the most important contributors to success.

Balancing growth and margins:

Typically, margins are in conflict with growth. There are some companies that take very low margins, like Walmart, and as a result are able to grow faster because they don’t charge much additional margin for their value-add. In contrast, if a firm has high margins, it usually has lower growth and lower potential for scaling. Only some exceptional firms, like the Four, are able to combine high growth with high margins.

Rundle:

A bundle of goods and/or services that justifies recurring revenue. This strategy exploits one of our key weaknesses as human beings: we are terrible at estimating the value of time. Firms that convince consumers to enter into a monogamous relationship with them are positioned to accumulate more value over time than firms that interact with consumers transactionally. Example: Apple currently offers music and streaming video subscriptions, but it could bundle both of those products, plus news, plus annual iPhone upgrades, into a bigger recurring revenue bundle. Disney could bundle Disney+, parks, cruises, and other perks into several tiers of packages based on recurring revenue, or a multiple-product subscription.

Vertical integration:

A firm’s ability to control the end-to-end customer experience by controlling as much of the value chain as possible. Companies that control distribution reap huge benefits.

Benjamin Button products:

Products or services that age in reverse (get more, rather than less, valuable to users over time) due to network effects. Example: Spotify

Visionary storytelling

Telling a compelling story unites employees and attracts top talent and cheap capital.

THE SHINIEST UNICORNS IN THE HERD