7 Companies Had 3 Minutes Each to Pitch Us. This Is What Happened.

I had the privilege of watching 7 excellent startups present at The Syndicate’s Remote Demo Day. All are seeking early stage funding for their company from the investment group, which I’m a part of.

I came away from the meeting amazed at the quality of companies out there now. While I can’t share specifics about the companies (yet), here are a few things that struck me:

  • This was a pretty diverse group. It’s not all a white guy’s club anymore. I’m grateful because I don’t want to miss out on any good ideas! Diversity is on a lot of people’s minds right now, and I see things changing.
  • These are real companies. The public may think of startup funding as someone walking into a meeting with an idea and asking for money, but that’s not what it is. Every company had a real product in the market and many had millions in revenue. Some are even making a profit already. They need money to scale, not to start.
  • It’s not all software. One was a hardware solution for growing indoor gardens!
  • What the companies had in common: they were all focused on somehow making things easier, whether that’s working out with friends, growing food, etc.
  • Incredible growth rates. Many companies had year over year growth rates of 100%, 200%, even 500%.
  • Quality of companies is incredibly high. We have a lot of transformative innovation to look forward to very soon.
  • Many make opportunity available to anyone, whether that’s by monetizing your car or van, helping you pay for college, etc. This could be a real antidote to inequality.
  • My favorite company: a startup in the income sharing agreement area, which lets people sell a share in their future income to pay for school. This can replace expensive and hard to access loans. You only pay if you make a good living after graduation.

Most are likely to be funded by our investment group, especially the software companies that act as a platform or marketplace. It’s a tried and true strategy that certainly worked for Uber and Airbnb, and that trend seems to be continuing.

Congrats to all the amazing companies involved!

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Photo: “Great white shark” by Gussy (Luke) is licensed under CC BY-NC-ND 2.0

Americans Are Using Their Stimulus Checks to Get Out of Debt

Stimulus checks for $1,400 went out this month to most Americans. I found myself wondering today, did they save it, invest it, or just blow it?

Data indicates that the biggest use of stimulus funds has been to pay down debt. A Census Bureau survey found 52% of people mostly used their checks to pay off debt, while only 28% mostly spent them.

Repeated rounds of stimulus have left households with the lowest debt levels on record:

Households finished 2020 with $14.1 trillion combined in checking and savings accounts, compared with $11.4 trillion in 2019, according to Federal Reserve data. Their debt-service burden—the percentage of after-tax income used to pay off debt—fell to its lowest level in records going back to the early 1980s.

Nonetheless, the impact of stimulus funds on consumption has been notable. Bank of America found a huge spending spike among its customers:

As the latest round of federal stimulus payments reached bank accounts, credit and debit card spending soared 45% overall last week on a year-over-year basis and 23% over two years, according to data aggregated by Bank of America.

I strongly advise people with debt to pay it off before they do anything else. If you owe money on a loan at 10%, for example, when you pay it off, you are automatically guaranteed a 10% return on your investment! And that’s exactly what it is, an investment in your future.

As someone who invests for a living, if I could get a guaranteed 10% return anywhere on earth, I’d be singing Hallelujah and dancing a jig. Take the easy win!

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Photo: “Monopoly Guy Graffiti – Rich Uncle Pennybags” by Indrid__Cold is licensed under CC BY-SA 2.0

This 21 Year Old Makes Millions Selling Products He’s Never Seen

As a teenager, Kamil Sattar knew he wanted to work in business. But he dropped out of his college’s business program during his second year when he said he realized, “I wasn’t actually learning how to do business. I was learning how to work for someone else’s business and make them money.”

His online store has pulled in $1.7 million in revenue this year alone. Sattar sells products online that he sources from manufacturers. Another company holds and ships the actual items. This is called drop shipping.

Offshoring separated manufacturing from distribution and marketing. What drop shipping is doing is separating distribution and marketing. Sattar excels in promoting products and running the online store. With drop shipping, he can do just those functions and leave the manufacturing and distribution to specialists:

Drop shippers use wholesale marketplaces like AliExpress, which is owned by Alibaba, China’s largest e-commerce site. AliExpress sells every category of goods, from apparel to luggage and yoga mats, for shockingly cheap prices. Drop shippers then identify products they think will be of interest to consumers. Once they find a product, they advertise it on platforms like Facebook and Instagram with high-quality photos and video, and if a customer bites, they handle getting the product from the supplier to the customer.

