Losses Are the New Black
The relationship between investors / shareholders and firms has largely been the same for a century: We (investors) will fund losses for 1-3 years, and then you (firm) begin making profits you distribute back to us. No more. The firms markets reward with the greatest valuations have turned this on its head and replaced profits with vision and growth. Losses are the new black.
The trend has gone hyperbolic. Facebook and Google were both profitable when they went public. The latest hot girl is Snap Inc., who in 2016 earned 412M and lost 500M. Not to be outdone, Uber did 5B and lost 3B. At L2, our venture capitalists convinced us profits were “so yesterday” and nudged / shoved us to take their fire hose of cash and begin spraying it at technology and people, and leave profitability in the rear-view mirror. And they were right. The marketplace wants growth and special, regardless of the resources to keep feeding the beast.
What caused this? Simple: firms mimic success, and the most successful firm in the world is Amazon. Amazon’s core competence is not operations, the cloud, or even technology, but storytelling. Jeff Bezos’ ability to paint an extraordinary vision (“Earth’s Biggest Store”) and register steady progress against that vision is rewarded with the cheapest capital in the history of business. And…
Cheap. Capital. Is. Awesome.
Amazon can try 10 things for every one thing peers can. When I sit in board meetings, directors usually ask management to come up with ideas that provide advantage, relative to required investment — we want cool ideas, that don’t cost too much. I’ve never been in an Amazon board meeting, but I believe management is charged with coming up with cool ideas that are ridiculously expensive, as others can’t follow. The majority of (actual) wars have not been won with strategy, bravery, training, or superior equipment, but brute force. At the end of WWll, the Allies had 38 gallons of gasoline for every one the Germans did. Amazon is the retailer with 38 gallons.
Like an illusionist, Amazon has the markets and regulators focused on its super-competitive retail business, distracting them from the sectors the firm is also dominating, hose in hand — cloud, media, and video streaming. The craziest example of this is Amazon’s spend on original content this year.
Only Netflix is spending more and just projected they will burn through 2B in cash this year, as they 1) hear Amazon’s footsteps, and 2) have mimicked the best (Amazon) and focused on growth regardless of what it costs.
Old-economy firms are stuck with heroin addicts for investors, who become upset, angry, and hostile when you take away their heroin / profits, as opposed to today’s super-cap companies, which never made the mistake of getting their investors all jacked up on skag. In addition, loss-as-black firms never pay taxes, as they aren’t profitable, and don’t aspire to be. This could all end badly, as shareholder value is supposed to be the present value of growth opportunity, assuming, at some point, tomorrow becomes today (profitable). But many firms will not register the growth that wallpapers over losses, and investors will apply traditional metrics, which will crush valuations.
A few predictions:
— After another frat-rock / shit-for-brains move by CEO, the market will realize Uber has substitutes and levy the mother of all down rounds in 2018/2019.
— Congress will consider moving to a revenue-based tax, as they acknowledge the objective is to subsidize small firms, not enormous firms that don’t want or need to be profitable.
— Amazon will be broken up, as District Attorneys realize the blue-line path to the Governor’s mansion is to go after a job-destruction machine financed by groupie investors (see above: Amazon).
Four Funerals and a Wedding
This year, for the first time, I’ve been to more funerals than weddings. At that age — scary. However, I find the funerals more inspiring. Attended a “re-commitment” wedding a few months ago, which makes no sense to me. Thankfully, it was an awesome party, so I forgive them — sure they’ll be relieved. Weddings are just behind Christmas, graduations, and award shows for events that will not stand the test of time.
Last weekend I went to a wonderful funeral. I never met the deceased, but went since I know his (grown) kids. The funeral home couldn’t fit all the people who showed up, so we were stuck in the back, couldn’t see anything, and listened to the eulogies over a poor PA system. The words were moving. There was the lifelong friend serving as MC who struck exactly the right tone, and quoted from (no joke) Dr. Seuss:
“Don’t cry because it’s over, smile because it happened.”
Every eulogy contained rich examples of how much the man had loved life, as evidenced by his generosity and passion for a good time. There was the decades-long work colleague who referenced the skills and formidable success his mentor registered and, at the end of his eulogy, paused, broke down, and proclaimed, “He was like a father to me, and I loved him.” I think that may be the nicest thing anybody can say about someone else.
Central to the prosperity and survival of our species is mothers and fathers who have an irrational passion for their kids’ well-being. To fill this role for people who aren’t your offspring is generosity toward the planet and species. I’ve never understood the idolatry of Steve Jobs. The world needs more engaged fathers, not a better fucking phone. But that’s another post.
This man’s kids are living testaments to what a great person he was. They both share a comedy gene — two of the funniest people any of us know. Their humor stems from the confidence to be outrageous, an ability to see irony in almost everything, and joy at seeing others laugh and have a good time. These qualities are likely a product of warm, loving, and generous parents. Methinks that would be a decent tombstone:
The service was what we all want, if a long time from now — a standing-room-only crowd of people who are crying because it’s over, but can’t help smiling because it happened.
Life is so rich,