China Is Crushing One of Its Most Innovative Companies

July 16, 2021 tremendousblog Leave a comment

Didi Chuxing, or “Honk Honk Taxi”, was one of the greatest success stories of Chinese tech. Founded in 2012, it broke out just months later by providing rides during a heavy Beijing snowstorm. A regular taxi was impossible to get, but Didi came through.

After that, the company was on the fast track. It raised over $23 billion in funding from major venture firms like Softbank and beat Uber to dominate the Chinese market. So when the time came to go public this summer, markets had every reason to cheer.

Just sixteen days later, things look a lot different. Here’s what Didi’s stock has done:

Investors are down 15% in just two weeks, a disappointing debut. Meanwhile, Didi’s offices are flooded with Chinese state security agents:

China sent regulators including state security and police officials to Didi Global Inc.’s ride-hailing business on Friday as part of a cybersecurity investigation, the latest development in a regulatory saga that has gripped China’s tech industry.
Regulators from government units including the Ministry of Public Security, the Ministry of State Security, the Cyberspace Administration of China, the Ministry of Transport and Ministry of Natural Resources will be stationed at Didi starting Friday for the investigation, the cyberspace administration said in an online statement.
Potential outcomes include financial penalties, suspensions of business licenses and criminal charges.

Imagine if, shortly after its IPO, FBI and CIA agents raided Uber headquarters. This is exactly what’s happening to Didi.

Didi may not have adequately disclosed the concerns the Chinese government had about its security practices. That, and substantial investor losses, set the stage for a tsunami of shareholder lawsuits. Indeed, a class action suit has already been filed against Didi.

I see Didi being increasingly distracted by heavy pressure from the authoritarian Chinese government along with cascading lawsuits in the US. Even if the company survives, they’re distracted and ripe for disruption.

There is no evidence Didi has actually done anything improper with user data. But the Chinese government doesn’t like any information passing outside its borders, and companies are required to make disclosures to IPO in the US, so Didi is now under fire from a powerful and dictatorial government.

Another company had its IPO on the same day as Didi: SentinelOne, a California-based cybersecurity startup. Here’s how they’ve done since:

Up 4% with no regulatory problems: a situation Didi can only dream of.

If one Chinese company after another comes under the Communist thumb, and investors suffer as a result, why wouldn’t the venture funding go to the SentinelOnes rather than the Didis? Even in today’s hot market, there are always more startups than there is funding. Chinese companies, with their unique regulatory risks, are likely to be the last in line.

China has generated amazing innovation, but those days may be coming to an end.

Have a good weekend everyone!

Hedge Funds’ AMC Death Spiral

July 15, 2021 tremendousblog Leave a comment

Despite losses of nearly $4 billion so far this year shorting stock in AMC Entertainment Holdings, Inc., short sellers are actually increasing their bets against the company:

As AMC tests its key 50-day moving average support level, short bets against the company are increasing, according to data from S3 partners. Over the past week, short bets increased 6% to 5 million shares, worth nearly $200 million.

When a stock is up 17-fold for the year despite a recent correction, and you’ve already taken billions in losses, why would you add to your position? I suspect that some hedge funds, who tend to be large short sellers in AMC, are swinging for the fences because they have little alternative. Many have already taken huge losses, and a few conservative bets won’t bring them back.

Keep in mind the incentive structure for hedge fund managers: they generally make 2% of all assets under management yearly, plus 20% of any gains. That 20% performance fee is what can really make them rich. But, if their fund is down, there’s no performance fee until they’re back in the black.

If only high risk bets can get you back to earning your fat performance fee, you make those bets. Slowly clawing back over a period of years with prudent trades means no performance fees for an extended period, and that’s not palatable to many fund managers. They’d sooner take high risks with their current fund and, if it fails, close it and start fresh with another.

Nice deal for them, not such a nice deal for the pension funds and universities whose money they hold.

If I held a position in any hedge fund that was betting against meme stocks, I’d liquidate it immediately before they lose more and suspend redemptions. The risk here is simply too high and too unpredictable.

There are easier ways to make a buck.

When Citadel Almost Died

July 14, 2021 tremendousblog Leave a comment

Meme stock traders on Reddit and elsewhere love to hate Ken Griffin, CEO of Citadel LLC. The hedge fund and market maker manages over $34 billion and handles more US stock trades than anyone else. Many suspect it had a hand in Robinhood limiting buying in GameStop shares, which angered traders.

Its tentacles are everywhere. Citadel is so big, well-known, and rich it almost seems invincible.