This market is growing like a weed. Drop shippers clocked $102 billion in sales in 2018 and the growth rate through 2025 is projected at 29% a year, leaving physical retail in the dust.

This makes me wonder what other aspects of the retailing experience will be unbundled and done by specialists in the future. Perhaps one company does the online promotion while another focuses on maintaining a usable, scalable website?

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Inside the Archegos Implosion: “We Don’t Know How Far the Tentacles Go”

Brokers are selling over $30 billion worth of positions in imploding hedge fund Archegos Capital Management, shaking markets. Wall Street does not know exactly how many positions the fund holds for two reasons:

  • It is very lightly regulated because it’s organized as a “family office,” rather than a typical hedge fund
  • Archegos didn’t actually own most of the stocks it took positions in, if any. Instead, it owned derivatives called “contracts for difference (CFD’s),” which have few disclosures.

Some experts liken the Archegos blow-up to the bankruptcy of Bear Stearns, which helped precipitate the financial crisis:

“We don’t know how far the tentacles go,” said Joe Saluzzi, co-head of trading at Themis Trading. “Early in the Bear Stearns crisis, the market was fine — until it wasn’t.”

Others are comparing the liquidation of the hedge fund’s positions to that of Long Term Capital Management (LTCM) in 1998, which caused severe market turbulence and ultimately required a bailout:

“This reminded me a lot of the Long-Term Capital situation,” Steve Sosnick, chief market strategist at Interactive Brokers, told Insider in an interview.

Long-Term Capital Management, a massive hedge fund staffed by famed traders and Nobel Prize-winning economists, employed such highly leveraged trades that it threatened to expose America’s largest banks to more than $1 trillion in default risks by 1998. The “genius” hedge fund nearly collapsed had it not been for a bailout package from the Federal Reserve and some major Wall Street banks.

However, Archegos’s positions appear to be far smaller than those of LTCM. Nonetheless, Archegos was very heavily leveraged:

Shrouded by the secrecy of CFDs, Hwang was able to build up almost $50 billion in stock positions on the back of the $5 billion to $10 billion that Archegos managed.

Perhaps the greatest source of worry for markets is uncertainty over exactly how many positions Archegos has and with which banks. This counterparty risk was a driving factor in the LTCM crisis in 1998 and the financial crisis of 2008:

…it seems clear that the banks didn’t realize until too late that they were holding similar positions, with malign implications for efforts to keep markets in those shares from falling further.

“You can have a suspicion that maybe this person is doing this trade with a bunch of other people,” said Jay Dweck, a former trading and risk-management executive at Goldman and Morgan Stanley and now consults for banks and hedge funds. “But no one knows the aggregate.”

In all, given the smaller size of the portfolio being liquidated and the current buoyant state of markets, I don’t expect any extreme shock from Archegos going under. I think the experience with LTCM, Bear Stearns, Lehman and others will also stand banks and regulators in good stead when dealing with Archegos. But you could see some choppiness for a while as we find out who is exposed to Archegos and wind down those positions.

Another possible outcome is stricter regulation, especially of these opaque family offices, which I think would be good for markets. Indeed, regulators are already scrutinizing hedge funds after the run-up in GameStop shares this year stung some with huge losses. From the WSJ:

The steep losses at Archegos come as a council of top U.S. regulators known as the Financial Stability Oversight Council is already scheduled to meet on Wednesday to discuss hedge-fund activity during the pandemic-triggered crisis.

For more on Archegos and markets, check out these posts:

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When the Suez Canal Was Blocked for Eight Years

As the Suez Canal, chokepoint for 15% of world shipping, was cleared today, I thought of another time it was blocked. Not for a week, but for 8 years.

Following the Six Day War in 1967 between Egypt and Israel, Egypt blocked the canal to prevent Israel from using it. They placed old ships, debris, and even explosives in the canal. And it stayed that way, for eight years.

Thousands of workers rotated on and off the ships over the years to protect these valuable pieces of equipment. They organized joint social events and even created their own postage stamps, which have since become hot items for collectors.

The closure also had a serious effect on world trade, especially for countries that relied heavily on the canal. Seventy-nine country pairs saw the effective distance between them increase by 50% or more:

For these pairs, the closure caused an average fall in trade of over 20% with a three to four year adjustment period. Trade between these pairs recovered completely after the canal reopened eight years later with a similar adjustment period.

