Sunday Reads #165: When the ball is in the zone, swing big.
What happens when an opportunity meets a prepared mind.
Yes, I know it’s a Saturday 😊.
Based on the responses to the survey in the last edition, I’m sending this out a day early as an experiment. If it works well, I might have to change the name of the newsletter…
Anyway, so glad to be back after a few weeks of travel! I’ll be traveling some more, but will make sure to be in your inbox every week.
This week, let’s talk about seizing the day. How to recognize an inflection point, and take decisive action.
A journey that starts with Paytm, passes through Accel, Uber, LVMH, and even Blackstone, and ultimately arrives at your own life (and mine).
Hope you like it.
[Before we jump in, a quick note: next week, we’ll tour the landscape of generative AI. The cool stuff that’s already possible, and the cooler stuff that will soon be.
Make sure to subscribe, so you get it in your inbox.]
1. Opportunities to change your life don't show up often. When they do, swing big.
In How much would you pay for a box that beeps?, I spoke about Paytm.
You all know the origin story of the success of Paytm, one of India’s leading payments providers.
When India did its demonetization back in 2016, Paytm swung. And swung big.
Front page ads in the country's premier newspapers welcoming the new digital economy. Thousands of foot soldiers recruiting retailers into the Paytm fold. The QR code at every store, stall, and hawker's cart.
Paytm saw a once-in-decades moment. A billion people forced to move from cash to digital payments. And it swung for the fences.
There are two clear and separate things happening here:
1. Recognizing an inflection point. Seeing the ball in the zone.
2. Swinging big.
Let's talk about both.
Lesson 1: See when the ball is in the zone.
An opportunity meets a prepared mind.
In his excellent book The Power Law about Venture Capital, Sebastian Mallaby talks about the origin of Accel.
The most thoughtful new entrant was Accel Capital, the first venture partnership to position itself as a specialist in particular technologies. By accumulating deep expertise in software and telecoms, Accel aimed to have the inside track on which entrepreneurs to back and how to guide them to a healthy exit.
At the same time, Accel embraced an approach that it came to call “the prepared mind.” Rather than looking anywhere and everywhere for the next big thing, the partnership carried out management-consultant-style studies on the technologies and business models that seemed to hold promise.
Accel partners aimed to comprehend entrepreneurs so thoroughly that they could complete their sentences and predict the next slide in their pitches. They spoke internally of the “90 percent rule.” An Accel investor should know 90 percent of what founders are going to say before they open their mouths to say it.
Accel's concept of "prepared mind" helped them invest in "the next big thing", again and again.
By embedding themselves in their respective sectors, sitting on boards of portfolio companies, and blending their direct observations with management-consultant-style analyses, Accel partners could anticipate the next logical advance in a technology.
“Every deal should lead to the next deal,” was another Accel saying.
Swartz (the founder of Accel) in particular liked to invest in successive iterations in a single product class. He backed a videoconferencing startup in 1986, another in 1988, and a third in 1992; on two of these three bets, he made fourteen times his money.
Oh, and Accel invested in Facebook early on.
Bill Gurley of Benchmark found Uber - Benchmark's biggest success - with a similar approach.
Another excerpt from the book:
Gurley’s investment in Uber was the perfect model of an intelligent Series A bet. Before joining Benchmark, he had been struck by the writings of Brian Arthur, a Stanford professor who studied network businesses. Companies that enjoyed network effects inverted a basic microeconomic law: rather than facing diminishing marginal returns, they faced increasing ones.
In most normal sectors, producers that supplied more of something would see prices fall: abundance meant cheapness. In network businesses, contrariwise, the consumer experience improved as the network expanded, so producers could charge extra for their products. Moreover, the improving consumer experience was matched by falling production costs because of the economies of scale in building a network.
As Benchmark had discovered when it had backed eBay, the rewards could be enormous...
After signing on with Benchmark, Gurley extended the eBay concept from products to services. His first hit was a startup called OpenTable, which connected diners to restaurants... What excited Gurley about OpenTable was that the network effects proved every bit as powerful as theory predicted: as more restaurants signed on, more diners visited the site, which in turn attracted more restaurants.
As Gurley and his partners pondered other sectors that might be ripe for similar treatment, they alighted on taxi and black-car services. There was so much inefficiency in pairing riders with drivers; surely better matching should be possible?…
In 2009, Gurley heard of Uber, which was looking for angel backers. To his delight, Uber’s strategy was to target unregulated black cars. “We’ve got to meet with these people immediately,” Gurley recalls thinking...
...Benchmark presented a term sheet to Kalanick, and after a bit of back-and-forth the partners led Uber’s Series A round, paying $12 million for one-fifth of the equity. Gurley had landed his OpenTable for black cars.
