Firehose #192: 🍽 Campo a la mesa. 🍽

Lightspeed invests in Frubana, doubling down on LATAM. Plus: pumping up PTON, anime going mainstream, the NFT bust, and more.

One Big Thought

Latin America (LATAM) is the fastest growing e-commerce market in the world. It has 640M residents with $5.8T of GDP (6–7% growth). GDP per capita is $9K, or roughly the same as China. The region has near ubiquitous mobile and internet penetration, yet it has a fraction of the tech investment dollars of comparable developing regions like Southeast Asia. One sign that capital is flowing into the region now is the meteoric rise of MercadoLibre (MELI)*, which has increased its stock price by 4x in the last 3 years, buoyed by LATAM’s digital transformation during COVID.

Private capital flows have accelerated too. 2021 is tracking to an all-time high of ~$15B of venture capital in LATAM companies, a 3x increase since 2018. The secret is getting out that LATAM will be the next global region for breakout tech startup growth.

While the macro factors are attractive, one of the more practical aspects that makes me bullish on LATAM is a new generation of experienced talent emerging to start their own companies. MercadoLibre (founded in 1999) is the poster child of the 1st generation. Companies like Nubank (founded in 2013) and Rappi (founded in 2015) exemplify the 2nd. This 3rd generation cut their teeth at these foundational startups and got an invaluable, real-world education in company building. Their market timing is even better than that of their predecessors.

In late 2019, I met a compelling founder from this 3rd LATAM generation. Fabián Gómez was one of Rappi’s earliest employees and top performers. He had recently founded Frubana — a wholesale marketplace for local restaurants. In our initial meeting, I was blown away by Fabián’s incredible passion, market knowledge, hustle, and attention to detail. I had some good context for his business since I led Lightspeed’s initial investment in Faire in 2018. My experience with Faire, as well as our portfolio companies Udaan (India) and Ula (Indonesia), informed my belief that B2B/wholesale would be the next wave of online marketplaces.

While we weren’t prepared to invest in Frubana at that time, my partner Mercedes Bent and I set out on a mission to map the LATAM ecosystem and build relationships with entrepreneurs and investors in the region. We met hundreds of companies in the following 18 months. In early 2021, we finally decided the timing was right to make our first few investments.

We happily announced our first LATAM investment in Stori a few months ago. This week, we announced that our second is Frubana!

Frubana* is a wholesale marketplace serving the restaurant industry in LATAM. 1.5M restaurants in LATAM spend over $100B procuring goods each year. The market is transacted today through a complex supply chain of middlemen in local stalls in town plazas. The below is a typical produce market in Mexico City, for example. Farmers and restaurant owners meet at these markets several times a week to exchange goods and money. To reach these markets, product passes through multiple layers of middlemen in a highly inefficient process with little transparency or consistency.

Frubana has vertically integrated the supply chain for produce, giving farmers more value for their products, reducing waste, and delivering transparent pricing to restaurants. Frubana purchases directly from farmers, aggregates produce in regional distribution centers, and fulfills deliveries using intelligent routing. While building a produce supply chain is no easy task, doing so has enabled Frubana to create a highly recurring purchase behavior with its customers, leading to best-in-class retention for a wholesale marketplace.

Frubana also sells proteins and packaged goods through a 3rd party marketplace where sellers compete for Frubana’s customers. While most customers start buying produce from Frubana, over time they grow their “share of wallet” by adding the other categories to their deliveries. Frubana has some of the best retention we’ve seen in the wholesale category. In cities like Bogotá, Mexico City, and São Paulo, tens of thousands of restaurants essentially run on Frubana.

Compared to in the US, the restaurant industry in LATAM is significantly more fragmented. 86% of restaurants are independently owned, similar to developing nations like China (81%) and India (81%). The US restaurant industry is only 47% independent, and as such large food distributors (Sysco, US Foods, Performance Food Group — in aggregate, $59B market cap) have grown to serve corporate restaurant chains. Because of their local economies of scale in distribution and ability to cross-sell, these distributors are incredibly hard to disintermediate in the US. However, in LATAM, no such oligopoly exists. By building a supply chain for produce first, Frubana has a unique opportunity to aggregate LATAM’s restaurant market.

COVID hit the restaurant industry hard in LATAM. Approximately 70% of establishments shut down or slowed operations. Despite these headwinds, Frubana grew active customers 6x and sales 3x in the last year — establishing its position as the “everything store” for the LATAM restaurant industry. This resilience in the face of adversity demonstrated how capable Fabián and his team truly are. With little digital penetration in local restaurants, we think Frubana will be well positioned to bring these businesses online, help facilitate a transition to electronic payments, provide working capital, and in general drive efficiencies throughout the entire food ecosystem.

