Stealing Signs - Issue 37
Why Nintendo Isn't the Next Disney, Becoming a Public SaaS Company, "Customer First" Healthcare, The Miss w/ Steve Schlafman, & Reboot Motion
Worth Reading
Why Nintendo Isn’t the Next Disney
Aaron Bush, The Motley Fool
Connecting to the company’s core values, Nintendo is flexible in its approach and sincere in its intentions, but it will never compromise on being its unique self. And if the company’s central mission is to put smiles on the faces of everyone it touches, that means Nintendo’s driving force isn’t maximizing profits or expertly allocating capital. Does management want to grow profits and allocate responsibly? Definitely. But if certain profit-maximizing decisions run counter to the unique Nintendo way of putting smiles on people’s faces, then it’s off the table.
In this exceptional breakdown of Nintendo’s business model, Aaron makes the key distinction between their model and the likes of Disney: Nintendo is driven on core values, not revenue optimization. He also identifies a few strengths and weaknesses of this approach that are worth digging into.
The first is Nintendo’s failure in mobile gaming. Aaron suggests this is largely do to a mismatch between device and game design. “Free to play” has emerged as the optimal model for mobile games which means they monetize via advertisements and in-app purchases, unlike Nintendo’s traditional “pay to play” model with console games. Dynamic game design has also also proved to be the most effective strategy in mobile — ever-changing levels, new characters, real-time updates to rewards and in-game offers, etc — but Nintendo has refused to adopt this approach in fear of fatally veering off course. Nintendo’s hesitancy to change the revenue and content models for their games is evident in their multiple mobile game failures and supports Aaron’s theory that Nintendo is value-driven, not revenue-driven. They’re a prime example of a large enterprise optimizing while others innovate, at least on the software side for Nintendo.
The hardware side of the business, however, is Nintendo’s biggest strength. Nintendo has a long history of innovation in hardware ranging from their VR headset Virtual Boy in 1995 to the Wii U in 2012. While both products were deemed as failures, Nintendo’s commitment to their values — a focus on being the best version of themselves and avoiding the noise of other potential competitors — in hardware is what produced rockstar devices like the Gameboy, the Wii, and the Switch. As Aaron notes, this allows Nintendo to bypass zero sum games, which means they end up competing less directly with Xbox and Playstation which tend to copycat each others innovations and are often compared to each another.
Nintendo’s hardware strategy starkly contrasts their software strategy. In the former domain, innovation and commitment to values is a strength, and in the latter, it appears to be a weakness.
What it Takes to Become a Public SaaS Company
Jamin Ball, Redpoint VC
The current IPO process is broken. Companies are shopped at a discount to large funds, and coming up with the IPO price has too many flaws. In today’s day and age it should not be this hard to come up with an efficient price (but it is with the current pricing mechanisms). Especially when large institutional investors have massive, sometimes 100%+ profits after just 1 day (Lemonade investors mad 200% in 2 days!). The process clearly favors the large institutional investors at the expense of companies and retail investors. My personal belief is that the company should be the #1 beneficiary, not the institutional investors.
Jamin offers an incredibly useful examination of the IPO process (for SaaS companies specifically). Admittedly, I knew very little about the IPO process going in, but after reading multiple times I think this is the best place to start for anyone looking to understand how companies go public.
Jamin notes that a some of steps in this process closely resemble the investment and diligence processes in venture capital. In hindsight, this is obvious — an IPO is simply another round of institutional financing taken on by a private company. But a few of the steps resemble the VC process more closely than others, which I’ll expand on below:
Setting the Initial Price Range. “If we look at the (most likely) next SaaS IPO to price, nCino, the comparable set is probably high-growth SaaS (which currently trade at ~24x forward revenue), and financial services vertical software (which currently trade at ~12x forward revenue). Where the range gets set in relation to these two comparable buckets is part of the art! Business model, margin structure, unit economics, etc all factor into which multiple the company “deserves.”
This step most closely resembles venture capital financing — specifically that pricing an IPO is as much an art as it is a science. Early stage VCs rarely have concrete data or historical performance metrics with which to price a company, so much of it comes down to narrowing in on an acceptable range and massaging the number in that range based on industry comps. This is the most commonly used strategy I’ve seen at the early stage and reminds of the brilliant advice Mark Suster gives to entrepreneur’s when they investors ask them, “What is the valuation of your company?”