His ambition for the startup was that it might match OpenTable in its results, going public in due course at a valuation of perhaps $2 billion.
"Perhaps $2 billion". For Uber. Indeed.
This begs a question - are we at an inflection point right now? If we are, how do we recognize it?
Hold that thought, while we go to the 2nd lesson from Paytm.
Lesson 2: When the ball is in the zone, swing big.
LVMH is the world's biggest luxury company.
And the founder Bernard Arnault is the second-richest man in the world. Yes, richer than Bezos! With a net worth of over USD 150 Bn.
And there’s a good chance he might become #1 soon, what with the fiasco that’s underway at my favorite social media company.
It all started with buying a bankrupt company for a single franc.
Mario Gabriele tells the story in LVMH: The Civil Savage:
Maison Dior had fallen on hard times. Founded in 1947, the couturier’s parent company slumped into the 1980s. That was less to do with the performance of Dior than the other businesses weighing down “Groupe Boussac,” including a flagging textile business and disposable diaper brand.
After declaring bankruptcy in 1984, the French government stepped in to find Boussac a buyer.
Arnault couldn’t believe it. One of the country’s most beloved and prestigious brands was for sale and at a discount! But even in its distressed state, buying Boussac looked beyond Arnault’s means. After all, the French government wanted someone who could commit to investing in the business. Though Ferinel (Arnault's family business) did well, the $15 million in annual revenue it brought in was still a far cry from the capital needed.
But Arnault was not to be deterred; he would get the money, one way or another.
His salvation came in the form of Antoine Bernheim, an investment banker at Lazard Frères...
In 1984, Arnault acquired Boussac for a token franc. The actual cost of the deal was $80 million, with Lazard financing over 80% of it. The rest came from the coffers of Ferinel.
Now, Arnault didn't just swing big in buying the acclaimed Maison Dior. He then slashed costs hard.
He wasted little time in conforming Boussac to his vision. Despite promising to keep jobs and maintain the group’s structure, Arnault slashed aggressively, selling off unprofitable divisions and re-centering the business around Dior. With that streamlining went 9,000 jobs. The name changed, too, this time to Financiere Agache.
Whatever one thinks of Arnault’s gutting of Boussac, financially, it proved the right call. Over the following few years, Agache stabilized, then flourished. By 1987, the company earned $1.9 billion in revenue a year and netted $112 million.
Arnault could have stopped here. With a single franc, he had gotten himself an annual dividend of $112 million.
But he didn't stop.
He continued swinging big whenever he saw the opportunity. He saw a chance to own LVMH by playing both sides in a boardroom tussle, and he did it. More in Mario's article.
The rest of Arnault's story is more straightforward. A snowball inexorably transforming into an avalanche.
Peter Drucker talks about decisiveness in The Effective Executive:
Once you decide, be decisive.
An imperfect decision made in time is better than a perfect decision too late.
There's a sharp line between deliberation and implementation. Once a decision has been made, the mindset changes. Forget uncertainty and complexity. Act! “If one wishes to attack, then one must do so with resoluteness. Half measures are out of place.”
The wise officer knows the battlefield is shrouded in a “fog of uncertainty”. But at least one thing must be certain: one’s own decision.
No half measures. You make your decision, and you follow through.
A second part of it is having the courage to bet big, once you’re convinced.
The Man Who Solved the Market has a great anecdote about Soros breaking the British pound:
Druckenmiller walked into Soros’s expansive midtown office to share his next big move: slowly expanding an existing wager against the British pound.
Druckenmiller told Soros authorities in the country were bound to break from the European Exchange Rate Mechanism and allow the pound to fall in value, helping Britain emerge from recession. His stance was unpopular, Druckenmiller acknowledged, but he professed confidence the scenario would unfold.
Complete silence from Soros. Then, an expression of bewilderment.
Soros gave a look “like I was a moron,” Druckenmiller recalls. “That doesn’t make sense,” Soros told him.
Before Druckenmiller had a chance to defend his thesis, Soros cut him off.
“Trades like this only happen every twenty years or so,” Soros said.
He was imploring Druckenmiller to expand his bet.
The Quantum Fund sold short about $10 billion of the British currency. Rivals, learning what was happening or arriving at similar conclusions, were soon doing the same, pushing the pound lower while exerting pressure on British authorities.
On September 16, 1992, the government abandoned its efforts to prop up the pound, devaluing the currency by 20 percent, earning Druckenmiller and Soros more than $1 billion in just twenty-four hours.
Opportunities for life-changing wealth don't show up often. When they do, you MUST swing big.
OK, so why am I telling you all this?
Be fearful when others are greedy...