Frubana’s mission is to make food cheaper and more accessible in LATAM. It reduces food waste thanks to its innovative supply chain. Frubana only looses 1–2% of tonnage to waste compared with over 50% in the existing supply chain. That means more money in the pockets of farmers, more efficiencies for the restaurant owner, and cheaper end-product for consumers. Any great platform gives away more value than it captures, and that’s certainly the case for Frubana.

Lightspeed is delighted to partner with Fabián and the Frubana team to build a category defining company in LATAM. We’re excited to co-invest with friends Carlo Dapuzzo at Monashees, Hans Tung at GGV, Tiger, Softbank, and more.

If you’re interested in hearing more of my thoughts on Frubana’s market opportunity, and global wholesale marketplaces in general, check out this interview I did last week at a virtual customer event for Frubana. It’s even translated into Spanish!

And, if you’re interested in working for Frubana and reside in Bogotá, Mexico City, Buenos Aires, or São Paulo, check out their careers page.

Note: I originally published this post on the Lightspeed Medium here.

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Links I Enjoy

#commerce

Pumping up Peloton.

Peloton was about as counterintuitive an early stage consumer investment as you can find. CEO and founder John Foley famously struggled to raise the first $400K angel round. A $2,000 exercise bike, with negative margins, in an industry built on breakage? Conventional wisdom said, “No way.”

But, Foley led Peloton through its IPO and built the most addictive exercise service ever to exist, with 90%+ annual retention of members. Its margins are world class on both hardware and subscription, and its market position continues to grow.

This week I read an insightful bull case on the company. It hits on some of the same factors that make Netflix such a successful business, namely that Foley regards the subscription price of $39/month as “sacrosanct” and that over time he wants to “make it irresponsible to not have a Peloton membership.”

The management has stated that the goal is to have 4 or 5 fitness platforms that are instructor-led, music, and socially driven. What initially started as a bike to democratize access to boutique fitness classes will transform into a multiplatform fitness ecosystem that will radically improve our approach towards fitness.

In addition, the post touches on another element of Peloton’s strategy, which the author calls “premiumization”.

Our day is composed of hundreds of experiences and if any given company is able to improve a relevant aspect of our life for a reasonable (but higher than other alternatives) price, we will eventually make the transition towards its products or services.

The author is making the argument that gyms used to be gritty and inconvenient (Gold’s Gym, etc). Then they got fancier, but still inconvenient (Crunch, Planet Fitness). Then they got social and fancy, and slightly less inconvenient (SoulCycle, CrossFit). Peloton is the inevitable end-state: a premium, social gym experience with all the convenience of working out at home.

This evolution of the fitness industry from gritty gyms to $2,000 connected home bikes reminded me of the premiumization coffee industry. My mother drank Folgers’ brand, freeze dried coffee every morning growing up (and so did her mother). Then Starbucks came along and turned coffee into an “experience” — charging multiples per cup of what you could make at home. Keurig made similar quality coffee even more convenient at home. Then came along even higher end home coffee machines like those made by Nespresso. Finally, we saw the rise of the “third wave” coffee companies like Blue Bottle that make a truly artisan product available commercially through all points of purchase. The price of coffee for a consumer can literally span an order of magnitude today. It turned out the market for coffee was much bigger than anyone expected as it became de-commoditized, or “premiumized.”

#media

Anime is going mainstream.

One of the oddest trends in media during COVID has been the western rise of anime in popular culture. According to The Information, Netflix has seen viewership of anime double over the last year in the US. In Chile and Peru, anime shows are consistently in the top 10. Netflix apparently pays 50% more to anime studios compared to its usual deals, due to the demanding technical nature of developing these shows. The best IPs are also proven out by the comics (or “manga”), which means they are highly competitive and generate bidding wars. Netflix acquired the first season of Demon Slayer, for example, on a non-exclusive basis — highly unusual.

The subsequent Demon Slayer movie, released in late 2020, has now grossed over $500M globally, making it the highest grossing film of 2020! For those of you playing along at home, that worldwide gross is more than Christopher Nolan’s Tenet brought in at the box office. Furthermore, the movie starts chronologically exactly where Season 1 of the anime stopped, with no recap whatsoever. It makes no sense at all if you aren’t familiar with the series. And it’s in Japanese with subtitles! I gotta believe that everyone who saw that movie was already a severe Demon Slayer fan.

