Patrick O’Shaughnessy runs the popular Invest Like the Best podcast. A recent episode had Gavin Baker, founder & CIO of Atreides Management LLP, a growth PE investor specializing in tech and consumer plays, as guest. Both Patrick and Gavin are wellknown on investing twitter and run their own investing shops too.

The podcast was titled ‘Investing Through a Bear Market’ and covered how Gavin views investing in a fast-dropping market as well as the impact of COVID-19 on the market and the emerging business landscape.

Patrick O'Shaughnessy's Blog

The first third I thought was a bit thin on the insights front, but it picked up in the second third; overall I found it fairly interesting and worth a listen. Here is what I thought worth highlighting. All of the text is as spoken or an edited grammatically proofed, filler-word removed version by me of Gavin Baker’s speech.

(1) The most important metric today

The metric that probably every investment firm in the world is looking at, or for that matter every company, says Gavin Baker, is the days of solvency at zero revenue. “That is the equation that is being run everywhere… I don’t know that that equation has actually ever been run…. We’ve been through a lot of bear markets a lot of recessions. But no one had run an analysis of zero revenue….you want to have a standardized metric of how many of these companies can exist forever. If you have zero revenue forever, then the answer is none, for even if you have a hundred billion dollars in cash and no debt, even if you ultimately get down to just one employee, you will eventually run out of cash with no revenue, if you have expenses.”

(2) Book recommended in the show

Gavin recommends Market Wizards as one of the best books written about investing

(3) On software and ARR

“There is no such thing as truly recurring revenue when it comes to software / SAAS products. Some revenue is just more recurring than others.

A lot of people are baselining off what happened in 08-09 and I think that is dangerous.. because…in 08-09 software was 7 to 10% of IT spend.. and today it is roughly 30%.. and if you include spends on cloud like Azure, AWS and Google Cloud, then Software Plus Cloud is almost 50 percent of IT spending. So in 08-09 if you were the CIO, you could stop buying servers, storage or new PCs to cut your budget. So it makes perfect sense that software did not get hurt. Today with software at 30% and software plus Cloud at 50%, if budgets are going to get cut, then software is going to get hurt, and I don’t see any way around that. “

On the topic of not all revenue being recurring, Gavin narrates “One of my good friends who runs a private equity firm knows that I’ve been thinking about this. He called me 3 nights ago with his sister, who is a dentist; she’s grappling with how to run her practice. She said listen I was on a big webinar that was put on by our trade industry group on what you should do to manage your practice, and the #2 or #3 recommendation had been to call up all of your software vendors, and either ask for an extension of payment terms., or a reduction in monthly rate and threaten to switch if they didn’t do it. In one hour she cut her software bill in half… she said there was zero pushback. I have been telling people this story. We all have friends who run small businesses and in the last two days, lots of friends have come to me and said hey, I told my brother my sister my mom my dad my uncle my aunt my friend who has a small business that story. They did the same thing, and they cut their software bill 30 to 50% in an hour. I think the data is indicative and means something. Anecdotes are very dangerous just because they play in to so many biases that we all have but I think it is interesting to hear that this is happening.”

More on this in Gavin’s piece here.

(4) On why minor differences in UI/UX matter in tech

“Something that matters immensely in technology is that very small differences in UI and UX – User interface and user experience – matter immensely.

At some level iOS today is probably, 50 basis points better than Android at most.. I would argue personally they are at parody.. but 50 bips is huge…If you’re 50 bips better, that can be the foundation of $100s of bns in market value. Google found that milliseconds of latency mattered in  search. That if you could take two milliseconds out of search latency, that had a huge impact on search volumes.

Zoom’s UI and UX for all sorts of reasons, isjust better than Hangout’s, Facetime’s or whatever the comparable Facebook product is and if one of those companies, particularly say either Google or Apple… had FaceTime or Hangouts been as good as Zoom from UI UX perspective, then think of the value that would have come out of this. I think they’ve already missed one of the biggest changes to come out of this recession.”

(5) Why Amazon or Instacart may not be the big winner of this recession

“I think there’s a temptation to say, oh, eocmmerce is going to be huge beneficiary of this…i thought long and hard about this…and for sure, ecommerce is going to structurally shift upward on the percentage of retail sales. I don’t know though whether after the structural shift up, whether it will continue to take share at anything different than the rate it’s been taking share of the last 5-6 years, which has been very consistent.

What I am beginning to think about is that these omni-channel retailers like Walmart, Target, Costco, maybe even Kroger are going to be the biggest beneficiaries of this. They’re going all in on e-commerce…they are building years of e-commerce experience / muscle / knowhow in months. I’m sure they’re going to do 12 to 18 months of e-commerce capex in months, if not in quarters.

