Kelie Morgan 9/4/20 Kelie Morgan 9/4/20

The Weekly: Edition #61 - September 4th, 2020

Family Guardians

“Our responsibility was to guard that heritage. That’s why we call it co-guardians to look after it and start thinking long-term because our job is to look after it for only a certain period of time. It’s a transition from generation to generation.” - Fred Mouawad

This week, we came across a wonderful podcast worth sharing that highlights the Mouawad Family's global jewelry business (courtesy of @MikeBoyd and the Business of Family Podcast). Most importantly, we wanted to share our thoughts on what helped the family grow over multiple generations to become a world-renowned luxury jeweler with several Guinness World Records.

A Focus on Adaptability

“It was interesting to see how we had to reinvent our business and reposition it based on where we thought the world was moving towards. It was an exercise of not necessarily innovation but adaptation and being able to forecast how the markets are going to change over the long run and how we should prepare for that change.”

After years of selling multiple product lines across the quality spectrum, Fred Mouawad observed that the market was demanding (and they were best at crafting) luxury pieces, and recognized an opportunity to focus the business on the highest quality pieces. This adaptation to the market trends helped the Mouawad Family cement their brand's image as one of the highest quality jewelers in the world, and has resulted in multiple Guinness World Records.

A Focus on Scarcity

“We have the inventory; we have the expertise. If we create masterpieces and truly craft extraordinary (pieces) and position the brand at the very top, then we should be able to build a very niche business. That would stand in the marketplace and have a very clear image.”

Let's face it, there just aren't that many $55M diamond necklaces or $3.8M handbags out there. The Mouawad family realized that if they focused their business on the top end of the market, there was a natural scarcity of product and very little competition. This scarcity of product led to both strong pricing power and brand recognition over time.

A Focus on Continuity

“I think it’s all about preparing the next generation to be the right stewards for the organization and how do you get there? You get there by exposing them to the business, by having them get richer with experience. By exposing them to different elements in the business and outside the business.”

To ensure that a business transitions smoothly from one generation of leaders to the next, Fred Mouawad helped his family's business draft a living constitution for the family enterprise. In this document, the 'guardians' of the business recorded decision-making procedures for approval of key initiatives and created checks and balances that will serve as a guide to the business's operations for future generations. To ease the transition from one generation to the next, the 'guardians' expose younger members of the family to the business at an early age to allow them to learn the business from the ground up.

Family businesses can be very difficult to maintain over multiple generations, but Fred Mouawad is a great example of how family leaders can position their enterprise for longevity, flexibility, and continuity through attentiveness to market trends and leadership training of the next generation. We love stories like the Mouawad Family's, and strive daily to build our family of businesses by partnering with organizations that take a similar long-term approach to business success and longevity.

Big-box stores, worried about Amazon, were ready for coronavirus (Wall Street Journal)

+ "Several factors tie their success together. These big companies had already invested to build their online businesses and had cash on hand to adjust to the pandemic. They were selling what people were buying and had large supply networks they could tap to eventually restock. In addition, most were deemed essential retailers early in the pandemic and thus have largely remained open. When the coronavirus surfaced in the Raleigh-Durham area this spring, Target stores were ready for the sharp increase in online orders. Most had already allowed shoppers to pick up items in parking lots. All had staffers in back rooms packing up orders."

Fred Mouawad - billionaire diamond owner & 4th generation co-guardian (The Business of Family)

+ This is an episode worth listening to for its clarity of thought around family business continuity.

What happens to freight rates in a pandemic? (Supply Chain Dive)

+ "Spot rates in the trucking market hit their lowest point in April, down around 25% year over year. Since then, "we've seen quite a dramatic turnaround in rates," said Avery Vise, VP of trucking research at FTR, adding that rates are rising at a time when they usually trend downward. Trucking rates will typically fall throughout the summer until the holidays. Spot rates were up 10% year over year in July and have continued to trend upward, according to DAT. "I think it is likely to moderate," Vise said. "But it quite possibly will still hold much higher than certainly we thought it would just a couple of months ago.""

Meet the “menu engineers” helping restaurants retool during the pandemic (The Hustle)

+ "You’d be hard-pressed to find many people who have thought more about restaurant menus than Michele Benesch. In 1968, her grandfather, Walter Baker, started Menu Men, Inc., a creative consultancy that specializes in infusing menus with fanciful designs. At the time, says Benesch, the art of the menu was largely neglected. Sensing some room for disruption, Baker convinced restaurateurs to invest in fully customized designs."

6 small steps for handling the emotional ups and downs of work (First Round Review)

+ "Maybe you’re a founder shouldering the heavy load of steering a company through a global crisis. Or a marketer tasked with pivoting to virtual events. Or a manager struggling to support your team through a tumultuous time while simultaneously trying to cultivate healthy remote habits. Or more universally, you’re facing an everyday struggle to navigate a chaotic outside world and an upended life at home, which serves as the backdrop (and now Zoom background) for your work. Whatever the case, every emotion you feel sits beside you at your desk — whether you realize it or not."

Alternative forms of wealth (Morgan Housel)

+ Morgan Housel offers a variant perspective on what 'wealth' can look like for each of us during tough times.

How Saudi Prince Sultan bin Turki II 'disappeared' (Vanity Fair)

+ "Prince Sultan bin Turki II was cut off from the Saudi royal family’s cash flow after criticizing the regime. So he appealed to Prince Mohammed bin Salman for help—and was never seen again."

We'd love your help.

If you stumble across something great, send it to weekly@permanentequity.com.

If you know an owner, operator, or someone who works with SMB's, please give us the highest compliment and send them our way. You can find previous The Weekly issues here.

Kelie Morgan 8/28/20 Kelie Morgan 8/28/20

The Weekly: Edition #60 - August 28th, 2020

Eliminate The Waste

"My whole life is about trying to treat the working man fairly and give him a good opportunity." - Ken Hendricks

Every so often, we are reminded of how big our economy is, and how great family-led businesses can hide in plain sight for years. ABC Supply Co. is a great example of the type of 'boring business' we enjoy partnering with for the long term. We noticed the article resurface this week on Twitter (h/t @TheSamParr) and wanted to share the thread highlighting Ken Hendricks' journey building a billion dollar blue collar business.

Back in 2006, Ken Hendricks was named Inc.'s entrepreneur of the year, but unfortunately passed away later in 2007 in an unfortunate fall. Hendricks, a high school dropout, worked as a roofer alongside his father for several years until deciding to start his own roofing company. A sign of what was to come, he had 500 employees working for his business within 7 years. While growing his business, he began to notice the fragmented nature, the wasteful practices, and the low quality of service of the roofing supply industry. Through his experiences with the roofing supply industry, his famous 6-word mantra of "create jobs, eliminate waste, preserve value" was born. We were particularly drawn to the elimination of waste as it applies to the SMB space.

Hendricks was known for his thrifty ways and worked hard to cultivate an owner's mentality among his employees:

"On his visits to distributorships, Hendricks is forever astonished at how much waste he sees. Many businesses fail, he believes, because management doesn't value the right things. "Maybe somebody nicked a little bit of roof edging in a warehouse, and they say, 'Ahhh, it's scrap. Throw it away," says Hendricks. "Well that's $30 or $40, and at a 20 percent margin you've got to sell that five times before you're back to breaking even. You've got customers who are building a shed or something and they'll pay 80 percent for that."

Underscoring Hendricks' focus on eliminating waste, he had a unique ability to reuse 'junk'. He repurposed dilapidated real estate, refurbished old manufacturing equipment, and bought scrap materials at auction because he could see value where others couldn't. Hendricks embodied a belief in 'waste not, want not' and focused on finding creative uses for what others viewed as 'waste'.

"Hendricks believes almost anything can be salvaged. I ask him for reasons not to buy a business, and he swats away the question. "Wrong location? Move it," he says. "Wrong people? Replace 'em. Wrong industry? I don't believe it. I've got a company in the machine tools industry, and we're doing great. I'd happily go into the coal business. It's how you look at something and how it's managed that make the difference."

During the pandemic, most businesses have had to take an honest look at exactly where their hard-earned dollars were being spent and what resources were being used (or not). Pandemic or no pandemic, it's never a bad idea to approach your personal and professional life with a healthy focus on what you are wasting (time, money, relationships). If we all focused a little more on eliminating the waste in the good times, there'd be much less to cut in the hard times.

Sam Parr on ABC Supply Co's success in the roofing supply industry (@TheSamParr)

+ "“Walk in the back room and talk to the warehouse guy or the forklift operator and say, ‘If you were running this business, what would you do differently?’ ” says Hendricks. “I guarantee if you fixed what they tell you, 95% of the time that would be a successful business."

Amazon is delivering nearly two thirds of its own packages (CNBC)

+ "According to data from ShipMatrix, Amazon shipped 415 million packages in July compared with a monthly average of 389 million between April and June. The e-commerce giant also delivered 66% of its own packages in July, compared with 61% between April and June."

Silicon Valley's eccentric real estate king, Stanley Lo, has sold over $6B worth of property (The Hustle)

+ "In 1968 — at the height of the Vietnam War — Lo secured a US student visa and boarded a plane to study electrical engineering at San Jose State. “I landed with $100 in my pocket,” he says. To financially support himself, Lo took on any odd job he could get, working as a busboy and a nightclub cleaner — often late into the night. After work, he’d study until 1 or 2 am, get a few hours of sleep, then wake up at 6 and commute from San Francisco to San Jose for classes. He says he ate hot dogs for nearly every meal."

The 2020 San Francisco exodus is real, and historic, report shows (SF Gate)

+ "Online real estate company Zillow released new statistics shining a stark light on the issue this week. Their "2020 Urban-Suburban Market Report" reveals that inventory has risen a whopping 96% year-on-year, as empty homes in the city flood the market like nowhere else in America."

The pandemic startup surge, by the numbers (Marker Media)

+ "111,680: that's how many applications were filed to start new businesses the week of August 10th, a 69% increase over the same week last year."

Walmart's e-commerce explosion by the numbers (Marker Media)

+ "97%: that's how much Walmart's online sales grew in the second quarter of 2020, compared with the same period last year."

The e-commerce surge (Benedict Evans)

+ "As I wrote here, we’re in a period of both forced experiment and forced experimentation. In January everyone was online and willing to try anytime online: now we have no choice. So, some of this is the future happening more quickly, with years of growth being pulled forward, but some of it also is an experiment that won’t stick. We’ll find out which in the next six months or so."

The Nielsen total audience report (Nielsen)

+ "While the level of engagement may be similar, perceived productivity while at work varies between those who worked from home prior to versus as a result of the pandemic. Unsurprisingly, those with more experience working from home have, in most cases, had less upheaval to their daily routines, and 89% feel that they have been equally or more productive working from home as a result. However, 72% of new work-from-home respondents have also maintained or increased their productivity during these trying times."

The wildest insurance fraud scheme Texas has ever seen (Texas Monthly)

+ "As records from banking and telephone companies arrived, Reed uncovered even more instances of what he believed to be criminal activity. He learned that in March 2014, T. R. had crashed his Lamborghini, which he’d bought for $76,000, into a water-filled ditch. His insurance company gave him $169,554. In October 2014, T. R. bought a 1998 Hunter Passage sailboat in Hawaii for $50,150. He “sold” it a month later to a man in Honolulu named Edward Delima for $193,500—money T. R. had “loaned” Delima through a mortgage company he and his business partners created. The boat sank in a marina under mysterious circumstances. In 2015 Delima, who had insured the Hunter Passage for an increased value, handed over the $180,023.80 insurance payout to his mortgage company, held in the name of T. R. Wright."

Kelie Morgan 8/21/20 Kelie Morgan 8/21/20

The Weekly: Edition #59 - August 21st, 2020

Niches, Riches

"Niche down" is a popular saying among small business entrepreneurs, serving as short hand for "dominate a small piece of the market before moving to another." This week, we wanted to bring your attention to a wonderful example of how one entrepreneur spotted a growing need in the data privacy niche and built a billion dollar business in the process. Kabir Barday, founder of OneTrust, had a first-hand view of where data privacy policy was heading and decided that this was his niche to own. Here are 3 key lessons that are worth reflecting on for SMB owners and entrepreneurs:

Recognizing an opportunity is always preceeded by work in a related field. Prior to founding OneTrust, Barday worked in the data privacy field at AirWatch, a data privacy firm specializing in securing mobile phones for large employers as personal phones were increasingly being used to conduct business on behalf of corporations. Turns out, he was in the right place at the right time. But that was only half of the story:

"Barday, who comes off as equal parts soft-spoken and swaggering, recognized a colossal market in its infancy. How he seized the opportunity is a lesson in diligent prep, great timing, and aggressive action."

Find, then own, your niche. From Barday's vantage point, he realized that this niche market of data privacy and compliance was growing rapidly and saw a gap between the solutions being offered and marketplace needs. The potential customers were easily identifiable, easily accessible, and had an underserved need in a fast growing market:

"There may be sexier tech companies out there that generate more headlines than OneTrust. But in pure business terms, there's nothing sexier than quietly amassing control of a deep niche that just keeps getting deeper."

Pursue what you are uniquely positioned to dominate. Barday had dreams of striking out on his own and even mulled over the idea of opening up Pizza Studio franchises across the Southeast. But after reflection, he realized he wasn't uniquely suited for franchising. Instead, he decided to pursue the nascent opportunity of data privacy.

We believe this last lesson is the most critical to consistent success over time for business owners. All business owners must reflect on what makes them truly different. At Permanent Equity, we realize that many can buy a business, so what makes us unique? Ultimately, we rely on our reputation as long-term partners with some rare and valuable skills, and a permanent capital base to close transactions with no intention of selling. In a sea of potential buyers, we offer a unique and alternative solution for a business in search of a permanent home. Not every business will fit this description, but for those that do, we strive to be best in class.

'A growth industry like I've never seen': inside America's no. 1 fastest-growing company (Inc. Magazine)

+ "Atlanta-based OneTrust, which landed at No. 1 on this year's Inc. 5000, with more than $70 million in 2019 revenue and a staggering 48,337.2 percent three-year growth rate, is among the global leaders in privacy-law-compliance technology. In the most straightforward terms, OneTrust builds a suite of digital tools that gives companies a clearer view of all the user data they accumulate. This enables them to comply with privacy laws, like the European Union's General Data Protection Regulation (GDPR), that give consumers greater control of how and whether companies use their data. Before lawmakers began to take notice of consumer complaints about data misuse, most companies simply didn't have dedicated technology for managing their users' privacy. Now they must."

Amazon and mall operator look at turning Sears, J.C. Penney Stores into fulfillment centers (Wall Street Journal)

+ "A number of U.S. malls are already doing business with Amazon, such as renting parking lots to Amazon’s huge van fleets. But for Simon to lease a large, well-located indoor location would be the rare instance of a major mall operator offering prime retail space to Amazon. “To replace department stores, mall owners considered schools, medical offices and senior living,” said Camille Renshaw, chief executive officer of B+E, a real-estate investment brokerage firm. “With the current pandemic, industrial is the only thing left now.”"

How to become the linchpin in your ecommerce supply chain (Jay Vasantharajah)

+ "Phil Knight, the founder of Nike, had $0 sales and his company was just him and his running coach when he met with Onitsuka Co. in Japan. Yet, he was able to persuade them to give him exclusive distribution rights to sell Tiger shoes in the US. The supply chain is an underrated area of eCommerce that doesn’t get much love. Optimizing it can give your company a huge advantage, especially if you’re able to achieve a negative cash conversion cycle."

