Discussion on recent financial trends and examples

From: myfirstmillionpod

Business Difficulty Scale

Andrew Wilkinson classifies businesses on an “easy to hard” scale:

• Hardest Physical goods businesses with many employees, such as brick-and-mortar operations or those requiring movement of physical inventory [00:25:22]. An example is a bakery and deli with 40-50 employees requiring early morning work and complex coordination, susceptible to issues like sick staff or broken equipment [00:25:45]. Restaurants are also considered brutal businesses [00:24:45].
• Medium Agencies are considered medium difficulty. They are asset-light, requiring minimal physical infrastructure like an office and internet connection [00:26:31]. They are scalable but face constant challenges balancing supply and demand, and require readiness for radical changes during downturns [00:26:50].
• Easiest Businesses that are “sitting idle” with strong fundamentals and can be grown with simple best practices and a small team, like WeWorkRemotely, a remote job board [00:57:57].

Personal Business Journeys and Lessons

Andrew Wilkinson, founder of Tiny, describes his evolution from a prolific business starter to an investor. He initially started new businesses every month, treating it as “throwing spaghetti against the wall” to understand effective business models through trial and error [00:02:41]. He learned that many businesses were “incredibly, incredibly painful” [00:03:31].

His early experiences include:

• Pixel Union (Success): An early Tumblr theme business that started by chance, generating automatic revenue of $10,000/month<aclass="yt-timestamp"data-t="00:06:54">[00:06:54]</a>.ItlaterexpandedtoShopifyandwassoldfor$7 million in 2014, when it was doing $500,000innetprofit.Andrewlaterboughtitbackfor$26 million when it was generating $4millioninannualprofit,eventuallytakingitpublicasWeCommerceata$260 million valuation [00:07:43]. He regretted selling it initially, realizing its high growth rate made the 14x multiple seem low after learning about investing [00:08:48].
• HJ Muse (Failure): An e-commerce store for cat furniture, which involved investing $300,000. He learned about the “brutal” nature of e-commerce, with razor-thin margins (2-3% EBITDA compared to 30-50% for agencies) and the constant need to reinvest profits into inventory. He shut it down, losing all his investment [00:23:35].
• Famous Original (Failure): A bar and pizzeria started with friends, which reinforced the difficulty of the restaurant business. They learned through overspending on build-out, wrong management, and labor shortages [00:31:55]. This experience, however, informed his decision to later acquire a stable, long-standing bakery/deli [00:32:41].
• Flow (Failure): A project management software that lost $10 million in competition with Asana, teaching him about the futility of fighting companies with “unlimited budget” [02:41:00].

Becoming an Investor

After selling Pixel Union, Andrew had cash and was compelled to learn how to invest. He spent two years intensely studying value investing, including the works of Warren Buffett [00:10:21]. He emphasizes Buffett’s quote: “I’m a better businessman because I’m an investor and I’m a best better investor because I’m a businessman” [00:10:45]. This operational background gives Tiny an advantage over “spreadsheet investors” who may not understand the complexities of implementing changes in a business [00:11:11].

Notable Acquisitions and Holds

• Aeropress: Tiny acquired Aeropress, a coffee maker with a strong brand identity and loyal customer base. Andrew believes it has “potential lasting impact” and can exist for decades, comparing it to acquiring “a way of making coffee” like Kleenex is for tissues [00:18:41]. Although not an internet business, Tiny aims to leverage its online potential, which was previously underexplored. They hired the former president of SodaStream US to lead Aeropress [00:21:41].
• WeWorkRemotely: A remote job board acquired from Basecamp, which had strong SEO and ranked number one for “remote jobs.” With simple best practices and a small team, it was built into a “very large business” as remote work gained traction [00:57:57].
• Me Lime: A fitness meal plan business that Tiny acquired a 70% stake in. The founder, Mitch, successfully grew the business independently, leading to its acquisition by Albertsons for “tens of millions of dollars” [00:43:22].

Tiny’s general philosophy is to buy and hold businesses forever [00:44:21].

Current Financial Trends and Concerns

Slowdown in Agency Services

Andrew notes a current “softness” in the market for agency services over the next six months, with clients seeking to achieve similar outcomes for less money. This creates pressure, especially with rising labor costs [00:30:30]. This contrasts with SaaS businesses, which tend to be stickier and less affected by immediate market sentiment [00:31:10].

Critique of “Smart Money” and Venture Capital

Andrew expresses concerns about the incentives and practices within the venture capital (VC) and public markets, often leading to what he calls “legal stealing” [00:55:19].