I fully expect we’re going to see more anime movies opening in wide release post-COVID and, given the prior anime TV series and manga popularity, we’ll see them beat out major live action releases in US theaters.

#tech

Boom and bust (and boom again?). →

NFTs are one of the most exciting trends in tech this year, but it’s hard not to notice the rapid decline in enthusiasm in nearly every NFT category in the last month. I point to the data in this post not as a nay-sayer, but as a conscientious observer who is interested in the underlying long-term trend.

One nevertheless bullish observation is that, compared to June 2020, active NFT wallets are still up YoY in most categories. In addition, the biggest category of decline is collectibles, which I’ve personally viewed as the most speculative category. The time it takes to establish an item traditionally as collectible is at least a generation (nostalgia needs time to set in), so a whole raft of creators claiming they’re creating new collectibles in 2021 feels premature to me. On the other hand, NFTs that are attached to experiences like games, meta-verses, or sports, have retained much better than collectibles.

My prediction is that we’re about to enter the “trough of sorrow” for NFTs, but that more productive use cases will rise from the ashes.

#science

Twisted black holes.

Black holes are the mystery machines of physics. They sit at the edge of what we know and what we want to know to understand the cosmos. The scale and energy of these systems simply defies all intuition. This article is about a particular, supermassive black hole called M87 that its at the center of the Milky Way galaxy:

“The black hole in M87 is about the size of our solar system,” Issaoun said, yet it produces a 5,000-light-year-long current of white-hot plasma. That’s like the Statue of Liberty popping out of a marble. Some 3 trillion trillion trillion joules of energy flow up the jet each second — 500 trillion times more energy than the entire human population burns in a decade. “How could something so tiny be so powerful?”

In particular, the article discusses recent explanations of black hole jets and goes back to review old theories. The above video does a good job reviewing the basic concepts.

#culture

Here’s Johnny!

Like many “old millennials,” I grew up watching MTV. Jackass debuted in 2000 and ran for 3 seasons on the air. It redefined the age old art of the daredevil in an irreverent, vulgar modern context. The first few seasons of the show were addictive, and Knoxville, along with his peers like Bam Margera and Steve-O, became iconic symbols of the Gen X, IDGAF, skater punk generation.

This GQ profile of Johnny Knoxville is nostalgic for me, and I bet it will be for some of you. Crazy to see your childhood heroes get a full head of grey hair.


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Disclaimer: * indicates a Lightspeed portfolio company, or other company in which I have economic interest. I also have economic interest in AAPL, ABNB, ADBE, ADSK, AMT, AMZN, BABA, BRK, BLK, CCI, COUP, CRM, CRWD, GOOG/GOOGL, FB, HD, LMT, MA, MCD, MELI, MSFT, NFLX, NSRGY, NEE, NET, NFLX, NOW, NVDA, PINS, PYPL, SE, SHOP, SNAP, SPOT, SQ, TMO, TWLO, VEEV, and V.

Firehose #191: 😲 $1B+ brands 😲

Are consumer brands getting bigger, faster? If so, why?

One Big Thought

How big can a single brand be?

Here’s one data point — for about a week this May, the richest person in the world wasn’t a tech magnate like Bezos or Zuckerberg. It was Bernard Arnault, the majority shareholder in LVMH, the parent company of luxury brands like Dior, Louis Vuitton, and Tiffany. LVMH has a market cap over €320B and produces around €50B in annual revenue across 75 premium brands. Fashion & leather goods are 47% of revenue, while wines & spirits and perfumes & cosmetics make up 11-12% of revenue each. The remainder is comprised of watches & jewelry, as well as other non-branded activities like retail and publishing.

LVMH doesn’t disclose the revenue of individual brands. However, if we remove the retailing, publishing, and hospitality revenue, we get around €40B, or ~€500M per brand on average. At current exchange rates, that’s $600M+ per brand. The leading brands in its portfolio almost certainly produce over $1B in annual sales each. For example, Louis Vuitton, which was founded in 1854 (!), is estimated to produce over $15B of revenues at over 30% profit margins. Even at a conservative 10x EBITDA multiple, Louis Vuitton should be worth over $45B with that kind of performance. Despite its scale, only ~10% of LVMH sales come through e-commerce. Even in 2021, the world’s leading luxury brands are predominately offline businesses.