So I think there are huge cross currents in ecommerce. It is for sure going to benefit as a category but I think it may be dramatically more competitive in 2021, than it was in 2019, which was super competitive.”

(6) For investing, look at sectors where there are going to be many bankruptcies

“I think the companies that are going to benefit the most from this are where their competitors go bankrupt. Where I have been focusing is actually on both physical omni-channel retailers and Quick Service restaurants.

The reason for that is, that it is very clear that tragically a lot of small businesses and retail and restaurants are going to go bankrupt. A lot of owner operators are going to go out of business and then I put that back together with thinking through the sequencing of what happens when the world begins to restart.

And by the way, the world beginning to restart does not mean that the recession is over.. It just means that Americans slowly begin to return to a more normal pattern of daily life. The first thing that people are going to do when this current coronavirus quarantine ends is go to Quick Service Restaurants that have a drive-through. Who couldn’t use a good fast food hamburger or some cooked fried chicken or taco right now? At the end of this, everybody is going to be tired of eating only at home. People got out and bought literally a historic amount of groceries. And as soon as the world begins to restart, I think people are going to go back to these restaurants. And these restaurants are going to face a significantly less competitive environment because so many of their owner operator SMB competitors will have ceased to exist. So for sure they are going to come back to a world that is less competitive, same thing for physical retailers. If you are a large physical omni-channel retailer, you’re benefiting right now because you’re being able to do years of e-commerce brand building and expertise building in months. When you turn your physical store footprint back on, there’s going to be less competition.”

(7) On WeWork and HQ location planning as a core competence

“The heads of real estate of the world’s largest companies were super excited about WeWork. There’s this notion of core competence in business.  There is a core competence in real estate too. That’s generally in the company’s hometown. They know the right architects, right builders, the right real estate lawyers, Brokers etc. But for branch offices is that really a core competence? You don’t have as much local knowledge. You don’t have the local connections and more to the point, you can never size it appropriately. Branch offices were always too small or are too big.

So this notion that outside of your headquarters it made sense to put a significant chunk of your workforce in a more flexible, co-working environment made sense to the head of real estate. They would have buying efficiencies the same way that corporations who outsource their kitchens to Aramark and Compass Group find that they could generally run a corporate cafeteria cheaper and provide higher quality than any individual corporation could. “

(8) On the metaverse

“The metaverse is the most exciting trend in the world today; I think of the metaverse as being the culmination of the internet in the same way that mass production was the culmination of the Industrial Revolution.

The metaverse is simply a series of connected virtual worlds that I firmly believe a majority of people will spend a majority of their waking hours in, within my lifetime. Today, most of those virtual worlds are called video games and I would say the metaverse being the culmination of the internet is a relatively accepted opinion amongst early stage investors or in large technology companies.

When you hear Mark Zuckerberg say he wants to own the next platform and that’s going to be augmented reality or virtual reality, that is the metaverse. The metaverse is the next platform, and then what is the strategic point of control in the metaverse? What is the abstraction layer? What layer in the metaverse actually becomes a platform?

This is why Facebook bought Oculus. The thought is, hey if you can own the company, that powers these virtual realities, you’ll be able to own identity. You’ll be able to own avatars, your own payments and that will create a lot of value.

I’m not sure that that is true. There is a very real world in which some of these video games emerge as platforms unto themselves. This is already happened with Roblox. It is happening with Fortnite.

I do think broadly video games are social networks. Kids and people under the age of thirteen..when they want to hang out with their friends.. .often rather than calling them..,they will play a game with them.

So if the meta verse is going to be kind of the culmination of the internet and foundational to the future, I think in that metaverse, video games are going to be super important to it than these social networking parts are going to be ever more important.

DJ Marshmello had a concert on Fortnite that 40 million people watched.. There’s a special Star Wars premiere within Fortnite.. They’re already events regularly at every video game… I am becoming more and more convinced that these video games are going to be.. foundational to the metaverse.

One kind of sign post is that we have a lot of data on internet traffic that shows video traffic is up a 100%…has people are working from home, and kids are spending more time at home. I saw a Telecom Italia stat that saw video game traffic up about 75% and social media traffic up 0%. And that is because people are connecting with in video games…. So I would not underestimate the importance of games and their ability to become platforms…Xbox… PlayStation.. steam ..any video game platform that has an identity and a payments layer is fairly well positioned. I think an asset that is very interesting is Discord. I think Discord is something that could easily come out of this as a platform. It is something like Zoom. They can I think potentially go between work and play….yeah, I think all of this really pulls the metaverse forward. “