“The reason the social-networking phenomenon is something that I invested in early and massively—I led the Series A financing for Friendster; I founded a company called Socialnet in 1997; I founded LinkedIn; and I was part of the first round of financing in Facebook—it sounds trivial, but people matter. The deeper thing is, it’s massively valuable if you can integrate and coordinate with other people in order to enhance their lives.” – Reid Hoffman
In my opinion (and with the power of hindsight), the best tech investments and acquisitions over the past 10 years have been network effect businesses. Whether it’s Youtube, Instagram, Netflix, or Airbnb, these initially misunderstood businesses have generated massive levels of value today.
While I haven’t had many opportunities to invest in these types of businesses at Relational Investors, I’ve spent a good portion of my investing career trying to understand them, their business models, and why they are so valuable. Even today I have a fondness for finding platforms at a reasonable price.
When it comes to analyzing platform businesses, one of the more interesting concepts I’ve adopted comes from Reid Hoffman and his seven deadly sins of social networking framework. Continue reading
As the year comes to an end, I can’t help but look back retrospectively on the things I’ve done as an investment professional and how those experiences shape the way I look at investing, activism, and business today. It’s difficult to describe what life was like at Relational Investors doing high profile shareholder activism in sleepy San Diego. I could probably write an entire book on my experiences, but for the sake of brevity I’m going to apply Tren Griffin’s 25iq.com approach and share a dozen things I learned working for Ralph Whitworth (and the more behind-the-scenes co-founder David Batchelder) at Relational Investors.
While Ralph Whitworth is probably best known for having Paul McCartney and The Rolling Stones play private parties in San Diego, he is also (in my completely biased opinion) the best in the business when it comes to shareholder activism and working with boards to improve companies.
There aren’t many articles that dive into Ralph’s thinking and why he’s so effective so hopefully this helps shed some light.
Disclaimer: These are my opinions and wording based on my experiences. Most of these lessons are obvious (hiding in plain sight) if you’ve studied Ralph’s past investments.
“A paperclip can be a wondrous thing. More times than I can remember one of these has gotten me out of a tight spot.” – Angus MacGyver
How to value a business can feel like a MacGyver scenario at times given the constraints. Investors and companies are dealing with incomplete information, limited resources, little time, and future uncertainty. Finding a solution is part art, part science, and part circumstance. Given all these constraints, many lean on their swiss army knife of valuation frameworks- like revenue multiple or company comparison – to “MacGyver” the quickest, most efficient valuation solution.
While these methods are useful and have their place in the valuation toolbox, there are circumstances when using such approaches can meaningfully misvalue the long-term opportunity of a business. In these situations, it sometimes makes sense to value a company using its total addressable market as a reference point. Continue reading