Ryan Reynolds sells his Aviation Gin brand for $610M (Forbes)

+ "The company already owns some of the top-selling names in the category—including Tanqueray and Gordon’s. But these are fairly traditional London Dry bottlings. With this latest addition Diageo is obviously hoping to court a new audience. Namely: millennial consumers who are compelled by the more accessible tonalities of so-called ‘New World Gin.’"

How restaurants got crushed by covid, by the numbers (Marker Media)

+ "15,770: That’s how many restaurants listed on business review platform Yelp have permanently closed since March 1. That accounts for 60% of the 26,160 total closures of restaurants on the platform. Plus, 44% of the 5,454 closed bars and nightclubs listed on Yelp have permanently shut as well."

Inside the barbershops keeping the NBA shaped up in the bubble (GQ)

+ ""We’re giving them two or three weeks’ notice, and then they have to go tell their wife and kids and business partners, “Hey, I’m going to be gone for a month and a half.” So that weeded a lot of people out fast. And then even though the accommodations are nice, it’s still a bubble. It’s isolating. You can’t go anywhere. You can’t go to the store, you can’t see your family, you’ve got to be right there for four to six weeks or even longer. There’s all this uncertainty—it’s an unprecedented situation, nobody’s ever done this before. So the six barbers, three stylists, and three nail technicians I was able to select, they all took this as a blessing and an opportunity to both grow their brands and do something that’s never been done before, to be a part of history."

Companies strain to outdo each other with work-from-home perks (Wall Street Journal)

+ "“Yay, let’s do this people!” urged Amy Schnall, the director of executive operations, on a recent Thursday afternoon, raising a glass of sauvignon blanc and speaking to remote workers over Zoom. And so began the company’s first virtual ukulele-building class. DIY ukulele kits had been sent to employees’ homes and a hired music teacher took over the Zoom call for a pep talk."

George Wu on negotiating over Zoom (Chicago Booth Review)

+ "Many experienced negotiators have honed their skills for a specific negotiation context: in-person meetings, where reading the room and observing body language can be important elements to building trust and achieving success. But the pandemic has made in-person negotiating difficult or impossible for many people, and even after the health threat subsides, the business community's new collective fluency with Zoom may make remote negotiation more common than it was before."

Yes, some Boeing 747s still run on floppy disks (Popular Mechanics)

+ "The 747s in question, from British Airways, include calculation-heavy, but graphics-low software that aids with flight mechanics. “Pen Test Partners discovered a 3.5-inch floppy disk drive in the cockpit, which is used to load important navigation databases,” The Verge reports. And that actually makes sense. The entire text of Moby-Dick, stored as a plaintext file with all the Project Gutenberg trimmings, is just 1.2 megabytes."

Kelie Morgan 8/14/20 Kelie Morgan 8/14/20

The Weekly: Edition #58 - August 14th, 2020

Family Business - Freedom & Constraints

Family businesses are some of the most dynamic, profitable organizations in the world due to their nimble nature and permanent ownership structure. This week, we wanted to bring your attention to the India-based Poonawalla Family and their Serum Institute to highlight several key factors that illustrate both the freedom and constraints of family business.

1) Family businesses often have a smaller number of key decision-makers, which can result in more nimble operations. Typically, this means that decisions are made faster and without a lot of red tape:

"The only shareholder Poonawalla has to answer to is his 79-year-old father, Cyrus—one of India’s best-known bon vivants in his day and the man he credits for his own liberal attitudes toward money. That family ethos is what created Serum’s massive capacity, and, in Poonawalla’s view, it allows the company to move faster and take bigger risks manufacturing in the pandemic than any publicly listed pharmaceutical giant. After all, he can afford it. Have you seen the plane?"

Unlike many public companies with their own institutional inertia and bureaucratic approval processes, family businesses face imminent demise at every turn and must always remain nimble. This was key to the Poonawalla family's rise as a vaccine manufacturing giant. But, in many family businesses, as the seeds of success are sown, the fruits of labor are often split over multiple generations and the challenges of transition become evident. This brings us to the difficulties that follow successful family businesses.

2) Family businesses typically have generational challenges as the family grows larger and the spoils are split in numerous, complicated ways:

"But his descendants had large families, which divided inheritances. By the time what was left of the fortune made it to Soli, Adar’s grandfather, all he got was a house and 40 acres of undeveloped land. Soli used that spread to create the Poonawalla Stud Farms, which would eventually become the country’s most successful breeder of racehorses. But the sport of kings had an uncertain future in newly independent, officially socialist India, and as he came of age, Soli’s son Cyrus figured it would be wise to diversify into a business with more mass-market potential."

At Permanent Equity, we specialize in helping family businesses transition ownership and operations from one generation to the next while allowing the family to continue doing what they do best - operate. With backing from a permanent source of capital, family businesses can afford to take risks they may not otherwise take.

3) Family businesses must thrive off of internally generated cashflow, and are thus resource constrained unless they raise outside capital. Therefore, making big bets comes with a larger risk of failure:

"The Oxford team published promising data in a July article in the Lancet, showing its vaccine produced an immune response in almost everyone who received it in early tests. But it still has a long way to go before its safety and efficacy are proved in large-scale human trials, which are now under way. If the vaccine fails to prevent disease or turns out to have unacceptable side effects, Serum’s preparations will have been for nothing. That would incur a loss the company estimates could be as high as $200 million—though the Bill & Melinda Gates Foundation has agreed to help share some of the production risk, and Serum hopes to repurpose its new equipment for other coronavirus vaccines."

At Permanent Equity, we stand ready to help you continue to operate your family business with the help of our strong balance sheet and our willingness to take intelligent risks. If we can be of service to your family in any way, please do not hesitate to reach out.

My life pouring concrete (Quillette)

+ While slightly racy, this piece covers what the world of hard, blue collar labor is like from the perspective of an insider. Worth the read, especially if your 'shoes and shirt are clean.'

"To the extent construction workers are discussed at all in the media or popular culture, it’s usually by reference to stereotypically negative attributes, such as sexist leering, foul language, and substance abuse. Unless you are embedded in this world, you’ll miss the offsetting positive aspects, including the unspoken code that exists among most crews: (1) Do the best work you can, without creating more work for others; (2) don’t shirk the dirtiest or hardest task; (3) obey your direct boss, but remain suspicious of authority more generally, especially when it walks on to the site with clean hands and nice shoes. (Young engineers tend to be particular objects of scorn); (4) never rat. If someone’s alcohol or drug problem is out of hand, let the supervisor address it. If your colleague gets fired because you blew the whistle, you may lose something more precious than a job."

Thousands of small businesses are dying and no one is tracking them (Bloomberg)

+ "Yelp Inc., the online reviewer, has data showing more than 80,000 permanently shuttered from March 1 to July 25. About 60,000 were local businesses, or firms with fewer than five locations. About 800 small businesses did indeed file for Chapter 11 bankruptcy from mid-February to July 31, according to the American Bankruptcy Institute, and the trade group expects the 2020 total could be up 36% from last year. While the businesses are small individually, the collective impact of their failures could be substantial. Firms with fewer than 500 employees account for about 44% of U.S. economic activity, according to a U.S. Small Business Administration report, and they employ almost half of all American workers."

The world’s best hope for enough covid-19 vaccine comes from India (Bloomberg)

+ "Serum already has a deal to produce a billion doses of ChAdOx1 nCoV-19, the vaccine being developed by the University of Oxford and AstraZeneca Plc, which could win approval from U.S. and European regulators as soon as this autumn. But Poonawalla argues that whichever of the more than 100 vaccine candidates in development ends up being effective, Serum will have to be part of any global-scale manufacturing plan, and not just because of the size of its factories. The only shareholder Poonawalla has to answer to is his 79-year-old father, Cyrus—one of India’s best-known bon vivants in his day and the man he credits for his own liberal attitudes toward money. That family ethos is what created Serum’s massive capacity, and, in Poonawalla’s view, it allows the company to move faster and take bigger risks manufacturing in the pandemic than any publicly listed pharmaceutical giant. After all, he can afford it. Have you seen the plane?"

Sweatpants forever: the unraveling of the fashion industry (New York Times)

+ "Inspired by a French children’s film, Entireworld’s sweatsuits come in a prism of cheery colors and, in Sternberg’s vision, “sort of make you look like a cross between a Teletubbie, Ben Stiller in ‘The Royal Tenenbaums,’ and a J.C. Penney ad from 1979.” It wasn’t long before Sternberg’s employees began texting him happy-face emoji. On an average day, the brand — still in its nascent stage — sells 46 sweats. That day they sold more than 1,000. When they ran out of sweatsuits, shoppers moved through the T-shirts, socks and underwear. By month’s end, the brand’s sales were up 662 percent over March the previous year."

Meet the woman who got Joe Rogan and Michelle Obama to Spotify (Wall Street Journal)

+ "Podcasts need to become a big moneymaker if the nearly $50 billion company is to become profitable. It is Ms. Ostroff’s job as chief content officer to make Spotify less reliant on music, and the company has committed hundreds of millions of dollars to make it happen. She has helped position Spotify as a major player—and sparked an arms race for podcasting companies and talent—with deals for Gimlet Media, Anchor FM, Parcast Studios and Bill Simmons’s the Ringer. The streaming company now has more than 1.5 million podcasts on its platform, up from 185,000 in 2018."

Remote work is here to stay. Bosses better adjust. (Wall Street Journal)

+ "Every boss of a newly remote team whom I know admits that, like this vice president, they’ve been pushing themselves and their teams harder. A study conducted by one 350-person team at Microsoft Corp. found that in the four months after the team moved to remote work in March, employees worked an average of four more hours a week, attended more (albeit shorter) meetings, and spent about 10% more time in meetings. Fragmented “Swiss cheese” days became common as people struggled to care for and teach their children, and to meet other personal obligations. A “night shift” emerged: Employees sent 52% more instant messages between 6 p.m. and midnight. They worked more hours on weekends."

How China controlled the coronavirus (The New Yorker)

+ "The Chinese lockdown was more intense than almost anywhere else in the world. Neighborhood committees, the most grassroots level of Communist Party organization, enforced the rules, and in many places they limited households to sending one individual outside every two or three days to buy necessities. If a family were suspected of exposure to the virus, it wasn’t unheard-of for their door to be sealed shut while tests and contact-tracing were being conducted. One student I had taught in the nineties sent a photograph of a door in her community that had been closed with two official stamps."

Kelie Morgan 8/7/20 Kelie Morgan 8/7/20

The Weekly: Edition #57 - August 7th, 2020

Cultivating an Ecosystem

The metaphor of industry as 'the jungle' of capitalism is an apt one. Building a successful business requires cultivating a thriving ecosystem where your customers' demands are met, your suppliers' needs are met, and your company thrives in a sustainable manner. Just as in nature, a parasitic relationship in a business's ecosystem is a long-term risk to the system as a whole, whereas symbiotic relationships allow the entire chain to thrive. We love negotiating win-win partnerships with vendors, customers, and business owners. This week, we wanted to highlight the beauty of Costco's symbiotic approach with its suppliers to build the Kirkland brand and help you explore similar possibilities within your business.

Leverage your distribution and customer base - Costco only sells roughly 3,700 SKUs in inventory, but has millions of subscription-based customers who fill their stores annually to buy items in bulk. After building its brand and customer loyalty, this opened new opportunities for partnership - like building the Kirkland brand. If you have a stable base of customers or a distribution network in place, there are potential partnership opportunities with suppliers waiting to happen.

Consider supplier incentives - This was the key piece behind the Kirkland private label. Costco was able to supply the Kirkland brand at a lower cost by eliminating marketing expense for its suppliers. Because Costco had a built-in distribution network and customer base, it was able to partner with its suppliers to eliminate an expense to the supplier, pass on the savings to its customers, and enhance the value of the entire Costco ecosystem.They could cut out brand's need to market, give brands guaranteed access to millions of captive (membership paying) customers, and ensure higher unit volumes through their partnership. As we wrote in edition #9 of The Weekly:

"If you have a solid understanding of how your industry's ecosystem works, you can bring third parties into the deal and align their incentives with yours which can potentially increase the value created for everyone."

Great brands take years to build - The Kirkland brand was started in 1992. But there was a flywheel effect built into the win-win of lowering prices for customers and ensuring a steadily increasing volume of business to suppliers, which led to the brand growing into the behemoth that it is today. If your business can align value and incentives between all parties in your industry ecosystem, the flywheel effect can be powerful indeed.

Symbiosis ensures a healthy, growing ecosystem while parasitic relationships eventually lead to a dwindling value chain in the jungles of industry. There is opportunity to increase your business's momentum by answering one simple question: where do symbiotic relationships not yet exist between your business and your customers, your suppliers, and your employees? Your business is an ecosystem, so cultivate it.

How Costco convinces brands to canabilize themselves (Napkin Math)

+ "Kirkland’s success defies our intuition and experience. Shouldn’t lower prices lead to lower quality products? How can they offer rock-bottom prices but still have some of the best products around? The answer is this: they get the best manufacturers in the world — who already have products on Costco shelves — to make Kirkland products."

Practicing medicine in the era of private equity, venture capital and public markets (Forbes)

+ "In the last decade, there has been a remarkable shift in ownership of healthcare delivery. Previously independent, physician-owned medical practices have been acquired by private equity firms and publicly traded corporations. The rationale for these acquisitions is typically two-fold. First, the acquiring entity can streamline cost structures and implement management practices to lower the overall cost of delivering care. Second, these firms can use their consolidated position in the marketplace to extract more favorable rates from third-party payers. In addition to private equity and publicly traded companies, venture capital firms have invested heavily in healthcare hoping to reap rewards from new models of care delivery. Contrary to others observers of these trends, I believe this change in ownership of healthcare is not intrinsically good or bad."

The inside story of how the Ricketts family schemed and feuded their way to owning the Chicago Cubs (Deadspin)

+ "The Cubs were officially put up for sale shortly after billionaire Sam Zell purchased the team’s parent company, the Tribune Co., in April 2007. Zell took control through a leveraged buyout—a technique that allows the buyer to borrow heavily in order to make a purchase and then saddle the existing company being purchased with the resulting debt—worth $8.2 billion, leaving the Tribune with $13 billion in total debt. Once the purchase was complete, Zell went about completing the second step of the leveraged buyout playbook: stripping the acquired company down to the studs and selling off whatever assets still hold value. Thus, the Cubs were suddenly for sale."

The collapse of the ad industry by the numbers (Marker Media)

+ "52,000: That’s how many jobs U.S. ad agencies are expected to lose in 2020 and 2021, with half of those jobs projected to never return, according to an analyst at the research firm Forrester, as reported in the New York Times. With advertisers making severe, pandemic-induced budget cuts, Forrester also predicted that ad spends will decline 25% in 2020, not recovering until 2023."

Buying a bike during coronavirus? Expect a long wait. (New York Times)

+ "In March, nationwide sales of bicycles, equipment and repair services nearly doubled compared with the same period last year, according to the N.P.D. Group, a market research company. Sales of commuter and fitness bikes in the same month increased 66 percent, leisure bikes jumped 121 percent, children’s bikes went up 59 percent and electric bikes rose 85 percent."

A founder's guide to writing well (First Round Review)

+ "I’ve witnessed how well-chosen words can alter the troubled paths on which executives find themselves. In my early days at Google, Sheryl Sandberg led a rapidly-growing operations team that was chronically deprioritized from an engineering perspective, resulting in exponential growth of manual work for her teams. Realizing that Larry and Sergey valued engineering-oriented efficiency and keeping Google “lean and mean,” she penned a famous document called “How not to hire 10,000 people,” making the case for investing engineering resources in her operations. Sure enough, Larry and Sergey soon let Sheryl hire as many engineers as she wanted."

