What We’re Reading (Week Ending 31 October 2021) - 31 Oct 2021
Reading helps us learn about the world and it is a really important aspect of investing. The legendary Charlie Munger even goes so far as to say that “I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” We (the co-founders of Compounder Fund) read widely across a range of topics, including investing, business, technology, and the world in general. We want to regularly share the best articles we’ve come across recently. Here they are (for the week ending 31 October 2021):
1. An Interview with Mark Zuckerberg about the Metaverse – Ben Thompson and Mark Zuckerberg
You talked about things like interoperability and the importance of openness and you referenced your experience being an app on someone else’s platform and how that influenced your thinking. But there is a tension here where to deliver on a metaverse vision, particularly when you talk about things like being able to carry, say purchases, across different experiences, where it actually may be easier if there is one company providing the totality of the fabric, and that does seem to be this vision where Facebook is the water in which you swim when you’re in the metaverse, not Facebook, but whatever the new name, the new idea for this metaverse is, and then other people can plug into it. Is that a good characterization of the way you’re thinking about it? Or do you see this really being a peer-to-peer thing, where there are other metaverses and those are also interoperable? What’s your vision on how that plays out?
MZ: I think it’s probably more peer-to-peer, and I think the vocabulary on this matters a little bit. We don’t think about this as if different companies are going to build different metaverses. We think about it in terminology like the Mobile Internet. You wouldn’t say that Facebook or Google are building their own Internet and I don’t think in the future it will make sense to say that we are building our own metaverse either. I think we’re each building different infrastructure and components that go towards hopefully helping to build this out overall and I think that those pieces will need to work together in some ways.
We’re trying to help build a bunch of the fundamental technology and platforms that will go towards enabling this. There’s a bunch on the hardware side — there’s the VR goggles, there’s the AR glasses, the input EMG [electromyography] systems, things like that. Then there’s platforms around commerce and creators and of course, social platforms, but there will be different other companies that are building each of those things as well that will compete but also hopefully have some set of open standards where things can be interoperable.
I think the most important piece here is that the virtual goods and digital economy that’s going to get built out, that that can be interoperable. It’s not just about you build an app or an experience that can work across our headset or someone else’s, I think it’s really important that basically if you have your avatar and your digital clothes and your digital tools and the experiences around that — I think being able to take that to other experiences that other people build, whether it’s on a platform that we’re building or not, is going to be really foundational and will unlock a lot of value if that’s a thing that we can do.
I’ve talked a bunch about how I think that we should design our computing platforms around people rather than apps and I guess that’s sort of what I’m talking about. On phones today, the foundational element is an app, right? That’s the organizing principle for kind of your phone and how you navigate it. But I would hope that in the future, the organizing principle will be you, your identity, your stuff, your digital goods, your connections, and then you’ll be able to pretty seamlessly go between different experiences and different devices on that. I think that building that in upfront is going to be pretty important to maximizing the creative economy around this and making it so that somebody who’s building one of these digital goods or experiences can make it as valuable as possible because it just works across a lot of different things…
…I will admit, I’ve been very impressed with Workrooms. I’ve actually been using it with my team that’s been working on Passport for meetings once a week, and your focus on presence I think — it’s one of those things you talk about it a lot but until you actually experience it, it’s hard to articulate why it is valuable.
It’s very interesting, you talk about there’s this distinction between people versus apps that we talked about. Is there a similar distinction between presence versus asynchronous communication? Because I think that’s one of the things people like about messaging, for example, is you don’t necessarily have to be right on top of it, it can be an ongoing conversation over days and weeks and months. Whereas the good thing about presence is it is quite tangible, I have to say, I’m very impressed by it, on the other hand, you do have to sit down, you have to put on the headset, you have to log in. There’s a very deliberate part of that, that feels very different than where we’ve been.
MZ: Yeah. I mean, I think you’ll get both sides of this. I think that there’s a clear arc of technology where — when I got started with Facebook, most of the content online was text, and that was for a bunch of technological reasons. And then we got phones that had cameras and the Internet became a lot more visual, and then the Internet connections got a lot better to the point where now the primary way that we share experiences is video. But at each step along the way, it’s not like text went away. You’re going to have a lot of that, but I do think that now what we’re enabling is a new level of immersion and experience.
I certainly don’t think you’re going to put on a VR headset in order to have a quick message thread. Although I do think that for augmented reality, for example, one of the killer use cases is basically going to be you’re going to have glasses and you’re going to have something like EMG on your wrist and you’re going to be able to have a message thread going on when you’re in the middle of a meeting or doing something else and no one else is even going to notice. Think about what we’ve had over the last couple of years during the pandemic where everyone’s been on Zoom, and one of the things that I’ve found very productive is you can have side channel conversations or chat threads going while you’re having the main meeting. I actually think that would be a pretty useful thing to be able to have in real life too where basically you’re having a physical conversation or you’re coming together, but you can also receive incoming messages without having to take out your phone or look at your watch and even respond quickly in a way that’s discreet and private. So I think that there are going to be those use cases. I think that there are going to be easier ways to get in and out of experiences where you’re experiencing that deep sense of presence.
