Stuff I thought about last week 4-7-19
Greetings – for anyone that wants to catch up on SITALWeek from Spring Break, you can find #186 here and #185 here. This week: a top-performing Silicon Valley venture capital fund is becoming a registered investment advisor, and it surprised me to learn that top VC performance has lagged top public market tech investing for the last 10 years! Walgreens announced a $10B share repurchase after Amazon bought Pillpack last year – they should have invested in their actual business instead of their shares. And, some of my thoughts on Ray Dalio’s thoughtful, but seeming impossible proposal for evolving capitalism.
[Please read important disclaimers at the bottom of this post]
Stuff about Innovation and Technology
In the most important story of the week, Patagonia has decided to no longer make their signature vests available with embroidered logos of tech companies and VCs – only fellow “B-Corps” and members of “1% for the Planet” will be able to receive the logo wear directly from the company. Knowing the Bay Area cannot survive without corporate logo Patagonia vests, could this move by Patagonia change tech company behavior and save the planet?
Walgreens is a company we poked fun at last year for announcing a $10B share buy back instead of investing in their business to become a platform that their customers enjoyed rather than suffered through out of necessity. So, I didn’t feel bad for them when I saw their stock now 10% below where they announced their $10B buyback. After they spent billions buying their own stock at much higher prices, they said they would curtail the buyback for the remainder of this fiscal year to only $700M – I guess the cheaper stock is less attractive to them. Obviously, the entire board and management team should be sacked.
I wish I had more to say about Zuck’s plea for the world’s governments to regulate social networks and “update the rules of the Internet,” but his game theory advisors are clearly way smarter than I am, so I haven’t been able to figure out his endgame.
Snapchat held a partner conference this week with a series of new announcements. The company remains on an existential race to profits – the current forecast would leave them with a few hundred million in cash cushion in 2021 if they can get to breakeven, absent a dilutive capital raise. While Snap’s strategy of doubling down on teens and expanding reach of the platform makes sense given the hand they’ve been dealt, this demographic may simply not have enough potential ad revenues to offset the company’s high cost of operating. However, things could break Snap’s way if the public sharing that Facebook is now shunning in favor of private messaging spreads to Instagram and shifts users toward Snap, but it seems like a gamble.
Natural disasters have cost AT&T $847M since 2016 and now the company is working with the Department of Energy to identify risks and spend to make the network more resilient – a good example of the rising cost of doing business in climate change.
The proliferation of apps in the cloud for enterprises has created a problem of pools of customer data that don’t talk to each other. A startup, Segment, has raised $175M from Google Ventures and others for its “customer data infrastructure” database tool. The main problem Segment is solving is that CRM tools now only capture a tiny bit of customer interaction, which increasingly happens across multiple apps, channels, and interactions. This sounds very similar to complaints about the 1st generation of ERP tools in the 1990s. 20 years into SaaS it appears the disruptors are now dealing with “legacy” problems, which could accelerate the M&A market in software even more as the incumbents piece together solutions (similar to the Salesforce acquisition of Mulesoft). Identity services from companies like Okta and Sailpoint also sit at the heart of this issue.
In other enterprise software news – Business Insider interviewed Oracle co-ceo Mark Hurd in what is apparently an ironically titled podcast “This is Success.” I think the joke is on Mark: since Hurd started at ORCL in September, 2010 the company has underperformed the S&P 500 by 52%, and it’s lagged SAP by 34% and Microsoft by an astonishing 289%! The only question I have for Oracle: why is Larry Ellison continuing to let his legacy wither into nothing under the misdirection of the current co-ceos?
As AI moves out of the cloud and into connected devices at the edge we’ll see a boom for semiconductors of all types.
“The edge is becoming more and more intelligent,” said Lip-Bu Tan, president and CEO of Cadence. “Sending everything to the cloud is too slow, so you’re going to see the edge starting to take off. The hyperscale cloud will continue to explode, but for automotive and industrial the activity will be at the edge. The next big thing is the edge.”
This also reminds me of the excellent quote from Kurt Vonnegut in ‘Player Piano’: “Out on the edge you see all kinds of things you can't see from the center...Big, undreamed-of things--the people on the edge see them first.”
Piezoelectric is a term you’ll hear more often in semiconductors – it dates back to the late 1800s when it was discovered that certain materials produce an electric field when they are altered mechanically (with force or motion). A good example is the piezoelectric microphone made by Vesper (Amazon is an investor for Alexa devices), which uses sound (which is a pressure wave in the air) to make the mechanical motion to generate electric signal. Here is another cool example: Microchip has made a single chip solution for COPD nebulizers that combines a processor with a piezoelectric transducer.
DoD warns the US is losing the competitive battle for 5G in part because the DoD is holding on to key spectrum needed to deploy the tech in the US.
“Without aggressive action as outlined in this report, we believe there is a high likelihood that the United States will be unable to convince the rest of the world to adopt mmWave technologies as the standard 5G pathway.”
Their suggestions include the DoD and FCC flipping their prioritization from mmWave to sub-6 GHz spectrum. That will mean the DoD co-existing, or sharing, its bands with commercial 5G deployment for consumers. In particular, it’s proposed, the DoD should focus on opening up access to the same bands that China is already using, specifically the 3.2-3.6 GHz range, and the 4.8-5.0 GHz range. That way, the US could take advantage of existing modems, chipsets, and other hardware already designed to work in China.
