Simon's Newsletter #2
Takeaways from Ukraine, Late Stage Startup Investing, The Man Behind Peloton's Turnaround Plan; Book Review: James Dyson
Introduction:
This is the 2nd post of my newsletter. I want to take time to thank everyone who has subscribed to this newsletter as a sign of support.
Just to reiterate, I will write about top 3 geopolitical or business events and its implications followed by a book review.
Why this Ukraine saga matters to the world?
I had to rewrite this portion as Russia started the invasion of Ukraine on 24 February 2022. As of this writing, the Ukrainians are putting up fierce resistance in the face of being outgunned in every situation. However, stories of heroism in places such ‘Snake island’ in the black sea, where 13 Ukrainian soldiers refused the surrender and told the Russian warship to go fuck themselves before being completely annihilated, indicates that morale continues to be high on the Ukrainian side and that Putin’s hopes for a quick victory is in doubt. Here are a few implications globally now that a war has started.
Wheat Prices → Instability : Russia is the world’s #1 exporter of wheat, followed by Ukraine at #5. There will be pressure on wheat prices globally. Rich developed nations will be able to stomach the price increases (hell we’re already at 7% inflation in the U.S. so why not add more ). However, African countries, some of which are tinderboxes of instability, will be the biggest losers in such a wheat supply disruption. In the coming months or within the year, do not be surprised at unrests in Ethiopia, countries in the Sahel and Egypt, which heavily subsidizes bread for its people.
Taiwan: No doubt China is monitoring the situation closely because how the West responds to Ukraine will be indicative of how it will respond to future aggressions against Taiwan. There are lessons also for Taiwan as well. The most important lesson is in order to deter an invasion, you have to raise the cost for the aggressor. This is becoming evident as Ukrainians have put up stiffer resistance than anticipated by the Kremlin. Taiwan’s military conscription is only 4 months compared to the required 2 years of conscription in Israel, Singapore, and South Korea, all of whom are surrounded by hostile neighbors. In summary, Taiwan needs a more robust civil defense framework such as Ukraine’s and procure advanced weapons and defense knowledge from countries such as Turkey, Israel, South Korea in addition to the U.S.
Efficacy of sanctions will be put to the test: I read a very sobering article about the history of sanctions by the Economist. In summary, the more we isolate nations such as Russia, the more incentive they have to develop new solutions that will insulate their economies from its effects. This is why cutting Russia off from SWIFT may cause temporarily pain but it will push the country to develop an alternative system for financial flows with China and have more transactions in the world settled in the Chinese yuan vs the dollar or euros. According to this analysis by the Economist, sanctions loses its teeth over time.
My Opinion:
Putin has irreversibly exacerbated an outcome he desperately wanted to avoid: a re-invigorated NATO, more NATO troops in Russia’s flank and an irreversible pivot towards the West in Ukraine. The geopolitical order has changed and the relative peace in the post-Cold War era has abruptly ended. We now face a much more dangerous situation in that armed forces of nuclear powered nations are much more closer to each other for conflict. One thing for sure is that the invasion of Ukraine will mark a point where the geo-political order has fundamentally changed. What happens next is anyones guess; supply shortages, emboldened Chinese aggression towards Taiwan, Sweden and Finland joining NATO just to name a few.
Late Stage Startups Need To Get Their Shit Together
Late stage startups that are barely profitable and/or are cash intensive will find it tough to raise capital or do so at favorable terms. The Information, a technology news outlet, has reported that Tiger Global Management, a hedge fund , has pulled back its investment in late stage startups and is now primarily focused on investing in early stage startups and public companies that now seem attractive given the depressed prices.
My Opinion:
High-growth startups that are burning cash such as GoPuff and DoorDash are going to struggle if they do not control their cash burn. I am picking on ultra-fast delivery startups because I don’t believe this business model will succeed in the long term as they are presenting the market with a nice-to-have solution with brutal unit economics that is not necessarily needed. One likely outcome is that the entire ultra-fast delivery startups will consolidate their operations to reduce costs, raise prices and extend their cash runway until the next bull market, where there will be more investor appetite for capital infusion with favorable financial terms. At the moment, these high growth / cash intensive startups cannot decelerate their acquisition costs as this will inevitably lead to lower revenue and prolong the time it takes to achieve positive unit economics.