The second wave of layoffs and furloughs is well underway (RIWI)

+ "- Of workers who were placed back on payrolls after being initially laid off/furloughed as a result of the COVID-19 Pandemic Crisis, 31% report that they have been laid off a second time, and another 26% of those placed back on payrolls report being told by their employer that they may be laid off again. These results were surprisingly higher for workers in states that have not been experiencing recent COVID-19 surges, relative to those in surging states.

- 37% of respondents employed by third-party employers (i.e. not self-employed) have been laid off/furloughed – at least once – since March 1, 2020.

- 57% of those initially laid off/furloughed reported being put back on payroll sometime after their initial dismissal, but 39% of such respondents say they were put back on payroll yet were not asked to return to actual work."

Meet the company that sells your lost airplane luggage (The Hustle)

+ "Every year, 4.3B bags are checked by airlines around the world. Around 25m of them (5.7 per 1k bags checked) end up lost or misdirected. The 0.03% of bags that are still not reunited with their owners after 90 days are sold by the airline. Chances are, they are purchased by a company called Unclaimed Baggage."

Kelie Morgan 7/31/20 Kelie Morgan 7/31/20

The Weekly: Edition #56 - July 31st, 2020

The Airplane Rule

"In case of a cabin pressure emergency, put on your own mask first before assisting others."

Most business founders and owners are busy. It's just a fact. But just because you are busy, doesn't mean you have to neglect personal needs in favor of your business's. We see it time and again, where business owners work harder on their businesses at the cost of neglecting themselves - physically, mentally, emotionally, spiritually. And it works - for a time.

As we wrote in our thoughts on maintaining margin in life, usually the effects of an over-committed schedule or over-leveraged balance sheet only show up during the tough times. The same holds true for neglecting personal needs. Burnout occurs slowly, then all at once. We like to call it the airplane rule:

Neglecting to put on your oxygen mask in turbulence won't kill you instantly, but after a few minutes, you will be neither effective for yourself or others around you. And so it goes in business. You must build the best version of yourself before you can build your business.

Here are a few practical ways to implement the airplane rule for busy owners.

Carve out the time to reflect. Bill Gates is famous for taking his 'think weeks' where he escapes all business functions to read, think, and reflect on both past and future. It is worth exploring whether your business would operate in a seamless manner without you for a week to reflect and strategize future direction. If not, it may be time to ask why.

Get back to the 'Why'. Being busy creates an aura of progress. But with the lack of margin comes a lack of vision. Time horizons shrink to match deadlines. And when time horizons shrink, sometimes the 'why' behind the efforts can be lost. Why did you originally start or buy the business? Why did you come to work for the business in the first place? If you have no 'why', your 'what' won't matter.

Focus on the pain points. As the Anna Karenina principle states, 'all happy families are alike, but every unhappy family is unhappy in its own way.' The same is true of every business owner - all joyful owners are alike, but every unhappy owner is unhappy in her own way. It is worth reflecting on how to eliminate the root causes of your struggles as an owner. They will be different for each owner, but the more stress you can remove from your plate, the more freedom you will have to reflect on your decisions and focus on your 'why'. This is, in essence, the virtuous cycle of the airplane rule. Focus on yourself first to build a better business.

Amazon met with startups about investing, then launched competing products (Wall Street Journal)

+ "Dealing with Amazon is often a double-edged sword for entrepreneurs. Amazon’s size and presence in many industries, including cloud-computing, electronic devices and logistics, can make it beneficial to work with. But revealing too much information could expose companies to competitive risks.“They are using market forces in a really Machiavellian way,” said Jeremy Levine, a partner at venture-capital firm Bessemer Venture Partners. “It’s like they are not in any way, shape or form the proverbial wolf in sheep’s clothing. They are a wolf in wolf’s clothing.”"

339 Startup failures post-mortem (CB Insights)

+ A valuable reminder that small business and startups are hard.

Unlucky charms: the rise and fall of billion-dollar jewelry empire Alex and Ani (Marker)

+ "Sources described a once-focused and enthusiastic organization plagued by uncertainty and a visionary creative leader who seemed ill-suited to running a massive retail brand. According to those who worked with Rafaelian, the same improvisational, shoot-from-the-hip approach to business that helped make Alex and Ani such a spectacular success also contributed to its undoing."

Which colleges will survive the pandemic? (Scott Galloway)

+ "The ugly truth is many college presidents believe they have no choice. College is an expensive operation with a relatively inflexible cost structure. Tenure and union contracts render the largest cost (faculty and administrator salaries) near-immovable objects. The average salary of a full professor (before benefits and admin support costs) is $104,820, though some make much more, and roughly 50% of full-time faculty have tenure. While some universities enjoy revenue streams from technology transfer, hospitals, returns on multibillion-dollar endowments, and public funding, the bulk of colleges have become tuition dependent. If students don’t return in the fall, many colleges will have to take drastic action that could have serious long-term impacts on their ability to fulfill their missions.

Leading advertisers 2020 fact pack (AdAge)

+ "The advertising economy in 2019 reached a record high in the US (media ad revenue $239 billion excluding political ads, up 6.8%) and the world (media revenue of $587 billion, up 6.2%) according to WPP's GroupM."

How to take personal development off the backburner (First Round Review)

+ "A theme we’ve noticed in our last several pieces here on the Review is that it’s important to push back against these feelings by setting aside the time for critical reflection. Whether it’s an introduction to the concept of emotional fitness, a guide for managers leading their employees through a crisis, or our most recent article on building a vulnerable culture where you can truly be yourself at work, we’ve found time and time again the importance of tapping into that inner voice of strength and resilience. That work hinges on a resolve to deeply introspect about where you’ve been, where you’re headed and how you can seek self-improvement, even in the midst of stormy weather."

The technology that changed air travel (Retool)

+ "A lot has changed about air travel since it went mainstream in the 1930s. On-board smoking, free-flowing booze, and five-star meals have given way to baggage fees, cramped seats, and mystery meat. It ain’t all bad, though — flying is also more safe, affordable and accessible than ever before. Through all this change, one thing has stayed the same — the software that manages it all."

Kelie Morgan 7/24/20 Kelie Morgan 7/24/20

The Weekly: Edition #55 - July 24th, 2020

Big Bites, Chew Slowly

Nathan's Annual Hotdog Eating Championship is a sight unlike any other. The bites, the (lack of) chewing, the speed of attack - it's an iconic American experience. Competitors shamelessly take bites that rival most people's dinner portions, digesting them without so much as breathing. It's a race to cram down, and keep down, the most dogs.

This is small business in a nutshell.

Biting off more than you can chew, and hoping you can keep it down, is a regular practice in growing a small business. But, as the piece we higlight today illustrates, what often gets lost in this process is the line between your business's capacity and your business's capabilities. Two questions come to mind for reflection: how can you sell your business's product or services (capacity) while maintaining an honest dialogue about what you can or can't actually provide (capabilities)? And at what point does growth actually harm your business?

Growing a small business is about strategically selling up, over promising and over delivering. But there comes a point in time at which over-promising crosses the line from reality to an outright lie. This never fails to result in under-delivering to your customers, and the vicious cycle of losing customers, employees, and investors can compound quickly. So how do you balance growth, business capacity, and business capability?

A couple lessons from ScaleFactor's demise:

1) It's OK to oversell your capacity, but dangerous to oversell your capabilities.

The 'fake it til you make it' may work for a time, but eventually, you have to actually 'make it', or the chickens will come home to roost. Moving fast and breaking things only works if you learn early and at a small scale. Breaking things at scale doesn't normally work as a viable business strategy. ScaleFactor (no pun intended) sold its services ahead of where the technology actually was, anticipating that they would eventually be able to catch up - a white lie that unraveled the entire ball of yarn. As business owners, it is important to know where fact and fiction separate when you make promises to customers.

2) Validate your vendors' capabilities on a small scale before adding capacity.

ScaleFactor may have had the capacity to deliver on its promises for back-of-house accounting functions, but it vastly oversold its capabilities as an AI-driven accounting service for small businesess. Worse, they convinced business owners who knew how to run their financial operations to outsource their accounting to a company that didn't know how to run their accounting operations at all, resulting in costly errors. While outsourcing may free up time and resources, it offers no flexibility and often leads to greater resources being tied up if the outsourcing effort goes sideways. As the Russian proverb says, trust but verify.

As business owners, we understand how hard it is to turn down new opportunities that appear enticing at first glance. But there is a balance to strike between your employees' capacity, your business's capabilities, and your desire for profitable growth. If the desire for growth outstrips your capabilities, it is your reputation that will ultimately suffer. If you're going to take big bites, remember to chew slowly.

ScaleFactor Raised $100 Million In A Year Then Blamed Covid-19 For Its Demise. Employees Say It Had Much Bigger Problems. (Forbes)

+ "“Because evenings are for families, not finance,” ScaleFactor’s website proclaimed. But some of the startup founders and cafe owners who did take the night off soon regretted their decision to hire ScaleFactor: they didn’t get what they paid for. Instead of software producing financial statements, dozens of accountants did most of it manually from ScaleFactor’s Austin headquarters or from an outsourcing office in the Philippines, according to former employees. Some customers say they received books filled with errors, and were forced to re-hire accountants, or clean up the mess themselves."

How Shopify is keeping your neighborhood bakery afloat (The Hustle)

+ "When the pandemic hit, Shopify:

Signed up 62% more sellers between March 13 and April 24.
Extended its free trial from 2 weeks to 3 months.
Added $200m to its loan program for struggling businesses."

The economics of railcars is complex (Freight Waves)

+ "Changing market demand results in a high variance of cars built per annum. Railway freight traffic witnessed a volume growth spurt between 1980 and 2006. Then, with the Great Recession, railway cars available (market supply) far exceeded the market demand. Railcar investors were hurt. Badly. Car utilization rates declined. According to a March 2009 survey by Longbow Research, “as many as a half million cars went to storage.” Lease rates fell an average of 21 percent year-over-year in a Longbow Research report. Progressive Railroading’s March 18, 2009 outlook for new railcar deliveries in 2010 fell to fewer than 17,000 units. In contrast, 40,000 to 50,000 new railcars are delivered in “normal good years.”"

The story of Ross McLellan's financial crimes (Institutional Investor)

+ "McLellan has since been tried and convicted, lost an appeal, and, on July 7, said goodbye to his wife and four young children to report to federal prison in Ayers, Massachusetts, to serve out an 18-month sentence. The crimes he was convicted of — overcharging clients by millions as a young executive at State Street and conspiracy to do so — occurred nearly a decade ago. McLellan is inmate no. 99476-038."

Boom time for death planning (New York Times)

+ "Another new company, Lantern, which calls itself “the single source of guidance for navigating life before and after a death,” saw a 123 percent increase in users, most of them under 45. Lantern’s tone is soothing and earnest, but not everyone takes that tack. Cake skews playful. It features a tombstone generator and suggestions like “Viking funeral” and “shoot my ashes into outer space.” New Narrative, an event-planning company for funerals and memorials, introduces itself with a wink: “We’re not your grandma’s funeral (… unless it’s your grandma’s funeral).”

Airbnb was like a family, until the layoffs started (New York Times)

+ "“I have a deep feeling of love for all of you,” Mr. Chesky said, his voice cracking. “What we are about is belonging, and at the center of belonging is love.” Within a few hours, 1,900 employees — a quarter of Airbnb’s work force — were told they were out."

The pandemic is exposing more americans to remote work, and many are latching on to the practice (Morning Consult)

+ "Overall, 73 percent of U.S. adults who have careers where remote work is possible report that the pandemic has made them feel more positively about the prospect of remote work. And given the option, three quarters of these workers say they would like to work from home at least 1-2 days a week once the pandemic is under control."

The parrot king (Audobon)

+ "The organization operates a licensed zoo in Germany, and birds are also kept in the personal aviaries of ACTP’s members, who pay $1,100 to join. Surplus parrots that members and zoos don’t want are traded or sold to outside breeders. One ACTP representative, for instance, sells Hyacinth Macaw chicks at his pet shop that can go for around $18,000 apiece. How many birds are bred versus collected or sold nobody knows, because ACTP does not publicly disclose its finances or structure."

Kelie Morgan 7/17/20 Kelie Morgan 7/17/20

The Weekly: Edition #54 - July 17th, 2020

Margin

“A crisis doesn’t build character, it reveals it.” - Steve Tanger

As the coronavirus pandemic continues to take its toll on American economic prosperity, the importance of margin in our lives has never been more apparent. On a personal, professional, and corporate level, having built-in margin allows for flexibility with time and financial commitments. This week, we highlight a case study on Target that puts the concept of corporate margin (or lackthereof) on display.

The Target case study is a deep dive into what went wrong for Target during its expansion into Canada. If you're looking for a case in point about setting aggressive timeline goals with little to no margin for error and massive downside risks associated with failure, look no further. Several themes are readily apparent in the piece that highlight Target's emphasis on speed at all costs:

1) Unrealistic expectations for an opening schedule and supply chains:

"From the very beginning, there was a clock that was ticking,” says the former employee. “And that clock was absurd.” The company did everything it could to remove barriers that might slow progress and to ensure decisions could be made quickly. Timelines were hugely compressed. Building a new distribution centre from scratch, for example, might take a few years. Target was going to do it in less than two years—and it planned to construct three of them.

2) Technological change without the necessary forethought and planning:

“While SAP might be considered best in class, it’s an ornery, unforgiving beast. Sobeys introduced a version of SAP in 1996 and abandoned the effort by 2000. (It wasn’t until 2004 that the grocery chain tried again.) Similarly, Loblaws started moving to SAP in 2007 and projected three to five years to get it done. The implementation took two years longer than expected because of unreliable data in the system. Target was again seeking to do the impossible: It was going to set up and run SAP in roughly two years. The company wasn’t doing it alone, however, and hired Accenture (which also worked on Loblaws’ integration) as the lead consultant on the project.”

“The investigative team estimated information in the system was accurate about 30% of the time. In the U.S., it’s between 98% and 99%."

3) Lack of experienced talent and suffient bandwidth:

“In Canada, the company succeeded in hiring people with the right personalities, but young staff received only a few weeks of training, according to former employees who worked at Target in both countries. The Canadian team lacked the institutional knowledge and time to properly mentor the new hires. “Everyone was stretched thin. We didn’t have the manpower to get everything done in the time frame that was laid out,” says a former employee. Another was surprised to see how green his colleagues were. “I was one of the older people there, and I was in my mid-30s,” he says.”

The coronavirus has been an epic reminder that we should seek to build in a little more margin into our lives during the good times in preparation for the bad. Whether it is freeing up a packed schedule, cutting costs in a razor thin budget, or stepping away from low priority commitments (either personally or professionally), having margin allows for life's inevitable curveballs and the occasional storms. This week, take time to examine your personal life or business and ask where things are stretched thin, think about what can be eliminated, and keep first things first.

The last days of Target Canada (Canadian Business)

+ “Nobody disagreed with the negative assessment—everyone was well aware of Target’s operational problems—but there was still a strong sense of optimism among the leaders, many of whom were U.S. expats. The mentality, according to one former employee, was, “If there’s any team in retail that can turn this thing around, it’s us.” The group was riding a wave of momentum, in fact. They had overcome seemingly endless hurdles and worked gruelling hours to get to this point, and they knew there were costs to delaying. The former employee says the meeting ultimately concerned much more than when to open the first few stores; it was about the entirety of Target’s Canadian launch. Postponement would mean pushing back even more store openings. Everyone else in attendance expressed confidence in sticking to the schedule, and by the time the meeting concluded, it was clear the doors would open as promised. “That was the biggest mistake we could have made,” says the former employee. Roughly two years from that date, Target Canada filed for creditor protection, marking the end of its first international foray and one of the most confounding sagas in Canadian corporate history. The debacle cost the parent company billions of dollars, sullied its reputation and put roughly 17,600 people out of work.”