Newer brands have accumulated similar revenue and value over an even shorter period of time. One secret is owning their own distribution — first retail, then e-commerce. Founded in 1964, Nike (NKE) produced $39B of LTM revenues and is worth $215B today in market cap. 35% of its revenue, or $13B, was sold through its own website. Founded in 1998, Lululemon (LULU) produced $4.4B of LTM revenues and is worth around $51B today in market cap. 52% of its revenue is DTC and 38% comes through its own network of retail stores. Founded in 2006, Yeti (YETI) produced $1.1B of LTM revenues and is worth around $7.6B today in market cap. 53% of its revenue is DTC, and that segment is growing faster than wholesale.

The trendline suggests that $1B+ revenue brands are becoming more common and are scaling revenue faster. The one common characteristic of those who reach scale is a high percentage of e-commerce sales. As articulated by Andy Dunn of Bonobos* years ago, the digitally native vertical brand (DNVB) thesis relies on a direct relationship with an end customer to accelerate the discovery and continual optimization of product/market fit. The flywheel of building brand love simply spins faster with online transactions. As such, these brands can get to $1B+ of revenue faster than their offline predecessors.

DNVBs have finally started to go public. Founded in 2014, Casper (CSPR) had its IPO in early 2020 and is currently worth $389M in market cap on close to $500M in trailing revenues — not exactly stellar performance. In Firehose #154, I wrote about some of the problems with Casper’s strategic choices prior to its IPO. However, we should also note that its direct competitor Purple (PRPL) is worth $1.9B on nearly $650M of revenues. So, the mattress-in-a-box business actually works, just not for CSPR unfortunately.

A similar dynamic played out in the meal kit space with Blue Apron (APRN) and Hello Fresh (HFG). The former was the pioneer of the model, but the latter got the implementation right. APRN is now worth only $90M in market cap on $488M of revenues, while HFG is worth $16B on $5.2B of revenues. It crossed $1B in revenues in its first 5 years, and $5B in revenues in a decade — a record for a DNVB. In addition, The Honest Company (HNST, a Lightspeed portfolio company)* had its IPO last month and is currently worth $1.4B in market cap. It disclosed over $300M in revenues in the last fiscal year. We discussed its path to IPO in my partner Jeremy Liew’s blog post here.

All these companies were built on custom technology platforms. The newest cohort of companies are building on 3rd party e-commerce platforms instead. For example, medical apparel company Figs (FIGS) IPO’d last week with remarkable success. FIGS is itself a business that few people “got” at the beginning; yet, it clearly serves an under-appreciated niche extremely well. This statement in the company’s S-1 stood out to me:

Our mission is to celebrate, empower and serve those who serve others.

Who does that sound like? I’ll give you a hint.

In Jobs’s incredible speech upon his return to Apple in 1997, the Apple founder talked about how he was rearchitecting the company’s marketing strategy:

To me, marketing is about values. This is a very noisy world. And we’re not going to get a chance to get people to remember much about us. No company is. And so we have to be really clear about what we want them to know about us….

One of the greatest jobs of marketing that the universe has ever seen is Nike. Remember — Nike sells a commodity; they sell shoes. And yet when you think of Nike you feel something different than a shoe company. In their ads, they never talk about the products. They don’t tell you about their air soles and why they’re different from Reebok’s air soles.

What does Nike do in their ads? They honor great athletes, and they honor great athletics. That’s who they are; that’s what they’re about.

In honoring those who serve others, FIGS is carving out a unique space for consumer brand values and claiming it as their own. They also are the first company to go public explicitly with the DNVB moniker front and center. Again, from its S-1:

We Are a Digitally Native Direct-to-Consumer Brand.

We are a digitally native DTC brand that utilizes technology to deliver a differentiated customer experience. We disrupted the industry’s historical distribution model, which required healthcare professionals to physically travel to brick-and-mortar stores to purchase their uniforms. We have built the largest DTC platform in healthcare apparel, leading the industry in the shift to digital. By selling directly through our digital platform, we control all aspects of the customer experience. Further, we are able to engage with our community of healthcare professionals before, during and after purchase, through our digital platform and numerous other channels. This direct engagement enables us to establish personal relationships at scale and provides us with valuable customer data and feedback that we leverage across our organization to better serve our community.

FIGS has grown over 100% annually since 2016, with over $260M revenue in 2020. FIGS took a while to find its groove, but really took off in 2017:

The company’s gross margins are over 70%, with 28% adjusted EBITDA margins. It has simultaneously increased LTV and lowered CAC over time — although COVID likely had something to do with falling CAC in 2020. Cohort retention is very strong for an apparel business, likely due to the non-discretionary nature of the category.

