Tremendous

An angel investor's take on life and business

  • This Is Why Credit Suisse Keeps Getting Punched in the Face

    Credit Suisse keeps getting smacked. Let’s review a few of their recent scandals:

    • $4.7 billion charge for losses in trades with Archegos Capital Management, the imploding hedge fund
    • $1.5 billion loss likely in dealings with collapsed supply chain finance company Greensill Capital, just three weeks prior
    • Bonus scandal: Former CEO Tidjane Thiam spied on employees and was forced out in February 2020

    So they’ve been busy! Why is this one company stumbling from cliff to quagmire?

    A major factor appears to be its bifurcated business, which focuses on both asset management and investment banking, but is too small to be a big player in either market. So, in order to win business from its bigger competitors, it has to offer better terms and do worse deals.

    In reality, the asset-management unit, which brought in Greensill, and the investment bank, which handled Archegos, were too small to square off with Wall Street giants. The bank tried to make more money from fewer clients than rivals with larger balance sheets and ended up overlooking risks, the executives said.

    There were clear warning signs on both Archegos and Greensill.

    There were clear warning signs on both Archegos and Greensill. Archegos founder Bill Hwang had been sanctioned by the SEC for insider trading and banned from handling client money, which is the entire reason he started Archegos in the first place. It was a family office, managing just his own family’s money, due to that SEC ruling. Credit Suisse thought the risk was limited because he wasn’t managing client money, but failed to consider what would happen to its own funds!

    Greensill too had come under scrutiny early enough to avert problems, but nothing was done:

    In 2019, members of the credit-structuring team escalated its alerts about Greensill to the bank’s reputational-risk committee, the person familiar with the funds said. They had become concerned Greensill might be taking operational shortcuts.

    Interestingly, the dynamic of Credit Suisse agreeing to anything in order to win business from larger competitors was played out by its client Greensill as well:

    Mr. Greensill signed up some big, credit-rated companies. To wrest those customers from big banks, Greensill had to offer competitive terms that didn’t make it much money, according to people familiar with Greensill’s business.

    Credit Suisse seems to lack any internal controls whatsoever, and I strongly recommend investors avoid

    Credit Suisse seems to lack any internal controls whatsoever, and I strongly recommend investors avoid it. We can also gain a broader lesson from this fiasco. If you’re a smaller company trying to get into a market, don’t do disadvantageous deals just to get some market share. You expose yourself to too many problems that will blow you up before you ever get a chance to compete with the big boys.

    For more on Archegos, check out these posts:

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    Photo: “Punch to the Face” by Ninja M. is licensed under CC BY-NC-SA 2.0

  • The Lost Planet of Vulcan

    For nearly two hundred years, Newton’s laws of motion worked pretty well. Then, a French scientist named Urbain Le Verrier came along and messed it all up.

    He calculated Mercury’s orbit using Newton’s laws and waited until it orbited the sun again in 1848, awaiting confirmation of his calculations. Mercury didn’t behave as expected. Its orbit was off by a fraction of a degree, enough to perturb exacting astronomers. Le Verrier went in search of what could’ve caused his calculations to go awry, and seized upon a dramatic possibility.

    What about an unknown planet? If a small planet existed between the sun and Mercury, it would explain the deviation in his calculations. Le Verrier called the unknown planet Vulcan, and set about trying to find it.

    Only Le Verrier never could find it, and neither could the many other astronomers who looked.

    The mystery was finally solved decades later by Albert Einstein’s General Theory of Relativity. It showed that Newton’s laws were wrong, and the mass of objects warped space in a way that brought objects together, rather than an object itself attracting other objects. It also perfectly explained the shape of Mercury’s orbit without needing to postulate a planet no one could find.

    Einstein’s theory remains unchallenged to this day, and even NASA telescopes can’t find Vulcan. It seems to have existed only in our imaginations.

    I found out about Vulcan today in an excellent class I’m taking. It’s called Puzzles, Problems and Paradoxes and you can sign up here. It’s online every Wednesday at 11:10am Central through UT-Austin.