CMBS delinquency rates surge for third straight month, nears all-time high (Trepp)

+ “The percentage of loans with the special servicer grew from 6.07% in June to 8.28% in May. According to June servicer data, 20.5% of all lodging loans were in special servicing, up from 16.2% in May. In addition, 14.3% of retail loans are with the special servicer, up from 9.3% in May. The percentage of loans on servicer watchlist in June was 20.9%.”

The Tanger Outlets CEO thinks online shopping is overrated – now he’s betting on it. (Wall Street Journal)

+ “It’s a bet Mr. Tanger has been making for years, even as online retail threatens to flatten every shopping center in America. Wall Street investors have taken the other side of that bet, sucking his company’s share price steadily downward since 2016. Mr. Tanger’s strongest rebuttal is that human beings will always prefer to buy some merchandise in person. Maybe not diapers or dog food, but definitely fashionable clothing. And because his company’s 39 outlet centers, spread across the U.S. and Canada, specialize in discounted apparel, Tanger is well-positioned to take whatever the economy dishes out. “In good times, people like a bargain,” he often said. “In tough times, they need a bargain.””

Don’t call time on the megacity (Exponential View)

+ “The forces of attraction are the mixing, mingling, diversity, convenience, economics. The forces of repulsion the anonymity, over-crowding, expense, pollution and disease. The balancing point between these forces is determined by many factors which change over time. If it wasn’t for the balancing point, we would have seen much larger cities than we previously did throughout history. Two millennia ago, Rome exceeded one million inhabitants, as did Alexandria. But cities did not subsequently achieve that scale again until London reached it in the 19th century.”

The forces that will reshape American cities (Bloomberg)

+ “Indeed, the migration of families from superstar cities to suburbs and less expensive metros was well underway before the virus and its related crises struck. As the Brookings Institute demographer William Frey has documented, the growth of hyper-expensive cities like New York and San Francisco had begun to reverse over the past five years, as people began heading to smaller metros, suburbs, and rural areas in search of more affordability. What the current crises have done is accelerate this process, compressing family-formation moves that would have been made anyway over the next several years into one or two months. And Covid-19 is not the first significant health crisis that has accelerated the shift of Americans with families to the suburbs. The period immediately following the Spanish Flu was one of rapid suburbanization.”

Pinduoduo and the rise of social e-commerce (Y Combinator)

+ “Social shopping may seem like a new concept, but the reality is that in the physical world, shopping is meant to be “interactive and fun” and purchases are regularly informed by friends and family. Consider how much harder it feels to purchase a new clothing item without immediate feedback from friends. E-commerce platforms like JD, Alibaba, and Amazon don’t account for this. Instead, they optimize for efficiency, funnel conversion, and purchase rates. Pinduoduo, on the other hand, has tried to mimic the offline shopping experience online by building community via their team purchase model, driving engagement via fun and interactive games and rewards, and offering personalized experiences and value via recommendations.”

The coronavirus impact on marketing agencies: 3 months into lockdown (Orbit Media Studios)

+ “Most providers of media planning, social media and PR reported a major negative impact. Consumer behavior has changed so drastically and quickly that advertisers are pulling back, despite falling CPMs on sites like Facebook. Most retainer-based services take a hit as brands look to reduce monthly expenses in anticipation of an almost certain recession. CMOs and CFOs everywhere are debating what to cut. The most impacted agencies serve most impacted industries: travel, hotel, events, higher education and entertainment.”

Indigenous circuits (Computer History)

+ “I learned that from 1965-1975 the Fairchild Corporation’s Semiconductor Division operated a large integrated circuit manufacturing plant in Shiprock, New Mexico, on a Navajo reservation. During this time the corporation was the largest private employer of Indian workers in the U.S. The circuits that the almost entirely female Navajo workers produced were used in devices such as calculators, missile guidance systems, and other early computing devices.”

Kelie Morgan 7/10/20 Kelie Morgan 7/10/20

The Weekly: Edition #53 - July 10th, 2020

Bottlenecks

The task of growing a business can be defined as finding and eliminating bottlenecks to allow for greater capacity and throughput. Your business will only operate as fast as your narrowest bottleneck allows. The pandemic, with its resulting shifts in customer behavior and constantly changing requirements on businesses, are exposing bottlenecks many of us didn’t know were there. As the world moves online, customer expectations grow around instantaneous service, further compounding the issue. Now more than ever, it is critical that we root out the bottlenecks in our organizations and open them or eliminate them altogether in order to meet the demands of this new reality.

Supply Chains - There are vendors who deliver, and there are vendors who don't. Covid-19 has exposed how optimizing for the lowest costs can increase the risk around timely delivery. Going forward, we believe companies who ensure that their supply chain is uninterrupted will win business when competitors falter in their ability to deliver. Is your supply chain experiencing interruptions and how does this compare with what your competitors are experiencing?

Operations - The fundamental purpose of technology is to give the end user leverage over their time to accomplish more with less (time or money or both). When change is necessary, we often lose this leverage as we spend inordinate amounts of time coaxing our systems to follow new process. Does your technology stack give you more flexibility to meet changing demands, or is it locking you in to processes that are no longer relevant or hold back your ability to respond to shifts in the landscape?

Talent – In times of uncertainty, team agility becomes critical. Your team not only needs to be willing to turn on a dime when necessary, but ideally are thinking creatively about tactics to address emergent challenges. Often this is not the case as disruption causes many to retreat to routines that are familiar. Tough times can cause true leaders to emerge, so be on the lookout for those who are willing to tackle new problems and encourage them to lead. If you have the capacity to do so, many industries have a richer talent pool than they’ve seen in years from which to hire. Now is a great time to encourage your current team out of their safe places and to support new leaders.

Finance – Many of the great success stories of today were born during the financial crisis of 2008. Slack, Uber, Pinterest, and Square came through hard work and great product to be sure, but none would have been possible without access to capital. Do your current financial partners enable or hamper your growth? Have you revisited how you’re handling accounts receivable and cash management? Do you current investments and capital projects still make sense in this landscape?

As we begin the climb out of the economic crater that is Covid-19, addressing consumer demand efficiently will be a large part of what defines the winners and losers in the coming years. Consumers and businesses alike have experienced delays, bad customer service, or no service at all due to various bottlenecks in business operations. The winning companies will be able to adapt to customer needs by asking and addressing these questions.

How will the world change after COVID-19? (Hawk Equity)

+ This is one of the best crowd-sourced lists we've come across that shows how people think the world will change after COVID-19.

American Airlines will no longer limit capacity on flights (Paste Magazine)

+ "Currently American books its planes to about 85% of their total capacity. About half of the middle seats of the main cabin are sold for flights right now, and presumably those are filled by parties who are traveling together and thus already regularly exposed to each other. As of next week, though, American’s going to stop doing that. There will be no caps on how many seats can be sold for any flight. They will notify passengers in advance if a flight is full, and give them the option of switching to a less crowded flight, if one is available, but otherwise it’s back to the glory days of packing as many people into that metal tube as possible."

Our ghost kitchen future (The New Yorker)

+ "The ghost kitchen is an increasingly crowded space. In addition to Reef, there are Zuul and Kitchen United in the United States, Deliveroo in London and Paris, and Panda Selected in China. CloudKitchens, the new venture run by Travis Kalanick’s City Storage Systems, buys real estate, brings in kitchen facilities, and leases them to chefs and small-business owners, most of whom do not have other brick-and-mortar spaces. Ojalvo cites his own experience in the restaurant industry (as a partner, he worked on the expansion of Sushi Samba, a Peruvian, Japanese, and Brazilian fusion-restaurant chain with locations in Las Vegas and Amsterdam) to note that opening a brick-and-mortar restaurant is high-risk and expensive, whereas ghost kitchens are lower-risk, offering a more affordable way for entrepreneurs to enter the business."

US online grocery shopping hits a record $7.2B in June (TechCrunch)

+ "Despite the slow reopening of the U.S. economy over the past several weeks, online grocery shopping is continuing to reach ever-higher numbers as Americans seem to be in no rush to return to the store. According to new research released today by Brick Meets Click and Mercatus, U.S. online grocery sales hit a record $7.2 billion in June, up 9% over May, as 45.6 million households turned to online grocery pickup and delivery services for a larger portion of their grocery needs."

There’s a worldwide shortage of roller skates (Vogue)

+ "Steilen, a.k.a. Estro Jen (her skate name), founded Moxi in 2008 with a mission to create beautiful made-in-America rollers that had the same retro appeal as Farrah Fawcett’s. The Moxis come in every color of the rainbow with wheels that hold up outdoors. At $299 a pair, they’re not cheap, but Steilen has seen her business double each year since opening. In the last six months, her staff has grown sevenfold to keep up with demand, from five to 35 people, all skaters who had lost jobs in the pandemic. “We’re seeing last year’s annual sales in one month,” she says. Executives at C7 skates, Impala Rollerskates, and Sk8 Fanatics all agreed that the demand right now is truly unprecedented."

How coronavirus and millennials killed the non-digital gym (VentureBeat)

+ "The fitness industry is in the midst of a digital transformation. Fitness, like just about every industry from transportation to leisure, has witnessed the emergence of digital as a force for change, and brick and mortar gyms are having a tough time keeping pace. Entire companies have been successfully launched to capitalize on the rise in digital fitness as evidenced by the popularity of companies such as MIRROR Home Fitness, Peloton, FiiT, and SWEAT. These are just a few fitness providers that have leveraged digital technology to engage audiences that are looking for customized fitness experiences that meet their individual schedules and routines."

Who is the mystery shopper leaving behind thousands of online shopping carts? (Wall Street Journal)

+ "When The Wall Street Journal contacted Google in June, a spokesman at the internet giant, after a few days of digging, provided an update: The mystery shopper is a bot of its own creation. The purpose: making sure the all-in price for the product, including tax and shipping, matches the listing on its Google Shopping platform or in advertisements. It wasn’t to cause angst to merchants due to thousands of abandoned carts."

Ability to work from home: evidence from two surveys and implications for the labor market in the COVID-19 pandemic (Bureau of Labor Statistics)
+ "A recent article by Erik Brynjolfsson et al. estimates that 31 percent of workers who were employed in early March had switched to working at home by the first week of April. Even when stay-at-home orders are relaxed, many workers may continue working at home until the pandemic is fully contained."

The coming child care crisis (Axios)

+ "Most working families need care for at least 40 hours a week, and schools were providing that," says Adrienne Schweer, a fellow at the Bipartisan Policy Center, a Washington think tank. "If that's gone, there's nothing to fill the void." Care for children under five is also in crisis, she says. The Center for America Progress projects that the pandemic will put up to 50% of day care centers out of business, erasing some 4.5 million slots for young kids."

Do you have what it takes to be a master auctioneer? (Texas Monthly)

+ "We sold a horse. We sold Yeti coolers. We sold wireless meat thermometers, Craftsman shop vacs, trailer tires, and vintage saddles. When stomachs were growling, we sold popcorn snacks. A rum cake, made by one woman’s ninety-year-old Hawaiian grandmother, sold for hundreds of dollars. A three-speed 1921 Emerson fan and a football signed by former Oklahoma Sooners coach Bob Stoops each went for much less. In desperate times, we sold whatever we saw nearby: eyeglass frames, an American flag, a Texas flag, folding tables, a lectern—even the very microphone we held."

Kelie Morgan 7/3/20 Kelie Morgan 7/3/20

The Weekly: Edition #52 - July 3rd, 2020

Culture of Adaptation

Morgan Housel recently wrote a thoughtful piece on the necessity to adapt to changes in the business environment that is especially pertinent given the challenging economic environment and the acceleration of certain trends brought about by the pandemic. As owners navigate these uncertain times, it is necessary to take a step back to assess the changes that are occurring and strategize how to survive in a post-covid world. Last week, we discussed how a culture of long-term ownership allows organizations to be flexible in how they approach strategic decision making. In parallel with this idea, we would like to add that long-term survival requires a culture of adaptation. In his piece, Housel points out that an owner needs both a stacked hand and a great game plan to ensure the longevity of their business:

"Companies have a high failure rate in their first three to five years. Then the challenges plateau. Averaged across industries, a business in its 25th year has roughly the same probability of dying as it did in its 10th year:"

What exactly does a stacked hand look like? An advantage over your competitors in the form of lower cost, higher speed, higher quality or some combination of the three. Even so, no castle stands forever:

"If you invest in 100 high-risk startups, you probably expect 40 of them to fail. Then if you move on to investing in 100 mature public companies, 40 of them will probably fail, too. They might stick around longer than the startups, but the end result is the same. What does that say about competitive advantage? Or the concept of moats? It says that those things, to the extent they exist, are rarely permanent."

Moats are routinely discussed in a static sense, as if they exist in some form or fashion for most businesses. But the facts simply don't bear this out. Indeed, the facts show that every business, year after a year, decade after decade (Lehman), has a non-zero percentage chance of extinction. And the longer your organization is in business, the faster you have to run to remain in place because the competition only intensifies as you near the top of the industry, especially when 10% better means 100% of the potential profits. The incentive for improvement is ever-present. As Jeff Bezos would say, it's always Day 1.

The irony of constant improvement is that as your moat grows, your company becomes more comfortable with its advantaged position and resistant to change - and corporate inertia sets in. The moat becomes more vulnerable as adaptation becomes less tenable:

"Two, some advantages create new disadvantages. Most species tend to get bigger over time because big things are strong. But being big also makes you slow, clumsy, and unable to hide. “The tendency for evolution to create larger species is counterbalanced by the tendency of extinction to kill off larger species,” one study wrote."

So how does an owner avoid stagnation and extinction? In today's tech-centric, information-saturated, 24-7 world, owners must instill an attitude of flexibility and a culture of adaptibility because the only thing that is certain besides death and taxes... is change.

From the Permanent Equity Team, Happy Fourth of July!

Keep Running! (Collaborative Fund)

+ "There are 32 million businesses in the United States. The Bureau of Labor Statistics tracks how many of them die each year, and how old they were at death. Dig through the numbers and one thing’s clear: there is no age at which business gets easy."

Wirecard auditors say elaborate fraud led to missing billions (Bloomberg)

+ "EY, as the accounting firm is officially known, finally sounded the alarm last week, when they refused to sign off on Wirecard’s 2019 financial report. (The firm remains the auditor of record). That set off a cascade of events that started with Wirecard admitting it couldn’t locate billions of euros in cash, followed by the ousting and arrest of former Chief Executive Officer Markus Braun before Thursday’s insolvency filing."

Summer update: Tech and the new normal (Benedict Evans)

+ Benedict Evans' mid-summer update is a masterpiece worth exploring for its data on where technology is growing or maturing, how we will connect in a post-covid world, and what areas covid-19 is accelerating change.

Online shopping during COVID-19 exceeded 2019 holiday season (Adobe)

+ "The key finding in the May analysis is that e- commerce shopping levels during COVID-19 (April to May) were higher than what retailers saw during the 2019 holiday season (November to December). Indeed, consumers spent over $153 billion online in the last two months ($70.2 billion in April and $82.5 billion in May), which is 7% higher than the $142.5 billion spent online during November and December 2019. Additionally, the recorded online spend is $52 billion more than what retailers typically see during April and May."

