Circle of Competence Issue #78
QUOTE OF THE WEEK
Tricks and treachery are the practice of fools that don’t have brains enough to be honest. – Benjamin Franklin
FOOD FOR THOUGHT
Insights on VC pricing: lessons from Uber, WeWork, and Peloton (Musings on Markets)
Damodaran wrote a wonderful piece this week on the pricing of current IPO's and focused on Uber, WeWork, and Peloton as particularly notable examples of market froth where revenue growth is more important than a path to sustainable cash flows:
"After all, the most successful user-based companies, such as Facebook and Amazon Prime, have shown how having a large user base can provide a foundation for new products and profits. However, there are companies that focus just on adding users, using badly constructed business models and pricing products/services much too cheaply, hoping to raise prices once the users are acquired. MoviePass is an extreme example of user pursuit gone berserk, but it had no trouble attracting venture capital money, and I fear that there are far more young user-based companies following the MoviePass script than the Facebook one."
This, to me, was the key point in his argument. Bill Gurley, the notable VC investor, has wondered aloud whether some of the current tech businesses are pricing their services at $.50 on the dollar to fuel growth. My only question for this type of business model, from an investor's perspective: does it really seem that Uber (competes with rental car agencies and Lyft), Peloton (a fancy internet bike/treadmill/fitness company), and WeWork (a short term office rental company with emerging competitors) have pricing power and ancillary opportunities that will result in a path to profitability going forward? As Damodoran points out, they certainly don't spell out a path to sustainable cash flows in their S-1, forcing investors to question whether or not their business models will be sustainable in the long run. Speaking of sustainable business models...
MoviePass to shut down after September 14th (The Verge)
MoviePass raised $70M, charged users the effective price of one movie per month, and paid variable costs on each movie watched - is it any wonder that such a business model would fail from the beginning if carried forward ad infinitum? Of course, there were high minded visions of putting pressure on theaters to share more revenue if MoviePass drove higher attendance and to use data they collected to offer ancillary services, but I mean, come on:
"The company played the middleman by buying movie tickets at list price, then giving them to subscribers. The initial hope was that most subscribers wouldn’t actually use the service regularly — like gyms, which use no-show subscribers to financially offset their heavy users. But as it turns out, people like movies more than they like going to the gym. Many MoviePass subscribers who were attracted to the new service by the lower price began using it frequently. MoviePass started losing money on virtually every subscriber, and it then went bankrupt."
Who knew that people liked movies more than going to the gym? It doesn't take a rocket surgeon's IQ to be a business analyst people...
"It’s naive to think MoviePass simply got in over its head with a poor understanding of unit economics. The company’s new bosses understood that they would lose money on every subscriber, but they didn’t care. They wanted leverage in the form of a large, dedicated user base. The company amassed more than 1 million subscribers in the three months after introducing its new unlimited, $9.95 plan."
Is it naive to think that blowing through $70M unsustainably to simply achieve user growth is an ill-begotten business model? Here's the kicker and a point that one could also make about Peloton and WeWork:
"Its product was easy to replicate, and AMC did just that when it realized that creating its own sustainable version of MoviePass was far more preferable than partnering with a disorganized outside company."
TOP READ: A taxonomy of moats (Jerry Neumann)
Day two to one day: a maturing Amazon? (Stratechery)
One of the best investment philosophy one page diagrams I've ever seen (Ensemble Investments)
21st century moonshot: Bezos, Musk, and the new VC-fueled quest to explore the stars (PitchBook)
Return of the raider: T. Boone Pickens profile in 2002 (CNN Money)
The strategy behind TikTok's global rise (Harvard Business Review)
Lumber Liquidator's Tom Sullivan legally profits off of insider purchases according to Matt Levine (Money Stuff)
How David Swensen made Yale fabulously rich (Bloomberg)
TOP LISTEN: Steve Schwarzman with Kara Swisher on politics, business, and solving society's biggest problems (Recode Decode)
Mohnish Pabrai on the Dhando Investor method (MOI Global)
The biggest valuation spread in 40 years between the US and emerging markets (Meb Faber Show)