A quick note here with a few thoughts on technology
IPO companies with economic moats
I use Slack every day at work. It is an essential internal communications tool for my job. And, as such, I see it as a company with relatively high embedded switching costs. Moreover, because it is focused on the corporate market, where the demand curve is less elastic than on the consumer side, it has more upside revenue potential. What Slack lacks as a company is scale and distribution.
This is the kind of company that I think is a great IPO candidate, not just because of its revenue growth but also because it has the ability to weather any market hiccups that see loss-making growth companies fall out of favour. Moreover, it is an excellent acquisition candidate for a slew of enterprise software companies looking to expand their Software as a Service (SaaS) product suite. Microsoft is the first name that comes to mind here.
Looking up Microsoft’s interest in Slack yielded this from 2016:
Microsoft was mulling an $8 billion bid for super-hot work-chat app Slack — but opposition from founder Bill Gates and current CEO Satya Nadella killed the deal before an offer could even be made, reports TechCrunch’s Jon Russell.
According to that report, Microsoft Executive VP Qi Lu, the guy in charge of R&D for Bing, Office, and Skype, was the key figure in lobbying for the company to make a big bid.
But Gates pushed back, arguing that the cash could be better used investing in making its popular Skype app more business-friendly with new features.
That’s not necessarily a poor decision because it won’t cost Microsoft much more to buy Slack today than it would have three years ago. And Skype has not become a useful tool on the corporate side. So, Microsoft is probably looking for more useful enterprise software tools.
Web 2.0: Consumer vs. Enterprise
Most of the new IPO companies we are hearing about are consumer-facing companies that need massive scale to obviate existing value chains in the bricks and mortar world, whether that’s delivery, transportation, property rental or what-have-you. Social is mostly played out as a theme, with Pinterest being a notable exception.
But I would like to see a lot more business-facing IPOs because I think those companies. They are not necessarily more recession-proof. WeWork comes to mind on that score. But, I think their marketing spend to scale is perhaps lower than brands facing the consumer side of things – which makes them more ‘acquisition-ready’ as a fallback to going it alone.
On a different note, you’ve probably heard the news that Facebook is looking to enter the cryptocurrency space. And there have been lots of rumors about what their play will be. One view is that Facebook is looking to re-tool itself as a global WeChat style – a company described by Wikipedia as a Chinese multi-purpose messaging, social media and mobile payment app developed by Tencent.
The goal would be to move away from the privacy-challenged ad-based model and move more to a payments-based model that allows Facebook to monetize users via user action rather than through third-party monetization. That aligns Facebook more with end users and would likely end the interminable debates and headlines regarding privacy.
I like the concept of a Facebook coin. It’s a concept I first mentioned five years ago, with Walmart playing the role of Facebook:
Walbucks are simply a specific form of digital money, credit usable only in the Walmart universe. And because they are secured with a Bitcoin type of algorithm, Walbucks are freely and securely transferable to anyone outside of the Walmart employee universe. This is the crucial point here. Walmart is essentially creating a local digital scrip, if you will – usable only in the local Walmart universe but freely transferable like cash but, unlike cash, secure in terms of transferability.
My view on crypto has always been that blockchain technology is useful but not as a distributed and decentralized ledger to make an end-run around government money. Instead, it works better where it validates transactions, quickly and securely – probably via a centralized agent a la credit card companies. The benefit in crypto is the lack of human intervention and the reduction in cost, something bitcoin lacks due to the exponentially increase in transaction cost due to self-imposed limits.
Think of Facebook coin as a new and more robust PayPal. And of course, having an installed base of users will make the platform easy to distribute. Facebook is ideally situated for that. The challenge will be implementation. Amazon is missing a huge opportunity by not jumping on this. They are the company that would most benefit from their own payments system. Let’s see who jumps in here first.