Adobe 2020 Digital Economy Index Report (Adobe)

+ "BOPIS (Buy Online Pickup In Store) orders maintained a YoY growth of 195% in May, leveling off after the sharp upward trajectory seen in March and early April. We'll likely see this growth draw down further as stores re-open."

The house servant who pioneered the franchising business model (The Hustle)

+ "Ray Kroc is often credited as the “father” of the franchising business model. But 60 years before McDonald’s, a woman named Martha Matilda Harper built her own formidable franchise of hair salons — the first of its kind in the US — and trained hundreds of underprivileged women to run their own businesses. Harper not only pioneered franchising but is widely credited a trailblazer of the modern hair salon industry, which is now a $20B market. An ex-servant who escaped poverty, she built an empire of 500 salons all over the world. And she did it all during a time when women were largely silenced in their entrepreneurial pursuits."

Kelie Morgan 6/26/20 Kelie Morgan 6/26/20

The Weekly: Edition #51 - June 26th, 2020

Culture of Ownership

Here at Permanent Equity, we want to be long-term owners. We stress the importance of thinking, strategizing, and acting in the long-term best interests of our family of companies. With that in mind, we would like to highlight an article this week that illustrates how a culture of long-term ownership lends itself to flexible, adaptable strategic approaches.

In J. Peter Scoblic's Harvard Business Review piece on formulating strategy in the face of uncertainty, he makes the case for generating multiple scenarios for how the future may play out, and planning organizational strategy accordingly. This takes creativity, imagination, and the ability for executives to think expansively about what the future may hold. This assumes, however, that an organization has the ability to pursue different strategies in different future scenarios with maximum flexibility.

If the pandemic has revealed anything, it has laid bare the inability of many companies to respond flexibly in an economic downturn of this magnitude. Flexibility is required when attempting to adapt company strategy to a new reality. Those with the flexibility and will to adapt will flourish in the recovery.

To adapt, you must first have the ability to adapt, which comes through a long-term owner-oriented management approach. This almost certainly means low leverage, deep trust in the organization's team members, strong relationships among all partners, and aligned incentives across the board. Of course as a collection of messy people, no organization is perfect and there will always be friction. But the ideals should remain front and center.

While our portfolio companies haven't been immune from the recent turmoil, we are able to scenario plan with maximum flexibility due to our low amount of leverage and long-term outlook. We’re grateful that we’re allowed to think long-term while other organizations are forced by the current circumstances to think short term and focus on survival. Optionality, if you can plan for it, is a beautiful thing.

The invisible moat (Chris Mayer)

+ The culture of a company's ownership can be a moat that is nearly impossible to replicate, because it is fundamentally unique: "The Congdon family has continuously run the company since ODFL’s founding in 1934, retaining Board and management presence and a 13% stake in ODFL shares [John Congdon (Chairman; 4.3%); Earl Congdon (Executive Chairman; 2.7%), David Congdon (CEO; 5.8%)]... Two salesmen I spoke with a few years back had their entire 401(k)’s in Old Dominion stock and conveyed that Old Dominion stock is widely held among rank-and-file employees. ODFL shares comprise over 20% of employees’ 401(k) assets. A significant portion of service center managers’ quarterly bonuses are directly tied to profitability and service levels. Old Dominion’s employee turnover, at 10%, is the lowest I’ve come across in the industry and the labor force, unlike those of most LTL peers, is union free."

Emerging from the crisis (Harvard Business Review)

+ "The most recognizable tool of strategic foresight is scenario planning. It involves several stages: identifying forces that will shape future market and operating conditions; exploring how those drivers may interact; imagining a variety of plausible futures; revising mental models of the present on the basis of those futures; and then using those new models to devise strategies that prepare organizations for whatever the future actually brings."

How to build an enduring, multi-billion dollar company (Sarah Tavel)

+ While this piece may apply directly to startups, there is one key principle that applies to all businesses: Your business's advantage comes from saving your customers time or money, or providing higher quality for similar price.

How the Walmart-Shopify alliance helps both companies win against Amazon (Modern Retail)

+ "The rationale behind the deal was to put both leverage both companies’ expertise. Millions of online merchants are already on Shopify, and this partnership allows them to list their items on Walmart’s online marketplace without using new external tools. Jeff Clementz, vp of Walmart Marketplace, wrote in a blog post that the integration is aimed at :third-party sellers who are interested in growing their business through new, trusted channels."

Pepsi's $32B typo caused deadly riots (Sean Kernan)

+ "The number “349” was the $40,000 winning number. Pepsi had explicitly told its vendor factories not to print this number at all. The two bottles with that number would be specially manufactured and sent to the Philippines by Pepsi themselves. So here is Pepsi, churning along each month, not knowing they accidentally sent $32 billion worth of winning caps to the Philippines. Meanwhile, everyone in the Philippines is going bananas for this promotion, buying up all the soda bottles. This disruptive campaign increased Pepsi’s market share from 4% to 24.9% in just two months."

The hierarchy of marketplaces: part I, part II, part III (Sarah Tavel)

+ Sarah Tavel of Benchmark has written an in depth 3-part synopsis on what it takes to strategically and successfully grow a marketplace business. While this is geared directly towards technology startups, the series contains valuable strategic insights for all business owners as well.

Are employees more productive in a pandemic? (New York Times)

+ "Some individuals have had a harder time than others working from home, but many companies say productivity has remained at pre-pandemic levels, or even gone up. Without long commutes, small talk with colleagues and leisurely coffees in the break room, many workers — especially those who don’t have to worry about child care — are getting more done. Companies, too, are discovering that processes and procedures they previously took for granted — from lengthy meetings to regular status updates — are less essential than once imagined."

Why sports stadiums are suddenly full of cardboard fans (The Hustle)

+ "So, Müller contacted a local printer and a team to build a portal where fans could upload photos of themselves. For a sum of €19 ($21 USD), he’d print out each photo on a cardboard cutout and install it in the stadium, with the permission of club owners. Originally, he anticipated between 500 and 2k orders. So far, 21k+ people have purchased a cutout. All the proceeds go back to charities associated with the team, including a portion to fans impacted by the pandemic. Now, Müller has received inquiries from sports teams in “at least 15 countries,” including Sweden, Colombia, China, Russia, Serbia, and Austria, about setting up their own cardboard fan project. He’s even decided to apply for a Guinness World Record."

Kelie Morgan 6/19/20 Kelie Morgan 6/19/20

The Weekly: Edition #50 - June 19th, 2020

Customers, Quality, and Price

This week, we shared a piece by Benedict Evans on the history of the advertising industry in the US and one particular chart stuck out to us as relevant to all businesses who advertise online. Here is Evans explaining the move from internet searchers moving from recommendations for cheapest product or service to recommendations for highest quality:

"One of the most interesting charts I’ve seen on this theme comes from Google Trends. Like all Google Trends data it needs to be taken with a large pinch of salt, but this one is pretty instructive. I’d suggest this shows the internet moving up the ‘funnel’ - it moves from utility price comparison to recommendation and authority."

While Evans' research shows that customers have begun searching the internet for recommendations for highest quality rather than lowest price over the past 15+ years, every industry has its nuances. Your product or service will be differentiated along three dimensions: speed, cost, and quality. Your customers' needs will determine what is most effective. Based on Evans' research, here are several thoughts on how to best position your product or service:

1) Customers are searching for solutions that offer the best trade off between speed, quality, and cost. Know where your product or service falls and communicate this accordingly.

2) Understand where your competitors fall on each dimension and be able to articulate how your organization is different - i.e. what combinations of speed, quality, and price do you compete on?

3) In recessionary economic environments like the current one, do your industry's customers shift from quality to speed or cost or do their preferences remain largely unchanged?

4) Understand what is most important to your customers based on their needs: speed, cost, or quality. Generally, you can achieve two of the three.

As Evans' piece illustrates, the internet is changing the way consumers search, who they choose to do business with, and how businesses communicate their message. Business owners will have to adapt to changing customer preferences and technology stacks to stay relevant, especially as COVID-19 accelerates the adoption of trends already in place prior to the pandemic.

Rethinking last-mile logistics, post-COVID-19: Facing the ‘next normal’ (Automotive World)

+ "We believe pure brick-and-mortar retail will continue to struggle even after COVID-19. To illustrate, there has been a drop in store traffic across apparel and quick-service restaurants of 60% to 80% in the US since the beginning of the year. We expect a greater blending of online and offline retail. In extreme scenarios, closed or struggling stores in city centres could function as “dark stores” (i.e. fulfilment centres for local pickup and delivery)."

Delivery Technologies Are Reshaping the Grocery
Industry (Pitchbook)

+ "The coronavirus pandemic has reversed the long trend of declining grocery consumption relative to eating out. While grocery sales had generally been losing share to restaurants, restaurant closures and sheltering in place have driven consumers back to the grocery store. This trend is also being driven by modern delivery infrastructure that is allowing more grocery stores and other food vendors to sell via delivery apps, as consumers choose to stay home to avoid exposing themselves to the pandemic. Although life is returning to a degree of normalcy and restaurant business is improving, we believe the consumer shift to online grocery delivery will be a persistent, not temporary, trend."

Bankrupt Hertz is a pandemic zombie (Vanity Fair)

+"What happens 99.9% of the time is that existing shareholders get wiped out and the creditors, most of which won’t get their money back, divide up what’s left of the carcass. It’s often a Darwinian battle of epic proportions, with creditors fighting over every scrap of value. What happens time and time again is that unless and until every creditor gets back every penny it is owed plus accrued interest, there will be no recovery for the shareholders. As in zero."

News by the ton: 75 years of US advertising (Benedict Evans)

+ "So: if you talk to people at both Google and Facebook and in the agency world, you’ll hear that perhaps two thirds to three quarters of money spent on Google and Facebook is money that was never spent on traditional advertising - it’s coming from SMEs and local businesses that might have spent in classified at most but probably wouldn’t have done even that. $60bn of consumer spending went through Shopify last year - it’s safe to assume those vendors spent money on advertising, but how many of them would have bought an ad in a local newspaper? This has also come at much lower prices: Facebook in particular has been massively deflationary to online advertising: it offers vast quantities of relevant advertising inventory at much lower prices and much lower entry costs than you’d have needed in print, let alone TV."

GrubHub is buying up thousands of restaurant web addresses. That means Mom and Pop can’t own their slice of the internet. (The Counter)

+ "GrubHub’s commission fees had been inching upward over the years she’d been working with the platform. There was the flat transaction fee, which hovered around 3 or 4 percent. Then there were marketing fees and costs for additional promotions. Shivane says she feels like the platform is increasingly pay to play: Spend more to promote your restaurant, and see your search rankings rise. Cut down on marketing spend, and watch your restaurant fall to the bottom of the page and lose sales."

Chamath Palihapitiya on hiring based on a candidate's passion (Twitter thread)

+ "Think about something you deeply love. Take a few minutes to prepare and then teach it to me in a few minutes."

The manager's guide to inclusive leadership (First Round Review)

+ "From the immediate need to hold space for Black employees right now and lead vulnerable discussions with your team, to the long-term behaviors that build a welcoming culture, the team at LifeLabs distills inclusive leadership into its four most essential habits. For each of these high-impact behaviors, Dukuly, Luna, Sandhu and Tanicien share the small tactics and key questions that improve interactions and decisions. Their advice serves as an excellent starting point for leaders who have a renewed motivation to show up and work toward enduring change — the kind that starts within."

They were on a quest to visit every country. Then coronavirus happened. (National Geographic)

+ "Steve Fuller had one passport stamp to go. The 71-year-old judge from Kansas City, Missouri, had just spent three days on the Micronesian island of Nauru, the world’s smallest and least-visited republic. After a quick trip to Kiribati—the only country situated in all four hemispheres—he returned to Fiji’s Nadi International Airport for a connection to Tonga. It was February 15, 2020, and he was one flight away from joining a rarefied group of globetrotters who have traveled to every country in the United Nations."

Kelie Morgan 6/12/20 Kelie Morgan 6/12/20

The Weekly: Edition #49 - June 12th, 2020

Equity: Risks, Types, and Sources

Last week we discussed the risks, types, and sources of debt for business owners exploring the sale of their business. The biggest risk around using debt in a transaction, as we have seen in the private markets lately, is that it is contingent on the lender's ability to provide funding at the time of close. This risk is reduced as more equity is used to fund a purchase. This week, we'd like to examine various sources of equity and the differences between types of financial sponsors.

Typically, financial sponsors can be broken down into four groups: private equity, fundless sponsors, search funds, and permanent capital sources. Each type of buyer comes with different sources of capital, different time horizons, and different leverage profiles, so it is important for sellers to think about what their ultimate goals are when considering selling their business. Looking for the highest possible payout up front? A firm that uses tremendous amounts of non-recourse debt will likely win the bidding war. What about sellers who care about the business’s health post-close? All things being equal, a buyer who employs less debt or no debt would be a better choice.

Certainty of close always matters, so it's important to note where each group sources their capital, both debt and equity, and what type of leverage they will employ. During economic expansions, capital flows are strong and transaction risk is lower. Said differently, when it’s relatively easier to procure both debt and equity, certainty of close is less of an issue. But during tougher economic times, like we’re in today, being able to close is far more important than the price or the terms. Without the ability to close, nothing else matters.

Traditional private equity groups are largely dependent on their lenders to finance levered transactions. Search funds are beholden to their limited partners to commit additional capital once they have identified an attractive acquisition target, and often employ meaningful amounts of bank debt. Fundless sponsors, by definition, need to source both equity and debt for each transaction.

But the final group - permanent capital sources - have cash equity ready for investment. At Permanent Equity, we don’t have to source capital, equity or debt, to close a transaction. Our funds are committed and available, and we rarely use debt. In good times this allows for speed of close and greatly reduces headaches for sellers who normally must get “checked off on” by the buyer’s investment committee, outside accounting firm and law firm, and lenders. In challenging times, it means we’re one of the few groups that can close a transaction.

Private Equity Sponsors
- Large number of Limited Partners commit capital to a fund which is deployed into operating businesses
- Typically use moderate to high levels of debt mixed with low to moderate amounts of equity
- Holding period ranges from 1 to 7 years

Fundless Sponsors
- No committed equity behind the individual(s) or group looking to acquire a business
- May have a plan to hold the business long term, but most likely will look to sell to harvest their investors' capital
- May or may not want to operate the business, and may be looking to simply purchase the business with existing management or provide new management post-close
- Typically uses moderate to high amounts of debt, as well as seller financing

Search Fund Sponsors
- Have intended, but not committed capital from typically smaller limited partners including family, friends, and family office capital
- Will typically operate the business post-close
- Typically uses moderate levels of debt to fund the transaction and may ask for seller financing
- Small number of Limited Partners who invest with the 'searcher(s)'

Permanent Capital Sponsors
- Family Offices, conglomerates, permanent capital investment groups
- Typically have longer time horizons and are able to fund transactions with cash equity and little to no financing risk, although style is buyer-dependent

Supply studies syllabus - a primer on the logistics industry (Supply Studies)

+ "This document, intended for collaborative iteration, presents a series of readings in areas of interest to the critical study of logistics. It begins with an opening “Stage Setting” section and continues on to topics in: Logistical Media; Mining and Extraction; Production and Assembly; Shipping, Storage, Distribution; Speculations on Supply; Activism and Resistance; Logistical Histories; Commodity Communications; Migration, Mobility, and Movement; Corporations and Capitalism; Computational Production; Infrastructures and Spaces; and Consumers and Consumption. The goal is to present a broad selection of texts from which more specialized seminars can be developed, or which could be incorporated into other courses."