Peloton:
Peloton saw its fortune transformed practically overnight at the onset of the pandemic with share prices reaching as high as $162 in Dec 2020 (currently below $30). There were backlogs of months for a Peloton bike right when the pandemic began. However, as people are rushing back into gyms, there is less of a need for a $2000 stationery bike with a $40 monthly subscription. Add to Peloton’s woes, the company has over-invested in inventory to the point where they had to halt production of bikes. Founder & CEO John Foley is now out (but still retains majority control of the company as executive chairman) and will be replaced by Barry McCarthy, who is an interesting person for the job because of his past tenure as CFO for both Spotify and Netflix. He is an interesting character because this is the same person who helped architect Netflix’s turnaround. Back when Netflix went IPO in 2002, a majority of the revenue was still from DVD rentals. There was a growing existential risk for Netflix post-IPO given Amazon’s interest in DVD rentals as well. McCarthy was slotted for retirement but chose to stay on to tackle the Amazon challenge and pivoted Netflix’s entire business model to streaming and the rest is history since all other media companies (including Amazon) are now mimicking Netflix. There was a story mentioned in one of the Acquired podcasts about Peloton where McCarthy was asked why he stayed on at Netflix when he could’ve retired. “You don’t leave your friends in a knife fight” was his answer.
My Opinion:
As much as Peloton has the right CEO to turn things around, a more likely outcome in the next 12 months is that they will find a buyer (Google, Apple e.g.). They have built a network of celebrity instructors and a fanatical fanbase for monetization that should look attractive to any buyer. There is also an option to move away from the capital-intensive business of building and selling bikes and become more of a ‘Netflix’ for fitness. If they choose to pursue this route, Peloton definitely has the right person for the job in Barry McCarthy given his experience in turning around companies. I also find this interview with him fascinating and yields incredible insights into how he thinks about running a business and work-life balance (or lack thereof).
Book Review: Invention: A Life by James Dyson
Summary:
The book chronicles James Dyson’s early life, struggles and explanations of design principles in Dyson products. You get to go through a hero’s journey and learn about the unsuccessful trials that goes behind every successful product. Last but not least, you get a first-person account of Dyson’s rise as a company and its company decisions at every major pivotal point in its life.
Interesting Snippets from the book:
Dyson and the food industry:
Dyson also has a complex farming operations (36,000 acres). James Dyson believes in sustainable agriculture as evidenced by this funny snipe at environmentalists: “The same eco warriors who are so keen on re-wilding of farms think nothing of consuming avocados flown in by air” . You can actually buy produce and meat from Dyson online in the U.K.
James Dyson is a proponent of Brexit. This is most likely due to this battle with German vacuum manufacturers who lobbied Brussels extensively to formulate vacuum standards to their advantage and mask their defects compared to a superior Dyson machine.
There are many times Dyson has criticized British society’s lack of appreciation for manufacturing. He compares and contrasts his experience of trying to build a factory in Britain that would take years compared to less than a year in the Philippines and Singapore. The Dyson company also received much more enthusiasm and support from Asian governments compared to the British.
The Dyson car! Dyson had a prototype electric SUV ready to be produced in 2020. However, the plans were scrapped at the last minute. The car would’ve cost around $200k. The reasons for abandoning the project is due to scale. At the time when the project started, Tesla didn’t even produce its Model S. Now that all car companies are pivoting towards electric vehicles, there is less of a need for Dyson to be in the market. If only we could’ve had a Dyson car given how awesome all their household products are!
If you are a fan of stories about perseverance, science & technology, and how to scale a business, this is definitely a good read. I have gained newfound respect for James Dyson as a person, Dyson as a company, and also respect for Dyson products. I also joked to my wife that if she actually breaks any of the Dyson products I bought for her, it is actually not the fault of the product but of the user!
Thank You
Thank you so much for reading. Please do give feedback if you find this insightful or if there is a subject you want me to write about.