Supported by Greenhaven Road Capital, finding value off the beaten path.
The ILTB podcast continues to be one of my favorites. The episode with Savneet Singh is no exception. While the entire interview was good, this post will only focus on Moats and Allocation.
We devoted a post and podcast to Moats and Allocators but to recap; strong moats and wise allocators are important because of alpha erosion. Monkey see monkey do. Strong moats can be built around good brands, high switching costs, and network effects. Intelligent allocators reinvest in the best opportunities, not the easiest ones.
Exponent episode #143 had Ben Thompson and James Allworth discussing Dropbox and they touched on this idea. Dropbox has solid network effects (refer a friend and you’ll each get more storage), great branding (it just works), and high switching costs. That’s why it’s the “Biggest IPO since Snapchat.”
Savneet Singh understands the power of brands. He told Patrick about a Spanish real estate investment. Why did it work? “What I found interesting about Airbnb is, if you think about the power of the brand – I can think of Uber, Lyft, and Juno – but most people don’t know what’s beyond Airbnb.”
Singh is building Tera Holdings, a software “holding company that partners with management to help grow their business over decades.” A Berkshire of software. Besides an early interest in value investors, Singh’s early venture capital investments demonstrated what Michael Mauboussin calls The Sucess Equation.
“The first deal I ever got into was Uber and it was complete luck,” Singh explained, “The single lesson I’ve learned from venture (capital), which makes it so hard as an asset class is it’s not systematic. When I break down the success I’ve had as an angel investor there’s no pattern…I couldn’t create a pattern for it.”
Mauboussin uses a two-jar model to explain the balance of skill and luck. Singh’s experiences articulated Mauboussin’s questions:
- Are cause and effect easily identifiable?
- How steep is the mean reversion?
- How predictable are the effects?
Each of those questions must be answered accurately among the crosswinds of our biases.
Value investing was different. Strong moats and wise allocation was different. The Berkshire of software was different.
Why software? “The Demand for Software is very strong and stable,” Singh said. Software is eating the world, others have said. Singh wrote that Constellation Software is a good example:
“What does a GREAT software business look like? Constellation software is Canadian holding company that only buys niche small software applications. They acquire boring, sticky software businesses and reinvest the cash those businesses generate into the next acquisition. They do NOT get involved in the day to day operations.”
Constellation was founded in in 1995 by Mark Leonard, a modern day Chuck Feeney. The best source on Leonard is this, sadly limited profile:
“As should be obvious by now, Leonard declined this magazine’s request for an interview, but at least he was prompt in declining. ‘Kind of you to offer,’ he replied by e-mail within about half an hour of the request being made, ‘but I discovered when I was in the venture business that interviews aren’t for me. What little I have to say, I generally put in my letters to shareholders. I do occasionally speak with students, but usually in the vain hope that I can distract them from pursuing careers in investment banking and private equity.'”
That vain hope is built on the same ideas Singh is looking for; un-sexy long-term good businesses. This business, Singh explained, “clearly has a moat because your customer lasts for fifty years, you can raise the price every year and no one is going anywhere, you have the ability to reinvest for growth.”
Fifty years seems long. How do you do that?
Talk to people. Paul Graham, Pat Dorsey, and IDEO have all figured out this business secret; talk to the user.
Singh says that he went on a listening tour and, “We quickly discovered it was a much bigger opportunity than we ever imagined…The first thing we started to do was exploratory. We started calling software company after software company.”
Tera looks for mission-critical software, companies like Dropbox, in stable businesses.
“Let me add a little color. Another key attribute we look at is; is the underlying asset that it’s serving going to be around for a long time? We look for companies that service utilities, governments, healthcare. A great example is dental practice software. Dental offices have a 1% failure rate…think of the dentist who installs this software. It does his billing, his payments, his scheduling…if someone comes to him and says ‘I’ll give you a 25% discount on my product,’ there’s almost a zero percent chance that dentist is going to go for that.”
The value proposition for Tera Holdings is in the name, holdings. As Brent Beshore has spoken about, there’s more to selling a business than just money. Business owners are community members, patrons, employers, neighbors, friends.
While technology has made it easier to connect, face to face meetings still signals a lot. “We get on the planes,” Singh said, “We’ve been on seventy flights in six months. We try to meet them in person because that’s how we show our value.”
Tera’s value-add is sales and marketing expertise. For example, Singh explained how they changed the incentives. “We said, ‘Everyday that salesperson makes thirty calls they get a fifty buck bonus. But if you get four in-person demos I’m giving you a thousand dollars.”
Michael Lewis said that his popular NYT profile of Shane Battier resonated because “It’s also a story about how people are not incentivized to help their team because they aren’t being measured properly.” Incentives matter.
Thanks for reading, one caveat. Analogies help us understand broadly but not deeply.