Ben Thompson on competition and niches in the internet era (Stratechery)

+ "Again, though, the fact that this is a one-person blog doesn’t mean that my competitive situation is any different than that of the New York Times or any other media entity on the Internet. In other words, to the extent that the New York Times has been successful online — and the company has been very successful indeed! — it follows that the company is well-placed in terms of both focus and quality, and in that order."

The looming bank collapse (The Atlantic)

+ "Just as easy mortgages fueled economic growth in the 2000s, cheap corporate debt has done so in the past decade, and many companies have binged on it."

COVID's impact on ad pricing (IAB)

+ IAB takes a look at the recent impacts on ad pricing for programmatic ad sellers and ad publishers due to COVID-19.

Expect store closings to soar throughout the rest of 2020 (Coresight Research)

+ "According to its recently released U.S. Store Closures 2020 Outlook, Coresight predicts that from 20,000 to 25,000 retail stores will close in 2020. The midpoint of that range — 22,500 closures — is a significant jump from Coresight’s previous estimate of up to 15,000 retail store closures. Not all retail sectors will be hit equally hard, though. Coresight predicts that about 55 percent to 60 percent of all store closures this year will be mall-based."

42 million jobs are supported by the American Retail Industry (National Retail Federation)

+ "Anyone whose job results in a consumer product – from those who supply the raw materials to factory workers to the truck drivers who deliver goods to stores – counts on retail for their livelihood. With 3.6 million stores drawing on a vast array of suppliers, retail supports 42 million jobs and represents $2.6 trillion of annual GDP in the United States."

Recruitment in the age of coronavirus (Yello)

+ "Even without COVID-19, candidates are looking for organizations with cutting-edge technology. A Yello survey revealed that one-quarter of Gen Z job seekers prefer to communicate digitally. More than half responded that they would not apply to a company if they considered their recruiting methods to be outdated. A Yello client, BDO found using pre-recorded video interviews helped them screen twice as many candidates in less than half the time: saving as much as $1,000 per candidate."

Forrest Fenn confirms his treasure has been found (Santa Fe New Mexican)

+ "An estimated 350,000 people have hunted for Fenn’s treasure. Some quit their jobs to do so. But it’s had deadly consequences. At least five people have died while searching for the chest."

Kelie Morgan 6/5/20 Kelie Morgan 6/5/20

The Weekly: Edition #48 - June 5th, 2020

Debt: Risks, Types, and Sources

The most important benefit of keeping debt to a minimum is the flexibility it affords. With little or no debt and healthy cash flow, a company has the optionality to reinvest for growth, stockpile cash for a rainy day, make distributions to shareholders, self-fund acquisitions, decrease prices, gain favorable terms from suppliers, or spend on employees. With lots of debt options decrease and quickly, which is why most business owners carry minimal debt.

That being said, debt, prudently applied, can magnify outcomes – both good and bad – and it is worth exploring how various forms of debt function for business owners contemplating selling their business. As a business owner, when you are selling your business, the more leverage employed in buying your business, the greater number of parties involved, and the more financing risk you introduce into the transaction.

Generally, you can think of debt falling into two categories – traditional debt (bank debt, high yield debt, and mezzanine debt) and more creative forms of debt (seller financing, factoring, asset-backed financing). Traditional sources range from senior debt that has a shorter term (4-8 years) and is secured by the assets and cash flows of the company to more junior forms of debt that can be non-recourse, sport longer terms (7-10 years), and allow much more flexibility in terms (interest-only, paid-in-kind, warrants). The more creative forms of debt can be used to bridge valuation gaps, increase liquidity for working capital needs, and leverage hard assets on the balance sheet.

As a seller potentially exploring the sale of your business, the main risks to a transaction falling through on the financing side are 1) how much leverage will be used and 2) what types of debt will be employed, besides the obvious fundless sponsor who doesn’t have the equity available. Higher leverage may mean a higher purchase price, but always comes with a lower chance of closing and greater post-close stress.

In challenging economic times, credit markets tend to tighten or lock up, like they are now, and limit the amount of lending that occurs. The Fed’s unprecedented actions in the debt markets have spurred record debt issuances in the public markets by acting as a ‘lender of last resort’ and assuring credit investors of their role as a ‘purchaser of last resort’. But availability of transaction debt in the private markets is largely non-existent. Recently a friend tried to finance a transaction for a sub-$10M earning business that was positively affected by COVID. He was using low leverage and the business prospects were strong. They went to get bids from over 30 banks and had zero responses. Zero. The markets are frozen.

Permanent Equity typically uses little or no debt because we want surety of close, simplicity post-close, and the optionality to use cash flow in whatever way best positions the business long-term. That’s our way, but certainly the odd way.

Traditional Sources

Revolving Credit Facility

- Senior debt (top priority in the case of a liquidation)

- Capped at a maximum amount

- Generally acts as a working capital line of credit to be accessed when a company needs short term funding

- Typically this form of debt is non-amortizing, interest-only

- LIBOR-based (plus a premium) rate

- Sources: Banks

Bank Debt

- Senior debt (top priority in the case of a liquidation)

- Based on asset value as well as cash flow

- Can take the form of Term A (amortizing, 4-6 year term) or Term B (non-amortizing, with a bullet payment at the end of the life, 6-7 year term)

- LIBOR-based (i.e. floating rate) term loan

- Secured by all assets and equity

- Sources: banks, syndicated investment groups

High-Yield

- Generally unsecured

- Fixed payments with no amortization and a bullet payment

- Can be senior (top of the capital stack), senior subordinated (next to top of capital stack), or junior subordinated (bottom of the debt stack, but before the equity)

- Longer maturity than bank debt (7-10 years, with no amortization and a bullet payment)

- Sources: institutional investors, hedge funds, private investors

Mezzanine Debt

- Can be convertible into equity

- Can come with warrants for the right to purchase equity at a certain price

- Can come with PIK features

- Sources: institutional investors, private equity funds, hedge funds, credit funds

Creative Sources

Seller Notes

- Buyer issues a promissory note to seller to repay the portion of the business that is financed

- Generally fixed period of time

- Generally cheaper than other forms of junior debt

- Can be attractive to a seller when credit markets are not as leverage-friendly or where obvious risk should be shared

- Sources: seller

Asset-based financing

- Can utilize fixed assets on the balance sheet as collateral for fixed, amortizing payments that will reduce the need for cash equity as well as other forms of debt

- Generally can be in the form of fully-amortizing debts with balloons at the end of a specified term

- Sources: banks

Factoring

- Securitization of cash flows that are attributable to assets such as receivables that can be liquidated for quick cash in a business transaction

- Generally these will not account for a large portion of the business transaction and may be used to provide early working capital and liquidity needs for the buyer

- Sources: factoring companies

Amazon is the fourth-largest US delivery service and growing fast (Digital Commerce 360)

+ “Since 2014, Amazon has spent $39 billion to build out a massive delivery network, according to Bank of America Global Research, a unit of big U.S. financial institution Bank of America Corp. And that investment soars to $60 billion when including capital leases for such items as warehouses and aircraft, the report says. (Amazon leased 97% of its fulfillment and data center space in 2019, the retailer said in its annual report).”

The way A.P. Giannini built Bank of America shows that hard times can breed the upstarts who fuel the next boom (Wall Street Journal)

+ ““I might never have gone into the banking business,” he later recalled, if he hadn’t gotten into a shouting match with the head of a local bank about its reluctance to make small loans to individual borrowers. In 1904, Giannini founded a bank of his own in San Francisco, called Bank of Italy, to do just that. Then, on April 18, 1906, an earthquake struck the Bay Area, killing more than 3,000 people and setting the city ablaze.”

Learning from Copart’s Willis Johnson (Masters Invest)

+ “Think of us [Copart salvage auctions] like the local sewer system. We’re a utility. Nothing can get rid of us - nothing. Two of the biggest businesses in the world are car manufacturers and insurance companies. If insurance companies don’t write insurance policies on cars, then they’re out of business. If manufacturers don’t make cars, then they’re out of business. They’re always gonna make cars, and they’re always gonna insure them. We’re the guy in between. As long as we’ve got the land in the right place to put the cars on, we can’t fail. We are like the septic tanks of the sewer system. You can’t have the system without us.”"

Meet the secretive German family behind the $2.5B Peet’s Coffee IPO (Yahoo! Finance)

+ “Shares of JDE Peet’s surged 14% in their debut on Friday in Europe. The company, resulting from the merger of Jacobs Douwe Egberts and Peet’s last December, is the world’s No. 2 coffee player, with a portfolio that includes Jacobs Coffee, Douwe Egberts, Peet’s, L’OR, Senseo, Tassimo, Pickwick and more. But most consumers still know very little about JAB Holding, the investment firm that pulled off the Peet’s IPO, or the family behind it: the Reimanns of Germany. Many coffee lovers are likely not even aware that one company is the owner or majority owner of Peet’s, Panera, Krispy Kreme, Dr. Pepper Snapple, Keurig Green Mountain, Caribou Coffee, Mighty Leaf, Stumptown, Intelligentsia, Espresso House, Baresso, Au Bon Pain, Bruegger’s Bagels, and Einstein Bros. Bagels.”

San Francisco, Silicon Valley rents plunge amid downturn (San Francisco Chronicle)

+ “Rents for a one-bedroom apartment dropped most in the cities richest in high-paying tech jobs, falling 9.2% in San Francisco compared with May of 2019. In Mountain View, home to Google, rents fell 15.9% year over year, while in Apple’s hometown of Cupertino rents dipped 14.3%, according to the rental search engine Zumper. In San Bruno, where YouTube has its offices, rents tumbled 14.9%.”

The 2020 Customer Experience Report (CX.Report)

+ “The CX Report gathers trends on how business happens in the computational era by examining the tech stacks for marketing and products in the context of digital transformation.”

The business of building Utopia (Outside)

+ “Nygren stumbled upon the lush landscape that would eventually become Serenbe in the early 1990s. At the time, he was living in Atlanta with his wife and three daughters, experiencing the numbing bustle of running a constellation of 36 successful restaurants. One weekend, the family took a day trip to the rural farms south of the city, resulting in the impulse purchase of a country home on 60 acres. The open space made Nygren realize that he was ready to get off “the treadmill of life,” as he likes to say. In 1994, he sold his business and moved the family out of Atlanta. By the late nineties, Nygren decided to create a bed-and-breakfast on the property, bestowing it with the name his wife had coined for their rural escape, Serenbe—a mash of serenity and being. When, in 2000, development threatened to encroach on Serenbe’s surrounding areas, Nygren bought up 600 neighboring acres. He worked with the local government to craft zoning laws to encourage conservation-minded, village-like developments rather than a sea of McMansions.”

Kelie Morgan 5/29/20 Kelie Morgan 5/29/20

The Weekly: Edition #47 - May 29, 2020

Strategy

"Everybody has a plan until they get punched in the mouth." - Mike Tyson

Ask any business owner what type of business they are in and they'll tell you where they're located, what product they produce or service they provide, and even what their ultimate mission is. But rarely will they articulate their strategy for achieving their goals.

In other words, they'll tell you the 'what', maybe the 'why', but rarely the 'how.'

Strategy is the 'how' of a business - everything else is the 'what' or the 'why.'

But how do you know if your 'how' is good enough to achieve your 'what' and your 'why'?

As Jerry Neumann points out in his piece 'Strategy Under Uncertainty', any strategy for a business requires deep reflection about possible inputs (actions) and desired outputs (results). We believe the desired result of a comprehensive strategy should be to improve your company's competitive position within the industry. If executed in a sustainable manner, this tends to show up in the financials over time.

Broken down at a more granular level, for a strategy to be comprehensive, it must answer three main questions:

1. How does your company's relative negotiating ability stack up within the industry landscape (against established competitors, new startups, suppliers, customers)?

2. What is your organization's competitive advantage over other firms?

3. On what dimension(s) do you compete to keep or expand this competitive advantage (on price, quality, or speed)?

The strategic process doesn't stop here however. It isn't good enough to merely answer these questions. They must lead to results.

Ray Dalio made famous the simple equation of 'Pain+Reflection=Progress' in his book Principles and we believe this applies perfectly to strategic decision-making as well. Strategize, Act, Reflect, Adapt, Repeat.

As you implement your business's strategy, it is important to measure and maintain a commitment to your desired results - the 'what' and the 'why' - and consider whether to adapt your strategy if the goals aren't being met. A business strategy is only as productive as its execution allows, and business leaders are only as successful as the strategies they employ. Focus on the 'How' to achieve your 'What' and your 'Why.'

Inside the flour company supplying America's sudden baking obsession (Marker Media)

+ "Ely and her colleagues didn’t know it, but across Carbohydrate Camelot — the name that employees gave the 14-acre headquarters campus in Norwich, Vermont, that contains a restored farmhouse and a handful of small buildings — co-CEO Karen Colberg was staring in shock at the recent daily sales figures that had just popped up on her screen. “I fired off a text to the sales team to check their figures,” says Colberg. “It was obviously some sort of mistake.” No mistake, came the reply. The figures had already been double-checked. They showed a 600% increase in grocery-store sales almost literally overnight."

Sales advice - 7 crucial points (Y Combinator Forum)

+ "Sales is about people and it's about problem solving. It is not about solutions or technology or chemicals or lines of code or artichokes. It's about people and it's about solving problems."

Its time to build for good (Palladium Magazine)

+ "Offshoring is a choice that can be made quite quickly; it’s not clear that the same is true for onshoring. This is a devilish epistemic obstacle to confront. If we were discussing a country in, say, West Africa, we might call it a problem of economic development. In fact, it might not even make much sense to make a distinction between pre-industrial and post-industrial societies—such as ours—in this respect. Both often must start from epistemic and institutional scratch. This is the uglier, more uncomfortable side of our present condition: our crisis extends beyond will. We also have a crisis of capability."

Permanent Equity's Open Data Recovery Resources (Permanent Equity)

+ This is our attempt to aggregate recovery data related to COVID-19 across industries including retail, ecommerce, restaurants, transportation, agriculture, travel, construction, and more.

Foursquare's recovery index (Foursquare)

+ "As COVID-19 stay-at-home orders begin to lift, shifting real world behavior will be a critical indicator of economic recovery. How people start returning to different places - and in what order, at what pace - will be necessary information for governments, journalists, researchers and brands alike in navigating the times ahead. Foursquare location data reliably and accurately reveals these changes in visitation in near real-time, helping you understand and plan for the recovery process."

The opportunity and risks for consumer startups in a social distancing world — a framework for consumer attention (Sarah Tavel)

+ "I imagine consumers as dividing their attention in a given day across three different types of “events” or modes: Events that span bigger blocks of contiguous time (“Rocks”), micro events that take advantage of attention gaps between or during those blocks (“Sand”), and things that can overlay over the other two (“Water”). Each day, we fill our cup of 24 hours with some combination of the three (+the rare air bubbles), constantly allocating that time across and between our options to maximize our dopamine/serotonin/etc while at the same time fulfill our responsibilities to work, family, and health."

Nexar's Mobility Report (Nexar)

+ "In recent weeks, we’ve observed material changes in US driver activity on a city- and state-level as social distancing guidelines are increasingly relaxed. These mobility trends help us understand key facets of regional economic recovery. When coupled with real-time, ground-level imagery, analysts and governments can make informed, high-conviction decisions about anything from public health initiatives to investment allocation."

Post-COVID recovery indicators (Samir Madani)

+ This is a Twitter thread of the best post-COVID demand recovery indicators.

Why remote work is so hard—and how it can be fixed (Cal Newport)

+ "In theory, we have the technology we need to make remote work workable. And yet most companies that have tried to graft it onto their existing setups have found only mixed success. In response, many have stuck with what they know. Now the coronavirus pandemic has changed the equation. Whole workplaces have gone remote; steam engines have been outlawed. The question is whether, having been forced to embrace this new technology, we can solve the long-standing problems that have thwarted its adoption in the past."

