In terms of macro markets broader market indices hit all-time highs this week after Iran escalation fears were assuaged. They closed slightly down from Thursday’s level given the “disappointing” jobs number but not enough to derail a +0.9% week for the S&P and 1.8% week for the NASDAQ. The pain trade continues to feel higher in equities as most sell side strategists are calling for a +/- 5% year while they all hedge themselves into the election. The data supports another up year, if last year is any indication; in years in which the S&P was +20% the next year has averaged a double-digit return (11.2%) with 83% of observed periods (18 observations) exhibiting positive performance. Growth has outperformed value significantly over the past couple of years and in early ’20 that hasn’t shown any signs of reversing. When we think about what will outperform this year, Bloomberg published an article highlighting that ~40% of public stocks quoted in the US have negative tangible book value up from ~15% 20 years ago. They highlight that a “negative-value” fund composed of the shares of companies with negative tangible book value, would have beaten the Russell 3000 Index, by 24% over the last 20 years. That outperformance has almost all happened since the financial crisis.
Trevor Noren at BCA Research also published some interesting notes about global equity valuation pointing to the fact that US stocks are substantially more expensive than global peers across all metrics. US outperformance over the past decade has been pretty staggering but given the macro economic backdrop in Europe we’d expect it to continue for the foreseeable future at least amongst the developed world.
Venture Capitalists came back to work this week with ~$4.0bn invested globally of which $342mn went into FinTech with AvidXchange raising $130mn and HighRadius raising $125mn. AvidExchange is the 20+ year old startup which is the largest B2B payment network in the US serving 5,500 customers & 400,000 suppliers. As more and more companies focus on B2B payments Avid has a unique value prop for companies in the banking, construction, and real estate industry. HighRadius Series B raise was led by ICONIQ Capital valuing it at >$1.0bn creating the first FinTech unicorn of the decade. HighRadius is a SaaS provider for for integrated receivables, such as credit, cash application, EIPP, collections, deductions, and payments. HighRadius has shown strong product market fit in the early days with more than 400 customers including firms such as WMT, NKE, and PG. They claim to process more than $1.0 trillion (with a T) transactions per year. This partly plays towards Matt Harris’ trend of FinTech as “The Fourth Platform” where financial functions such as payments, receivables, lending, insurance, etc… are ubiquity layers of the stack.
Notably BTC was +10.5% on the week rallying initially with Gold & Oil on Iran escalation fears but decoupling as the trade unwound (more below).
We saw the first unicorn of the decade as ClassPass raised a $285mn Series E funding round led by L Catterton & Apax. While “wellness” has quickly become meme-able in SF as everyone is focused on the latest diet, sleep metrics, meditation, intermittent fasting, etc.… we think the trend is here to stay. As we look at the 8 dimensions of wellness (emotional, spiritual, intellectual, physical, environmental, financial, occupational, social) we’re starting to see venture backed companies find product market fit across each vertical. As we think about a request for startups we’re focused on more iteration around physical, financial, occupational, and social wellness. Financial wellness is clearly a focal point for us, and we think as more work is done around autonomous finance, self-driving money, and the incorporation of behavioral finance tendencies we’ll see companies more seamlessly integrate into the daily routine of customers as opposed to version 1 of the PFM tools which require a lot of hand-holding.
FT Partners published a 200 slide overview on the rise of challenger banks that would serve as a great introduction to anyone in the industry. They highlight a number of compelling macro tailwinds perhaps most notably the divergence between mobile penetration vs. unbanked in emerging markets. This places to the trend we spoke about in our decade ahead predictions regarding Emerging Market FinTech. There’s 350.0mn unbanked adults in Sub-Saharan Africa (2/3 of the population) and nearly 1/2 global population through 2050 is projected to come from Africa. Despite this unbanked metric there’s 80% mobile penetration which is a significant opportunity for startups.
Carta published an interesting post about the secondary market for private stock in 2019 likely surpassed the ~$30.0bn of secondary liquidity in 2018 as they saw $5.0bn in tender offers alone. This is driven by the convergence of trends we’ve alluded to in the past including companies staying private later & later, the continuation of “mega rounds,” and hybrid primary / secondary raises. While we’ve seen platforms like EquityZen, Forge, SharesPost, and Zanbato look to offer private company liquidity we think over the next couple of years you’ll see a true maturation of that market away from the structured products / bulletin board formats, to a more institutional caliber exchange venue. This will enhance price discovery and valuation of private company round as one investor investing 50% of a 20% round solely want determine the “value” of the company.
