More on the Rise of the Individual Investor
A friend read my post about individual investors becoming more of a force. We had a good chat about it today. Here’s my takeaway:
Investor knowledge gap – Just as early-stage founders have gaps in their knowledge about raising capital, lots of investors have gaps in their knowledge about deploying capital into early-stage tech companies. They see what’s happening, want to participate, and have the capital, but they don’t know where to start. This is beginning to change. Information is more readily available. More platforms are making it easier for would-be investors to find and participate in tech deals and connect with and learn from other investors. As more individual investors learn about and gain access to investment opportunities and find their community, they’ll start deploying capital.
Great chat today with my buddy. We’re both looking forward to the rise of the individual investor.
The Rise of the Individual Investor
I’ve been interested in personal finance and investing since adolescence. I’ve always read about them as much as possible, and I even crowdsourced financial advice when I got my first job offer. Usually, I was in the minority in my circle of friends. Finance and investing just weren’t things that many were interested in or cared to talk about. Over the past eighteen months, that has changed drastically. Investing and finances are regular topics in my various friend groups.
Consumer interest in investing and personal finance will continue to expand. Information is more readily available, fees have been virtually eliminated, and access to platforms is easier. This is leading more people to take a hands-on approach. They’re learning and applying their knowledge. I think this will be a positive trend in the long term, but there may be a period of adjustment in the short term.
Public investments like the stock market are most accessible, and that’s where many consumers have recently gotten their feet wet. As they get more comfortable investing, I suspect interest in investing in private companies will grow. If that happens, entrepreneurs will likely see more willingness among their friends and family to invest in their early ventures. This will have pros and cons but, I think, net out as positive. Founders will have access to more capital to build businesses. Consumers will be able to invest in private companies that serve their communities and hopefully see financial gains that they can reinvest in more founders.
I think the next decade or so will be one of change and disruption like nothing we’ve ever seen. Investing will look radically different in the future. I’m excited to watch the rise of the individual investor and how their capital will change the entrepreneurial landscape.
A Decade of Valuation Acceleration?
I spent time today pondering an intriguing idea of someone I respect. He believes technology is evolving so quickly that with respect to company valuations, the next decade won’t look like any other. The rate of change and disruption will be like nothing we’ve ever seen and result in valuations higher than we’ve ever seen. Historical valuation norms will be useless as benchmarks for the future.
This person believes these higher valuations will be difficult to grasp initially. But once it’s clear they aren’t going away (for a variety of reasons), people will quickly embrace the trend en masse, which may push them even higher.
This is an interesting concept. I’m not sure if I agree, but I can’t rule it out, either. I want to digest it further. If this person is correct, it will have broad implications, and not all of them will be good.
I read the reflections of a successful investor recently. Most of his insights had to do with why he and his team had been successful. One factor is that they focused on a sector that was target rich—meaning the incumbents were highly profitable in comparison with other companies globally. These incumbents weren’t keeping up with changing consumer behavior, though, so the sector was in need of modernization.
This was an interesting insight. Large, highly profitable companies were solving problems, creating value for customers. But their solutions weren’t keeping up with the pace of change, so they were outdated. This created an opening for a new solution.
This investor identified companies that were solving well-known problems. There was no need to wonder if the problem was painful enough for customers to pay for a solution; that had already been validated. The market size had also been validated by the incumbents’ large and profitable businesses.
This investor believes that investing in a target-rich sector significantly increased his chances of success. He thinks an average investor in a target-rich sector can win out over a great investor in a sector full of great competitors.
I like this reflection, and I think it’s a strategy some founders can leverage too. Focusing on a sector or problem that’s proven and ripe for disruption will likely increase your chances of success (assuming you have founder/market fit).
Coming to My Own Conclusions
Today I spent time learning about a company. Generally, public perception of it is slightly negative. I’ve followed the company for some time, and after my research today I arrived at a different conclusion. I’m bullish on the company. I think it has a good future. I shared this opinion with a few friends, who all pointed to public sentiment. They suggested the crowd is likely right and it’s not a wise investment.
Today reminded me of my early days as a founder: I see something others don’t. When I explain what I see, others dismiss it or disagree. After I start my company and we have meaningful traction, others begin to believe what I’d always believed—that my startup could be something big.
The fact that others don’t see the potential in this company signals to me that it could be an opportunity for an outsize return. These types of opportunities don’t come along often. I’ll continue to research and will likely go with my (educated) instincts and pull the trigger on this investment.
Large Landlords Acquiring Tenants on Airbnb
A friend shared an article with me today. It’s about an institutional investor, ReAlpha, planning to spend $1.5 billion to buy 5,000 homes to rent out. I’ve followed institutional buyers of single-family homes for the last decade. Atlanta is one of the biggest markets for companies like Invitation Homes and American Homes 4 rent, both of which are publicly traded and own tens of thousands of single-family homes across the country that they rent out on a long-term basis. The strategy has worked well as home prices and rental rates have steadily increased since the financial crisis.
