Stealing Signs - Issue 27
Scale and Loyalty Online, Pitching Microsoft, The Frontier VC, King Arthur Flour, Brainbase, & BAMTech
Worth Reading
Why Scale and Loyalty are More Important Online
Gavin Baker, Atreides Management
Online businesses are also more sensitive to changes in competitive intensity than offline businesses given that the Facebook and Google auctions are second price auctions, which are inherently chaotic and nonlinear in terms of sensitivity to changing auction pressure. i.e. It is almost impossible to significantly change the “CAC” of a scaled offline retailer, but it is possible to significantly alter the CAC of a scaled online retailer if the challenger spends enough money.
Gavin unpacks the phrase “CAC is the new rent” and why online businesses are much more reliant on scale and customer loyalty than offline businesses. In short, online businesses don’t pay physical rent, but they do pay to acquire customers via online ad networks. Google and Facebook dominate this market, so to effectively acquire any customer online businesses must pay either Google or Facebook and, in most cases, both. Their auction process advantages companies whose ads are most likely to be clicked on. These companies are not only better positioned to win auctions, but their scale and strong customer loyalty often enables them to pay less than smaller companies and still win.
In addition to a fantastic explanation of Google and Facebook’s online advertising auction process, Gavin makes a compelling case for brick and mortar’s increasing importance in retail. He suggests every online retailer will have a physical presence over time because rent can be a cheaper customer acquisition cost than online CAC. It’s an effective countermeasure to the high prices retailers must pay to acquire customers online, especially the smaller brands that are disadvantaged by Google and Facebook’s ad auctions.
Pitching Microsoft to Warren Buffett
Jeff Raikes, Microsoft, and Warren Buffett, Berkshire Hathaway
I really don’t see our business as being significantly more difficult to understand than the other great businesses you’ve invested in. But there is one potential difference that worries me, and it is a key part of the reason I spent the time to share these thoughts with you. The difference I worry about is the ‘width of the moat.’ With Coca Cola, you dan feel pretty confident that there won’t be a fast shift in user preferences away from drinking sodas, in particular Coke. In technology, we may more frequently see ‘paradigm shifts’ where old leaders are displaced by new.
This is an email exchange from 1997 between Jeff Raikes, long time Microsoft executive, and Warren Buffett on how to value Microsoft from an investment perspective. Jeff makes the pitch that Microsoft isn’t so different from the businesses Buffet has invested in already like See’s Candy and CocaCola. He offers an incredibly straightforward explanation of Microsoft’s business models in hardware and software using the following metaphor:
A PC is just a razor that needs blades
The blades, in this case, are Microsoft’s suite of productivity, entertainment, and educational software, which were clearly a key pillar of Microsoft’s growth strategy. An interesting note in all of this is that Jeff suggests a key upside of their software businesses was not in new software solutions or enhancing existing offerings, but rather a reduction in the piracy of their software. Jeff cites a near 10M PCs were using pirated Microsoft software in 1997.
Warren’s response solidified my belief that an apt metaphor is the most powerful explainer in business, or any discipline, really. These account for almost the entire email change, one metaphor after another. Warren cites the ‘happy zone’ framework from Ted William’s book The Science of Hitting to explain to how, despite Jeff’s accurate analysis of how Buffett might evaluate the business, his ‘happy zone’ is not technology businesses and, thus, he cannot ‘hit’ pitches there as well as Jeff can, who has a deep understanding technology businesses and Microsoft’s model.
The Most Futuristic Investor in Tech
Polina Marinova, The Profile
When we were starting Lux, we said, “Let’s turn to an area that other people aren’t looking at that we suspect will be a big area.” We believed it was advanced materials and breakthroughs in chemistry and physics. It led us to all these off-the-beaten path places. For example, if you’re looking for the next breakthrough band, you’d be looking in the dingy, underground nightclubs, not in the mainstream. So we started looking inside Cornell, Georgia Tech, UT Austin, and Michigan. It was all these universities that weren’t Stanford or MIT where all the venture capitalists already were.
An incredibly interesting interview with Josh Wolfe, the co-founder of Lux Capital, a venture capital firm focused on frontier technology. I’ve long admired Josh’s clarity of thought and his unique view of the opportunities in technology and venture investing. The early history of how Josh and co-founder Peter Hebert built Lux Capital provides a great example. Josh and Peter identified an opportunity to dramatically reduce uncertainty with information. To take advantage of this opportunity, they built a robust internal research team to identify emerging technologies, promising researchers and entrepreneurs, cutting-edge academic research, and distinguished scientists, which enabled them to aggregate as much high quality information as possible. Not only did this help them identify new investment opportunities and de-risk potential investments, but also created a unique network of information and resources to help Lux portfolio companies. The team grew to 150 people and they eventually spun out the business, Lux Research, and sold it to a PE firm a few years later.
It’s an early example of a venture platform, a firm offering more than just capital and a network in the form of value-add services like marketing, hiring, product strategy, and, in this case, cutting-edge research and access to world-leading researchers and academics.
