Link to video: https://www.youtube.com/watch?v=kFY30zE9td0&t=3398s
- In the pandemic, doing the most obvious things paid well, whereas investors are trained to discount the obvious things
- Humility and flexibility being important, pandemic wasn’t a high-conviction time, wide range of outcomes, haven’t had a global pandemic in a networked economy... wasn’t a historical analogue, and didn’t know much about virus
- With politics, virus and economy - had a 3-body problem
- Stock market unusually sensitive to NYC, funnily most prices made there
- Markets can’t bottom with VIX at very high levels
- In a world where so much investing is done quantitatively, it’s hard to get a true market price until companies give forward guidance, many models don’t know what to do, sell-side not willing to take brave forecasts
- Great book “Style Investing”
- Market bottoming is just a process of re-building loss-aversion
- Pandemic was most beneficial to companies with decisive CEOs
- Last 10Y in tech there were 2 main innovations... 1) iPhone/Smartphones and 2) Cloud computing
- These CEOs running huge software businesses have never gone through a recession
- Misconception that best companies born in recessions... More companies were born in ‘08 and ‘09 not because of the recession, but because of the Smartphones x Cloud Computing takeoffs
- Only the best could get funded after the tech bust (in a tough environment)... Google, Salesforce etc went public then
- Companies that will be the most-advantaged in the pandemic, are companies with decisive CEOs
Video Gaming Industry
- Big advantage in actually playing games, as an investor in them
- Metaverse, Ready Player One, lot of people will spend majority of time in virtual worlds
- I always thought games were social networks, but when Marshmellow had a concert in fortnite - showed that video games will really be the key platform for the personal metaverse
- Assassins Creed being a great way for kids to learn about Ancient Egypt and Greece
- Video games that exist today with the players and social networks built in
Who will be the winners of the metaverse?
- The developers and people that own the IP will be the winners
- More confidence in the underlying content owners
- Debate around what streaming games will do to the industry, vs streaming Netflix or Spotify
- Content is always king, and the comparison above stems from a misconception
- Reason content wasn’t king with Netflix and Spotify is because there was such a long-tail, billions of songs movies/TV series
- With sophisticated algos, you can bundle it, increase the value of that long-tail and deliver it in a subscription... that created immense value for Spotify and Netflix
- Video gaming streaming DOES NOT HAVE THE SAME LONG-TAIL OF CONTENT
- So the owner of the Sci-Fi metaverse, the Historic metaverse in gaming have way more leverage, the distribution options only just increase that leverage
- Tech being 2nd in complexity to Healthcare, where the investing knowledge compounds over decades
- Have to balance conviction and flexibility in investing, as you search for your truth
- TikTok is a purely meritocratic, algorithmic social network based on virality
- The earlier you cut expenses, the less expenses you have to cut
- This is an area under the curve problem, if you cut late you have to cut more because you need to get to the same area under the curve (which you can achieve by cutting earlier)
- Cutting expenses - this means firing people, understand the sensitivity around that word, people are the biggest expense for almost any business
- But the above has to be done, if you don’t cut expenses the company might go to 0 and you’ll have to fire everyone anyway
- If your company cuts expenses early, it won’t be cutting expenses under a recession, and your odds of getting a job are so much higher in a stronger economy, it’s more compassionate to do it earlier
- When you cut early, you don’t have to cut muscle
- Hard people that make hard decisions build really good companies, need to be able to make difficult decisions
- Many CEOs are either post-economic (having made their money) or haven’t lived through recession
- Many big unicorns run by post-economic CEOs
- In the internet, barriers to entry are low but barriers to scale are very high
- Marketplaces are great businesses, where you’re just taking a cut of transactions (after Search, probably the best business in the world)
- Amazon’s shareholder letters, as important as Buffet’s letters
- It’ll take Gavin 1 day to start a ride-hailing app, but getting supply and demand on that app - that’s barriers to scale
- Ultimately, scale is the most durable competitive advantage (link to the book, Competition Demystified)
- How recurring are in-app purchases in free-to-play games? What are the trends regarding in-app purchases?
- Not recurring revenue in theory, as not contractually as such
- But in practice, they are
- Software had to transition, had to get away from the drug of upfront license sales, instead of collecting $100 upfront... it’s better to collect $25 a year for 5 years
- Latter is a more valuable biz
- SaaS better than on-prem, more predictable, less piracy (probably the greatest SaaS value-add of all)
- Video game companies will have to move to free-to-play model, because what drives value in these virtual economies is persistence... it’s status (entire business of fashion and apparel)
- When a game get’s released on a cycle, you destroy the virtual goods annually (if you don’t move to free-to-play), and that repeats each release cycle
- All the world’s best videogames are free to play, you maintain the value of those goods for longer, people ascribe more value from them, value from the microtransactions is higher
- In ‘Destiny’, there’s an interesting idea... your status is never destroyed, but every 3 years you pay for a new version of the game
- Q: On Data Consumption, do you think this is a watershed moment for edge-computing companies and content delivery networks, or will the sector have consolidation?
- Gavin: all big cloud companies have their own big CDMs
- Latency will always exist (it’s a physics problem), so compute will be pushed closer towards users, lot of compute power will be in stores (AI-based loss prevention and checkout technologies in stores using GPUs)
- Part of the Cloud story was driving up-utilization which drives down-compute, this means you’ll have small-edge data-centers in every store
- So edge computing will go to stores and restaurants, with local compute power to deliver personalized in-store shop experiences
- Eventually, every processor will be utilized 80-85% of the time
- Public Equities vs VC
- In Public Equities, if you miss a forecast, there are horrible consequences (stock goes down, CEO fired)
- In VC, it’s accepted that all companies will miss forecasts, 90% will miss 1st year estimate often by a huge amount
- First thing you have to do in Venture, is really haircut the numbers a lot (not like in Public Equities), when you compound that out it’s about 50% of Y3 revenue forecast, so it’s a massive miss
- These aren’t public companies that care about dilution, the share count will grow 10-20% each year
- So in total, you have revenues that are 40-50% of what you underwrote, and share count is a lot higher
- Capital scarcity works to the advantage of good VCs and entrepreneurs, capital abundance works to the advantage of bad entrepreneurs and less-established VCs
- To be an investor in Tech, it’s critical to read science fiction, so much in tech has been written about 40-50 years ago... it opens your mind to the wide range of possibilities around the world
- Everyone should read Doom, the Culture Series (one of the most powerful visions of the future I’ve read)
- Read books that give you comfort with being wrong, with managing your ego... the dark matter about being an investor is... can you be rational when you are wrong?
- People historically find that shameful, they are irrational when they are wrong
- Find ways to deal with your own ego, a lot of good investors have a lot of intellectual humility... having that is absolutely important to being a good investor
- Need to become more and more rational when you’re wrong
- Link to Karol Dweck, process of learning is destroying the knowledge and processes you had before to re-build
- Being open to being wrong and learning is really important, there’s no right or wrong investment philosophy, you need to find a philosophy that meshes well with your own particular emotional make-up and one that will help you be rational when you are wrong (for some that’s deep-value for others its growth investing)
- Be open minded about investing philosophies, some of the greatest investors Gavin knows started with a different philosophy to that which they ended with