But again going back to one of your opening points today, you were like, “Why did you put together this video?” I think a big part of it is that it has been very hard to explain some of these concepts without people actually experiencing them. You talk about presence in Workrooms, and I think no matter how many times I explain or try to express how profound of a sensation this feeling of presence is, it’s not really until people get into the experience that they actually have a sense of it. And I thought that putting together this film would start to elucidate some of the use cases in a useful way for people. But I think you’re probably right that it’s not until people really experience what that real augmented reality experience is or get a VR headset that fits the use cases that they need that a lot of these things are really going to come to life. I think it’s just going to keep growing because these are very useful use cases to people.
Why now for the vision? There is an aspect of Facebook’s seems very hamstrung as far as acquisitions go, is there really any other alternative for Facebook’s cash flow other than returning it to investors than this all-in bet on the metaverse? I guess, in other words, is Facebook building the metaverse because it is best positioned to build something that is inevitable, or because Facebook needs the metaverse to exist so that it has further growth opportunities that are independent of Apple?
To your credit, you did buy Oculus way back in 2014, so this obviously isn’t a new vision. But to right now reorganize the company, to paint out this vision, to start announcing how much you’re investing and to what degree, obviously there’s the news cycles going on, why now? Why in October 2021 is this the time to paint this vision and be super public and upfront about it?
MZ: Well, I think there’s a few things. There’s all the business reasons and product reasons. I think that this is going to unlock a lot of the product experiences that I’ve wanted to build since even before I started Facebook. From a business perspective, I think that this is going to unlock a massive amount of digital commerce, and strategically I think we’ll have hopefully an opportunity to shape the development of the next platform in order to make it more amenable to these ways that I think people will naturally want to interact.
One of the things that I’ve found in building the company so far is that you can’t reduce everything to a business case upfront. I think a lot of times the biggest opportunity is you kind of just need to care about them and think that something is going to be awesome and have some conviction and build it. One of the things that I’ve been surprised about a number of times in my career is when something that seemed really obvious to me and that I expected clearly someone else is going to go build this thing, that they just don’t. I think a lot of times things that seem like they’re obvious that they should be invested in by someone, it just doesn’t happen.
I care about this existing, not just virtual and augmented reality existing, but it getting built out in a way that really advances the state of human connection and enables people to be able to interact in a different way. That’s sort of what I’ve dedicated my life’s work to. I’m not sure, I don’t know that if we weren’t investing so much in this, that would happen or that it would happen as quickly, or that it would happen in the same way. I think that we are going to kind shift the direction of that.
2. Alex Rampell – Investing in Operating Systems – Patrick O’Shaughnessy and Alex Rampell
[00:18:40] Patrick: Peter Thiel has this awesome definition of technology, which is really simple, which is just to do more with less. So this tool of leverage that creates for possibility and maybe therefore world-changing, to use your term. And one fun way I’ve heard you describe what you’re trying to do with your investing is that you’re hunting for operating systems, which are the ultimate form of technology leverage, if you will. Can you talk through this investment concept, what you mean by searching for operating systems as companies. And maybe we can go into as much detail as you’re able on this really interesting concept.
[00:19:12] Alex: My absolute favorite companies or businesses to invest in are ones that I think have an operating system like Mechanic. And that doesn’t mean that it’s Windows or Mac OS, but it has the same concept, which is if you ever go to a dentist or any modern dentist, I should say, almost every dentist in the country runs something called a DPM, a dental practice management software product. And that keeps track of all of the customers. It keeps track of the pictures of all of the customers’ teeth. And there are a number of companies that make them. Actually, one of the early ones was Henry Schein, which actually makes dental equipment, but turned out to get into the dental software space. But the retention rate of these products is basically a hundred percent. It’s a product that if you are the receptionist at a dental office or even the dentist himself or herself, you’re logging into this product every single day to check pictures of the teeth, to check when the next person’s appointment is, to check your outstanding billings, to go charge customers credit card. So it is the system of truth.
And when I say operating system, it actually means two things. It means system of truth. So it keeps track of everything at a company or even for a consumer, and I’ll talk about that a little bit later. It has very, very high utilization and usage. So it is this canonical, in consumer terms you would call it a DAU, a daily active use product or weekly active used product, because in the long run, what really matters the most, you could show evidence of a mode if you have a product that people use every single day and the margins that you’re able to extract from the product that you sell to these customers that use it every day, are maintained or even increased over time. So an operating system is basically something that runs the business, it is the system of truth, so it keeps track of what inventory you have, what your sales receipts are, how much you have in sales tax, all of these things. And the reason why that’s so valuable is because even though there is this kind of concept, the much valued concept of the App Store, you can start adding other things into that operating system.
So what does that mean? If you’re a dentist, you want to offer installment payments for the crown or cavity that that patient needs. It’s very easy, and you actually have free distribution of that new product if you are the operating system, versus what I would say, the very, very uphill battle of, “I am just a financing company that offers financing for cavities and crowns. Now I got to go find every dentist. I got to sign them up. The person that I signed up that works at the dental office might leave one month later, then I got to sign them up again. Then after I’ve signed them up, I have to hopefully count on the fact that they’re going to market this or push this in front of their patients, but they probably won’t do, so I have to re-market to them.” Again, versus the operating system where it’s the system of truth. There are operating systems for a lot of businesses like Toast, which went public recently. That’s an operating system for restaurants. They don’t just do payment processing. Like a lot of people think of it as like, “Oh, like I paid for my bill at the restaurant with Toast.” Well, Toast actually does payroll for the people that work at the restaurant.