FIGS is currently worth around $5B on its $318M of trailing revenues and $57M of trailing net income (~100x P/E). Much of that value was created in the last 5 years. If we started the clock 5 years ago, it’s possible FIGS could be the fastest DNVB to $1B in revenues. If so, what enabled it to move so quickly?

One anomalous factor could be that FIGS is the first public DNVB to build on a 3rd party e-commerce platform. The Shopify* CEO Tobi Lutke himself pointed this out on Twitter this week:

When Tobi said his goal was to “arm the rebels,” most of us assumed that the rebels would all be individually tiny. But, what if that assumption is false? What if building on a 3rd party platform like Shopify actually increases your odds of building a $1B revenue brand? Will we see DNVBs grow even faster to $1B+ in revenues because of the infrastructure Shopify and its competitors/partners provide?

My view is that it’s become so much easier to build iconic brands with these tools, and that many of those brands will start online with platforms like Shopify. They’ll also be able to access retail at scale much more easily thanks to wholesale platforms like Faire.* Omni-channel omnipresence is within the reach of the youngest companies now. With digital platforms, it shouldn’t be surprising to us that the some of the “rebels” are now themselves multi-billion dollar companies in record time.

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Firehose #190: 🎸 Creator equity. 🎸

How Web3 aligns fans and creators to take down online aggregators.

One Big Thought

A popular position in this newsletter is that small businesses are underinvested in relative to the critical role they play in the economy. Two weeks ago, I argued that the opportunity in SMB tech was hiding in plain sight, like mobile and cloud were a decade ago. At Lightspeed, our investments in Faire*, OYO*, and others have shown us that aggregating existing, offline small businesses can deliver massive efficiencies to the entire ecosystem. This is one of the reasons I’ve predicted a next-gen wave of B2B marketplaces in the coming decade.

In aggregate, small, offline businesses have inherent defensibility because people live in the real world. That might sound like a trivial statement, but our offline behavior is markedly different from our online behavior. The former is taking a stroll down Main St, popping your head into various shops along the way. The latter is hanging out on only a few, very popular websites or mobile apps. Case in point: we all start our searches on Google*, our purchases on Amazon*, and reflexively browse our favorite feed-based social products to kill time (Facebook*, TikTok, etc). It’s the offline equivalent of hanging out with friends on the highway median.

On the internet, near zero marginal costs of distribution and powerful network effects make this handful of companies very powerful. If you haven’t read Ben Thompson’s canonical post on Aggregation Theory, now would be a good time to check it out.

If you want to sell a product online, publish a game, or distribute a new app you built, you must pay a tax to one of several dominant aggregators. “Real estate” on the internet can therefore be much more competitive than it is in the physical world, where you pay a market-based rent, but foot traffic comes for free. A few digital companies have been able to grow initially by hacking distribution on someone else’s platform (e.g. Zynga on Facebook, Foursquare on Twitter, Airbnb* on Craigslist), but the bigger platforms eventually stop the fun. Very rarely, inherently viral digital products like Snapchat* or WhatsApp figure out an independent growth model.

This dynamic has begun to change in recent years. With its “arm the rebels” maxim, Shopify* has demonstrated a path for small, online businesses to get on the same footing as Amazon in their own niches. Wix and Squarespace have followed in this direction too. Substack is attempting to do the same in media. Vertically-oriented marketplaces like Outschool* have built platforms for individual creatives to find and engage audiences.

Yet, it’s still quite hard to build an audience online when you (a) don’t have name ID from another platform, (b) aren’t a naturally talented social media promoter, or (c) are creating in a small niche. Even if you are able to build an audience, it’s really hard to monetize it on a big platform unless you’re absolutely massive. For these reasons, Li Jin of Atelier Ventures argued that the creator economy needs a middle class:

The current creator landscape more closely resembles an economy in which wealth is concentrated at the top. On Patreon, only 2% of creators made the federal minimum wage of $1,160 per month in 2017. On Spotify, artists need 3.5 million streams per year to achieve the annual earnings for a full-time minimum-wage worker of $15,080, a fact that drives most musicians to supplement their earnings with touring and merchandise. In contrast, in America in 2016, 52% of adults lived in middle income households, with incomes ranging from $48,500 to $145,500.

A recent post by Cooper Turley and Kinjal Shah advanced my own thinking on this topic. They wrote about online “micro-economies” and what it takes for niche communities to develop an audience and a business model. The vision is that “the shift from Web2 to Web3 [will] create revenue streams which prioritize community ownership over individual ownership.”