Hit the emotional gym — the founder's framework for emotional fitness (First Round Review)

+ "Studies show that 72% of entrepreneurs have mental health concerns — but I very much doubt that a similar proportion of founders are currently in therapy. And far too often we see the consequences of a failure to do that work when startups implode, whether it’s due to a toxic work culture, co-founder conflict, or deep-seated leadership challenges.”"

Antilia: the tallest single family house in the world (Wikipedia)

+ Could you imagine what it would be like to live in a 27-story house? Just ask Mukesh Ambani, India's richest man.

Kelie Morgan 5/22/20 Kelie Morgan 5/22/20

The Weekly: Edition #46 - May 22, 2020

Sourcing, Hiring, and Retaining Talent

Companies, at their core, are collections of talented individuals working towards achieving a common vision. Given how tumultuous the labor market has become over the past 3 months, we thought it would be helpful to share a few high level thoughts on sourcing, hiring, and retaining talent ahead of what we hope will be a robust recovery in the coming months and years. In particular, Fred Wilson from Union Square Ventures has written several pieces (linked below) on sourcing, hiring, and retaining talent.

Sourcing Talent

In order to identify potential talented individuals, Wilson recommends asking several questions of your current team:

- Who have you worked with that is talented and you would work with again?
- What companies have recently been sold where talented individuals may be looking to make a move?
- Would it be worth starting an internship program as a pipeline for potential young hires?
- What large companies exist in or around your industry space? These may be fertile grounds for hiring people ready for a more entrepreneurial role.
- Who can your investors put you in touch with in their network?

Hiring Talent

Company culture is often used as a platitude for new hires, but to retain talent long-term, it must truly infuse the work and vision of the company. While interviewing potential candidates for roles in your company, it is worth asking two questions:

- What does your company's 'culture' consist of?
- Does this individual fit within the current culture of the company?

In the same vein, it is worth regularly reviewing company culture to evaluate where the culture has strayed and whether the current team members fit into the desired ethos of your organization.

Retaining Talent

Communicate with employees. Spending time with your employees, getting to know them and helping them progress career-wise will go a long ways towards building 'thick' relationships between coworkers. Employees want to feel like the company cares about their careers and progression. This includes regular check-ins between bosses, employees and coworkers as well as all-hands and company outtings.

Create a path to promotion. Sometimes hiring senior talent from outside of your organization is simply unavoidable, but it is almost always preferable to develop talent in-house if possible. Employees want to know that their hard work and development will pay off if they persist in their current roles. Wilson also recommends assessing your team at regular intervals and providing feedback for employees' development.

Pay well. In our experience, people respond best to no-frills, no-strings-attached cash compensation. Equity can certainly be valuable and can serve as a long-term incentive, but there is no risk attached with cold hard cash.

Now we'd like to turn to the audience and ask what we missed. The team at Permanent Equity wants to hear from SMB business owners:

- What has worked well for you in the past in terms of sourcing, hiring, and retaining talent?
- What are the biggest changes you will be implementing going forward in this area?
- What have been your biggest challenges in sourcing, hiring, and retaining talent?

Strategy under uncertainty (Jerry Neumann)

+ This post illustrates how strategy planning differs between startups and mature businesses due to the inherent differences between 'uncertainty' (for startups) and 'risk' (for mature businesses).

Nearly a third of small, independent farmers are facing bankruptcy by the end of 2020, new survey says (The Counter)

+ "Where do they expect this to end? Bankruptcy, from which many will not recover. And most of the respondents are between the ages of 25 and 44, in the midst of their work lives, not toward the end. Almost a third anticipate that they will be out of business by the end of the year. If they’re right, the virus will take out much of a generation and leave the market ripe for takeover by larger operations."

Manhattan faces a reckoning if working from home becomes the norm (New York Times)

+ "Before the coronavirus crisis, three of New York City’s largest commercial tenants — Barclays, JP Morgan Chase and Morgan Stanley — had tens of thousands of workers in towers across Manhattan. Now, as the city wrestles with when and how to reopen, executives at all three firms have decided that it is highly unlikely that all their workers will ever return to those buildings. The research firm Nielsen has arrived at a similar conclusion. Even after the crisis has passed, its 3,000 workers in the city will no longer need to be in the office full-time and can instead work from home most of the week."

Doordash and pizza arbitrage (Ranjan Roy)

+ "Customers called in saying their pizza was delivered cold. Or the wrong pizza was delivered and they wanted a new pizza. Again, none of his restaurants delivered. He realized that a delivery option had mysteriously appeared on their company's Google Listing. The delivery option was created by Doordash. To confirm, he had never spoken with anyone from Doordash and after years of resisting the siren song of delivery revenue, certainly did not want to be listed. But the words "Order Delivery" were right there, prominently on the Google snippet."

People, power and technology: the 2020 Digital Attitudes Report (doteveryone)

+ "Only 19% believe tech companies are designing their products and services with their best interests in mind. Half (50%) believe it’s ‘part and parcel’ of being online that people will try to cheat or harm them in some way."

Scale and Loyalty are more important online than offline, which drives much of the “winner take most” reality of the internet (Gavin Baker)

+ This is a useful piece on how to think about your online customer acquisition costs if you are either an online business or an omnichannel business with online and offline presences.: "Finally, the fact that “CAC is the new rent” for the internet economy also advantages omnichannel players. One of the best ways to lower online CAC, especially if you don’t have scale, is to have a physical retail presence and build your brand via traditional CPM advertising, especially television advertising which is likely undervalued in todays world."

How the Passion Economy will disrupt media, education, and countless other industries (Li's Newsletter)

+ "Many successful marketplace companies in the last few decades tapped into this idea of converting non-producers into producers, in terms of making physical assets productive: Uber, for instance, unlocked the economic value of people’s idle cars, and Airbnb converted excess physical spaces into valuable assets. New sources of supply, in tandem with a latent, large pool of under-served demand, created massive economic value. While these marketplaces started by amassing supply in order to attract demand, creators often have the opposite problem: they have already aggregated demand on large social platforms, but struggle with monetization. This is where many new platforms are entering, enabling creators to overcome non-production by offering value that fans would be willing to pay for."

When “grin and bear it” isn't the right answer - and what to do instead (First Round Review)

+ "Because that’s the real challenge: deciding what our new normal is going to be and how we are going to be happy. Maybe your values have changed, maybe they haven’t. But just as we built old habits, we must build new ones. Because when we do all the things that make life worth living, it becomes worth living again. Afterall, the only reason death is so terrifying is that life really is so good. Hard, but good."

Our weird behavior during the pandemic is messing with AI models (MIT Technology Review)

+ "It took less than a week at the end of February for the top 10 Amazon search terms in multiple countries to fill up with products related to covid-19. You can track the spread of the pandemic by what we shopped for: the items peaked first in Italy, followed by Spain, France, Canada, and the US. The UK and Germany lag slightly behind. “It’s an incredible transition in the space of five days,” says Rael Cline, Nozzle’s CEO. The ripple effects have been seen across retail supply chains. But they have also affected artificial intelligence, causing hiccups for the algorithms that run behind the scenes in inventory management, fraud detection, marketing, and more. Machine-learning models trained on normal human behavior are now finding that normal has changed, and some are no longer working as they should."

Kelie Morgan 5/15/20 Kelie Morgan 5/15/20

The Weekly: Edition #45 - May 15, 2020

Humility and Risk

"The biggest economic risk is what no one’s talking about, because if no one’s talking about it no one’s prepared for it, and if no one’s prepared for it its damage will be amplified when it arrives." - Morgan Housel

Humility is inextricably tied to first hand encounters with risk. Those who have experienced 'risk' - a business blow-up, a permanent loss of capital, an unforeseen insurance event, a competitive threat out of left field - tend to be more intellectually humble than those who have not experienced such an event. The hubris of business owners, investors, and entrepreneurs tends to be most prevalent during economic expansions, but quickly disappears during tumultous economic or geopolitical shifts.

Speaking of economic shifts...

Oil traded below $0 briefly as May futures contracts expired.

Filet mignon is being ground up into ground beef while supply of low-quality cuts are out of stock as meat producers can't keep up with demand.

Colleges are debating whether it's even worth the risk to bring students back to campus in the fall.

Some states are opening back up while some are determined to remain closed until further notice.

Hotels, airlines, and the travel industry have witnessed close to a 90% reduction in demand.

Technology trends that were already in place - remote work, online education, virtual meetings - have been accelerated by orders of magnitude in a short 2 months.

Pitch books are being circulated with EBITDAC numbers - pre-coronavirus financials - as if businesses get a free pass for what has occurred since the coronavirus broke out.

Who could have possibly foreseen any of the effects of coronavirus 3 months ago?

If we are honest, we can't begin to know what the outcome will be in terms of economic pain and loss of human life in a year, five years, or a decade from now. The one prediction that we will add to the mix is that there will be a marked dose of humility that enters the business world during the next economic recovery, but, as has mostly been the case in human history, humility will fade to hubris... and the cycle will repeat.

Many businesses, investors, and entrepreneurs viewed the world with rose colored glasses a mere 3 months ago. Optimism tends to accompany a desire for more leverage which can take the form of capital leverage, hiring, beefing up inventories, buying back stock, increasing financial incentives, and more.

Optimism doesn't always mix well with risk.

Risk is what you can't see (or predict). The more risk one has experienced in her life, the greater the humility with which she tends to approach a given set of possible outcomes and the greater discipline she tends to exert over leverage decisions. Greater humility allows for greater patience and longer term thinking. Longer-term decision-making optimizes for survival first and growth second. Humility acknowledges that to grow, you must survive first.

Let's be adults here: we've all been humbled to an extent the past 3 months with how events have unfolded in response to the coronavirus outbreak. Here at Permanent Equity, we attempt to minimize our risk by eschewing leverage and maintaining a rock-solid balance sheet for each of our portfolio companies. The coronavirus has affected each industry differently, and the tough truth is that in some cases a solid balance sheet has simply not been enough. If we can help you in this time of economic upheaval, please do not hesitate to reach out.

Back to work toolkit (Madrona Ventures)

+ "In early to mid April of 2020, we had more than 50 conversations with HR leaders, government and health officers. This site is the repository of documents that fit the practical needs of many company leaders –from HR to CEO to Facilities – to build a Safe Work Plan for Back to Work. This website offers both a slide deck of findings that was presented on April 27th, 2020 and documents gathered from many sources to help companies create their own Toolkit for Back to Work (BTW.)"

Pandemic spawns new reporting term ‘EBITDAC’ to flatter books (Financial Times)

+ "This week Schenck Process, a German manufacturing group, added back €5.4m of first-quarter profits that it said it would have made were it not for the hit caused by state-mandated lockdowns. Its operating profit for the period — “adjusted ebitdac” of €18.3m — was almost 20 per cent higher than the same period a year earlier, rather than 16 per cent lower."

The humbling of Exxon (Bloomberg)

+ "The coronavirus has laid bare a decade’s worth of miscalculations. Exxon missed the wild and lucrative early days of shale oil. An adventure in the oil sands of Canada swallowed billions of dollars with little to show for it. Political tensions doomed a megadeal in Russia. Exxon ended up spending so much on projects that it has to borrow to cover dividend payments. Over a 10-year period, Exxon’s stock has declined 10.8% on a total return basis, which includes dividends."

Beef producers are grinding up their nicest steaks, while retailers can’t meet demand for cheaper cuts (The Counter)

+ "“I’ve never seen this dynamic happen before,” said Matt Teargarden, head of the Kansas Cattlemen’s Association. “The combination of things that we’re seeing is unprecedented.” For the first time in recent history, producers have started to grind up higher-quality roast cuts, adding them to their ground beef since they are more likely to sell than if the cuts were kept whole. This in turn drives up the price of ground beef, since the meat that makes up the ground is of a higher quality."

For Joanna Gaines, home is the heart of a food and design empire (New York Times)

+ "In just seven years, since “Fixer Upper” began airing on HGTV, the couple has renovated more than a hundred houses and expanded the Magnolia brand into restaurants, craft markets, books, villas, real estate agencies, furniture, a magazine, a Target brand and — coming up shortly — their own cable channel, the Magnolia Network."

Advice is more important — and overwhelming — than ever. Here's how founders can cut through the noise. (First Round Review)

+ "The entrepreneur often already has the best answer to a problem. A good advisor will bring it out by forcing them to walk through the problem again and again."

5 questions that (newly) virtual leaders should ask themselves (Harvard Business Review)

+ As we adapt to new, more digitally-native workflows, these 5 questions will become more and more important for leaders to reflect on during COVID-19's forced work-from-home experiment.

COVID-19 is fueling a boom in the doomsday bunker market, thanks to some dubious marketing claims (The Verge)

+ "Prior to the pandemic, Vicino wasn’t making money off Vivos. “My goal is not to get rich off of this. I already was rich,” he explains. When the novel coronavirus started to spread in the United States, however, inquiries about new bunkers began to climb. At xPoint, the facility in South Dakota, Vivos has sold more than 50 bunkers and still has 500 to go. “We’re selling almost one a day right now,” Robert tells me. Two weeks ago, he says he made more than a million dollars on a single Friday. The following Monday he made $500,000."

The explorers who set one of the last meaningful records on earth - thirty six thousand feet under the sea (The New Yorker)

+ "Past twenty-seven thousand feet, the pilot had gone beyond the theoretical limit for any kind of fish. (Their cells collapse at greater depths.) After thirty-five thousand feet, he began releasing a series of weights, to slow his descent. Nearly seven miles of water was pressing on the titanium sphere. If there were any imperfections, it could instantly implode. The submarine touched the silty bottom, and the pilot, a fifty-three-year-old Texan named Victor Vescovo, became the first living creature with blood and bones to reach the deepest point in the Tonga Trench. He was piloting the only submersible that can bring a human to that depth: his own."

Kelie Morgan 5/8/20 Kelie Morgan 5/8/20

The Weekly: Edition #44 - May 8, 2020

American Grit

On May 14th, 1607, the first English colony was founded in Jamestown, Virginia, marking the first establishment in the new world. Jungles, mosquitoes, and wild beasts greeted the settlers that were lucky enough to survive the voyage. But the settlers' were tougher than their lack of modern amenities, knowledge of the land, and surrounding conditions. Grit won the day.

On July 4th, 1776, the original thirteen colonies signed the declaration of independance, marking a new beginning for the American colonies and a formal separation from England. After numerous examples of blatant authoritarianism and tyranny, the colonies decided it was time for a new form of self-governance and the American Republic was born. Grit won the day.

On December 7th, 1941, Japanese suicide bombers attacked Pearl Harbor and drew America into World War II. Despite a major blow to our naval fleet, our military joined forces with the Allies in defeating Nazism and Fascism against great odds. Grit won the day.

On August 28th, 1965, Dr. King marched on Washington after decades of segregation and oppression of African Americans. Despite his assassination, the Civil Rights movement continued to notch victory after victory. Grit won the day.

On September 11th, 2001, terrorists hijacked multiple planes, flying them into American landmarks and ushering in an era of fear and global terror. After the World Trade Centers collapsed, Americans built One World Trade Center in defiance. Grit won the day.

