Dear Clients and Friends,
Have you ever used Uber or Airbnb? If you haven’t you might have a younger friend or family member who has. These are two examples of companies that operate where the internet meets the real world of goods and services. Over the last decade, these services have disrupted industries beset by little competition and recalcitrance to change. This set of companies have generated volumes of attention due to the sky-high valuations which gained them the dubious distinction, “Unicorns”. When we peel back the layers of the onion, we can begin to understand that these types of business models are so prized not because of what they are, but because of what potential they have. If I were writing this piece 20 years ago, you could easily replace the aforementioned companies with the names Facebook and Amazon and the story would be much the same.
What Silicon Valley and the cadre of Venture capitalist see in this virtual economy is a need for services that the internet can provide, but hasn’t yet exploited. Matching peer A’s service with peer B’s need is one of the founding principles of economics, and today that matching process has taken on a life of its own. As companies get better at matching the supply and demand for consumers and business, the economy benefits but someone has to lose, right? In the case of Uber, taxi companies are losing and Uber is winning. The ‘wildcard’ for this industry is the trust inherent in the system, it is not ubiquitous, and consumers have to trust the service and the provider of that service in order for the transaction to be repeatable. So, the company that provides the best, most trusted service, will eventually win as they strip the competition of their market share, i.e. future business. Amazon knew this years ago and made customers experience the highest goal of their organization, and before them Nordstrom’s returned tires (which they had never actually sold) so the customer had a great experience.
What separates these ‘upstart’ companies from many of their traditional competitors is they have very few assets and provide a service that has traditionally been asset heavy. In the case of Taxi’s, Uber has almost unlimited capacity of taxi-like service without owning a massive fleet of cars. The same goes for Airbnb, where they have more capacity for rooms than Hilton and Marriott combined and yet own almost no real estate. Many have argued this makes them vulnerable, but this also creates a momentous opportunity. If consumers truly like the service and find it more convenient and easier to use, the consumer will respond by changing habits and going forward will use the service. What makes this so appealing is the fact that many of these services would not have been possible just a few decades ago based on the adoption of smart phones and advances in GPS technology.
Now, the above description of the Unicorn companies does not in any way represent an investment thesis. If you dig deep into companies like Facebook and Google you will see that they too have ‘moon shot’ projects that plan to exploit the inefficiencies in things like data analytics and healthcare. The Unicorn phenomena has challenged traditional businesses to look at cyberspace as an opportunity rather than a sideshow. Joseph Schumpeter once described the idea of “creative destruction”, which was outlined in his writings as innovation within a manufacturing industry that lead to growth through reallocating resources. I doubt Schumpeter envisioned the virtual economy and its ability to reallocate resources, but if he envisioned it in the 1940’s, he would have smiled upon it’s arrival. My talks with money managers and company executives have revealed that they too are very aware of the opportunity and the threat that these ‘upstarts’ present. Everything is fair game, there are no sacred cows and when you look closely at these ‘Unicorn’ businesses you will find the founders are relentless and sharp, unwilling to follow the traditional playbook. Today, that is exactly what this country needs.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All investing involves risks including loss of principal. No strategy assures success or protects against losses.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.