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WCM Investment Management | Insight | Beach Reads 6 - 23 | Welcome to Beach Reads. With summer officially upon us, this may be the first Beach Reads that can actually be consumed on the beach.

Beach Reads

June 23, 2020

Welcome to Beach Reads. With summer officially upon us, this may be the first Beach Reads that can actually be consumed on the beach. And while we all work to continue to adapt to our evolving landscapes (and figure out what a summer vacation may look like), I've largely gone back to basics in this edition, covering a lot of ground that has previously popped up - things like network effects, the metaverse, marketplaces, and more. Here's an outline of the themes covered in this edition.

  • Three interviews: learnings from Marc Andreessen, thoughts from John Collison, and vision-casting from Roblox's chief business officer
  • A three part series that describes successful marketplaces, from a Benchmark VC partner
  • What separates the good from the bad for platforms
  • Physical retailing and brand building through COVID-19: outlining the future
  • Auditing frauds, with EY in hot water. Also, thinking about position sizing

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Conor Deveney



ABOUT Beach Reads

Welcome to Beach Reads, a collection of interesting links that we at WCM have come across and want to share. The goal of this publication is to engage with a broader audience in order to better ourselves and others. Feel free to email us at with any thoughts or feedback, and click here to subscribe!

01. Three Interviews: Investing, Payments, and the Metaverse

The Observer Effect: An Interview with Marc Andreessen

Marc Andreessen and his firm a16z are familiar to Beach Reads readers. This time around we feature an interview in which the renowned tech investor talks about time management and continuous learning, while touching on his essay, It's Time to Build. This excerpt, on why many people have a difficult time changing their opinion, is striking: "Most of the people you're around most of the time hate being told that they're wrong, right? They absolutely hate it. It's really an interesting question as to why that's the case. The best explanation I'm able to come up with is: people treat their ideas like they're their children. I have an idea the same way that I have a child and if you call my idea stupid, it's like calling my child stupid. And then the conversation just stops. I've really been trying hard to spend less time actually arguing with anybody. Because people really don't want to change their mind. And so I'm trying to just literally never argue with people." Giving up on debating because it's tough to change someone's mind is a bit defeatist, but Andreessen does concede that those with strong, loosely held opinions tend to be successful in various fields, such as (or including) investing.

John Collison - Growing the Internet Economy

Overstatement and expectation management be damned - this edition of Invest Like the Best is one of the best podcasts I've ever listened to. Besides the incredible feat of building a $36 billion-plus payments company by age 29, Stripe co-founder John Collison shows his incredible grasp of business history, business strategy, and public equity investing, throughout this scintillating conversation with host Patrick O'Shaughnessy. It's one of those rare instances of a podcast that's worth listening to from start to finish, despite being 80 minutes long.

Roblox's ambitious vision for building online worlds

Past Beach Reads have gone in-depth on the metaverse, largely thanks to the work of Matthew Ball. These articles have, for good reason, focused on Fortnite as a large contributor to what the metaverse is becoming. This Protocol piece instead centers on another important "game," Roblox. "What's different for us is that the metaverse is inherently a social place," Roblox chief business officer Craig Donato says in a thoughtful interview. "It's this shared experience. So your identity becomes important. This ability to be able to have social interactions and maintain and actually make friendships becomes super important. What the internet is for information, the metaverse is going to do for social connections. I'm no longer bound by physical distance or all these constraints in terms of who I interact with or how I represent who I am. All these things are suddenly unleashed. It's insanely disruptive." Donato's focus on "identity" is important because it is increasingly clear to me that online identities are the strongest form of digital expression (discussed in this article: Signaling as a service). I'm curious what this means for legacy brands: will they bridge the gap to digital and become popular in online settings, or will new brands emerge to serve the solely digital consumer?

