Podcast Summary
Investing in Disruptors and Focusing on Business Quality: Focus on consumer needs and business quality when investing. Look for disruptors in large end markets and prioritize businesses with strong fundamentals and sustainable growth.
Learning from this episode of Invest Like the Best is the importance of focusing on consumer needs and business quality in investing. Andrew Segrue, a growth equity investor at Avenir Growth Capital, shared his experiences from his past roles at Caterton and Shumway Capital, which shaped his investment philosophy. At Caterton, he learned to keep the consumer as the North Star and look for disruptors in large end markets. At Shumway Capital, he emphasized the importance of business quality and making sure that winning is worth it. The conversation also touched upon the potential of counter positioning for unique distribution and the difference between good and bad growth. Additionally, they discussed specific businesses, Savage X Fenty and Latch, in which Avenir has invested. Overall, the episode provides valuable insights for both investors and operators on identifying disruptive businesses and the importance of business quality.
Identify businesses with sustainable advantages for long-term success: Find businesses with network effects, scale pricing, or intellectual property advantages and hire young, hungry, sharp people with a first principles mindset to maintain attractive returns in competitive markets.
To be successful in investing, it's essential to identify businesses with sustainable advantages, whether through network effects, scale pricing, or intellectual property. These advantages enable businesses to maintain attractive returns over time, even in competitive markets. Julian Robertson, a legendary investor, emphasized the importance of hiring young, hungry, sharp people with a first principles-based mindset. He believed that everyone in the industry is smart, but the key difference between successful and unsuccessful people is their hunger and willingness to understand the underlying dynamics of a market or business. For Robertson, his motivation came from growing up feeling like an outsider, which drove him to prove himself through quantifiable successes. To make this drive sustainable, it's crucial to find something you love and are passionate about, as this will help you harness your energy and turn it into a competitive advantage.
Investing in visionary entrepreneurs and businesses: Investing isn't just about financial gains, it's about making a difference. Identify industry trends, consider bear and bull cases, and invest in innovative businesses reshaping old industries.
Investing in and working with visionary entrepreneurs and businesses that aim to change the world for the better, provides immense satisfaction and a strong sense of purpose. This is not just about financial gains, but also about making a real difference in people's lives. The investing world is always evolving, offering endless opportunities to learn and adapt. For those in this field, understanding the current state of an industry or business, and identifying how technology can reshape it, is key. It's important to consider the bear case, as well as the bull case, and be open to different perspectives. Investing in businesses that bring innovation to old industries, creating high-quality businesses around large consumer needs, is exciting. These businesses often face skepticism, but a differentiated view and the ability to execute on that vision can lead to significant success.
Staying attuned to market trends and consumer behavior: Capitalizing on unfair advantages in customer acquisition is crucial for business success. Agility and responsiveness to market shifts and consumer needs can help new entrants disrupt traditional industries.
Identifying and capitalizing on unfair advantages in customer acquisition is crucial for business success. The lingerie industry, as an example, was historically dominated by Victoria's Secret with high operating margins due to its complex supply chain and strong brand affinity. However, the industry underwent significant shifts with the rise of e-commerce and changing consumer preferences towards inclusivity and body positivity. Traditional businesses like Victoria's Secret, with their heavy reliance on brick-and-mortar stores and outdated merchandising strategies, struggled to adapt to these changes. New entrants like Savage, with Rihanna at the helm, were able to leverage these shifts and build a successful international brand that catered to the evolving consumer needs. This story highlights the importance of staying attuned to market trends and consumer behavior, and being agile enough to capitalize on emerging opportunities.
Leveraging digital platforms, consumer connection, and innovation drive Savage's success: Savage's success comes from digital presence, consumer engagement, authentic brand storytelling, inclusive fashion shows, and repeat ordering
Having a strong online presence, a willingness to innovate, and a deep connection with consumers are key drivers of success in today's business landscape, as demonstrated by the case of Savage. By leveraging digital platforms, testing products with engaged communities, and telling authentic brand stories, Savage was able to capitalize on shifting consumer behavior and define itself by its community, rather than the boardroom. The brand's inclusive approach, as seen in its groundbreaking fashion shows, also resonated with consumers and generated significant press impressions, leading to increased brand awareness and customer acquisition. Furthermore, the importance of repeat ordering was highlighted, as a celebrity-driven brand can only go so far without providing value, quality, convenience, and selection to customers. The success of Savage, with its explosive growth and high repeat ordering, serves as an inspiring example for businesses looking to thrive in the modern marketplace.