Roadshow. “Once the initial IPO range has been set, the company, along with its bankers, hits the road for two straight weeks of investor meetings — this is called the Roadshow. These meetings are not too dissimilar from Series A / B / C meetings. The company pitches each investor on the business, its outlook, and why they should invest! It’s also a time for the company to get to know each firm. At the end of the day they’ll have the final say on who they give allocations to, and they want long-term shareholders.”
Jamin specifically calls out the similarity of this step in the IPO process to Series A/B/C meetings with VCs. In both scenarios investors meet with the executive team to understand the business model, financial projections, market size, and unit economics. The only major difference here is likely the importance of the founding/executive team. In Series A/B/C VC, the team undoubtedly plays a larger factor in the investment decision than in an IPO, but I’m curious how IPO investors evaluate executive teams. How important is the team in their assessment of the company? Are executives question about their role in the business and how that might evolve over time? Interesting questions to ask executives might be ‘what do you believe to be true about this company that the other executives strongly disagree with?’ or ‘which competitor poses the most significant threat to this business?’ or ‘for what reasons would this company underperform going forward?’ This is a very, very VC-driven question set, but I suspect these questions could reveal meaningful information about the executive team and company strategy.
“Customer First” Healthcare
Bill Gurley, Benchmark
Despite widespread belief to the contrary, the U.S. healthcare system does not operate as a free marketplace with the type of open-competition that we often associate with capitalism. It is certainly not a single-payer system, but that fact alone does not make it a capitalistic system. There is no price evaluation during the purchase. The person paying is not the person consuming the service, and the majority of choices are made without comparative options. In many ways, we have the worst of both worlds. Our system, which is the highest in the world as a % of GDP, has the illusion of a free market and the illusion of regulated market with the apparent benefit of neither.
This 2017 piece on the complexities and shortcomings of the U.S. healthcare system and is both timeless and prescient. You can count on Bill to always bring the heat, especially with marketplace analysis, and this healthcare piece does not disappoint. It’s an oldie, but a goodie.
The focal point of the piece is the evolution of the U.S. healthcare system from one set up to serve the payers and powerful stakeholders rather than the patient, to one that is “customer-first,” serving the patient above all other stakeholders. Bill suggests a few factors like the growth of high-deductible plans, growing coinsurance, and the rise of urgent care serving basic healthcare needs will help providers adopt a customer-first mindset, recognizing the patient as the true customer and re-configure the system enabling frictionless and transparent care coordination and delivery. More broadly, it’s a suggestion that healthcare will look more like a free market over time. Providers and insurers will adapt their offerings in response to competitive pressure leading to a better experience and more accessible offerings for patients.
Bill also notes two Benchmark investments, Brighter and OneMedical, that built technology solutions to shepherd in the new customer-first healthcare model. Both companies focus on high-touch customer support, democratizing access to care, and maximizing cost savings for customers/patients, and both have done quite well! We've seen more successful examples of this model in recent years with the emergence of customer-first healthcare companies like Roman, Hims, Nurx, and talkspace, so Bill was absolutely correct in his prediction of the shift to consumer-first healthcare.
A trend I’m beginning to see in healthcare technology is a focus on healthcare providers. Specifically tools and platforms to help providers start their own practice or telehealth offering. I believe the latter use case is an extremely high growth market, which begs the question, ‘will the next generation of healthcare technology companies be provider tools?’ One could argue that consumer-first healthcare companies must also build for the provider — and they’d be correct — but might there be an opportunity to build a sort of SaaS-enabled marketplace, beginning with tools to help providers spin up their own tele-therapy practices and then opening up to consumers, the demand side, over time. Are we entering the era of Solo Providers? (h/t Nikhil Basu Trivedi for the “Solo” concept)
The Miss | Steve Schlafman
Mario Gabriele, Charge VC
I couldn’t get it over the goal line. The team got stuck on the fact that PillPack didn’t know their cost of acquisition yet. They needed a license to advertise online, and because they hadn’t gotten that yet, they’d spent no money on paid marketing.