I dunno if you've noticed, but the world economy is going through some troubles. 😝
What should you do when others are fearful?
King of Capital is a great book, about the origin of Blackstone and the private equity industry.
It offers a look into how Blackstone invests in cyclical industries.
Timing is everything when you are borrowing to buy a cyclical company.
Like cliff diving in Acapulco, plunging in too soon or too late can be disastrous, which is why many private equity firms steer clear of cyclical businesses.
Nimbly timed, however, a leveraged investment at the bottom of the cycle can magnify any earnings gains. In addition, valuation multiples for cyclical companies tend to rise at the same time that profits do because buyers will pay a higher multiple of cash flow or earnings when those are on the upswing.
Harness both the earnings growth and the increase in valuations, and returns can shoot off the charts.
One of Blackstone's most successful deals (Celanese) followed this exact playbook:
Even before the deal closed in April 2004, demand had picked up enough that Celanese had begun raising prices. Over the course of that year it publicly announced thirty price increases, which helped lift its top line to $4.9 billion from $4.6 billion the year before and pushed cash flow up 42 percent.
On the strength of that, Celanese was able to borrow more money in September 2004 to pay out a dividend. With that, Blackstone recouped three-quarters of the equity it had invested in April. Thereafter, most of what it would collect would be pure profit...
By the time they sold the last of their Celanese shares in May 2007, Blackstone and the coinvestors raked in a $2.9 billion profit on Celanese—almost five times their money and by far the biggest single gain Blackstone has ever booked...
Celanese was a tour de force of financial engineering. By Chu’s reckoning, the cyclical upswing of the industry and the higher multiple the stock commanded in the United States accounted for roughly two-thirds of the Celanese profit.
When others are fearful, it's time to be greedy.
Look around you.
Public market prices are down to rock bottom. Multiples are shrinking in the private market. Good companies are struggling to raise capital. And when they do raise, they're raising at much lower valuations.
So what are you doing? Are you conserving cash, or are you going shopping at bargain basement prices?
You don't have to be right often. But when you're right, you MUST win big.
As Nassim Taleb said:
[PS. The same thing applies to our personal lives as well. You only need to make a few great decisions every year, as Nat Eliason says in Four Great Decisions per Year.]
Before we continue, a quick note:
Did a friend forward you this email?
Hi, I’m Jitha. Every Sunday I share ONE key learning from my work in business development and with startups; and ONE (or more) golden nuggets. Subscribe (if you haven’t) and join nearly 1,400 others who read my newsletter every week (its free!) 👇
2. Golden Nugget of the week.
Don't Hire People unless the "batteries are included".
The best teammates are the ones who are able to generate their own energy.
Do they have their own "battery pack"? Or do YOU need to recharge them everyday?
This is a superb metaphor from Michael Hyatt. More in Don’t Hire People Unless the Batteries Are Included.
3. This made me laugh out loud.
This guy has been trolling the entire Internet over the last few weeks. Check out his twitter feed 🤣.
4. Books of the Month - October 2022.
Hatching Twitter (Non-fiction, 7/10)
It's not the best book I read this month. But it's entertaining as hell.
It shows how Twitter has been a clown car pretty much since its inception.
Burn the Fat, Feed the Muscle (Non-fiction, 9/10)
I don't write (or read) much about fitness. But this is a great book on approaching your body scientifically. If you want to make fitness a "project", how do you ensure it's successful?
I wrote a thread about it 👇. Read that first, and then check out the book if it's interesting.
Building a Second Brain (Non-fiction, 5/10)
I didn't like it so much. Didn't learn anything new. Could be because I've been building a "second brain" for a while now.
But Tiago Forte is a thought leader in the Personal Knowledge Management (PKM) space. So if you want to start being more structured about your reading and learning, you could check it out.
The Man Who Solved the Market (Non-fiction, 8/10)
About the origin of the hedge fund industry and of Renaissance Technologies - the most successful hedge fund ever.
My biggest lesson from the book: How incredibly efficient the market is. And how hard you need to work, to squeeze mere pennies of profit.
A Deadly Education (Fiction, 8/10)
Unputdownable. It's like Harry Potter, but much darker.
Apart from the teenage romance stuff (I'm getting old!), it was absolutely captivating.
Player of Games (Fiction, 8/10)
Book 2 in the Culture Series by Iain M. Banks (I mentioned Book 1 in August).
If you like techno-optimistic science fiction, you'll enjoy this. The plot is OK, but the post-scarcity egalitarian vibe is awesome. This is a future I'd love to live in!
Hope you like some of these books. And please send your best book recommendations my way!
That’s it for this week. Hope you enjoyed it.
As always, stay safe, healthy and sane, wherever you are.
I’ll see you next week.