In yet another recent study on kids and screen time: “There is little evidence of a link between the amount of time teenagers spend on devices and their general wellbeing, a study has suggested. It counters claims that teenagers' mental and physical health could be damaged by excessive screen time. Even just before bedtime, being online, gaming or watching TV is not damaging to young people's mental health, study authors said.”
Here’s the complex science behind why compressed air cans cool off when you spray them (short YouTube video).
The importance of silence to the brain: “...two hours of silence per day prompted cell development in the hippocampus, the brain region related to the formation of memory, involving the senses. This was deeply puzzling: The total absence of input was having a more pronounced effect than any sort of input tested.”
Mirror pools and towering vents on the ocean floor: video and some photos (click on thumbnails on the right side of the page).
The man behind the world’s toughest running race: “What makes the Barkley so unique in the world is the fact that when someone succeeds, he makes it tougher,” Furtaw says. “He wants to keep it at the limit of possibility.”
Stuff about Geopolitics, Economics, and the Finance Industry
The general RIA backlash and disbelief from Schwab’s move to subscription-based investing products (instead of a percentage-of-assets fee) recalls the same behavior we saw from other industries that were disrupted by new subscription and distribution models...the RIA industry should be on notice – change your business model and/or distribution and/or products so that investors can actually get the benefits of long term stock marketing instead of losing out to high fees and misinformed market timing.
Ray Dalio lays out his detailed analysis of the failings of capitalism due to technology and information shifting profits from workers to companies, further exacerbated by a glut of money in the system which is concentrated at the top: “While the pursuit of profit is usually an effective motivator and resource allocator for creating productivity and for providing those who are productive with buying power, it is now producing a self-reinforcing feedback loop that widens the income/wealth/opportunity gap to the point that capitalism and the American Dream are in jeopardy. That is because capitalism is now working in a way in which people and companies find it profitable to have policies and make technologies that lessen their people costs, which lessens a large percentage of the population’s share of society’s resources.”
I tend to agree with a lot of what Dalio wrote here, but would level one criticism with respect to the cause of low rates – as I wrote last week, I think this has more to do with the deflationary impact of the Information Age than the abundance of capital driving long-term rates down. The former is optimistic while the latter is a pessimistic view. Dalio’s main solution is “double bottom line” projects that focus on both profit and social outcome, which is not too dissimilar from our focus on NZS. As Dalio points out, this problem of profit distribution in late-stage capitalism is going to expand dramatically with the advent of AI, and we are well behind in preparing for it, which is likely to cause a significant negative shock if not dealt with thoughtfully. However, at this point, the shock seems unavoidable.
Andreessen Horowitz (A16Z) is transitioning from a VC to an RIA: "As a firm, we have this massive ambition to be the best investor period, and want the flexibility to invest in what we think is the best investment." The paragraph below from the Forbes article on the performance of A16Z’s funds made me realize, with a bit of snark, that investors in the top tech mutual funds have beaten successful VCs over the last decade with far less risk and far more liquidity: “The firm’s first and third flagship funds, $300 million and $900 million, respectively, are already expected to return five times their money to investors, sources say. Its $650 million second fund and $1.7 billion fourth fund are expected to return three times their investment capital, good for the top quartile of firms, and are expected to climb.”
Compare that to the Janus Global Tech Fund which returned 5.5x since the first A16Z fund was raised in 2009, 3.6x from when the 2nd A16Z fund was raised in 2010...sure, it’s unfair to compare different asset classes and cherry pick time frames, but I think most folks would be as surprised as I was that a very skilled, legendary, top-quartile venture fund has done worse than just investing in the winning public tech stocks for the last decade – and much worse on a risk-adjusted basis! This win for public tech stock investors even came at a time when many companies are staying private longer, thus limiting the options for public investors. One key takeaway is that network-effect economics have accrued outsized returns to large public tech companies. A key follow-up question raised by that phenomenon: will the runaway advantages of the big AI/Cloud platforms continue this trend for the next 10 years?
A proposed tax on unrealized capital gains? Talk about creating a massive governor on asset growth – in an up market, most folks would be forced to liquidate stocks to pay “taxes” every Spring, introducing significant volatility. One way or another, whether it’s Warren’s wealth tax or other proposals on the table, it’s going to be a very different taxation and investing environment if there is a democratic sweep.
The ranges of social monitoring happening in China are increasingly under global scrutiny with varied conclusions: the Economist, on the benign end, has this to say:
“There is no sign that such schemes have strayed beyond the creepy paternalism that is often exhibited by local governments and that is just as often shrugged off by local residents.”
On the other end of the spectrum we have a University of Washington professor writing about China’s “Terror Capitalism” in the Muslim area of Xinjiang. NYT ran a big interactive piece “How China Turned a City into a Prison.” Clearly there is a different surveillance tactic in regular Chinese cities compared to the Muslim region where the Guardian reports alarming instances of Australian citizens being held and separated from their children. As an outsider, it’s a little hard to know what is Western “propaganda” and what is true with respect to monitoring in China.
Nothing in this newsletter should be construed as investment advice. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. I may own long or short positions in stocks discussed in this newsletter. This newsletter is simply an informal gathering of topics I’ve recently read and thought about. It generally covers topics related to the digitization of the global economy, technology and innovation, macro and geopolitics, as well as scientific progress especially in the fields of cosmology and the brain. I will frequently state things in the newsletter that contradict my own views in order to be provocative. I may change my opinions without updating them in the newsletter. Lastly, often I try to make jokes, and they aren’t very funny – sorry.