The article discussed a slightly different strategy: purchasing thousands of homes to rent out short-term on Airbnb. The idea isn’t new, but it hasn’t been pursued at scale by institutional investors. The customer acquisition strategy is intriguing. Instead of acquiring customers (i.e., renters) through traditional sales and marketing efforts, they plan to acquire them on Airbnb, which is a marketplace.
Marketplaces are places where buyers and sellers connect. Using a marketplace to acquire customers is an attractive and capital-efficient strategy for sellers. The fee (or take rate) is usually a fixed percentage of the revenue a buyer pays. That leads to a highly predictable customer acquisition cost. Sellers pay X cents for every dollar in revenue from buyers. Sellers don’t have to worry about paying to attract potential buyers who never pan out; they pay only to acquire revenue-producing customers. Sellers don’t even need to take on sales or marketing—they need only have the ability to service customers.
This approach has downsides, and the customer relationship is a big one. The marketplace owns the customer relationship. Buyers aren’t loyal to the seller they transact with; they’re loyal to the marketplace. Concentration is also a big risk. If you get all your customers from a single source that you don’t control, changes can significantly affect your revenue. Lots of stories circulate about businesses being crushed when a marketplace they rely on changes how listings are displayed or suspends their account.
If ReAlpha moves forward with these plans, it will be a huge growth opportunity for Airbnb. I’d imagine ReAlpha will seek discounts on Airbnb’s fees, but even so this could unlock a new product offering with the potential for massive scale in Airbnb’s platform.
I’ll be watching to see how this evolves.
Alternative Asset Classes
I’ve always been a fan of nice shoes. There’s an old saying: when you look good, you feel good. I think shoes are a big part of that. Shoes have transcended their purpose as foot coverings and become an asset class. And marketplaces like GOAT and StockX have helped illuminate just how much enthusiasts value shoes.
This got me thinking more about alternative asset classes. I’d imagine there are other tangible items that are prime to be turned into an alternative asset class. Their intended purpose at creation was X, but people now place more value on them—to the point that they don’t plan to use them as X. Instead, they’ll prize them for their monetary value or put them on display, or both.
Lots of items have been turned into alternative asset classes already (think art and wine), but I believe there’s a second-wave opportunity. Somebody with vision just needs to recognize a category of items that’s never been thought of as an asset class but that now resonates more with the masses or perhaps with younger generations and that owners value immensely. When they do, they’ll have a big opportunity to help owners legitimize the category as an alternative asset class.
If you’re a founder and passionate about something you own, consider solving this problem for yourself and others. It could be a huge market.
Takeaways from an Early Investment
In my twenties, I made an investment that I learned a ton from. It was the very beginning of the financial crisis. I saw an opportunity, made up my mind, and pulled the trigger. A few months later, the world was in free fall. The value of my investment plummeted, and my startup was struggling to get customers. It felt like nothing was going right for me (or anyone else). I recently reflected on that time with a close friend:
- Experience – I didn’t have experience with the type of investment I was making. In hindsight, I wish I’d connected with someone more seasoned in the space so I could have factored their wisdom into my decision-making. My lack of experience handicapped my decision-making and execution.
- Timing – The impact of timing can’t be underestimated. It’s not something one can usually control, but it can have an outsize impact on returns. In this situation, I was too early.
- Conviction – I didn’t have strong conviction about the investment I was making, so when things began to go differently than I had anticipated, I was ready to sell. I sold way too early for a small profit. Had I held on, my profit would have been huge. If I don’t have a strong conviction about something, I shouldn’t invest in it. Conviction is key to weathering the ups and downs of the journey.
- Horizon – I didn’t have much of an idea how long I planned to hold the investment. That and lack of conviction resulted in a premature sale. I now try to think about how long something might take to reach its full potential and use that as my time horizon.
In the end, this investment turned out fine and I learned a ton from it. I’m glad I did it. Because of it, I gained valuable knowledge that’s been useful over the years.
A close friend in real estate recently shared what he’s seeing: record low home inventory and rapidly increasing prices. Many factors that I won’t get into are contributing to this. He asked me what I’m seeing with early-stage startups. I told him valuations (prices) are increasing, many new companies are being formed, and there’s lots of investment capital. Again, lots of contributing factors.
The pandemic is still causing a great deal of pain. At the same time, multiple asset classes (real estate, stock market, etc.) are experiencing record highs. We had a lengthy discussion and came to a conclusion. We have no idea what direction everything is going in, but we’re probably witnessing a historic time in our economy and the opportunity of a lifetime (for some).
I’m curious to see where things go and will be watching closely. I won’t get the chance to observe historic change every year.
Diverse Investor Panel Takeaway
Tonight, I tuned in to a great conversation that various diverse investors on a panel were having. One of them said this about early founders: “There is funding for what you want to do, but you have to convince people that it’s worth the investment given the lack of data points.” This was a great point and I totally agree.
When a business has traction, it starts to be derisked from an investment perspective. A growing customer base and revenue are metrics that can indicate the business’s trajectory and help investors gain confidence. When the business is at an early stage, those data points just don’t exist. And in that situation, it’s the founder’s responsibility to articulate their vision in a way that investors can easily grasp and that excites them. When early founders can do that, they’re more likely to convince someone to invest!