Data-driven decision making in DTC businesses: Harnessing customer data leads to better inventory management, product iteration, and marketing strategies in DTC businesses, setting them apart from traditional retailers and driving profitability.
Data-driven decision making is crucial for the success of a direct-to-consumer (DTC) business. The example of Savage x Fenty, a DTC brand founded by Rihanna, shows how harnessing customer data can lead to better inventory management, product iteration, and marketing strategies. This scientific approach sets Savage apart from traditional retailers like Victoria's Secret and allows it to be more profitable, even in a competitive market. Additionally, having a well-known personality at the helm of a brand can be an effective growth hack, but authenticity is key. Savage x Fenty's success comes not only from Rihanna's influence but also from the community-driven nature of the brand. In terms of financials, a typical income statement for an apparel company includes revenue, cost of goods sold (COGS), gross profit, operating expenses, and net income. In the transition from a store-based model to a DTC model like Savage, key levers include reducing reliance on traditional marketing channels, optimizing inventory through data analysis, and focusing on community engagement for growth.
The key to success for apparel DTC brands is customer retention and high contribution margins: Apparel DTC brands should focus on retaining customers and generating high contribution margins to succeed, with brands like Savage and Lululemon serving as examples.
For apparel businesses, particularly direct-to-consumer (DTC) brands, the key to success lies in repeat customer behavior and the productivity of customer acquisition costs (CAC). Consistent gross margins are important, but the real opportunity comes from generating high contribution margins after marketing, distribution, and fulfillment costs. Brands that can retain customers and sell them additional products over time will have a significant advantage. Savage, for instance, has a higher customer spend compared to Victoria's Secret, making it a more attractive long-term model. Brands that struggle with one-time use cases or lack a clear identity may find it challenging to compete in the crowded apparel market. Successful brands, like Lululemon, can operate with high contribution margins and low overhead, leading to 20% or more operating margins. Engaging communities through monthly drops or other strategies can help retain customers and reduce the need for constant reacquisition.
Focusing on network effect and high ROI for customers: Latch found success by offering a hardware and software solution for access control in multifamily buildings, focusing on the network effect and high ROI for building owners, rather than just the hardware itself.
Latch, a company offering a hardware and software solution for access control in multifamily buildings, has found success by focusing on the network effect and the high return on investment (ROI) for its customers, rather than just the hardware itself. The hardware, which includes smart locks, is complicated to build and may commoditize over time, but the real value comes from the network of connected buildings and the operational cost savings and increased rents that building owners experience. This consumer shift towards on-demand services and the need for efficient access control has created a market opportunity for Latch to provide a solution that addresses this last millimeter challenge in delivery and access. By providing a technology paradigm that caters to the changing consumer behavior, Latch has differentiated itself in the market and gained the support of top property owners.
Revolutionizing Building Access with Latch: Latch offers building owners enterprise management solutions, seamless tenant onboarding, and long-term customer relationships through its integrated hardware and software system for managing multiple building doors.
Latch is revolutionizing building access with its integrated hardware and software system. This system allows tenants to seamlessly access multiple doors in a building using their smartphone, key card, or unique code. The need for this system arises from the inconvenience and security risks of managing multiple codes for various doors. Latch's business model is unique as it provides building owners with solutions for enterprise management of smart devices, better tenant onboarding, and more. The software contract associated with the locks enables ongoing access and record-keeping, creating a long-term, "locked-in" customer relationship. Latch's app-based onboarding process offers an unfair customer acquisition advantage, as it can offer renter's insurance and internet installation at the time of move-in. This high-frequency, densely demanded app usage is key to monetizing solutions and providing last-mile logistics businesses with an advantage. By understanding and leveraging the events that drive demand, businesses can create unique customer acquisition strategies.
Leveraging high demand areas for business advantage: Businesses in densely populated areas can save on costs and offer additional services by utilizing high demand, passing savings to customers and creating new opportunities.