They have tablets that go to the kitchen. So when the waiter or waitress goes and enters your hamburger order, it shows up immediately at the tablet at the kitchen. So it’s basically like a custom built piece of software that runs the business. And it will even keep track of how many hamburger patties are in the back kitchen as well. So these operating systems, they really retain customers extraordinarily well. And they are very adept. There’s a lot of what I would say out of the money call option value, if you will, of them being able to position other products and services to either the end customers, like the customer’s customers, or the customer itself. I actually wrote a blog post on this when I first joined this firm Andreessen Horowitz, which was my key learning, I called this the TiVo problem. This was at my company trial pay which I sold to Visa. So the TiVo problem, I call this, which is in 1998 TiVo and this other company called ReplayTV invented this amazing technology, at least amazing for people that were around it in 1998 like I was, that allowed you to pause live television. And TiVo was a very, very popular thing in the late nineties.
But today in 2021, it’s basically a patent troll rate. It was sold to another company which is effectively a patent troll that just sues other companies. I would never want to be in that position and I don’t have a lot of high regard for companies that do that. But the reason why that actually happened was TiVo did not control the distribution. They have this great product, but TiVo was not valuable if you just had a TV set and you lived in Antarctica. It only had value if you had Comcast, or if you had DirectTV. You need a TV to go. You need an actual television content to go into that TV, and then you would have live content to pause, hence TiVo. And I think the problem is that if you build an amazing, amazing innovation, and this is outside of the Clay Christiansen framework of disruptive versus sustaining innovations, it really is, “Do you control the distribution or not?”
So, Comcast has that pipe into your house. I think the problem is if you build TiVo, which is an amazing world changing thing, it’s not a sustaining innovation, it’s an amazing thing. But the problem is you have three outcomes that will eventually happen. Number one is Comcast says, “You know what? We should buy you. You’re an amazing company.” But if Comcast goes and buys TiVo, then what about Time Warner Cable and DirecTV? They’re going to say, “Hey, we’re not going to sell TiVo anymore. It’s owned by our competitor.” So you have this weird case in M & A where you can have not a control premium, which is a term often used where you’re paying more per share for the entire thing then you would for the marginal share. You’re going to have a control discount because TiVo is going to lose a huge chunk of their sales from the competitor. So that’s option one. Option two is that Comcast says, “Hey, you know what, let’s partner because we’re the ones that have the pipes into all the homes. We’re going to take 99 cents on the dollar. And you’re going to take 1 cent on the dollar.” And TiVo’s like, “Well, that’s not fair. I want a better deal than that.”
They’re like, “Yeah, well screw you. We’re just going to go with ReplayTV.” So you don’t really have that much leverage in a negotiation vis-a-vis the distributor. And then option number three is basically Comcast says, “That’s a nice little tool that you have there. We’re just going to go hire Accenture. I don’t know, some consulting firm or a bunch of engineers to go build a crappy version of the same thing.” And basically the problem is that one of those three options always happens to the TiVo, the metaphorical TiVo in this example, which is you build this amazing thing, it changes the world, you don’t control the distribution, unfortunately, and you either get copied, you get bought in an unfair price, or you get a partnership agreement which is really tilted out of your favor. So the lesson is, I mean, it sounds crazy to give this to an entrepreneur or a true innovator who’s like, “Don’t build TiVo, build Comcast.” Because if you build Comcast and you have a good product and engineering team, or you can actually create stuff, you have unlimited option value to go rollout TiVo, to charge more for TiVo, and so on and so forth.
Whereas if you’re TiVo, you’re kind of at the mercy of Comcast and you might get lucky, you probably won’t be. And 20 years later, you might get patent troll. And that’s kind of how I got to the operating system thesis to begin with, which is you want to look like Comcast. What does that mean? You want to be the pipes that actually control the backend of the business, because if you do that, and ideally even the front end. If you do that, you could be a body shop. Body shops should run on body shop software. Who’s going to build that software? Well, they’re going to have perpetual rights to offer, cross sell of whatever body shops need, whatever the customers of body shops need and so on and so forth. Or, you’ve got this whole other category of what I would call horizontal operating systems. QuickBooks is effectively an operating system. They do one thing for lots of types of businesses, which is the backend accounting. Or Square is a kind of operating system for lots and lots of businesses in a very horizontal way.
I use horizontal and vertical. As vertical is like focusing on one particular trant of business. It’s like Toast is a vertically focused operating system for restaurants, full stop. Square does that too, but it’s not as customized for restaurants, which is why Toast was able to steal a lot. But both of them effectively are operating systems. How do you know if it’s an operating system or not? I think this was a Supreme Court Justice Potter Stewart said, “How do you know if something is pornography?” And he said, “I’ll know it when I see it.” How do you know if something is an operating system? And I’ll say, “I’ll know it when I see it.” But really it’s like, “Is this thing the permanent system of record that stores all customer business interactions and is it used almost every single day?” And if the answer is, “yes,” it’s probably an operating system. If the answer is, “yes,” there’s almost this permanent up-sell capability where if you have, again, if you have a great management team, there are so many things that they can do with this.