By the time the canal reopened, most of the ships in the Yellow Fleet could no longer make the trip:

The canal had remained closed so long that most of the Yellow Fleet ships had decayed and needed to be towed. But two of them—the German ships Münsterland and Nordwind—made it out on their own steam.

We had the benefit of peace this time, so the canal could be unblocked quickly. These episodes really emphasized to me the importance of peace and the free flow of goods to our prosperity.

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Photo: “File:Israeli Tanks Cross the Suez Canal – Flickr – Israel Defense Forces.jpg” by Israel Defense Forces is licensed under CC BY-SA 2.0

What if Your Mask Could Test You for COVID?

Harvard researchers have invented a mask that can test the wearer for COVID:

Researchers at Harvard University’s Wyss Institute for Biologically Inspired Engineering have figured out how to integrate a freeze-dried diagnostic Covid-19 test into a face mask. The test reacts with exhaled particles and gives a diagnosis in 90 minutes or less.

The tests and a tiny blister pack of water can be mounted on any mask. After the mask has been worn for at least 30 minutes, a person punctures the blister pack to release the water needed to rehydrate and run the reactions. The test result is indicated by one or two lines, similar to a pregnancy test

The masks will be affordable and could be useful for a lot more than COVID:

The Wyss team…expects the product to cost about $5. The technology can be targeted to identify other viruses and variants as well.

Any such masks would be subject to FDA approval. Another team at University of California, San Diego is working on a sticker that could be stuck to any mask to test the wearer. Those stickers could cost mere cents.

Incredible ingenuity!

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A Giant Hedge Fund Is Imploding, Taking Stocks with It

Ten billion dollar hedge fund Archegos Capital Management is imploding, causing banks to frantically sell its portfolio to stem further losses:

One mystery in a dramatic year on Wall Street has been the identity of a trader whose persistent purchases have sent shares in ViacomCBS Inc., Discovery Inc. and a handful of other companies surging even when the broader market was down.

People familiar with the transactions say the answer is former Tiger Asia manager Bill Hwang. Late last week Morgan Stanley, Goldman Sachs Group Inc. and Deutsche Bank AG swiftly unloaded large blocks of shares in those companies and others, part of the liquidation of positions at Mr. Hwang’s Archegos Capital Management.

The sales approached $30 billion in value, some of the people said, and fueled a 27% plunge Friday in shares of ViacomCBS—an unusually large decline in a widely held, large-capitalization stock on a day with no significant company-specific news. Billions of market value in other companies were wiped out as the sales continued, surprising market participants who called the size and speed of these stock sales unprecedented.

Hwang had placed giant bets on several stocks funded with borrowed money, and his fund suffered major losses when the stocks moved against him:

…a major actor in supporting companies’ share prices appears to have been undone by his continuing to add to leveraged bets as markets soared. The strategy fell apart when some of those bets started to reverse on him.

There were serious warning signs about Hwang’s conduct, which his banks, including Nomura and Credit Suisse, did not heed:

U.S. securities filings show Credit Suisse was prime broker in 2011 and 2012 to Mr. Hwang’s former firm, Tiger Asia Management LLC. Tiger Asia handed money back to investors after Mr. Hwang admitted in December 2012 that the hedge fund criminally used inside information from investment banks at least three times to profit on securities trades.

This is the latest in a string of problems for Credit Suisse:

Credit Suisse is still digesting the collapse earlier this month of Greensill, a British supply-chain finance company that declared bankruptcy shortly after the Swiss bank froze funds that provided it with liquidity. The double hit could be an extraordinary run of bad luck; there were other banks caught up in both failures. Alternatively, it could point to endemic problems of risk management at Credit Suisse. The Swiss company carried on working with Greensill despite internal concerns.

So if you see volatility in stocks like Viacom, Discovery, Credit Suisse, etc. in the coming days, you’ll know where it’s coming from. I do wonder if other stocks may be impacted by this forced selling of Archegos’ positions.

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Palantir’s CEO Is Spending Time Critizing Wall Street, Rather Than Making Money

Palantir Technologies, Inc. CEO Alex Karp had some sharp words for Wall Street recently:

“We told the Wall Streeters that we will focus on building the long-term health of our company, that we are going to invest in our product development and in our clients, and you just have to battle it out with them,” said Karp, also a Palantir co-founder. The developer of data analysis software went public via a direct listing in September after nearly two decades as a private company.

