Venture Capital: Revenue at all Costs

The Vision Fund’s $370 million investment in Compass valued the residential brokerage firm at $6.4 billion in the summer of 2019. This valuation is supported by a “technology promise” that the company can make its agents more effective and productive.

Realogy, with 300,000 agents to Compass’ 15,000 agents and $505 billion of transaction volume to Compass’ $88 billion, has a market value of $384 million.

It would seem this technology would need to bridge a massive gap. Skeptics are raising eyebrows. The article cites Susquehanna analyst Jack Micenko:

“They are a residential real estate brokerage, just like everybody else. They make their money the same way Realogy does and Re/Max does.”

Compass’ S-1 filing cites an increasingly familiar combination: a disruptive and global technology platform coupled with massive losses.

In 2019 investors poured $136 billion into U.S. startups. Many of which were chasing revenue with little regard for profit. The mentality, per an article in the WSJ citing one such founder was “if you throw enough capital at it, you eventually figure it out.”

Investors were losing their patience with cash burning startups before the coronavirus crisis. Pressure to rethink infrastructure and move towards profitability has grown far more intense in the wake of the pandemic. The quote continues:

“When you have an overabundance of capital, you don’t have to prioritize as ruthlessly. They have to make really hard decisions now.”

It will be interesting to see what this funding figure looks like at the conclusion of 2020, and to see which companies adapt quickly enough to survive.

Edgewell Personal Care Co., the maker of Schick razors, has elected not to fight the FTC lawsuit banning the proposed acquisition of Harry’s Inc. This likely puts money-losing Harry’s in a difficult position.

Per the article, Harry’s has informed Edgewell that it intends to pursue litigation against them. I would think that Harry’s viewed this as an opportunity to shift the burden of profitability to a larger entity, and that the company is massively disappointed by this outcome.

While I do not have all of the facts, it does not surprise me that Edgewell would abandon the acquisition without a fight. If the rationale is that “the tie-up would eliminate one of the most important competitive forces in a shaving industry that has long been controlled by two entrenched companies,” then there’s little concern that Edgewell’s competition will make the acquisition. Edgewell likely realizes that Harry’s will have to develop a profitable business model to survive, which makes disruption far more difficult.

I find this particularly fascinating; the FTC has sued to block Edgewell Personal Care (maker of Schick razors) from acquiring Harry’s in a deal valued at $1.37 billion. Per the article, the FTC’s rationale is that Harry’s has been a benefit to consumers.

“Harry’s ‘has forced its rivals to offer lower prices, and more options, to consumers across the country,’ Daniel Francis, deputy director of the FTC’s bureau of competition, said in a statement.”

The article also claims that Harry’s is not profitable. If the strategy is to grow and burn cash until you are acquired, and the exit is blocked, what happens next? Should Edgewell and Harry’s decide not to fight this in court, it will be interesting to see how the VC community responds.

An article in The New Yorker offers a brief history of venture capital dating back to the whaling industry, discusses how the government and private sector have both participated in VC ventures, and offers some interesting thoughts on the future of the industry. Fast forward to today, and, the article contends, “a seepage of doubt is spreading, notably among venture capitalists themselves.” If investors are growing concerned why does the cycle persist? The article argues that institutionalized venture capital has created an abundance of fees, and that the lure of winning the lottery is too great:

“They do it in part from competitive pressure: if your rivals are growing wildly at an early stage, and with good hookups, you’re obliged to play the game in order to keep up. But they also do it for the chance at the lottery. Jackpots have only become bigger as venture capital has grown overcapitalized; last year exit values, the proceeds from selling shares, topped two hundred billion dollars for the first time.”

Click on the link for an interesting read.

Investors have provided nearly $3 billion of capital to scooter companies Bird and Lime, which are now (apparently) valued at approximately $2.5 billion each. An article in the WSJ reports that these companies are facing pressure to turn a profit as investors lose patience with startups that consistently burn cash. Per the article, weak infrastructure, the consequence of aggressive growth, will pose a challenge:

“Lime and Bird’s ambitious expansions outpaced operations set up essentially on the fly, according to more than a dozen current and former employees. The spotty logistics of their networks have weighed on the companies’ efforts to become profitable and led to safety concerns that this could endanger riders, these people allege.”

The article provides some interesting anecdotes citing challenges with respect to hiring, securing spare parts and maintenance issues.

A NYTimes book review for Billion Dollar Brand Club details the startups disrupting the consumer products space highlighting how quickly the direct-to-consumer approach has become “one of the most dominant forces in the retailing business today.”

“It began with a handful of start-ups, then grew to dozens, then hundreds — from mattresses (Casper) to bras (ThirdLove) to electric toothbrushes (Quip) to vitamins (Ritual) to tampons (Lola) to luggage (Away) to sneakers (Allbirds) to makeup (Glossier) to hair color (eSalon) to pet food (Farmer’s Dog) — and even thousands, counting the brands filling the endless digital aisles and shelves of Amazon Marketplace.”

The article offers a few statistics that are quite fascinating:

• In the four years from 2013 to 2017 nearly $17 billion in sales were captured by smaller brands.
• In 1999 small and medium sized companies had sales of approximately $100 million. In 2018 this figure surged to $160 billion.

Click below for a great read that focuses on how Dollar Shave Club and Harry’s came to control 14% of the razor blade market.