Facebook is kind of an operating system for human interaction. That’s maybe a little bit of a stretch because there are plenty of ways of operating outside of Facebook. But what other products and features has Facebook added over the last 15 years? It’s really remarkable. So much of their business growth has been from that. Because again, they had very high retention, people use the thing almost every single day, and therefore there was a lot, like if you go add another feature, if you add a TiVo-like feature that’s really cool, you know that you’re going to get the distribution because you already have these daily interactions with customers…
…[00:43:33] Patrick: In addition to this awesome idea of the operating system, another thing obviously that you spend a lot of time thinking about is FinTech. And I’d love to turn the conversation there for a while. It’s where you do a lot of your investing, it’s where you founded businesses before. And maybe the right way to introduce our conversation on FinTech is with this funny joke you’ve got about the pig. Maybe you could give us the pig joke as an entry point into the world of FinTech.
[00:43:54] Alex: I love this one and I apologize for people that listen to this and they’ve heard me say it 10 times before. But basically the joke is there’re two pigs in a barn. One of them says to the other, he’s like, “This place is awesome. Everything is free, it’s heated, there’s free food, the water tastes great.” And the caption underneath says, “If you’re not the customer, you’re the product being sold,” which of course means that the pigs are being turned into bacon and they don’t even know it yet, but they’re living a life of luxury until they do. Basically, those were the two business models. Either you sell a product to a customer, and this is either a transactional business model or a subscription business model. So Peloton sells you a bike and they sell you a subscription, and you’re the customer. Or it’s the Facebook business model, which is you, the user of Facebook, are not the customer, you’re the product being sold. Hopefully the product that Facebook is offering is good, that’s why you show up. But the actual customer is the advertiser. And that’s where Facebook, where Google, draws in most of their revenue. So when we would meet a company, we’d say, “Well, which one are you? Are you an advertising company or are you a transaction company?” Because it was like bucket one, bucket two, there was no bucket three.
Now there is a bucket three and bucket three is effectively what I call embedded financial services. So now if you were to extend that joke, it turns out it’s like, “Oh no, the barn is free, we just have to use the checking account provided by the barn owner and hopefully use this debit card that has more than exempt interchange on it.” Et cetera, et cetera. I joined this firm in 2015 to spin up and run our FinTech practice. But now almost every company in some way, shape, or form is a FinTech company. Not because it is a pure play FinTech company, but because if you’re building the next Facebook, if you’re Mark Zuckerberg of 2021, you now see that there are three routes to revenue. You charge transaction fees or a subscription revenue to your customers, and you may sell advertising, and you might decide, “Hey, it’s very, very lucrative for me to offer financial products and services to my customers because they already trust me, they know who I am. And if I’m able to be the dominant checking account. If I’m their checking account,” which I know sound strange, you would think you get your checking account with Bank of America or First Republic or Chase or something like that. But if you have your checking account with somebody, they have so much control and ability, going back to the old refrain, to upselling products to sell you other things. So as an example, it might sound insane, but Uber and Lyft should offer checking accounts to all of their drivers for a few reasons.
One is it turns out both of those businesses are historically supply side constraints. So everybody wants to take an Uber from the airport at 5:00 PM, especially with all the stimulus checks and everything else that’s hitting, not as many people want to drive for Uber. They drive for Uber for two weeks then they quit. What would be very smart is we’re going to give them a checking account, and that has two benefits. One is when they’re running low on money, I can send them a message saying, “Hey, you’re low on money. Why don’t you drive for Uber today? We’ll pay twice as much.” It’s got this daily active use product. They don’t have to re-market to that customer because they already own the customer. And number two, the way that the whole, you’ve already listened to my visa thing because you interviewed for that, but for people that don’t know, the way that the credit card and debit card infrastructure works is that there’s typically something in the neighborhood of a 2% fee per card swipe, which is assessed to the merchant, which can be retained by what’s called the issuing bank or the issuer of the card.
So if Lyft gives every driver a card and a free checking account, and the free checking account is a lot more appealing than the one that Bank of America gives you that has minimum fees and all this crap. They give you this free thing, they own you as a customer, 2% of all the spending that you get, they get to keep, which is very compelling, and they get to win you back as a driver when you might be low on cash. And they’ve got that real retention at work. And again, you wouldn’t have thought of that as a use case 10 or 15 or 20 years ago. But now what we see is that even outside of what I would call the FinTech team, a huge number of enterprise software companies, and a huge number of consumer software companies, are trying to monetize with FinTech as a third leg of that stool.
3. Data as a factor of production – Lilian Li
On April 9, 2020, the CCP Central Committee issued the “Opinions on Building a More Complete System and Mechanism for Market-oriented Allocation of Factors” (henceforth “Opinions”), where they introduced data as a factor of production alongside land, labour, capital, and technology.