    For more on science, check out these posts:

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    Photo: “False Color View of Mercury” by NASA Goddard Photo and Video is licensed under CC BY 2.0

  • Key Metrics for Startups: Consumer vs. Enterprise SaaS

    I listened to a fascinating podcast this morning in which Jason Calacanis, an early investor in companies including Uber and Calm, broke down how to measure startup success. The key metrics depend on what kind of company you’re looking at:

    Consumer companies:

    • Of the biggest users, how many are retained? For example, if someone used the app 3 times a week on average last month, how likely were they to return this month? Much of your app engagement is driven by the most active users.
    • What is the customer acquisition cost versus the revenue from each customer? Half to two thirds of the spending of fast growing consumer companies is marketing, even outpacing staff salaries! And that makes sense if you’re customer acquisition cost is $50 but you can get $100 from them. You should do that all day. This is also relevant for SaaS startups.
    • For marketplaces, how often do transactions happen? Higher revenue transactions, like booking an Airbnb, can be less frequent. Low revenue transactions, like taking an Uber, need to be more frequent.
    • Also for marketplaces: what is the take rate? How much money do you get from each transaction?

    Enterprise Software as a Service (SaaS) companies:

    • How many customers “land and expand”? Since enterprise SaaS tends to have a lower churn rate (customers leaving), how many become customers and then buy more licenses (“seats”) for more of their staff is key. Another way customers can expand is if you start selling more products and they buy those too.
    • Churn rate is less relevant. You don’t see as many customers cancelling because businesses put more consideration into a software purchase and then rely on it for their company’s success. A consumer is much more likely to take a flier on a Hulu membership than a company is to do so on a SaaS product. This means if you keep selling enough licenses and new, adjacent products to existing customers, you don’t even need to increase customer count much. This is less true for consumer startups.

    Bonus: Dating apps face some special challenges. Facebook and Instagram sometimes ban them from advertising, and it’s very difficult to get them approved in the Apple app store. This may be because some are used to scam people and companies want to protect their users.

    Some great info in this podcast! I’ll definitely be using it to guide my investment decisions. On the whole, SaaS seems a lot easier. Customers are less fickle, have deeper pockets, and are more willing to pay for something than consumers who have been trained that if it’s on the internet, it’s free.

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    Photo: CEO of hot startup Clubhouse, “Paul Davison” by jdlasica is licensed under CC BY 2.0

  • China Hacked Microsoft With Data from Previous Infiltrations

    Microsoft Corp. and U.S. government officials are still working to understand how a network of suspected Chinese hacking groups carried out an unusually indiscriminate and far-reaching cyberattack on Microsoft email software, more than a month after the discovery of an operation that rendered hundreds of thousands of small businesses, schools and other organizations vulnerable to intrusion.

    A leading theory has emerged in recent weeks, according to people familiar with the matter: The suspected Chinese hackers mined troves of personal information acquired beforehand to carry out the attack.

    More here.

    Microsoft Exchange servers run Microsoft Outlook, which is used almost universally for e-mail in corporate America. Having access to that is having the keys to the kingdom at almost any company in the country and many abroad.

    So where did they get all this personal information? The evidence indicates that it came from prior hacks:

    Among the potential sources of the personal data is China’s vast archive of likely billions of personal records its hackers stole over the past decade. The hackers may have mined that to discover which email accounts they needed to use to break into their targets, according to people familiar with the matter.

    Chinese hacking is starting to operate like a flywheel: hack target A, get information, use it to hack target B, get more information, then hit C.

    The Biden administration provided some wise guidance to Microsoft:

    Microsoft has pushed its customers to install security patches over the past month, releasing a blizzard of more than 25 patches that covered the wide array of Exchange versions. At the Biden administration task force’s urging, the company also simplified the updating process for customers, releasing a “one-click patch” option.

    I can’t help but think that this level of sophistication would’ve eluded the Trump administration.

    With China increasingly aggressive in numerous ways, this could be a big opportunity for American security companies to step up and provide better protection. I’ll definitely be on the look out for network security startups that look promising.