Another interesting point to note is the degree to which Josh’s approach to building Lux Capital mirrors his views about how entrepreneurs should think about building a business:
Every early entrepreneur should be asking themselves, “Is there something I believe I can do that no one else can do? How much money and how long will it take me to prove it?” Going back to the chess analogy, if you’re thinking a few steps ahead, the next question is, “Who will care?”
The similarities are striking.
Inside King Arthur Flour
David H. Freedman, Author & Contributing Writer at The Atlantic
King Arthur had become just one of many companies, including their direct competitors in the flour business, forced to confront soaring demand. But in a way that didn’t equally apply to the makers of Charmin, Purell, or Pillsbury, King Arthur had reason to feel its reputation was on the line. As both a premium and bestselling brand treasured by both professional and home bakers, the company had worked diligently over not just years, but centuries, to establish a trusting relationship with customers.
As the son of a chef, I’ve always taken an interest in the foodchain. And of course you know my love of marketplaces, so I pay close attention to restaurants and their shift to eCommerce, and how this shift changes their relationships with customers.
Enter an excellent piece covering King Arthur Flour’s (KAF) response to COVID-19. This story is of particular interest to me because KAF is a staple of the Dartmouth experience. KAF was founded in 1790, just 21 years after Dartmouth, and their headquarters is a stones throw from campus, just 5 minutes NorthWest across the Connecticut River. We even have a KAF cafe in our main library.
Of note is KAF’s response to the ‘new normal,’ evident in three adaptations:
In a matter of weeks they shifted long-distance product transportation from rail to trucks, which was more expensive but added speed and flexibility
KAF doubled customer support teams, which fielded 11k calls on the ‘Bakers Hotline’ and 50k customer questions across email and social media channels in April alone.
KAF’s intense focus on scaling their brand experience, not just production, in an effort to maintain a historically strong reputation.
I imagine #3 is a concern for many brands as they adapt to increasing online demand — how do they deliver their brand to millions of new customers and leverage digital channels to maintain their brand’s reputation?
Well, KAF built a production studio at HQ to deliver online baking classes and created a YouTube show called ‘Isolation Baking.’ Another example is the famed Chicago restaurant Girl and The Goat. Head Chef Stephanie Izzard launched a curbside pickup and delivery unit quickly after the lockdowns began. Each dish includes a QR code which takes the customer to instructional video, featuring Stephanie, on how to prepare and re-heat.
Both KAF and Girl and The Goat forged new digital relationships to deliver their brand. Calling back to Gavin Baker’s article above, loyalty is more important online. As restaurant and food brands shift their focus online, investment in digital relationships is very likely to yield stronger and wider customer loyalty when we return to normal.
<stuff> Weekly
LOL Weekly: My Plans… 2020
lol so good
Funding Weekly: Brainbase
Cavanaugh and his cofounders have no background in law but rather in fields like product design and economics. Cavanaugh says he was inspired to launch a startup focused on intellectual property when he was 19 and heard a talk by venture capitalist Fred Wilson about the problems created for startups by “patent trolls”—firms that don't make anything but amass IP in order to pursue legal action against companies that do.
Brainbase raised an $8M Series A round from Bessemer Venture Partners, Nosara Capital, Struck Capital, Bonfire Ventures, Alpha Edison, and FJ Labs to help brands manage and monetize their intellectual property.
What a cool product. What’s even cooler is that they’re building a marketplace to connect brands with potential partners like celebrities, athletes, and social media stars, to monetize brands’ IP. This is perfect example of a SaaS-enabled marketplace: Brainbase started with an IP management software tool and amassed a customer base large enough to be attractive to the other side of an IP transaction, the buyers, and they are now opening up a marketplace to facilitate those transactions. Love this one.
Baseball Weekly: BAMTech
I went down an Acquired Podcast rabbit hole this week, listening to their episodes on Intel, WhatsApp, TikTok, Convoy, Atari, and, of course, MLB’s BAMTech. I highly recommend all Acquired episodes, but this ep is fascinating.
MLB developed BAMTech (first called MLBAM, or Major League Baseball Advanced Media, and BAM for short) as an in-house technology division to help viewers stream out of market games, which was in part driven by the massive demand for MLB games in Japan upon Ichiro’s arrival in the league 2002. They began with a playoff package in late 2002 that offered access to all playoff games for $20 and received an overwhelmingly positive response. To capitalize on this opportunity, the BAM team scrambled during the 2002-03 offseason to develop a season-long streaming offer, which they launched at the start of the 2003 season. Keep in mind, Netflix began streaming video in 2007 — the MLB allowed fans to stream baseball games from anywhere in the world four years before Netflix began their ascent to streaming dominance and three years before YouTube was founded 🤯
Click here to listen to a short clip about how BAMTech could become even more valuable than MLB itself — clip made using my new favorite podcast app, Shuffle
Art Weekly: Enough is Enough
Very cool piece from Chicago-based artist David Heo. I especially love the size at 6.5 ft x 5.75 ft.
