If you missed Picks and Shovels – Part I, read this first (LINK).
Tobacco stocks were the ‘Sin Sector’ of the past generation. These businesses were built to exploit human addiction to Nicotine. Despite rising prices of cigarettes and the ultimate risk - death – many consumers had to have their fix. Rising regulation could not stop Tobacco companies and they provided great returns to shareholders over several decades.
Today, the dopamine hit has replaced the nicotine hit. While many aspire to quit checking their social updates, only a select few can claim victory. Technology companies have leveraged the building block of ‘dopamine’ to build great products that leverage the basic human need to be ‘liked’. Consumer engagement is strong. While smokers were a small subset of the population, social media consumers are virtually everyone with a mobile phone. The network benefits are strong.
Social media is a two-sided network. Consumers on one end, advertisers on the other. As the total time spent by society on social media networks has grown, advertising spend has migrated over from traditional channels. Today, digital consumer engagement is a bare minimum for every business. Digital spending provides better attribution – easy to know what worked or what did not – and a much higher return on investment over alternatives. 30%-40% of venture capital raised is spent on advertising. Startups may not pay rent or taxes, but everyone pays the advertising tax to acquire new customers. If consumer acquisition cost (CAC) is the new rent (Link to an INC article) then social media properties are the new landlords. The distribution and scale moats are wide and deep.
These companies make money by maximizing the amount of time spent on their platforms. To keep consumers interested, they innovate. Innovation has no limits. Video and original programming have been an easy way to increase the time spent. However, the progress in Augmented and Virtual Reality (AR/VR) has the potential to be the next platform of change. While we are already trying on clothes and interacting with brands using AR, the advancement and adoption of this technology has the potential to be truly revolutionary. The scale and range of applications would span multiple categories – from personal connection, education, science, entertainment, and work.
“Imagine wearing a pair of glasses that lets you visit with your parents no matter where you are, tour the Louvre on your lunch break and walk and talk with a friend on the other side of the planet and truly feel that they are at your side” – Social Media Company
It took two decades to go from a clunky, mobile box phone, to a supercomputer in our pockets. With the dizzying rate of improvement in chip design, gaming, 5G, and cloud computing, new platforms are evolving fast. Therefore, we are likely to go from a bulky headset or glasses to something elegant and consumer-centric much faster than we believe. The day that I can box with Mike Tyson, play one-on-one basketball with Michael Jordan is not that far off.
Imagine this new “new world” collide with advancements in data science where advertisements are the ones we want to see. A complex auction process that quietly runs in the back connects advertisers with consumers who are most likely to enjoy that piece of content. While this might be hard to envision today, this is the goal.
On the flip side, AR/VR might not evolve to engage consumers. Advertising is inherently a cyclical business. The tide is venture capital spending could recede in a recession. The regulatory drumbeat could get louder and act against big Technology. The investing business is full of risks, and unless one has a way of handicapping and underwriting the risks and the rewards, it is better to stay on the sidelines.
The best investments are the ones where consensus opinion on a business is the glass half empty, but we see enormous future opportunities. This opportunity also needs a leader who is a proven visionary, a valuation that is mouth-watering, with a strong core that can handle external setbacks. Then we sit and wait….
This material does not constitute an offer or solicitation to purchase an interest in Latticework Partners, LP (the "Fund"). Such an offer will only be made by means of a confidential offering memorandum and only in those jurisdictions where permitted by law. An investment in the Fund is speculative and is subject to a risk of loss, including a risk of loss of principal. There is no secondary market for interests in the Fund and none is expected to develop. No assurance can be given that the Fund will achieve its objective or that an investor will receive a return of all or part of its investment.
This material contains certain forward-looking statements and projections regarding the future performance and asset allocation of the Fund. These projections are included for illustrative purposes only, are inherently speculative as they relate to future events, and may not be realized as described. These forward-looking statements will not be updated in future.
I am an investor and these are my personal thoughts on investing, behavioral finance, markets, and sports viewed through the prism of a Latticework