Web3 is a new vision of the internet. It takes us away from today’s centralized internet, where data is stored in servers managed by trusted counterparties like Facebook and Google, to a decentralized internet, where a trustless network of peer-to-peer servers manages and verifies data. The network is mediated by various, composable blockchains working together towards a common goal. As Patrick Rivera explains in this presentation, the gravity of the data inside of these trusted counterparties in a traditional client-server architecture leads to monopolistic behavior, centralized control, and a single point of failure for these services.

According to Patrick, Web3 solves these problems by decentralizing governance, pushing data ownership to the individual participants in the network, and establishing a global state. The main challenges to Web3 are technological, but at the rate of change we’re seeing now in blockchain tech, many of those problems will be solved in the near future.

What would solving these problems mean for creators? Most importantly, it would allow fans to invest behind individual creative projects. For example, the aforementioned “Rise of Micro-Economies” post was written on Mirror, a decentralized blogging platform that employs one of the authors. You can see the ownership of the post is split 40%/40% between the two authors, with the remaining 20% split between other contributors — both named and anonymous.

When the scale of investment is proportional to the addressable market of the project, even the smallest creators can bootstrap. Furthermore, their success is financially aligned with the goals of their audience. Equity isn’t just defined in a corporate context; it can be defined on a creator-, or even project-level.

Some readers know that I played music pretty extensively in high school and college. My friends and I would get into bands often before they were widely known. For example, my bandmate Andrew saw John Mayer perform at a local record store (when those existed) in 2001. Mayer’s iconic debut album Room for Squares came out that June. I’m fairly certain that Andrew purchased the album at that event. Imagine if he were able to roll his purchase into tokens tied to the future royalty streams associated with “Your Body is a Wonderland” or “Why Georgia?”. As a fellow musician and fan of acoustic guitar music, Andrew was just as much of an authority on Mayer’s future success as any big label A&R executive.

If the micro-economy vision comes to fruition, college kids hearing their favorite bands play in local coffee shops will be able to participate in those bands’ future success. Doing so will make them even more likely to promote those bands to others — completing a virtuous cycle that funds more artistic production. The same principle could apply to writers, artists, and any manner of creator. The power shift from aggregators to the creators and their fans will be a massive value transfer away from middlemen to those who make things people love, and to those who enjoy them.

I’m excited to participate in this shift as an investor and, most importantly, a fan.

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Disclaimer: * indicates a Lightspeed portfolio company, or other company in which I have economic interest. I also have economic interest in AAPL, ABNB, ADBE, ADSK, AMT, AMZN, BABA, BRK, BLK, CCI, COUP, CRM, CRWD, GOOG/GOOGL, FB, HD, LMT, MA, MCD, MELI, MSFT, NFLX, NSRGY, NEE, NET, NFLX, NOW, NVDA, PINS, PYPL, SE, SHOP, SNAP, SPOT, SQ, TMO, TWLO, VEEV, and V.

❤️ Happy Mother's Day! ❤️

No newsletter this week. Call your mom!

Hello, all.

I sacrificed a few recent weekends to work, so today I decided to spend the day with my family to celebrate Mother’s Day. That means no newsletter today, but hopefully I’ll be back in your inbox next week.

If you’re looking for interesting stuff to read, check out my last 3 posts on various marketplace-related topics:

Best,

Alex

Firehose #189: 🥸 Hiding in plain sight 🥸

Small is the next big thing. Plus: oil crops and the environment, vibing out to mix tapes, speed running Pi, and peak shounen anime.

One Big Thought

Great investments tend to exploit information asymmetry.

While some information does a lot of work hiding from you, requiring years of research to unearth, a surprising amount hides in plain sight. Case in point: you could have invested in Apple* the year after iPhone came out (2008) and beat the NASDAQ by a cumulative 31% CAGR return through today. Or, you could have also invested in Amazon* when it first publicly broke out the financials for AWS (2015) and beat the same index by a cumulative 23% CAGR. On a risk and fees-adjusted basis, these returns are comparable with top quartile VC fund performance. Anyone with a brokerage account could have benefited from these investments.

Those who invested in Apple and Amazon over this period likely held a contrarian viewpoint on the potential of mobile and cloud computing, respectively.

How do you like ‘dem Apples?

At the end of 2008, the App Store was only 6 months old, with only a few thousand apps. The top free apps included a flashlight utility, several casual games (Tap Tap Revenge, PAC-MAN Lite, etc), and an HTML-5 based Facebook* app that the company later scrapped and Zuck called “the biggest mistake we’ve made as a company.” All the top paid apps were casual games.