The “Opinions” put forward the direction that China is creating a market-based allocation mechanism to realise the value generated by data inflow. The Chinese governance apparatus’ concern with data is clear — as the digital economy takes a larger share of a country’s GDP (in 2020 the digital economy accounted for 38.6% of the Chinese GDP), data governance is governance. China’s development state has always taken the stance that markets, societies and economies thrive under defined rules2. The role of the Chinese government is to assist in the creation of effective markets (as expansive as that word entails).
By creating the concept that data is a factor of production, China Inc. has formalised and legislated the stance that data itself is valuable rather than the algorithms it helps train. The Chinese leadership has subtly but deftly implied that data’s value to a nation is underpriced and currently subjected to market distortions. A country can unlock credible growth and competitive advantage by harnessing a resource such as data or land through a market-based allocation mechanism. Under this framework, today’s tech giants look similar to the Standard Oil of yesteryear, whose value came from its monopoly of the underlying natural resource. (For readers about to predict that China’s going to nationalise big tech, please read on).
4. Frontier Giants: Companies to Watch in Emerging Markets – Mario Gabriele
Tambua Health (Kenya)
I find that exciting emerging market investments have three key traits: they’re highly original, capable of securing a monopoly, and leapfrog existing technology due to restrained starting conditions.
Tambua Health, an African deep-tech company has all three.
The company is led by 21-year old Lewis Wanyeki, an MIT dropout from the spectral imaging lab. He could be considered one of the most intensely technical founders on the continent. He and the Tambua team have created a low-cost, portable ultrasound machine that leverages advances in neural networks for acoustic detection, sensor arrays, and software. Those innovations allow doctors to conduct ultrasound exams with instant image analysis on a rugged android tablet screen. The product can be used by hospital systems to build their own low-cost medical imaging practice, or by developers — Tambua has a number of APIs that can be accessed by others.
The company’s interdisciplinary approach across hardware, software, cloud, and sensors effectively replaces expensive ultrasound devices with a miniaturized machine costing less than $1,000. That’s an order of magnitude lower than existing devices, putting it within reach of many African healthcare facilities that have traditionally been priced out. This has profound implications, allowing for the rapid detection of many medical ailments that rely upon instant ultrasound for diagnosis, including respiratory illnesses.
What I find most exceptional is that the company created its sophisticated hardware and software product with less than 15 people and $3 million in financing. Tambua is quickly becoming a destination for great African deep-tech talent.
By being forced to miniaturize, Tambua has re-invented one of the most fundamental healthcare services: medical imaging. That would be a feat for any deep-tech company, let alone an African one. With that achieved, Tambua has the chance to become a global giant that the likes of Siemens and other incumbents couldn’t see coming from the continent.
— Sumon Sadhu, Global Angel Investor
Ejara (Cameroon)
At FirstCheck Africa, we invest in the overlooked potential of Africa’s women in technology. We back female founders early, at the pre-seed stage, so I’m always on the lookout for startups with excellent leadership. We only started this journey in January 2021, and we’ve made a few exciting investments. Still, if there’s one that’s gotten away so far, it’s Ejara, a decentralized investment and savings platform. The startup is led by Nelly Chatue Diop, a high-octane female founder from Douala, Cameroon.
Nelly is one of the pioneers of Africa’s crypto industry. She and her team at Ejara are exceptional on multiple fronts. They’re tackling a complex, meaningful problem with crypto and scaling a mission-driven startup to address the financial needs of Francophone Africa’s 430 million people. Many are locked out of the region’s sub-optimal, inefficient, expensive, and politically complex financial system. Ejara wants to give underserved users — including women, urban gig-workers, community savings groups, smallholder farmers, and rural populations — the ability to invest and save in cryptocurrencies, stablecoins, and tokenized assets.
There’s so much to admire about Ejara’s approach, and what the team has achieved already. They’ve built a simple mobile interface on a proprietary platform, with a few clever design decisions to help drive inclusion. By using crypto rails, Ejara can offer lower fees, faster transaction processing, and higher yields. Nelly is particularly keen on reaching female users. Already, about 40% of Ejara’s user base are women (roughly 3x crypto averages), though she is targeting 50%. Ejara created the first non-custodial wallet in Africa, meaning their users can exercise complete control over their assets. This decision is pivotal on a continent where men hold 80% or more of financial assets and where gender social norms can limit women’s financial freedoms. Ejara’s wallet is simple, operates in local languages, and works on basic smartphones in low-data environments. The startup’s platforms provide financial education on investment and savings, risk, and responsible crypto trading. Ejara is growing its user base at 25% month on month and is already live in eight countries one year after launch.
I first came across Nelly early this year when she joined one of the regular Clubhouse rooms that my partner and I started for Africa’s female founders and women in tech. She spoke about her frustration trying to raise VC for her startup, and without revealing much about the business, talked about how she’d put the entire process on pause to bootstrap instead. Our fund planned to stay in touch with her, but somehow, regrettably, never did. When Nelly and I reconnected not long ago, she had raised one of Sub-Saharan Africa’s largest female-led seed rounds to date and in record time. Her serendipitous journey kicked off with an interview on the Blockworks podcast, Empire, with Jason Yanowitz, which took her inspiring story of building in crypto from Francophone West Africa to the world.