But what’s less well known is that Citadel nearly went bankrupt during the financial crisis of 2008:

…in July 2008, Citadel endured the first of six straight money-losing months. Following his old script, Mr. Griffin raced to buy beaten-down assets such as convertible bonds, long his specialty, only to see them take a further beating.

Griffin’s hedge fund lost 55% of its value, and rumors swirled that the fund was about to go bankrupt. That was a very real possibility: 20% of all hedge funds shut down in 2008-09.

Citadel stopped investors from withdrawing money to stanch the bleeding. It also benefited from a helping hand from regulators, perhaps showing its political influence. From The Wall Street Journal:

In particular, regulators pressed Wall Street firms including Deutsche Bank AG not to make drastic changes in their dealings with Citadel, according to these people.

I suspect that if banks had been left to their own devices, Citadel would’ve imploded under an avalanche of margin calls and severed credit lines. When you’re down 50%, much less 55, people assume you can go down all the way. And they want to cut their losses.

With this governmental helping hand, Citadel managed to survive and today is thriving. But I find this history lesson instructive: the mighty can fall, fast.

How China’s Tech Industry Dies

July 13, 2021 tremendousblog 3 Comments

The Chinese Communist Party has launched a severe crackdown on the technology industry:

Didi Chuxing, the Chinese equivalent of Uber, had its app removed from all Chinese app stores shortly after its US IPO
ByteDance, parent company of TikTok, shelved its IPO plans under regulatory pressure. Its CEO has resigned.
Over 30 tech companies have been hauled in for meetings with regulators
Ant Group, a financial company founded by Jack Ma that would’ve been among the largest IPOs in history, had its IPO in China cancelled after Ma criticized authorities

This crackdown makes it nearly impossible for Chinese companies to list their shares in the US, removing one of the main ways that venture capitalists cash out. This will cause venture firms to shy away from investing in Chinese companies.

Why does this matter? Let’s take a look at how venture funding works:

1) Company makes product
2) Company pitches investors
3) Investors give company money
4) Company uses money to hire engineers and make a better product, and…
5) Acquire users through ads and/or building their sales team. Next…
6) With more users and revenue, company comes back to VC’s to raise more money at a higher valuation. Then, they do more of 4-5
7) After repeated rounds of VC funding, the company either gets acquired or goes public. VCs cash out.

But Chinese companies cannot go public in the US for the forseeable future, and even a listing in China may not be possible, as Ant Group proved. And if the Chinese authorities think a US listing brings security risks, surely the acquisition of a Chinese tech firm by a US company would be even riskier and thus also off limits.

What does that leave in terms of exits? Acquisition by a Chinese tech company, which means a lot fewer and smaller potential acquirers. The only other option is an IPO in China, providing the company doesn’t offend anyone. But the Chinese stock market is just 1/4th the size of the US one, so the payoff may be much smaller.

No exit means no investment. For VC firms, the exit is the entire point!

Unlike in China, firms in the US and elsewhere will be able to choose whatever exit is the most lucrative. That means they’ll be able to raise venture capital much more easily. That money will let them hire the best engineers, build the best products, and acquire tons of customers, leaving Chinese firms in the dust.

A couple of years ago, I thought the Chinese technology industry might overtake the US. I don’t think that anymore. With the government’s hand ever heavier, I see Chinese technology falling further and further behind.

The Chinese people have proven they have the skills to compete. But will their government let them?

Why I Just Invested in Gauge, the Best Way to Sell Your Car

July 12, 2021 tremendousblog Leave a comment

If you have a car to sell, you generally have 3 options:

1) Craigslist. You can get a good price, but buyers are flaky and the process takes forever. If you can sell it at all.

2) Dealer trade-in. Easy but the price is terrible.

3) Sell to a used car lot. See # 2

Now, there’s a much better option: sell your car with Gauge. Gauge is a Salt Lake City-based startup that gets you the highest price for your car, easily. When you list your car with Gauge, you get competing bids from multiple dealers. You pick the offer you’re happiest with, and that’s it!

Selling with Gauge avoids the hassles of shady Craigslist buyers, and the competitive process gets you a better price than taking the car to a dealer.

But what about Carvana?

What about them? Carvana buys your car itself, which means their incentive is to give you the lowest price possible. While Gauge does buy your car directly from you, it does so on behalf of dealers and buyers who want to bid on it. Gauge only makes money if you decide to sell your car on their platform. If you’re not happy with the bids you get, you’re free to sell your car elsewhere. So Gauge has every incentive to get you the best price possible.

This model is working so well they’ve earned a stellar 4.7 star average on Google. Sellers love the great customer service with no fees. Dealers love Gauge too, because they can get better quality cars than at most auctions. And not having to show up at an auction in person is a huge time savings, not to mention being safer.