With this app lineup, it would have been relatively easy to relegate the App Store to the junk bin of tech. Furthermore, not only was Apple a minority in PC sales, but its late entry into the smartphone market earned the infamous derision of Steve Ballmer, then CEO of Microsoft:

“That’s the most expensive phone in the world, and it doesn’t appeal to business customers!”

Ballmer’s critique turned out to be irrelevant. iPhone was a blockbuster for consumers, who later brought it forcibly into the enterprise with the “bring your own device” movement. The toy-like apps that littered the early App Store charts gave way to Uber, Foursquare, Instagram, HotelTonight, and many of those early native iOS apps that extended the platform’s utility. The rise of the iOS ecosystem was hard to predict looking at the App Store charts in 2008, but, if you were paying close attention, you could have identified the growth in apps and bet on the Apple stock.

Head in the clouds?

The same contrarian setup applied to cloud computing in the mid-2010’s. Below is the Gartner Hype Cycle for Cloud Computing, published in mid-2012, which shows cloud computing in the so-called “trough of disillusionment” on a 2-5 year journey towards the “plateau of productivity.” Other similar concepts (elastic multitenancy, PaaS, dbPaaS, public cloud storage, IaaS, etc) were at similar or longer lead times.

IT professionals threw a ton of shade at the cloud back then. I recall hearing a lot of arguments like this one around the security model of cloud computing. We also saw regulatory pushback around the geographic residency of data, or specific industry requirements around the collection and storage of personally identifiable information that the public cloud couldn’t easily support.

You needed to be one of the minority of IT professionals connected to the startup ecosystem to see the potential of the cloud at the time. Almost no one in Silicon Valley purchased servers. As startups grew into large companies, they set the standard for how progressive, flexible infrastructure would be deployed in the enterprise.

I recall a watershed moment, in 2015, when Mark Pincus returned to Zynga as CEO after a brief ouster. In cost cutting mode, he announced that the company was moving its massive computing infrastructure to AWS from its private cloud. He said Zynga would spend $150M with Amazon to do so:

“There’s a lot of places that are not strategic for us to have scale and we think not appropriate like running our own data centers,” said Pincus.

“We’re going to let Amazon do that.”

That last sentence was particularly telling. Here’s how some more progressive industry observers viewed AWS at the time:

It won't be long—maybe not in 2016, but soon—before any computing project that doesn't happen in the cloud will have to spend many cycles justifying what will be seen as an old-fashioned and inefficient approach. 

A few companies still generate their own electricity, but they're rare and special cases. That's the kind of market dominance cloud computing is headed for. And we're likely to get there faster than we think.

Of course, this was the right point of view, but given the concerns about information security and regulatory prohibitions, even in 2015 the public cloud’s dominance in IT infrastructure was not an obvious call. The information was out there, but you needed to speak to the right IT people to appreciate its gravity.

Small is the next big thing.

Small businesses are quite literally everywhere.

According to the SBA, the U.S. has 20 million businesses with fewer than 20 employees. In sectors like food services, construction, wholesale trade, real estate, and agriculture the majority of businesses are SMBs. Yet, while SMBs are ubiquitous, they are notoriously difficult to monitor, track, and analyze.

For example, when we made our initial investment in Faire* in 2018, I spent months looking for data on independent retailers. Because of the industry’s fragmentation and informality, I could only rely on official U.S. Census data from 2012! Beyond that, I had to rely on my intuition and past knowledge of the retail ecosystem. To most outside observers, while independent retail was admittedly everywhere, few thought of it as a large market. I knew enough to believe it was.

Working on a new SMB-focused investment opportunity this week, I realized that the lack of data on this category might, however, be a temporary problem.

If we more see companies like Faire, or Slice, or Toast, succeed, we will necessarily start mapping out the surface area of the SMB ecosystem for the first time. It will be like exploring the ocean’s depths with a new submersible that can dive deeper and reveal the unknown. We’ll make new discoveries, and some of them will influence the way we think about the world. I suspect that these discoveries will validate what has mainly been intuitive to me so far — that SMBs are still vastly underinvested in from a technology perspective and present an economic opportunity similar to mobile and the cloud did in their respective generations. In the context of data yet to be unearthed, what will be seen as contrarian today will therefore be seen as consensus tomorrow.

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Links I Enjoy

#climate

Drowning in vegetable oil.