Ejara announced its $2 million seed round a few weeks ago, with a press photo that made me incredibly proud. Here were six female technology leaders of one of the most exciting crypto startups in Africa who looked like me and many of the women I know. They were dressed boldly in bright, traditional African prints, each beautifully poised, with her head held high. Nelly tells me that every single decision in the photo was deliberate. Her team at Ejara is gender-balanced, but it was important to show the world what funds like FirstCheck Africa know already: African women are building too.
African female founders, like Nelly, are unicorns in the truest sense of the word. In 2021 so far, a record fundraising year for the continent, below 1% of the $3 billion of venture capital deployed has gone to startups led by a woman — less than $30 million. Just six startups led by an African woman have raised a seed round of more than $1 million this year. Nelly and her African female founder peers are trailblazers.
Stories like Nelly’s are why FirstCheck Africa exists. In a recent conversation, she and I spoke animatedly about the dream we share for female founders in Africa: record rounds in record time to build the startups, like Ejara, that will change the face of a continent.
— Eloho Omame, Co-Founder & General Partner of FirstCheck Africa
5. Mark Leonard (Constellation Software) Operating Manual – Colin Keeley
Mark Leonard is the billionaire founder of Constellation Software (CSI). CSI is a Canadian software conglomerate that acquires and holds vertical market software (VMS) companies.
They are a perpetual owner (they never sell) and own 500+ VMS companies at this point. They have only sold one business because they were offered a really high price in the early days. Mark regrets selling to this day.
These companies span over 75 verticals from library software to marina management…
…Mark Leonard, started Constellation with $25 million Canadian dollars in 1995 (equivalent to $32.85 million in 2021 US dollars) raised from investors.
The company went public on the Toronto Stock Exchange in 2006 to give some of it’s VC investors liquidity. The bulk of their investors were from a pension fund that didn’t need an exit. The VC investors sold their shares at a roughly $70 million valuation at the time, but no additional money was raised. Constellation’s market cap today is around $31 billion as of June 2021. CSI has reliably compounded at 30+% a year…
…When he was working in venture capital in Canada, it wasn’t going that well. He was particularly irritated by VC’s unflinching focus on companies operating in large addressable markets.
He saw plenty of great businesses operating in niche spaces that were great business, but may not have had the upside potential to be huge venture outcomes.
VMS businesses were high gross margin and sticky, and selling mission-critical software that was instrumental in a buyer’s operations.
He raised $25 million Canadian from his old venture colleagues and mostly from Ontario Municipal Employees Retirement System (OMERS), a pension fund where a friend from business school worked, with the goal of becoming the best buyer of VMS businesses in the world…
…Horizontal market software are things like word processors and spreadsheet programs that can be used in a wide array of industries.
Vertical market software is developed for and customized to industry-specific needs. These are businesses focused on a niche markets like spa & fitness or dealerships that have specific needs, but aren’t attractive to the larger players.
Their favorite businesses are bought directly from Founders. They naturally have the best cultures…
…Decentralized Human Scale. Mark has a great description of this:
“We seek out vertical market software businesses where motivated small teams composed of good people, can produce superior results in tiny markets. What we offer our BU Managers is autonomy, an environment that supports them in mastering vertical market software management skills, and the chance to build an enduring and competent team in a ‘human-scale’ business. While we have developed some techniques and best practices for fostering organic growth, I think our most powerful tool is using humanscale BU’s. When a VMS business is small, its manager usually has five or six functional managers to work with: Marketing & Sales, Research & Development (“R&D”), Professional Services, Maintenance & Support and General & Administration. Each of those functional managers starts off heading a single working group. If the business leader is smart, energetic and has integrity, these tend to be halcyon days. All the employees know each other, and if a team member isn’t trusted and pulling his weight, he tends to get weeded-out. If employees are talented, they can be quirky, as long as they are working for the greater good of the business. Priorities are clear, systems haven’t had time to metastasise, rules are few, trust and communication are high, and the focus tends to be on how to increase the size of the pie, not how it gets divided. That’s how I remember my favourite venture investments when I was a venture capitalist, and it’s how I remember many of the early CSI acquisitions.
That structure usually suffices until there are perhaps 30 to 40 people in the business. At that stage, some of the teams – perhaps R&D if the product is rapidly evolving or has high needs for interfaces or compliance changes – must grow beyond the five to nine optimal team size. If the head of R&D in this example is brilliant and is willing to work hours that are unsustainable for most of us, he may be able to parse out tasks for each of the team members despite the increased team size. He may be able to judge the capabilities and cater to the development needs of each of his direct reports. He may be able to recruit excellent new employees, and he may be able to manage the demands and trade-offs required to coordinate with the other functional managers. The more likely outcome, is that the R&D manager isn’t a brilliant workaholic and cannot cope as the team size exceeds double digits. Instead, he’ll break his team up into multiple teams. A new level of middle managers will be born, with all the potential for overhead creation, politics, and bureaucracy that comes with another tier of middle managers.