Businesses that can leverage "density of demand" in their operations have a significant advantage. This concept refers to the ability to provide services at lower costs due to high demand in a specific area. For instance, a cleaning service in a densely populated building can save on labor costs by having their cleaner move from one apartment to another, passing on savings to customers and offering additional services that wouldn't be economically viable otherwise. Density of demand also plays a role in marketplaces like Drizly, where local network effects and the unique needs of highly branded categories, such as alcohol, create opportunities for efficient advertising and direct consumer engagement. Overall, businesses that can effectively utilize density of demand can increase frequency of service usage, reduce costs, and create new opportunities to meet consumer needs.
Companies that embrace the future and capitalize on structural shifts are successful: Successful companies are led by visionary entrepreneurs, intentional about capitalizing on industry shifts, and focused on creating barriers to entry and better serving customers in the private investment world.
Successful companies, as identified by the investment firm Avenir, are those that embrace the future and ride the wave of inevitable structural shifts in their industry. These companies are led by entrepreneurs with a clear vision of how the world is changing and are intentional about capitalizing on these shifts, whether driven by technology, consumer preferences, or regulatory dynamics. Additionally, these companies are operated by individuals or teams who are not only focused on disrupting the incumbent and gaining market share, but also on creating barriers to entry and better serving their customers. The private investment world offers more opportunities for attracting capital and generating returns compared to the public investment world, where efficiency and competition have reduced the potential for alpha generation. Avenir's approach to investing is rooted in the belief that the future is defined by the person or team building it, and their portfolio companies embody this forward-thinking mindset.
A partnership approach to private equity investing: Successful private equity firms provide capital, guidance, and long-term commitment to foster growth, while founders value active thought partners for insights and challenges.
Private equity investing is a relationship-driven business where firms act as partners to companies, helping them with capital allocation and resource sequencing, rather than just buying and selling positions anonymously. The firms that succeed in this model are those that offer concentrated portfolios, deep engagement with founders, and a long-term commitment to their growth. The founders, in turn, value active thought partners who challenge their assumptions and offer valuable insights from across industries. This close relationship allows for a virtuous cycle of mutual understanding and increased conviction, leading to successful investments and enduring partnerships.
Focusing on unit level economics and high internal returns: Successful investing involves focusing on profitability at the individual level, avoiding reliance on multiple expansion, and seeking compounding advantages and network effects.
Successful investing isn't just about growth, but rather focusing on unit level economics and high internal returns on invested capital. The speaker emphasizes the importance of profitability at the individual level, whether it's for a specific customer or geography. Additionally, they warn against relying on multiple expansion or assuming compression, instead advocating for a focus on compounding advantages and network effects. The investor shares a personal story of the kindest thing anyone has ever done for them, which was their parents' sacrifice to raise them, instilling in them a sense of security and unconditional love that allowed them to take risks and pursue their passions. Overall, the conversation highlights the importance of focusing on fundamentals, long-term growth, and personal sacrifices in successful investing.
Canalyst's role in investment management with accurate and comprehensive data: Canalyst helps investment analysts triangulate expectations and make informed decisions by cohering ground truth reporting into financial models and predicting future trends.
Data plays a crucial role in the success or failure of buy side investors, and Canalyst's products represent another step forward in how data is utilized in the investment process. Jeremy Payne, Canalyst's new chief product officer, shared his personal experience of the importance of data in his career, which led him to Capital IQ and eventually to Canalyst. He explained that investment management involves triangulating expectations of others, the investor themselves, and the facts in place. Canalyst provides a valuable service by cohering ground truth reporting from companies and turning it into a coherent financial model, allowing investment analysts to make data-driven decisions. Additionally, Canalyst's models help analysts predict the future by taking the company's facts and assumptions and creating a sophisticated, forward-looking view. Overall, Canalyst's products enable investment analysts to more effectively triangulate expectations and make informed decisions based on accurate and comprehensive data.
A forward-looking financial model: The financial model discussed goes beyond presenting facts and figures, offering insights into a company's future performance, allowing users to predict impact of new subscribers on earnings per share.
The discussed financial model goes beyond presenting facts and figures, it also offers insights into a company's future performance. By inputting data for a company like Netflix, users can predict the impact of new subscribers on earnings per share. This forward-looking perspective sets the model apart from traditional financial analysis. For those interested in further exploration, check out joincolossus.com for episode transcripts, show notes, and resources. Additionally, sign up for Colossus Weekly, a newsletter that distills episode ideas, quotes, and top Internet finds.
