Happy New Year! When I see a chart like the above, it’s unfathomable to believe that it’s a good time to be in the airline business, let alone be a startup trying to enter the capital intensive sector. But that’s what David Neeleman (the founder of JetBlue) plans to do. History is littered with failures of upstart airlines due to a myriad of factors that make it an extremely difficult sector to compete in. Today’s 3 large legacy carriers (Delta, United and American) are the result of years of consolidation and currently control ~50% of the US market.
This is the first year that sales on Cyber Monday are expected to exceed Black Friday, but then of course, this year is anything but normal. I’ve never been a fan of the whole holiday shopping frenzy. As food lines extend miles and millions of people remain unemployed, it’s more important than ever to give back this year.
If you have a small but growing business selling on Amazon or even direct-to-consumer (D2C) you’re bound to hit a point where you require money to scale. For as much as the media talks about venture capital, the reality is that less than 1% of startups here in the US are able to raise money from VC’s. The challenge, however, is that consumer brands often have working capital needs associated with carrying inventory or affording increasingly expensive paid media. So where do these types of businesses get the cash to grow? Traditional lenders, such as banks, often have strict covenants in their terms and have not historically catered their products to this cohort, but a growing number of new, innovative solutions are disrupting the model. I should note that pre-revenue/pre-product startups are likely not going to be a candidate for institutional debt – but a convertible note, SAFE or crowdfunding remain a viable alternative at this early stage. As a side note on crowdfunding, the SEC recently increased the cap for fundraising via this channel to $5m (from $1m) which I suspect will open up more activity in this space.
I’ve been reading recently how an increasing number of companies (and startups) are giving their employees off today in order to vote. I applaud this move. It should be a national holiday so everyone has a chance to go out and make a difference. We are very fortunate that we even have a say in our democracy, while around the world this is not always the case.
Nearly 100 million people have already voted either through in person early voting or by mail – this is nearly three-quarters of the number of votes cast in the entire 2016 election. I expect, in the end, we’ll see significantly more voter turnout for this election then we did in 2016 and that’s a good thing.
I voted by mail, but for those who haven’t, I urge you to go out today and exercise your right to vote.
There’s been an interesting dynamic occurring in SaaS businesses over the last 5 years – Fintech solutions have slowly been added to their core software product especially in niche vertical markets such as construction and fitness. An example of this is Shopify, which initially focused their product offering on small businesses. They soon realized that this cohort was in need of more than just tools to build an e-commerce website – they also needed payment processing solutions, financing for working capital and insurance. Ant Financial, which owns the widely successful Alipay in China, is another example of a company that fundamentally is a tech platform that facilitates relationships with legacy banking partners. Because companies don’t want a lot of disparate tech solutions, it was easy for the SaaS businesses to create new revenue streams by offering these additional services. According to VC firm Andreessen Horowitz, by adding fintech, SaaS businesses can increase revenue per customer by 2-5x and open up new SaaS markets that previously may not have been accessible due to a smaller software market or inefficient customer acquisition. In the same way consumer brands have moved horizontally into adjacent categories to (hopefully) increase AOV, SaaS businesses are following the same path.
When I was at Jarden, a large global CPG, we announced a merger with Newell Brands. Over the next 6 months, our headquarters in Atlanta and NY turned into a conference room full of management consultants who were tasked with finding efficiencies between the two large $8b organizations. What they were providing was a high margin, somewhat commoditized service. Large global companies are often inefficient and can afford to pay these rates, but the same can’t be said for startups. There’s definitely a time and place for management consultants, but like other industries, theirs is also being disrupted. This is good news for entrepreneurs who now have alternative tools.
I spent 10 years in corporate America before making the leap to the startup world. I wasn’t actively trying to make the switch but during my last few years in a big company, I was yearning to be involved with something more nascent where I could have a seemingly sizable impact on the outcome. I felt like I was just another number among thousands of employees at a F-500 and was at a point in my life where I felt I could take the risk. It’s worth clarifying as well, “startup” can mean very different things. A company that just raised a few million dollars will be very different from a late stage pre-IPO startup. Most individuals who do make the switch from corporate to startup typically join the company during later stages as its less of a culture shock. I’ve heard from numerous founders that they are leery of bringing in a hire from the corporate world in the early days of the business for fear that they won’t function well in a world that isn’t yet defined and lacks a matrix org structure. To be sure, it’s not for everyone but here are my thoughts on making the change.
We’ve all been there. You’re sitting in a meeting that already has gone over its allotted time and think to yourself, what exactly are the next steps here. It seems everyone is talking in circles, bouncing ideas around, but times up and there’s a lack of clarity on how to move forward. This scenario plays out in most every company large and small, especially matrixed organizations. Compare that with the professional services space, where you’re not as likely to encounter this dynamic as a result of a flat organization. This is one major downside of a matrix model. It’s hard for one individual to truly own an initiative when it touches so many cross functional teams. I recommend startups adopt the DRI approach so each party understands where they stand in the decision making process.
If you have a startup and you’re venture backed, then you ultimately need an exit. Historically, this has been through M&A or by going public. However, with the exception of some SaaS deals, there’s not been a lot of M&A activity recently in the consumer space. Strategic buyers often feel many startups are overvalued and aren’t interested in paying the premiums. The alternative is an IPO and there’s a lot of new innovation to look forward to here. Earlier this year, there was growing support for direct listings among some high profile VC’s, namely Bill Gurley, who felt many startups were leaving “money on the table” by going through a traditional IPO. Slack and Spotify are two examples of companies that have done direct listings. His argument is that in a traditional IPO the bankers engineer the deal to get a pop for their institutional clients and ultimately the company doesn’t get to keep any of the upside. Case in point is Snowflake (SNOW) that went public yesterday via a traditional listing. The stock jumped 111% on the first day and as a result left $3.8b on the table. The downside with doing a direct listing has been the inability to raise capital as has been the case in a traditional IPO. That said, the NYSE has been working with the SEC on a way to do a primary raise concurrently with a direct listing that was recently approved but has since been rescinded as other parties pushed back. More to come here.
Investing in airlines has never made sense. As Warren Buffet once said “if a far-sighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.” Buffet never liked airline stocks, but did see a possible entry point after years of consolidation to make an investment in Delta which he followed through on. That’s now a distant memory as Berkshire recently cashed out their holding following the pandemic. It’s for this reason that you haven’t, and won’t, see startups getting into the airline business; it’s too competitive and capital intensive with meager margins to make the business attractive to growth stage investors. But you are seeing aviation tech on the fringes of the industry attract VC money. Jetblue Technology Ventures, for example, has made numerous investments in the travel sector.