    For more on technology, check out these posts:

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    Photo: “Xi Jinping at the EP” by European Parliament is licensed under CC BY-NC-ND 2.0

  • Apartments Are Banned from 76% of San Francisco

    I came across in incredible stat today. Apartments are banned in 76% of San Francisco. It’s no wonder that it’s the most expensive city in the United States.

    In fact, given increasingly restrictive zoning, 54% of the homes in San Francisco could not be built today! The picture in New York City is similar, where 40% of Manhattan homes couldn’t be built under current zoning codes.

    I find the anti-development discourse often focuses on “greedy developers” when a more appropriate person to focus on might be “working class mom who doesn’t want to live 90 minutes from work.” How we frame the problem may be the key to winning the argument. The “neighborhood character” trope is another NIMBY standby, but against a struggling single mom who spends four hours a day commuting on a bus to her job as a nanny and just wants an affordable place near her job, i think their argument loses its punch.

    Housing in expensive cities like SF and NYC could get more affordable in a different, more painful way. Everyone I know of who lives in San Francisco is decrying staggering amounts of crime and school closures that have gone on over a year. The tech industry has moved to Zoom and found real efficiencies there. I live in the NYC area and can attest that crime has increased substantially.

    Perhaps the way San Francisco and similar cities get cheaper isn’t by building, but by self-destruction.

    For more on zoning and politics, check out these posts:

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    Photo: “Typical San Francisco house” by 4nitsirk is licensed under CC BY-SA 2.0

  • AMC Shareholders Could Lose Most of Their Ownership. Again.

    CEO Adam Aron told FOX Business Network’s “The Claman Countdown” Monday that the company has asked its shareholders to approve up to 500 million shares, even though there is no intention of using them all at this time.

    Aron insists he doesn’t plan to issue them all at once:

    And we’ve asked our shareholders to approve up to another 500 million shares, not that we would use any amount like that any time soon. But we’re going to make sure – AMC was a very successful company for 100 years – we’re going to make sure that AMC theaters is around and is a very successful company for the next 100 years …

    More here.

    The thing is, AMC has only 450 million shares outstanding. This would more than double their share count, meaning every existing shareholder loses most of their ownership stake in the company. Perhaps they don’t intend to issue them all at once, but something tells me they won’t be issued over 100 years either. If you only intend to sell a few in the near term, why not authorize just that, rather than a wholesale dilution of the existing shareholders?

    This comes on top of a massive dilution last year. AMC had about 100 million shares in the fall of 2020. They’re now at 450 million. And they could go to a billion at any time if this proposal goes through.

    That would mean anyone who’d owned shares as of fall 2020 would’ve lost 90% of their ownership stake in the company. Granted, it’s a stronger company with the additional capital, but this level of dilution is rare.

    How is the stock reacting to all this? Just fine, thank you. In fact, it’s gone up approximately 5 fold since the end of 2020, despite 80% dilution, which is headed to 90% if these additional shares are issued.

    This defies all logic. I suspect the retail investors piling into AMC don’t know about the dilution or don’t know what dilution is.

    As much as one would like to pull for a classic American institution like AMC, I suggest doing so by attending a movie, not buying what’s left of the stock.

    For more on AMC and Wallstreetbets, check out these posts:

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    Photo: “AMC Theaters” by JeepersMedia is licensed under CC BY 2.0

  • Major Financial Firms Start a Bitcoin Lobby

    Fidelity Investments, Square Inc. SQ +1.30% and several other financial firms are forming a new trade group that aims to shape the way bitcoin and other cryptocurrencies are regulated.

    The Crypto Council for Innovation will lobby policy makers, take up research projects and serve as the burgeoning industry’s voice in championing the economic benefits of digital currencies and related technologies. Crypto investor Paradigm and Coinbase Global Inc., which operates a cryptocurrency exchange, also signed on as initial members of the group.

    More here.

    These companies are serious financial heavyweights. Fidelity has $10 trillion in assets under management. Square’s market cap is over $100 billion. And Coinbase expects to IPO soon as a valuation of nearly $70 billion.