The larger a business gets, the more difficult it becomes to manage and the more policies, procedures, systems, rules and regulations are generated to handle the growing complexity. Talented people get frustrated, innovation suffers, and the focus shifts from customers and markets to internal communication, cost control, and rule enforcement. The quirky but talented rarely survive in this environment. A huge body of academic research confirms that complexity and co-ordination effort increase at a much faster rate than headcount in a growing organisation. If the BU is small enough, and has a competent BU manager who has several years experience in the vertical, and good functional managers, then he/she will be able to cope with complexity for a while, making the right calls to optimise organic growth as the business grows. The challenge of running a BU of this size is human-scaled.
As a BU becomes larger (by our standards, that’s greater than 100 employees), I worry that even an extraordinarily brilliant and energetic manager, who has been in the vertical and the BU for a very long time, and is surrounded by a strong team that he/she has selected and trained over many years, is going to struggle to steer the business to above industry average organic growth. No one wants to admit that they’ve hit their limit. Some BU Managers lack the humility, some lack the courage, and most lack the time for reflection, to notice that their task is getting too large, and the sacrifices are getting too great. This is the point at which our Operating Group Managers or Portfolio Managers can provide coaching. If a large BU is not generating the organic growth that we think it should, the BU manager needs to be asked why employees and customers wouldn’t be better served by splitting the BU into smaller units. Our favourite outcome in this sort of situation is that the original BU Manager runs a large piece of the original BU and spins off a new BU run by one of his/her proteges. Ideally, he/she has been grooming a promising functional manager who’ll be enthusiastic about running and growing a tightly focused, customer-centric BU.
This dividing of larger BU’s into smaller units is rare, but not unknown, in other large companies. One of the HPC’s that we studied was Illinois Tool Works Inc. (“ITW”). It has hundreds of BU’s. We began following the company from afar in 2005. The most relevant period in ITW’s history for CSI was the tenure of John Nichols. Nichols began consulting to ITW in 1979, and appears to have been the primary author of its decentralisation strategy. He was CEO as the company went from $369 million in revenues in 1981 to $4.2 billion in 1995 ($6.7 billion in today’s dollars). Prior to Nichols’s tenure, ITW had acquired only 3 businesses. During his tenure, ITW aggressively acquired and often split the larger acquisitions into smaller BU’s. ITW had 365 separate operating units by 1996 when Nichols retired. I’m sorry I didn’t reach out to some of the ITW employees and ex-employees until 2015. When I did talk with one of the senior managers, he said (I’m paraphrasing) “Something wonderful happens when you spin off a new business unit.” … “With a clean sheet of paper, the leader only takes those he needs. They set up in an open office with good communication and no overheads. They cover for each other. They leave all the bureaucracy and the crap behind”. I did record a couple of verbatim quotes from that conversation: “Don’t share sales, R&D, HR, etc. because the accountants never get the allocations right and the business units always treat the allocated costs as outside their control”, and “When you get big you lose entrepreneurship”.
Volaris and TSS regularly divide their larger BU’s into smaller BU’s that focus on sub-segments of their markets. Volaris feels strongly that splitting larger BU’s into smaller ones allows more targeted products and services that differentiate their offerings from their more horizontal competitors. Harris has very successfully acquired multiple BU’s in the same industry and run them independently rather than combining them into one BU. Both tactics forego obvious and easily obtainable benefits from economies of scale. We think we get something valuable when we constrain BU headcount, but it isn’t a panacea for all of our organic growth challenges.”
6. A Conversation with David Swensen – Robert E. Rubin and David Swensen
RUBIN: But then I think the question, David, is this—and this is what I think myself; I’m very focused on it. I agree with what you just said. But then do you have—does that enter—since you’re not a market timer, but a long-term investor, does that enter into your asset allocation at Yale? Should it enter into my asset allocation? I’m a long-term investor. Or should you just take the view these things are going to happen, they’re pretty much unpredictable in terms of timing and duration and magnitude, and so we accept them and figure that if it goes down, it’ll go back up? Which do you do?
SWENSEN: So we’re absolutely not market timers, but I would talk about market timing as kind of a short-term swing in the portfolio to take advantage of some knowledge that you have or some belief that you have about where markets are headed in the short term. But I think we have to take strategic positions in the portfolio. One of the most important metrics that we look at is the percentage of the portfolio that’s in what we call uncorrelated assets. And that’s a combination of absolute return, cash, and short-term bonds. And those are the assets that would protect the endowment in the—in the event of a market crisis.
Prior to the downturn in 2008, we were probably about 30 percent in uncorrelated assets. By the time 2009-2010 rolled around, we were probably around 15 percent. And the reason for the dramatic decline is these are the sources of liquidity in times of stress. And so today we’ve rebuilt that. It actually works out quite nicely from a cyclical perspective, if you’ve got a rebound afterwards. Instead of being 70 percent in risk assets, you’re 85 percent in risk assets. But over the years subsequent to the crisis, we’ve rebuilt our uncorrelated assets position to an excess of 30 percent. And we’re currently targeting about 32 ½ percent, which is somewhat above the long-term goal…
…RUBIN: What about the notion, David, that over time—a notion that I think is getting a lot of currency now, actually, that over time AI, machine learning, and all these kinds of things are going to replace the David Swensens of the world. And they will be—and I know all of us reject that. And we say, no, our judgement is what we want to rely on, but they have done an awful lot of back-testing on one thing or another, and they have a sort of an interesting case to make. Do you have any view of that?