Gauge is growing very fast, and I’m super excited to be an investor! They only list cars in the Salt Lake City area at the moment, but they’re expanding rapidly, with several new markets already in the works.

If you’re in the area with a car to sell, I don’t think you can do better!

CUTE ANIMALS ONLINE: MY TOP 5

July 9, 2021 tremendousblog 2 Comments

As a fun thing heading into the weekend, I thought I’d share five of my favorite cute animal accounts online. I’m a big animal person, rodents especially, and really enjoy spending time with them. The next best thing is checking out adorable animal content online, and these are my favorites!

Number 5: Goodable

More than just cute animals, but some wonderful cute animal content. Check out this adorable abandoned kitten that was found and saved by some very kind people:

These two home renovators came home to find an abandoned kitten.

When they looked closer, they saw he was blind.

Here's the update we've all been waiting for…#Humanity ❤ 🥲 pic.twitter.com/btLUpeA7OE
— Goodable (@Goodable) July 2, 2021

Number 4: My Little 4 Rodents

Wonderful Instagram account with some very cute gerbils, along with other fine rodents!

View this post on Instagram

A post shared by ♡ ︎𝐽𝑒𝑠𝑠𝑦 ♡︎ (@my.little.4.rodents)

Number 3: Hummingbird Returns to Man Every Year

A man who rescued an injured hummingbird and nursed it back to health. He later let it go, but it returns every year and sits in his hand during its migration! Wonderful story.

Number 2: Chi Channel

Adorable chinchilla and degu videos! It’s all in Japanese, but even if you don’t speak the language, the cuteness translates!

Number 1: Cat saves little boy from falling from balcony!

Just do what kitty says! 🙂 What an amazing cat!

View this post on Instagram

A post shared by Satisfying Fun Videos 🌐 (@satisfiyngfun)

Have a great weekend everyone!

Short Sellers Lose $44 Billion in 30 Days

July 8, 2021 tremendousblog 2 Comments

Short sellers had a disastrous June:

Overall, U.S. short sellers are down -$44.49 billion in net of financing mark-to-market losses over the last thirty days.

The #1 source of short seller losses? AMC, by a wide margin, at $2.8 billion. AMC was also the #2 stock in the entire market in increased short exposure in June, a little behind Tesla, which has a market cap more than 25 times as large.

How can we describe this behavior by short sellers? Delusional? Suicidal? Or perhaps rational, given the incentives hedge funds are facing. Numerous funds are down heavily on bad bets against meme stocks. Once a hedge fund is well into the red, it has to make back its losses to even have a chance of earning its 20% performance fee. (That fee is collected only on gains over the capital invested.)

So, the deeper in the hole a fund gets, the more incentive it may have to make risky bets. Only a huge payoff on a volatile stock (like AMC) can get them back in the black, earning those sweet, sweet performance fees.

Unfortunately, this exposes investors who have already lost much of their capital to enormous risks. If I were an investor in a hedge fund that bet against meme stocks, which fortunately I am not, I’d pull my money out ASAP before they lose it all. It’s hard to make money shorting anything in such a hot market, but shorting one of the most popular stocks out there is a recipe for disaster.

The hedge funds were just lucky that June is a short month.

Why Indian Tech Is Exploding

July 7, 2021 tremendousblog Leave a comment

The Indian tech industry is growing at an incredible pace:

Indian startups have raised a record $10.46 billion in the first half of 2021, up from $4 billion during the same period last year

Salaries are also increasing rapidly, from an average of $40,000 to $70,000, and even $150,000 for some top engineers.

Why is Indian tech growing so fast? I think several changes in the industry in recent years are weighing in its favor:

Major investors went remote due to COVID, and have largely stayed that way even as the pandemic recedes in the US. This means they can meet an Indian entrepreneur just as easily as one across the street in San Francisco. This democratization is great for the entire industry.
The venture industry as a whole is on fire, with both exits and valuations in the US reaching staggering levels. This gives venture firms more incentive to look outside the US for better deals, and more cash with which to do so.
It’s easier to incorporate in the US than ever. I recently invested in a startup that lets companies incorporate, issue stock options, and handle compliance cheaper and easier than ever before. Many of their customers are outside the US, but incorporate here to make fundraising from American investors easy. (More on this awesome company soon!)
India is stacked with tech talent. Anyone who has worked at a software company in the US can tell you that Indian-Americans are a huge part of the industry, and they have incredible skills.
China is killing its tech industry. Heavy-handed regulation, massive fines, and even disappearances of tech entrepreneurs is having a chilling effect, and the number of Chinese startups breaking out is way down. India competes with China for venture funds, and right now, it’s looking like the better bet.