02. The Hierarchy of Marketplaces

The Hierarchy of Marketplaces - Introduction and Level 1

The thoughts of Benchmark Capital General Partner Sarah Tavel have been featured in past Beach Reads. I was originally drawn to her work on "The Hierarchy of Engagement," which she now builds on to explain the formula for a successful marketplace business. In short, the focus should be on consumer happiness. In the first in a three-part series, the venture capitalist writes: "Much like MAUs [monthly active users] is a vanity metric for consumer social companies, I believe GMV [gross merchandise value] is a vanity metric for marketplaces. As we saw with the three case studies, GMV does not get to the heart of whether you are creating enduring value or not. No matter how large an incumbent may be, they are always vulnerable to a new entrant that makes buyers and sellers happier. In other words, happiness — not scale — is your moat." Happiness as a moat source - what do you think?

The Hierarchy of Marketplaces - Level 2

The second installment goes into detail on how happiness unlocks "tipping points" or virtuous cycles. "Happiness loops are incredibly powerful," Tavel says. "They reward the suppliers you want to retain — the suppliers that are leaning in on your platform and providing the best experience for your buyers. They help buyers get to better matches, leading to more happiness and higher buyer retention. And lastly, they help you scale without degrading the buyer experience by sorting out the suppliers you want to reward with a greater share of buyers, and the ones you are fine if they churn." Marketplaces are interesting because they operate two-sided networks. Therefore, as Tavel points out, happiness loops work to better the suppliers and customers on the platform. I wonder if these happiness loops are unique to network effect businesses: in the piece, Tavel says "growth in the network = growth in happiness for the customer." Do all network effect businesses work this way? In other words, is it most important to think of happiness as a moat source for a network effect business, or can happiness support a business with other moat sources, such as switching costs?

The Hierarchy of Marketplaces - Level 3

The final installment in the series focuses on leveraging a position of strength to create a massive position of strength. The basic idea is that the further ahead of competitors you can get, the less you have to invest in growth to continue to grow. This is one of the unique characteristics of marketplace businesses. What I found more interesting than the idea that scale begets scale, however, is the focus on broadening offerings to better service customers. "The key with broadening is to do so in a way that is consistent with your brand and mission," Tavel says. "You still need to stand for something in the buyer's mind. For example, Uber has continued to expand its core SKUs, but all are a means of transportation." Broadening is a way to satisfy adjacent customers' needs and therefore grow the total addressable market that a business is focused on. Pursuing the right adjacent opportunities seems to be an underappreciated source of growth, if done correctly. One lingering curiosity regarding customer happiness is how do you know the customer knows what is best for them? In a startup lecture series, Twitch chief executive Emmett Shear talks about the dangers of taking exact customer feedback, and how solving the pain points of non-customers is more important than solving the issues of existing customers. What does that mean for Tavel's focus on customer happiness?

03. Platforms: The Good, the Bad, and the Ugly

The Platform Matrix: Not All Platforms Are Created Equal

In a timely article, given Tavel's thoughts on marketplaces outlined above, Sameer Singh looks at what makes platforms unique, specifically focusing on the network effects they have. First, though, Singh thinks it is critical to define what a platform is. "Platforms combine an underlying software product and the development capabilities of software frameworks with the matching and monetization functions of marketplaces." In a similar way to Tavel, Singh suggests that growing into adjacent areas is important for platform businesses to succeed. "If platforms are cross-border by nature, their scaling potential should depend on their ability to organically expand into adjacent vertical markets or categories (not regions)," he says. "In other words, scalability depends on the breadth of [the] platform's standalone capabilities." Put another way, the broader a platform, the better (for growth opportunities).

News by the ton: 75 years of US advertising

A fair amount of news related to the retail and direct-to-consumer markets in Beach Reads looks at how startup brands can grow through branding and advertising. This sometimes highlights the power of large social media companies. This article, by independent tech analyst Benedict Evans, takes a historical perspective on advertising, looking at it through the lens of the declining newspaper business. "Newspapers were an oligopoly, and they lose that oligopoly online," Evans writes. "Newspapers are, yes, a content business, but they were also a light manufacturing business, and it was the replacement of light manufacturing and trucking with bits that removed the barrier to entry and unbundled their attention." I'm curious as to what the postmortem for today's large platforms and social media companies regarding advertising might look like. Could powerful AI (e.g. TikTok) businesses perhaps disrupt more traditional online advertising through deeper targeting and engagement?

