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Hidden Learnings in Company Visits

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I was fortunate enough to spend 10 days travelling throughout the United States, visiting 5 different States, undertaking company visits. It was a jam-packed trip filled with site tours, company and analyst meetings and of course many flight changes and delays.

Along with learning about and gaining a deeper understanding of ASX listed companies that we are invested in (and not invested in), there were hidden outcomes that were crucial to this trip. This was a deeper understanding of what “best practice” is. This was a great outcome as it helps ensure we don’t get the ‘wool pulled over eyes’ and are better equipped to invest in great companies.

Understanding global best practice helps ensure we don’t get the ‘wool pulled over eyes’

Along with meeting a host of listed and soon to be listed ASX companies, I was able to spend time with large US listed companies such as Amazon, Tesla, Etsy, SS&C to name a few, as well as large funds and venture capital firms such as Blackrock, Blackstone, Level Equity and FT Ventures.

Lesson 1: Use data to give the Customer, what the Customer wants

During the day I had in Seattle, I had three meetings with different Amazon teams – Amazon Strategy, Amazon Merch and Amazon UX. We often hear Jeff Bezos talk about their customer centric business model. However, speaking to a manager within their strategy team really brought this home. When I asked about their ecommerce platform and how they compete with bricks and mortar competitors, the response is he is aware of the bricks and mortar competition but spends all his time focusing on what the customer wants. This led to a conversation about the data Amazon collects, and how they can use this data to open a bricks and mortar store with exactly what the customer wants. Sounds obvious, right? Open a store with what the customer wants. However, Amazon is only able to do this because they are a data driven business. They are now trialling Amazon 4 stars, a store in SoHo New York. Amazon 4 stars is a bricks and mortar store which stocks only items that have a 4-star rating or higher and that have trended well on the Amazon ecommerce platform.

Lesson 2: How to scale an ecommerce platform

Meeting with Etsy was an important company visit as it helped me to understand the competitive landscape in niche marketplaces. However, digging deeper, this meeting uncovered another best practice learnings. This was how a successful marketplace business was able to scale their operations globally and how they are now able to implement fee increases. Etsy which is a US listed $5bn market place connecting sellers of unique good with buyers explained how they initially scaled their business and how they are now able to increase their fees. Etsy describes a market place as a “magic in a bottle”. Understanding this path to what they describe as “magic” will be a valuable lesson for us when assessing prospective and existing investments. Etsy initially spent all their marketing on the sellers. This is because inventory levels were vital for them. Metrics such as Inventory per buyer, total addressable markets size per category, and the percentage of GAM used in marketing are all tools we can use going forward when assessing potential market place opportunities. Now that Etsy feels they have the “magical” market place, they have, for the first time, increased their commission fees from 3.5% to 5.0%, whilst also introducing a seller subscription fee. Interestingly, because they are the go to marketplace with global scale, they have seen very little churn.

Lesson 3: Valuations in Tech startups can be tricky, but it can be done

The last hidden learning came from understanding how other successful US investment and venture capital firms think about software and technology valuations. Australia like many markets is seeing an increase in software companies. Software companies can be unique in the sense that there is typically a large upfront investment in developing the technology before material revenue is realised. Therefore, evaluating these styles of companies can be different. At Perennial Value, we have certain metrics we look for including EV/Sales and EV/ARR. I undertook a company visit to Level Equity; a specialist global software investor. In meeting Level Equity and understanding their valuation process, enhanced and endorsed our existing methodology. We are now able to draw on best practice US valuation methodologies from Level Equity and other investment firms such as Blackrock and adapt and enhance these for our own Australian software investments.

This is the view of the author, Ryan Sohn, Analyst, Perennial Value Small Caps. This article is general in nature and does to take into account your personal circumstances.

See the fruition of Ryan’s investment ideas and research by reading more about the Perennial Value Smaller Companies Trust