New regulations that may require companies to expose users and break encryption are the biggest risk I see on the horizon for Indian tech. But with a deep talent pool and ample funding, India’s is a startup scene to watch.

सौभाग्य!

AMC + UFC = Jackpot

July 6, 2021 tremendousblog Leave a comment

AMC Entertainment Holdings, Inc. just made a bold move to capture a huge new audience:

Many of you have suggested we show live pro sports, Esports and events. We are on it. On Saturday July 10, live from Las Vegas, the Poirier McGregor UFC matchup will be on AMC’s big screens at 95 U.S. AMC Theatres. Tickets only $25 vs. $70 on pay-per-view! https://t.co/RDn2TVfZ9E pic.twitter.com/l90bGpqHqZ
— Adam Aron (@CEOAdam) July 5, 2021

The value proposition here is obvious: why pay $70 when you can pay $25? But the implications for AMC are even bigger than they may appear.

UFC is growing at an incredible rate, dwarfing growth in any other major sport. 2020 was a banner year for the league:

“For us personally, it’s the best year we’ve ever had. Crazy to say that, but we broke just about every record we have, except for live gate, obviously,” White told TSN. “It was a very challenging year for us, to pull all this stuff off. It was without a doubt the hardest year of my career.

Viewers grew 30% on ESPN and the UFC’s YouTube and Instagram accounts are second only to the NBA in followers.

UFC not only brings an enormous new audience to AMC, it counters one of the biggest problems movie theaters have: strong seasonality in their business. The most anticipated movies are usually released in the summer, and the crowds swell. But in the colder months, major releases are fewer and attendance drops off.

Unlike the movie business or most professional sports, UFC is not seasonal. Major tournaments happen regularly throughout the year, and there is no off season.

Picture normally empty theaters packed with cheering fight fans in January, and then imagine the money printing machine in AMC’s headquarters spitting out hundreds. While the stock’s price is a little high for my taste at the moment, I have to applaud CEO Adam Aron’s leadership.

Why I Just Invested in Crafter, Maker of the Most Beautiful Arts and Crafts Kits in the World

July 6, 2021 tremendousblog Leave a comment

I’m super excited about today’s company! Of all the startups I’ve looked at recently, Crafter might have the most compelling product. This San Diego-based company makes arts and crafts kits of the very highest quality and provides great instructional videos that will have you making beautiful crafts in no time.

A beautiful textile project from Crafter

I never thought I’d consider embroidery until I saw their product! Crafter, also known as The Crafter’s Box, can also help you make quilts, leather bags, and even stained glass! This post barely scratches the surface; you really have to check out Crafter.com and see all this cool stuff! Go ahead, I’ll wait here. 🙂

The founder, Morgan Spenla, created Crafter after what was supposed to be a relaxing crafting experience turned into a nightmare. Morgan wanted to make a nice necklace, and found herself at Joann’s looking at a thousand different tools and materials. She had no idea what to choose. The store was about to close and her kids were going wild. Morgan wound up with a random assortment of materials and couldn’t find a YouTube video to show her how to turn them into the necklace she wanted. She wound up giving up in frustration. But she knew there had to be a better way.

I doubt Morgan is the only person to have this experience. Crafting has become increasingly popular during the pandemic. If you’re stuck at home, why not make a cool scarf? And I don’t see people giving up their fun new hobby just because things are reopening.

The venture capital world is largely male, and most of us probably don’t do crafts. But that doesn’t mean other people don’t! Arts and crafts is a $44 billion dollar industry that has grown by half in just 5 years, and it’s almost all brick and mortar retail. Crafter could completely disrupt this market. Etsy is the go-to for finished crafts, and Crafter may become the go-to for making crafts. Oh and by the way, Etsy is valued at $25 billion.

On a meeting with Morgan recently, I was impressed by her resourcefulness and dogged persistence. Founders giving up is the biggest killer of startups, and I don’t see Morgan giving up. She funded the company herself for nearly 5 years before raising venture capital, and continues to work long hours to make her dream a reality.

She also excels at recruiting the best people to help her. On a recent episode of This Week in Startups, Morgan shared her strategy of recruiting former Starbucks employees for customer service jobs. They excel at dealing with difficult customers, and if your tech startup can pay more than Starbucks, you’ve got them. This struck me (and the host, noted angel investor Jason Calacanis) as brilliant.

Take a look at Crafter.com and make yourself something awesome! And by the way, that link will save you 20%!

Tremendous

Monthly Archives: July 2021