As Diners Flock to Delivery Apps, Restaurants Fear for Their Future

An immensely popular article about arbitraging Doordash (Pizza Arbitrage) in a previous Beach Reads highlighted some of the issues with food aggregators. This article from the New York Times puts a spotlight on further challenges for these platforms. "All the delivery services are now facing anger from smaller restaurants for giving priority in their apps to chain restaurants because of the volume the chains can bring, even though the chains generally pay the apps lower fees, according to restaurant consultants," the story says. "In the apps, the chains often appear at the top of the list of restaurants in any area — unless smaller restaurants pay additional fees to bolster their placement." If we think about the issues food delivery apps are having through the lens of the Singh and Tavel articles above, I'm curious how the food delivery app landscape will evolve. Consolidation seems inevitable, but what about scaling into adjacencies to grow, which Uber Eats does to a degree (building off the Uber driver network)? Looked at from the perspective of supply and demand "happiness," one side of the equation seems very unhappy.

04. The Future of Physical Retailing

What Will the Retail Experience of the Future Look Like?

As the US begins to reopen, many consumers remain concerned for their well-being, which is translating into more online shopping, limited physical interaction, and fewer runs to non-essential stores. The challenges this presents for physical retail operators are addressed in this article from the Harvard Business Review, which covers tactics that stores and brands can use to continue to serve customers in safe and creative ways. One suggestion, which I've seen before, is more personalized and appointment-based shopping. "Technology can also generate connections by making every consumer feel like they have a personal shopper who has favorite items (in their size) placed in a dressing room when they arrive or who can suggest similar pieces based on prior purchases," the report says. "Members at NEW INC...the New Museum's incubator, are already working on augmented reality and artificial intelligence solutions that could power anything from the virtual closet Cher Horowitz uses to pick her outfits in the movie Clueless to holographic fashion shows." Perhaps in the not-so-distant future we'll all be shopping personalized physical and digital wardrobe collections on Roblox.

05. Auditing Auditors and Managing Position Sizes

EY fights fires on three audit cases that threaten its global reputation

The last edition of Beach Reads featured an article about Luckin Coffee, the Chinese company that turned out to be engaged in fraudulent activities. It appears that Germany's Wirecard is another troubled company (see NYT article here) and revelations about missing funds have put a third blemish on accounting firm EY's reputation, according to this Financial Times article. Wirecard, NMC and Kaloti have all recently been exposed for having significant financial discrepancies - and all three have been audited by EY. While the accountants works to fix these issues, some see limited repercussions on EY. "One former EY partner added: 'In terms of the potential damage, the reality is that they will keep going, life for the big accountants just moves on. The financial impact on companies of this scale is only ever petty cash. Their ego may take a hit, but only regulatory change will have any tangible impact." This raises questions about the power of the "Big 4" auditing firms and how exactly complex accounting challenges should be dealt with.

The fund managers that kept faith with Wirecard

While reading like a bit a victory lap by the FT, this article does raise important points by highlighting a number of buyside investors and sellside analysts who turned out to be wrong about Wirecard. Perhaps more importantly, the author draws attention to position sizing, a perennial challenge in money management. "[The] manager of the flagship Deutsche fund at asset manager DWS ... had allocated almost 9.2 per cent of what was then a €5.1bn fund to shares in the German payments company [Wirecard]," it reads. "This week, as shares in Wirecard lost four-fifths of their value, DWS reduced its ongoing exposure to zero." Mistakes are unfortunately a very public and humbling part of the investor's job. And while uncommon, the alleged fraud carried out by Wirecard serves as a reminder to pay careful attention to position sizing, and extra attention when investing in known battleground stocks.


Disclaimer: To the extent that Beach Reads discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. The companies and or securities referenced and discussed do not constitute an offer nor recommendation to buy, sell or hold such security, and the information may not be current. The companies identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the companies identified was or will be profitable. Beach Reads does not constitute a recommendation or a statement of opinion, or a report of either of those things and does not, and is not intended, to take into account the particular investment objectives, financial conditions, or needs of individual clients.

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