The day we passed, TJ and I went out to dinner. I was bummed because I really did believe in him and the company. Over the years, whenever he was in town, we’d go for a walk or a coffee. A month before Amazon announced the acquisition for $1B he texted me and said, you know, you’re really going to regret passing on us. He’s right about that.
An excellent interview with Steve Schlafman, former investor at RRE, Lerer Hippeau, and Primary Ventures, and now the founder of High Output. Schlaf’s big miss in venture was PillPack, a full-service online pharmacy acquired by Amazon in 2018. The quote above demonstrates the complexities and nuances of many, or really every, venture investment. In this case, Schlaf knew the PillPack founders in the earliest days of the company and developed a close personal relationship with them. He didn’t end up investing in the seed round, but had another chance to invest in the subsequent A round. Again, Schlaf did not end up investing. But his description of the diligence process reveals a key struggle for many early stage investors — the founders vs. the company, or, in other words, the jockey or the horse.
Many early stage firms declare a commitment to backing exceptional entrepreneurs, over indexing on the founders vs the company. This suggests a focus on the jockey, not the horse, but they'’d be lying if they told you the company said founders are building does not impact the decision to invest. This may seem obvious and in some respects it is, but I sometimes struggle to properly weight the value of the founders and their company in the diligence process.
It’s very difficult to reach consensus on the decision to invest without believing in both the founder and their mission, but there are many examples of investments purely in a founding team — a belief that a team will execute and succeed regardless of the mission. I tend to believe over indexing on the founders at the early stage is the right approach. Schlaf’s PillPack example embodies this struggle — I wonder how heavily he weighted the founding team, especially relative to the significant uncertainties of the business model at the time? Is there a bucket of metrics or uncertainties that a founding team can usually mitigate? If so, which? And on the flip side, which uncertainties are non-negotiables? How far does the strength and belief in a founding team stretch?
<stuff> Weekly
LOL Weekly: Eurovision
lololol another Will Ferrell classic. Hilarious.
Funding Weekly: Shopery
Shopery provides retailers, brands and corporations with a marketplace-as-a-service technology (MaaS) as a new source of digital revenue. Its solution enables the launch of a scalable and flexible digital sales channel, incorporating the catalog of products and services of external companies such as suppliers and distributors.
Shopery raised $1.47M from GoHub Open Innovation and other undisclosed investors. Shopery is throwing their hat in the marketplace tool ring alongside competitors like Magneto and Mirakl. While this space has many well-funded competitors, it seems there’s still a gap in the market big enough to make some noise.
It appears the competitive advantages Shopery intents to build are around data analytics and intelligence, and streamlined operations, eliminating much of the tedious, in-the-weeds work for marketplace operators. While still early, if Shopery can successfully execute on these competitive advantages, they could become attractive acquisition targets for the larger players. I doubt Shopery wins on pure marketshare, but they certainly could win on best-in-class analytics tools and streamlined marketplace operations capabilities.
Baseball Weekly: Diamond Kinetics x Reboot Motion
…the ability to link body motion with bat and/or ball dynamics, in an affordable, widely accessible way, will be an industry breakthrough that will benefit all players at every level, and help give coaches and parents simple, understandable data and analysis
An exciting partnership announcement in the baseball world. As I understand it, Reboot Motion’s movement analysis technology is a leading biomechanics solution and they’re pioneering the biomechanics-as-a-service model. The partnership with Diamond Kinetics appears to be a major step forward for consumers and validation of both Reboot’s technology and business model — providing the underlying biomechanics technology for consumer applications which the masses would not have access to otherwise.
The new offering is certainly one I wish I had when I was playing. Mobile access to world class movement analysis and biomechanics technology would have made the hundreds of bullpen sessions at high school fields, indoor facilities, and my backyard much more productive. And it’s not a stretch to suggest this offering will revolutionize player development for both amateur and professional players — I imagine it’ll become table stakes for baseball coaches and programs across the country over time.
Art Weekly: Transfiguration
Universal Everything
Transfiguration (2020) is a reworking of the Universal Everything studio classic from 2011, The Transfiguration. The Transfiguration was first shown at the studio’s first major solo exhibition Super-Computer Romantics at La Gaite Lyrique, Paris. Now completely remade using the latest procedural visual effects software, the updated CGI artwork brings new life to the ever-evolving walking figure, with a new foley-based soundtrack by Simon Pyke.