    I suspect these corporate giants are trying avoid the possible banning of bitcoin anonymity that I wrote about here on March 5. A proposed regulation from the last days of the Trump administration could have removed one of bitcoin’s most appealing features, its untraceability.

    A major lobbying group, a Fidelity ETF…bitcoin is really becoming institutionalized. Although I don’t trade cryptocurrencies myself, I view this is a significant positive for the technology. Every step towards establishment adoption and away from crippling regulation helps.

    For more on bitcoin, check out these posts:

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    Photo: Coinbase CEO “Brian Armstrong – Caricature” by DonkeyHotey is licensed under CC BY 2.0

  • Unicorns Are Being Minted Faster Than Ever

    On average there are 7x the number of billion dollar exits now than a decade ago.

    This was Eric Feng writing in September 2018. Since then, this staggering increase in startups hitting that magic “unicorn” $1 billion valuation has only accelerated. Data indicates the number of unicorns has nearly doubled again since Feng’s writing. That’s a growth rate almost twice the prior period.

    What’s driving this staggering growth? The biggest factor may be capital flooding the market, making it more likely for companies to be able to raise bigger and bigger rounds of financing at higher valuations, and also making it easier for them to build and scale faster.

    What’s more, changes in technology have made it easier to create a startup than in the past. You can host and scale your computing needs via cloud computing, including with no servers, which was a pitch I saw Friday. You can find engineers on LinkedIn, create a website with SquareSpace, and manage your cap table easily with software. We are getting closer and closer to having a “startup in a box.”

    For more on startups and venture capital, check out these posts:

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    Photo: “Unicorn Attack!” by Sam Howzit is licensed under CC BY 2.0

  • Palantir Sued Over Controversial Founder Privileges

    A Palantir Technologies Inc. shareholder sued Peter Thiel and its other two founders in Delaware Chancery Court on Thursday, claiming they made themselves “corporate emperor for life” through charter provisions that make investor votes “magically appear and disappear” on demand.

    “The founders decided to completely untether voting power from equity ownership” by providing that their shares always control 49.99% of the vote, no matter how much of Palantir they own, the complaint says. “This power grab stretches the flexible bands that keep Delaware law in balance beyond their breaking point.”

    More here.

    So even if the founders sell their shares, as they have been doing, they control approximately half the company’s votes no matter what. Got only half as many shares as before because you cashed out? No problem! We’ll just give you twice the votes!

    Extreme levels of founder control proved a disaster in the case of WeWork, and the same could happen here. On principle, I wouldn’t want to own shares in a company that will never give me or my fellow stockholders any control. And even Adam Neumann didn’t get to keep his votes if he sold his shares.

    Note that these provisions continue until the last of the three founders dies. The youngest is 37, so it’s basically a lifetime privilege.

    It’s incredible that not only did they create such a bizarre voting structure to deprive shareholders of any say, they’ll defend it in court with shareholder money. On the other hand, if they can’t vote you out, why not? This along with losses every single year of its 18 year existence are enough to keep me far away from this stock.

    For more on Palantir, check out these posts:

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

  • GameStop Plans to Dilute Shareholders, Issue Hundreds of Millions in New Stock

    Well, it’s here:

    GameStop Corp. GME -3.90% said it could raise hundreds of millions of dollars from stock sales in the coming months, as the videogame retailer turns to public markets to help support its turnaround plan.

    The company said Monday that it would sell up to 3.5 million shares, adding that the timing and amount of any stock sale would involve various factors.

    Plans for issuing more shares were in their most recent annual report, as I called out here on March 25th.

    3.5 million shares would be about 5% of the current shares outstanding. With GameStop’s share price still 60x above where it was a year ago, I would expect further capital raises. If they can use the money wisely to fund a turnaround to e-commerce, this could wind up being a positive for shareholders in the long term, but in the short term any dilution is likely to hit the stock’s price.

    GameStop has failed at turnarounds before, and I’m skeptical they can do it right this time. If not, shareholders are left with diluted shares in a company that’s hit a dead end.

    For more on GameStop, check out these posts:

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