As of March, 2020, America is suffering from both a pandemic as well as a forced economic lockdown, with over 75,000 dead and 30 million jobless claims - so far. Since the beginning of the United States, there have been over 45 recessions, a civil war, two world wars, numerous foreign wars, countless terrorist attacks, a civil rights movement, a gold standard, a fiat currency standard - and this list barely scratches the surface of monumental moments in our nation’s history. American Grit has stood the test of time so far. At Permanent Equity, we are betting on American Grit to get businesses, families, and communities through this period and to carry the torch long after this threat is defeated. We are firm believers in the strength of Main Street America and look forward to playing our part in the rebuilding phase of a post-COVID world.

A crisis playbook for family businesses (Harvard Business Review)

+ "The stress, anxiety, and fear that come out in a crisis can amplify already challenging dynamics, paralyzing decision making throughout the enterprise or causing conflict to spiral out of control. On the other hand, the crisis can be a call to action, causing family owners to “rally around the flag,” put aside their differences, and take actions that allow the business to survive. Our survey shows a split between those reactions: 29% have seen some negative impact on family relationships, while 24% have seen a positive impact (the rest have seen no change). The ultimate impact of the crisis on your family business will be substantially shaped by how you, as owners, respond."

The shape of post-Covid retail (Ana Andjelic)

+ "American Dream is closed. Six weeks ago, this seemingly cursed New Jersey megamall was gearing up to celebrate its latest addition, an indoor DreamWorks Water Park. The monster retail-entertainment complex featured attractions with names like Lemur Leap, Mad Flush, and Forbidden Waters Hot Tubs. With forty water slides and fifteen attractions over 8.5 acres, it is the largest indoor water park in the Western Hemisphere. Or, it aspired to be."

Eastman Machine survived one pandemic and is determined to survive this one (New York Times)

+ "“It’s painful, and we never like to lay people off,” he said. “But otherwise there would be no company to come back to.” He has continued to pay for those workers’ health benefits, so he feels he has kept his word that everybody would be taken care of. On Monday, he brought back five assembly-line workers. Demand for the cutting machines that Eastman makes at its downtown factory is down 50 percent, but there have been enough orders to keep production employees on the job.""

M&A market condition survey - assessing the impact of COVID-19 (Dunn Rush)

+ "With regard to transaction volumes and valuations, it is our opinion that there will be a significant drop in the number of transactions completed between now and the end of 2020. To the degree the U.S. economy can begin the reopening process in the next few months, we believe the middle market M&A transaction environment should recover to a more “normal” environment by mid-2021."

The share of mortgage loans in forbearance increases to 7.54% (Mortgage Bankers' Association)

+ "The Mortgage Bankers Association's (MBA) latest Forbearance and Call Volume Survey revealed that the total number of loans now in forbearance increased from 6.99% of servicers' portfolio volume in the prior week to 7.54% as of April 26, 2020. According to MBA's estimate, a total of 3.80 million homeowners are now in forbearance plans."

Marie Kondo cleaned house. Now she wants to clean yours. (Fast Company)

"Over the past year, Kondo has been forced to negotiate the tension between her introverted personality and her desire to introduce her philosophy to larger audiences. Tidying Up With Marie Kondo, her Netflix series that launched in January 2019, went on to become the global streaming service’s most-watched nonfiction show of the year. Suddenly, Kondo was vaulted into a new constellation of stardom, alongside other goddesses of wellness and domesticity such as Martha Stewart, Oprah Winfrey, and Gwyneth Paltrow. By the end of 2019, she had established an e-commerce site, a blog, and a newsletter. She had also increased the size of her consultant network—people whom Kondo personally instructs in her decluttering method—to 40 countries."

Leading a family business (Harvard Business Review)

+ This is a useful compendium on managing, leading, and growing a family business from HBR.

Developing the next generation of leaders in your family business (Harvard Business Review)

+ "Of course, some of the greatest family business leaders I have met in my executive search work over the past three decades have taken a completely different approach. Genuinely caring for the healthy future of both their firms and their families, they start by understanding how they can help their next generation become the best possible versions of themselves. They aim to firm up their company’s “family gravity,” which includes the dynamics between relatives and their relationship with the business, with perpetuity as the main objective. This requires following a disciplined process with three simple steps."

The death of the office (1843)

+ "When time-and-motion studies examine offices today, their results can be dispiriting. Office-work takes up not merely the bulk of our time but the best part of it, the hours when we are alert and alive. Home, and its occupants, has the husk. Most managers spend at least 20 hours a week in meetings, according to a study by Bain & Company in 2014. Over the course of a lifetime that amounts to nearly five full years. Many of these meetings, in wistful retrospect, might have profitably been skipped."

How to die with $60M worth of the San Diego Chargers (San Diego Reader)

+ "With this week's death of Chargers minority owner George Pernicano at 98, his heirs may be looking at a $60 million payout from his 3 percent interest in the team, according to a back-of-the-envelope calculation by a Union-Tribune sports writer."

Kelie Morgan 5/1/20 Kelie Morgan 5/1/20

The Weekly: Edition #43 - May 1, 2020

Operating Systems, Revisited

In The Weekly issue #31 we explored the idea that businesses are merely operating systems that repeat functions. This week, we are revisiting the idea of operating systems given how virtually all companies are refreshing their operating systems in the face of rapid change. There are technology stack and non-technological improvements that can be made to business operations, but this week, we'll focus on technological changes in a few industries as well as by business function.

COVID-19 is forcing many businesses to transition rapidly to cloud-based solutions to fulfill customer demand and adapt to accelerating industry trends. It is also highlighting the risks for businesses who tend to adapt slower to new technologies.

Here are a few examples by industry and business function that we've noticed over the last few weeks:

Industries

Retail - scrambling to adopt to online fulfillment and on-demand delivery, moving from offline to online

Restaurants - adapting to ghost kitchen operations, Doordash and delivery, and emphasizing value of offering vs. experience and location

Healthcare - adapting to telehealth: remote triage, diagnosis, and prescriptions

Commercial real estate - office redesigns for touchless entry and exit, potential increase in flex needs, potential decrease in overall square footage needs

Education - asking existential questions around in-person vs. online education models, pricing of the '4 year experience', and questioning student-debt problems

Business Functions

Finance - digital payments are heavily preferred over checks and cash due to COVID-19 transmission issues

Project management - a robust cloud project management platform is a must during mandatory work-from-home conditions

Communication - absolute emphasis Zoom, Google Meet, GoToMeeting, Microsoft Teams, Slack, Workday

Marketing - increased emphasis on online ad spend vs. offline physical marketing

Logistics - touchless delivery, omnichannel approach for retail shifting heavily to online channel

All of these observations reinforce our thought that the adoption timeline for new technologies will shrink post-COVID.

After all, technology's purpose is to provide leverage for a given task to be done in a faster, cheaper, easier manner. Businesses that fail to adopt new technologies risk falling behind relative to competitors.

We would love to hear from employees and owners of SMB's on what new trends they are observing by industry and function. What functions of your business have improved as you have been forced to move them to the cloud? What industries have you seen adapting well to the new technological needs?

A leader's toolkit for reopening (Scott E. Page, Michigan Ross School of Business)

+ "The coronavirus pandemic creates a set of complex, unanticipated challenges for businesses and organizations. This site is designed to assist with planning a safe reopening: how to maintain core functions while keeping employees, customers, and communities safe, and how to make work meaningful despite proximity constraints. These same challenges can be reframed as opportunities. Changes to behaviors, relationships, and structures might improve organizations in the long run."

How freight master Flexport's Ryan Peterson learned to CEO (TechCrunch)

+ "I didn’t know what the term ‘freight forwarder’ meant until a year into starting the business.” Considering his shipping logistics startup Flexport was last valued at $3.2 billion, that quote from my first interview with CEO and founder Ryan Petersen back in 2016 seems even more surprising now. But it also hints at why he’s one of the most talented and exciting executives in tech: He learns. Humbly. Relentlessly. About whatever the role requires as it evolves."

Flex-office heads discuss industry’s survival (The Real Deal)

+ "Going forward, Hodari said he expects more flex-office companies to opt for management agreements with landlords over leases — as Industrious does — to protect themselves."

The pandemic will change American retail forever (The Atlantic)

+ "We are entering a new evolutionary stage of retail, in which big companies will get bigger, many mom-and-pop dreams will burst, chains will proliferate and flatten the idiosyncrasies of many neighborhoods, more economic activity will flow into e-commerce, and restaurants will undergo a transformation unlike anything the industry has experienced since Prohibition. This is a dire forecast, but there is a glimmer of hope. If cities become less desirable in the next few years, they will also become cheaper to live in. In time, more affordable rents could attract more interesting people, ideas, and companies. This may be the cyclical legacy of the coronavirus: suffering, tragedy, and then rebirth."

Mary Meeker's exclusive COVID-19 trends report (Axios)

+ Mary Meeker is known for her annual Internet Trends Report, which many use as a touchstone for where tech is now and where it's going. This report is Meeker's attempt to distill technology trends accelerating during COVID-19.

The retail pulse (Within)

+ "Using data from a sampling of clients, we are tracking year-over-year trends in ecommerce revenue, ad spend, and conversion rate relative to the pre-COVID benchmark period."

Digital strategies to get your brand through COVID-19 (Within)

+ This Q&A white paper is a follow-up to the retail pulse above on how to think through branding and marketing during COVID-19.

Where Americans are moving - 2019 migration report (North American Moving Services)

+ "For inbound moves, the top five states in 2019 were identical to 2018, with Idaho first followed in order by Arizona, South Carolina, Tennessee, and North Carolina."

Employee COVID-19 impact survey (Permanent Equity)

+ "In our Owner/Operator survey, 70% of business owners did not intend to expand work from home options post-crisis. Employees seem to feel differently, with 62% reporting that they have the same or more productivity when working from home and over half stating they would prefer to work from home after restrictions are lifted. Bigger concerns are raised with childcare. Only 39% of those with children say they can return to a normal schedule post-crisis, with the balance needing to either continue working from home, relying on family, or unsure of how they’re going to handle their childcare needs."

Jubilee Jim Fisk and the great Civil War score (Boston Globe)

+ "In 1865, a failed stockbroker tries to pull off one of the boldest financial schemes in American history: the original big short."

Kelie Morgan 4/24/20 Kelie Morgan 4/24/20

The Weekly: Edition #42 - April 24, 2020

Optimism

"Everything can be taken from a man but one thing: the last of the human freedoms—to choose one’s attitude in any given set of circumstances, to choose one’s own way." - Viktor Frankl, Man's Search for Meaning

Viktor Frankl was above all a purveyor of positivity. Despite his controversial post-Holocaust history, his experiences during the Holocaust shaped his view that man possesses the freedom to choose his attitude, no matter what happens to him.

Nearly 200,000 people have died due to complications related to the virus. Hundreds of millions of people have experienced economic pain the likes of which we haven't seen for almost 100 years. The sheer magnitude and swiftness of the viral outbreak and decline in consumer demand caught almost all small business owners off-guard. In fact, we recently surveyed over 300 small business owners from 43 states over the past week and the numbers were in-line with the precipitous declines we expected. And yet:

"Despite some bleak numbers, our respondents indicate the entrepreneurial spirit that drove owner/operators to build their business in the first place is still alive and well. 77% of respondents agreed with the statement that their business will emerge from the pandemic stronger than before."

Positivity, like pessimism, is a choice. And so is the choice to be an entrepreneur, a small business owner, or a sole proprietor. As one well-known entrepreneur once put it, starting a business can be like "eating glass and staring into the abyss." And this is a choice that most small business owners, if given the opportunity, would choose again. And again. And again. The entrepreneurial spirit is fundamentally optimistic.

As we begin to digest the human toll and pick through economic wreckage caused by COVID-19, small business owners have a choice to make - to infect others with positivity or with pessimism. Here at Permanent Equity, we're still open for business, and over the long-term we're still optimistic on the resiliency, creativity, and strength of American Small Business.

Owner Operator COVID-19 impact survey results (Permanent Equity)

+ "Now 56% of businesses have >80% of employees working remote - a massive shift. But the shift appears to be temporary, with 70% of businesses not planning on expanding remote work after the crisis has passed. There is high industry correlation here, with Transportation, Wholesale, Manufacturing, and Construction obviously needing to bring employees back to be productive again. But some resistance to remote work is seen based on company size as well: of companies generating less than $10M in annual revenue, 36% are considering expanding their remote workforce post-crisis versus 19% of companies above $10M."

Buying and selling businesses in 2020 (Permanent Equity)

+ We've distilled our thoughts on what buying and selling businesses in a post-COVID world will look like including effects on deal terms, financial terms, and

Keep calm and carry on - (KKR's Macro Trends)

+ "In terms of economic growth, we are looking for a sharp downturn during the second quarter, followed by more of a U-shaped recovery than a V-shaped one. There are several forces at work. First, we are now embarking on a major de-leveraging cycle, one that many investors may not fully appreciate. The reality is that, unlike the downturn in 2008 (which was more linked to individual home ownership and banking), this crisis has started as a non-financial, corporate crisis. One can see this in Exhibit 2. It also has the potential to be a serious government de-leveraging cycle, given the huge outlays that the United States and Europe are now making to bridge their economies during this uncertain period."

American deflation: truckers are getting rolled by the coronavirus economy (The Inquirer)

+ "Prices are falling. Big manufacturers, with orders slowing, “are unilaterally changing their terms,” Tucker said. "If they paid within 60 or 90 days, they are waiting until 120 days. But a lot of [owner-operators and small firms] live day-to-day on that cash flow. All of a sudden, you push that out 30 days.” There goes fuel money for that next trip: "And you drop like a rock off a cliff.”"

Positional scarcity and the virus (Alex Danco)

+ "There’s a case to make here, which I see being spitballed around on the Internet a lot, that the old way of doing things is over. Our year of remote-only will dispel the familiar rituals and expose our expensive addictions to these things. And after this is over, we’ll have a harder time with casually approving $4000 of flights, hotels, and lost time for an in-person meeting when a Zoom call could do, or spending $50,000 on tuition for learning that could happen online. I doubt it. I believe the contra case is actually stronger. Our year of disruption may very well reinforce, not disrupt, the core reasons for why we do these things."

Why most post-COVID predictions will be wrong (Marker)

+ Amidst all of the post-COVID predictions, it is imperative not to take them too seriously. Here's a look at a few post-9/11 and post-2008 predictions that were just plain wrong: "To take one specific example of how consumer behavior was predicted to change decisively: the end of SUVs, conspicuous symbols of the old excess. In 2008, GM drastically slashed SUV production in favor of sedans, marking an “end of the SUV era.” Gas prices approaching $4 per gallon “are changing consumer behavior and changing it rapidly,” GM’s CEO said. “We don’t believe it’s a spike or a temporary shift. We believe it is permanent.” Experts agreed: “The trend away from these vehicles is irreversible,” said one analyst. An economics academic added: “The SUV craze was a bubble — and now it is bursting. It’s an irrational vehicle. It’ll never come back.” And after all, according to a widely noted book published in 2009, the rise of gas prices to $20 a gallon was “inevitable.”"

This is the end of the office as we know it (Vox)

+ "According to a new MIT report, 34 percent of Americans who previously commuted to work report that they were working from home by the first week of April due to the coronavirus. That’s the same percentage of people who can work from home, according to a recent University of Chicago publication. These new numbers represent a seismic shift in work culture. Prior to the pandemic, the number of people regularly working from home remained in the single digits, with only about 4 percent of the US workforce working from home at least half the time. However, the trend of working from home had been gaining momentum incrementally for years, as technology and company cultures increasingly accommodated it. So it’s also likely that many Americans who are now working from home for the first time will continue to do so after the pandemic."

Even Banksy is working from home during the pandemic (CNN)

+ Famed outdoor artist Banksy is taking his... interesting... creations indoors during the COVID-19 pandemic.