• Lack of Diligence: He points out that even “very smart people are doing some really dumb things” [01:13:08]. The amount of diligence expected for large investments (e.g., Paradigm investing $290 million in FTX) is often not met, as evidenced by the FTX collapse [01:16:56].
• Misleading Valuations and IPOs: In the public market, especially smaller exchanges like in Canada, companies might be “dressed up” to match current trends (e.g., vertical farming, Esports, electric vehicles) and then dumped to retail investors. These companies, often with questionable fundamentals or losing money, are IPO’d at high valuations, only to see their stock plummet to near zero [00:54:16]. Investment bankers often profit legally through fees and warrants regardless of the company’s long-term performance [00:55:00].
• VC Fund Structure: Andrew criticizes the traditional VC fund structure where VCs make guaranteed management fees (e.g., 2% of $1billionfundis$20 million annually) for years, regardless of fund performance. He finds this “gross” and ensures Tiny’s funds do not charge management fees [01:14:01].
• “Non-Binary Term Sheet”: To address the binary nature of venture investing (either huge success or total loss), Andrew experimented with a “non-binary term sheet” for his company Supercast. This structure adjusted the valuation down if certain revenue benchmarks were not met within two years, aiming for a fairer outcome for both founders and investors [01:02:38].

Examples of Questionable Investments and Business Practices:

• Nikola: An electric semi-truck company that faked its product demonstration, rolling a truck down a hill to appear as if it was driving on a flat surface [00:59:25].
• Bird: A scooter company that raised over $1billionandwentpublicata$3 billion valuation, only to be worth $70 million. Founders often cash out significantly at IPO, while later investors suffer losses [01:00:53].
• Metro Mile: Taken public via a SPAC by Chamath Palihapitiya, who compared it to Geico, but it sold for one-third of its public valuation less than a year later [01:17:39].

Cryptocurrency and FTX Saga

Andrew is generally cautious about crypto, viewing it as “currency trading” and prefers investing in great businesses [00:46:47]. The collapse of FTX and the actions of Sam Bankman-Fried have had a “lasting negative effect on crypto and trust” [00:45:43]. The incident raises questions about whether Bankman-Fried was a “bad actor” or simply “got in over his head” with excessive leverage and related-party loans [00:49:37].

New Venture: Tenzing

Andrew and his partner Chris are starting an “Investment Bank for Founders” called Tenzing. Named after Tenzing Norgay, the Sherpa who helped Edmund Hillary climb Everest, the firm aims to act as a “financial translator” and guide for bootstrap founders [00:39:27].

• Purpose: To make the world of finance accessible to founders, especially those with businesses generating $1-5 million EBITDA, who typically struggle to find support from larger investment banks [00:38:02].
• Services: Helping founders explore options like bank credit, debt for M&A, secondaries, or selling their businesses, in a way that is aligned and not solely fee-driven [00:39:42].
• Motivation: Andrew realized he himself missed out on opportunities (e.g., R&D tax credits, credit lines for ads) due to lack of financial understanding [00:40:41].

Investment Philosophy and Lessons

• Patience: There’s “always a second chance on the train.” Many successful companies like Amazon and Facebook offered later opportunities to invest, even if one wasn’t early. The challenge is having the conviction to act when prices are down and fear is high [00:47:49].
• Independent Conviction: Do not “outsource your conviction” by blindly following the investments of “big names” or “smart money” [01:19:50]. Even smart people make “colossal mistakes,” and their success might stem from structural advantages (like fees) rather than superior investment acumen [01:22:56].
• Understanding the Investment: When following other investors, understand their strategy and overall portfolio. For example, a distressed debt investor might buy equity in a company they expect to fail, which is different from a retail investor putting their money in it [01:24:26].
• Aligning Incentives: A major problem in finance is misaligned incentives, where promoters or fund managers profit regardless of investor returns [01:39:39]. This is a core part of financial transparency and lessons from personal financial journeys for Andrew.
• Errors of Action vs. Inaction: It’s acceptable to make mistakes when trying hard (errors of action), but not when due to a lack of thought or negligence (errors of inaction) [01:20:52].

Business Idea: Advertising Sniper Rifle

Andrew proposes a service that allows hyper-targeted advertising to put a specific person on an individual’s “radar.” For example, if a company wants to sell to HubSpot’s Dharmesh Shah, the service would ensure he sees content about that company everywhere he goes online [00:34:06]. He believes this “advertising sniper rifle” would be highly valuable, citing an example of a founder who used LinkedIn ads to target a single person to get into an accelerator [00:35:13].