SWENSEN: So, Bob, usually I’m not glad that I’m 63 years old—(laughter)—and nearer to the end of my career than the beginning of my career. But that question actually makes me glad of those two facts. (Laughter.) You know, I have never been a big fan of quantitative approaches to investment. And the fundamental reason is that I can’t understand what’s in the black box. And if I don’t know what’s in the black box, and there’s underperformance, I don’t know if the black box is broken or if it’s out of favor. And if it’s broken, you want to stop. And if it’s out of favor, you want to increase your exposure.
And so I’m an old-fashioned guy that wants to sit across the table from somebody who’s done the analysis and understand why they own the position. And then if it goes against them, I can have another conversation and try and figure out whether the thesis was wrong and we should exit, or whether the thesis is intact and we should increase the position. And I don’t understand any other way to invest…
…RUBIN: They’ve survived a difficult environment for that activity, yeah. (Laughs.) This may seem like an odd question, but I was thinking about it myself the other day. If you look back, say, 10 or 15 years ago, or 20—whatever you want to do; I don’t care—and you think about how you thought about investment then, and you think about how you think about investment now, is it any different conceptually or practically?
SWENSEN: You know, I think if you asked me that question 25 years ago, I would have had a reasonably long list of things that I thought were important in an investment management firm. Today, I would say that number one is the character and quality of the investment principals. Number two is the character and quality of the investment principals. Number three—(laughter)—you get the idea. And you have to go further down the list before you get to some of the nuts and bolts. And I’m absolutely convinced that there is nothing more important than being partners with great people.
RUBIN: I agree with that.
SWENSEN: In the investment world, if people are the way that you’re taught and—introductory econ—if they’re maximizers, they’re going to raise massive funds, charge high fees, and make a lot of money for themselves. I’m looking for somebody that’s got a screw loose and they define winning not by being as rich as they can be individually, but by producing great investment returns. And you do that—you can still make a great living, but instead of managing $20 billion, you probably manage $2 billion. And the other day we met with a manager, and they said their goal was to be in the IRR hall of fame. And I love that, because if they produce great returns, that’s going to benefit the university. But if they gather huge amounts of assets and charge high fees, that’s going to benefit them and not Yale…
…RUBIN: Well, we’ll find something next year. But, no, but this is my final question. But it was sort of what I was getting at. I’m not equipped to do what you can do, which is make these bottom-up judgments. But it does strike me we live in a very complicated world.
And so my final question will be this—and maybe this is—I’m not going to phrase this exactly the right way, but it seems to me, but maybe I’m wrong, that when I think as an investor, which I do, about the world that we’re in, it seems to me to have a lot more uncertainty and complexity in many kinds of ways—geopolitically, economically, populism, all this sort of thing—than it did 15 or 20 years ago.
Now, my friend Larry Summers tells me that you always think that the present moment is more dangerous than other moments, and therefore you overstate that. And maybe Larry’s right, but maybe he’s wrong. So I’ll ask you what you think; not a choice, by the way, he necessarily acknowledges. (Laughter.) But I’ll ask you what you think. (Laughs.)
SWENSEN: So what Larry says resonates with me, because one of the things that I like to say is that we should never underestimate the resilience of this economy. But that—that said, it does feel as if this is a particularly fraught time.
7. Internal vs. External Benchmarks – Morgan Housel
There are two ways to measure how you’re doing: Against yourself and against others. Internal vs. external benchmarks.
There’s a time and a place for both, but I’ve come to appreciate how much happier you can be if you appreciate when internal benchmarks should get the spotlight.
If Jeff Bezos started a new company that got to $100 million in revenue and sold for a billion dollars, it would mean … nothing to him, both financially and on his list of accomplishments.
But if I did it, it would be … unbelievable. Everything would change.
So accomplishments have a cost basis. What you gain or lose is always relative to where you began. And since we all begin at different spots, there’s a range in how people feel when experiencing the same thing…
…External benchmarks are deceiving because accomplishments are advertised while the ugly, hard, and painful parts of life are often hidden from view. Almost everything looks better from the outside. When you’re keenly aware of your own struggles but blind to others’, it’s easy to assume you’re missing some skill or secret that others have. Few things are as awful as chasing something you eventually realize you never actually wanted…
…The most important point may be this: Internal benchmarks are only possible when you have some degree of independence.
The only way to consistently do what you want, when you want, with whom you want, for as long as you want, is to detach from other peoples’ benchmarks and judge everything simply by whether you’re happy and fulfilled, which varies person to person.
I recently had dinner with a financial advisor who has a client that gets angry when hearing about portfolio returns or benchmarks. None of that matters to the client; All he cares about is whether he has enough money to keep traveling with his wife. That’s his sole benchmark.
“Everyone else can stress out about outperforming each other,” he says. “I just like Europe.”
Maybe he’s got it all figured out.
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. Of all the companies mentioned, we currently have a vested interest in Alphabet, Apple, Facebook, and Square. Holdings are subject to change at any time.