Not everyone on Wall Street has such a short-term focus, Karp acknowledged. Nevertheless, he said it remains “one of the most destructive, corrosive attributes of an otherwise interesting and largely functioning system.”

Is 18 years short term? That’s how long Palantir has been in business, and it’s never made a profit. Google and Amazon built businesses for the long term as well, but they reached profitability far sooner. Amazon took seven years and Google took just three.

I suggest that Karp stop wasting time criticizing Wall Street and start focusing on making his company spit out some cash for shareholders.

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Photo: Palantir co-founder Peter Thiel. “Peter Thiel” by jdlasica is licensed under CC BY 2.0

Has GameStop’s Business Peaked?

GameStop’s 2020 results, released this week, were disappointing, with losses over $200 million last year.

These weak results may be the best GameStop is likely to do for some time. The reason is something called the “video game console cycle.”

Video game consoles are a huge part of GameStop’s business, especially with the games themselves increasingly moving to digital downloads. New consoles sell like crazy when they’re first released. Gamers line up outside stores, sometimes even overnight, eager to get their hands on the latest tech.

And then…the enthusiasm fades. Sales of the console drop, and another doesn’t come out for 4-7 years. The lines outside GameStop disappear, and business gets tougher.

There are three major video game console makers: Microsoft, Sony and Nintendo. Microsoft and Sony just released new consoles in November 2020, right in time for the Christmas rush. Nintendo’s latest console came out in 2017, and they may have a new one ready within a few months.

Where does that leave GameStop in the later months of 2021 and in the next several years? All the major companies will have recently introduced new consoles, and their sales will have started to drop off. Physical game sales are likely to continue to be supplanted by digital downloads. And whatever rent abatement they were able to get from landlords due to COVID will have likely ended.

This could lead GameStop to much bigger losses in the future. Indeed, before COVID, losses were significantly larger, coming in at $500 million and $700 million for 2019 and 2018 respectively.

If Chewy founder Ryan Cohen and the team he’s putting in place can turn GameStop into a viable e-commerce business quickly, they may escape this fate. But they have 5,000 stores with long term leases and limited cash reserves to fund this transition.

Investors may be expecting a brighter future for GameStop with Mr. Cohen’s changes and the end of COVID, but I suspect the mediocre results we saw in 2020 may be a best case scenario.

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Are GameStop Shareholders About to Be Diluted to Oblivion?

It’s no secret that GameStop shares are way up this year, despite recent struggles:

This could be an opportune time for the company to sell more shares to fund its transformation from a brick-and-mortar to a digital business. Indeed, the company hints at this in their latest annual report, just released after Tuesday’s market close:

Since January 2021, we have been evaluating whether to increase the size of the ATM Program and whether to potentially sell shares of our Class A Common Stock under the increased ATM Program during the course of fiscal 2021, primarily to fund the acceleration of our future transformation initiatives and general working capital needs. The timing and amount of sales under the ATM Program would depend on, among other factors, our capital needs and alternative sources and costs of capital available to us, market perceptions about us, and the then current trading price of our Class A Common Stock.

When a company issues more shares, that means each existing share is less valuable because it represents a smaller slice of the company. You’re slicing the pizza into thinner slices, so to speak.

To get an idea of what such a dilution could mean, consider AMC Entertainment Holdings, Inc., another darling of the Reddit crowd that has experienced a huge run up in price this year. They sold so much stock that each share only owned 20% as much of the company as before! That’s an enormous haircut for investors.

GameStop has just $635 million in cash on hand. That’s enough to avoid bankruptcy for the forseeable future, but is it enough to fund a transformation into the Chewy of video games, outcompeting the likes of Amazon and Microsoft? I doubt it. So they could go for a huge capital raise, severely diluting shareholders.

The flip side of this is if they raise a lot of money and successfully transform the business, you may not care. You own a smaller slice of the company, but the company is worth more.

However, if the transformation fails, you’re left with less ownership in a company that’s still struggling. GameStop has the drag of 5,000 money losing stores. And in a video game sales market that’s increasingly digital, with giant competitors with way more tech expertise and capital, I think dilution and a failed transformation is the more likely scenario.

For more on GameStop, check out these posts:

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Photo: “Retail GameStop” by ccPixs.com is licensed under CC BY 2.0