In sports we wanted to highlight a tweet from Rob Petrozzo the Co-Founder of Rally. Mastering the art of storytelling Rob lays out an 18-tweet thread talking about how the ’88 Jordan II’s changed everything and saved Nike as a precursor to the mini-IPO of the game-worn Jordan’s from 3/10/88 that will be going up on the platform in late January. We continue to believe in the “financialization of everything” and think the market for non-accredited investors to access alternatives is a significant white space opportunity. Rally is the early leader in this space having conducted 50+ mini-IPO’s through Reg A+ offerings last year starting with rare cars, but moving into sports memorabilia, collectible literature, wine, whiskey, and bags. The story of how Nike was initially Jordan’s third choice behind Converse & Adidas, Phil Knight’s perseverance, Tinker Hatfield’s inquisition of Jordan from a first principles standpoint, and the direct line from this to the influencer community today is well worth the read.
In a continuation of the “financialization of everything” Spencer Dinwiddie has announced he’s looking to raise up to $13.5mn by issuing 90 3-year notes that are expected to pay a 4.95% interest. This will be a private placement limited to accredited investors with a minimum investment size of $150,000. Spencer is creating Professional Athlete Investment Tokens (PAInts) for the instrument to be “tokenized.” It’s unfortunate that the NBA became antagonistic in conversations with Dinwiddie going as far to hire Debevoise & Plimpton claiming his initial construct constituted “gambling” while threatening to void his contract. The player-option would have made this a significantly more interesting instrument with a hybrid equity-like payout structure, however it wasn’t meant to be. Dinwiddie is trying to incorporate a fan loyalty angle here offering up to 8 investors the chance to join him at the All-Star game if he’s selected to the team. Given shortened NBA contracts, and a constant focus on free agency, younger NBA fans continue to gravitate towards players as opposed to teams. Over time we’d expect to see the financialization of fandom being associated with player performance either directly or in a wagering market.
As it pertains to deals, Town Sports International (TSI) the Parent Company of New York Sports Club has entered into an agreement to acquire FlyWheel in what can only be described as a messy structure. Kennedy Lewis International Management (KLIM), Flywheel’s current owner has agreed to provide a second-lien loan for $50mn. Of that total $25.0mn will be funded by KLIM in cash, and another $25.0mn will be conversion of a seller’s note. In a market where ~70% of sovereign credit is negatively yielding the fact that they needed seller financing tells you all you need to know about TSI’s financial predicament. TSI is expected to provide its 600,000+ members access to Flywheel’s boutique facilities through packaged membership options, which we expect to see more of. While we’ve seen an explosion of boutique fitness in NY / CA and a bit in Chicago, and the South East many of these firms have failed to stay on strong financial footing sans franchising (e.g., SoulCycle ditched IPO and subsequent sale to Equinox).
BTC finished the week +10.5% which was its best performance in months. It initially rallied with gold and oil on Soleimani assassination headlines as displayed below by Travis Kling from Ikigai. This is notable because despite the crypto communities best wishes it’s rare to see BTC act like a macro asset; yet it did. Part of the pitch to date has been the lack of correlation with traditional portfolios which inherently de-risks a portfolio, but price action in shortened time periods such as this suggests the beginning of the institutionalization of the asset class.
Top Articles / Videos / Podcasts
Below is a compilation of links for articles / videos / podcasts we referenced above or found interesting during the week that we thought were worth sharing:
· Capitalists Without Capital Are Ruling Capitalism- Bloomberg
· Goldman is doing its best Blackstone impression- Business Insider
· Nobody Feels Overpaid- Michael Batnick
· The Art of (Not) Selling- Akre Capital
· All the FinTech- Charley Ma (Plaid)
· The Rise of Challenger Banks- FT Partners
· What to Work On- Fred Wilson
· FTSI announces the acquisition of Flywheel Sports- Press Release
· Topgolf IPO Could Value Company at $4.0bn- Bloomberg
· 2020: What a Time to Be Alive- Collaborative Fund
· Apple Airpods: iPhone accessory or the next big thing?- Kevin Rooke