More land globally is devoted to vegetable oil crops than all fruits, vegetables, legumes, nuts, roots, and tubers combined. Oil crops are second only to cereals in their global land area, but are growing significantly faster — doubling since the 1970’s.

Oil crops are some of the most land inefficient crops in existence, requiring an order of magnitude more land per kg of food product than barley or potatoes, for example. Higher land use leads to more deforestation, which furthers the outsized climate impact of these crops. And for the benefits of their caloric density, oil crops are some of the most nutritionally poor crops available. They account for 30% of global crop lands, but 0.01% of the world’s essential nutrients.

#media

It’s a vibe. →

Like many in my generation, my friends and I grew up making and trading mix tapes. We would often capture songs off the radio, or later rip full CDs of bootlegs from concerts downloaded over the internet. These mixes could be a flex — showing that you had that rarest of rare performance of a Pearl Jam B-side — or the expression of a vibe — unrequited love, teen angst, etc. Sometimes a list of songs can say something that is hard to put into words.

All that’s old is new again, as “oddly specific mix tapes” are starting to emerge on Spotify* and Facebook.* They appeal to a similar need that I found in my middle and high school days, but with the context of a global pandemic:

All of the admins I spoke to say that they have seen the group’s membership grow over the past year—not just a natural incline, but one that they believe is a result of the coronavirus pandemic. As increased loneliness and stress have contributed to declining mental health, people have turned to online communities to seek reassurance and companionship. “I guess loneliness is, more than ever in recent memory, a common experience for many,” says Eli. “This has driven perhaps more extroverted people online to find social interaction, and the chance to find like-minded people worldwide has, and speaking from a personal perspective, really helped me through some dark times.” While he doesn’t believe that everyone in the group is looking for this kind of deep connection, even the posts that are only intended to “get a giggle” out of their audience still inspire and drive the community.

Enjoy “Eating Painkillers at McDonalds” to get a sense of what they’re talking about.

#tech

Who disrupts the disrupters?

Packy McCormick at Not Boring wrote an important piece about what comes after the web aggregator phase of the internet. We’ve heard a lot recently about how crypto will enable a new set of disrupters, but not so much how this magic will occur. Packy leans on Clay Christensen’s theory of disruptive innovation to illustrate how crypto tech can enable “better than free” platforms:

While the Aggregators definitionally serve nearly everyone, they actually do overlook a segment of their users: the people who aren’t happy to just use the products for free, but who want to earn ownership, privileges, and money for their participation, and who are willing to accept a lower-quality user experience to get those things. This is where they’re susceptible -- while they generate tiny profits on each user, they’re not willing to go negative and actually pay those users. 

So how do you low-end disrupt a high-quality, ultra-low-margin or even free product? How do you get a price lower than the $0 they’re paying today? You go negative; you actually pay people to use the product, in a currency that gets more valuable as more people join. 

#science

Speed running Pi. →

At age 23, Isaac Newton completely changed the way we calculate the irrational constant Pi. For 2,000 years, upper and lower bounds for Pi were approximated by subdividing polygons into distinct shapes. Newton played around with the binomial theorem and used the calculus he invented to create an infinite series that converges to Pi much faster than the polygon method. This video by Veritasium walks through how Newton derived his brilliant insight.

#culture

Peak shounen. →

Anime and manga (the Japanese comic books from which anime are derived) have very specific genres that are designed to be marketed to different groups of fans. The “shounen” genre is marketed towards high school age boys and often follows a teenage protagonist through a progression of battles and obstacles towards a stated goal. Many shounen anime can be fairly predictable — they all have similar plot notes and progression dynamics.

Within the last year, however, anime fans have been blessed with two genre re-defining shows that will become classics. One is Attack on Titan (I’ll write about this one later because it’s incredible), and the other is Jutusu Kaisen. I wouldn’t watch this video unless you’ve spent some time on the series (spoilers!), but if you have it does a great job laying out why Jutusu is the future of shounen in so many ways.


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Disclaimer: * indicates a Lightspeed portfolio company, or other company in which I have economic interest. I also have economic interest in AAPL, ABNB, ADBE, ADSK, AMT, AMZN, BABA, BRK, BLK, CCI, COUP, CRM, CRWD, GOOG/GOOGL, FB, HD, LMT, MA, MCD, MELI, MSFT, NFLX, NSRGY, NEE, NET, NFLX, NOW, NVDA, PINS, PYPL, SE, SHOP, SNAP, SPOT, SQ, TMO, TWLO, VEEV, and V.

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