No.19: Scaling Challenges, JP Morgan Acquire Campbell Global, NVIDIA Scuttleblurb write-up, Music Industry Revenue
I was surprised by the dynamism and variety of companies in Berlin when I wasthere recently - for example, Ableton. I’ve been an avid music fan since I was a kid and used Ableton software to record and mix music. I had no idea that they were headquartered in Berlin. The same goes for the Blinkist reading app, and Ecosia – a search engine that invests 80% of its profits into climate protection. I’d like to get around to meeting all these companies someday. So, if any Capital Buddha readers work in Berlin – send me an email, I’d love to catch up and learn more about the business you’re in!
As part of my trip I visited a few friends who worked in early stage businesses. One of the interesting topics that came up was the tension to professionalize to grow – and how some founding teams can hold the company back, rather than being enablers of true potential.
This showed in boring but necessary areas like legal and compliance, where founding teams didn’t pay much attention to getting these things done on time. In addition, some management teams pursued pet projects rather than those most rational to achieve growth.
It’s hard to judge which course of action will ultimately prove correct. After all, I’ve worked for a founder where what I thought were “pet projects” ultimately worked and scaled. And it’s hard to argue that management should be signing legal and compliance papers rather than focusing their best hours of the day on the future of the company.
However, in the end, some level of professionalism is needed to scale – and CEOs must sign boring things like audit papers, even if there is a better use of time.
After these discussions in Berlin, I have even more appreciation for founders who grow with their company - and the teams that grow with them. It’s hard to develop professionalism while retaining the stubbornness, vision, and eccentricity that got the company moving. Having such mental flexibility is truly valuable.
JP Morgan Acquire Campbell Global
As a former timber man, I was very interested in this deal. I understand the ESG angle – it looks good to say that your company manages sustainable assets. From my experience, it can be a very lucrative too - if you strike the right management deal with forest owners (i.e. your clients). The only capital required is working capital to pay salaries, send invoices to the forest owners, and pay for a few desks and computers.
Forest investment managers like Campbell Global have a large roster of institutional investors. They convince the clients to have their check books ready to go, citing great inflation-adjusted return potential on forests over time. Then the forest manager knocks doors around the world, saying to existing forest owners “we can buy this asset off you”. Once Campbell Global purchases the forest, they charge their client a fee per ton of forest product shipped (some have performance fees added on for profit levels too) in exchange for overseeing operations – which results in huge profits to the forest manager. Forest managers are generally comparable to the hedge fund 2/20 fee model, where the incentive becomes to gather as many assets and ship as many tons as possible – stopping only short of over-harvesting so that they preserve the biological value of the forest. But unlike hedge funds, forestry is rather illiquid and the operators are old-school. Therefore I don’t foresee rapid technology changes disrupting the nice fee structure.
AUM matters in this business. The managers who can write big checks generally scoop up the A-grade forests which have attractive, sustainable fee revenue streams. I believe that Campbell Global has a nice foot in the door in terms of AUM and deal pipeline.
Good deal JP Morgan – it’s a great business!
NVIDIA Scuttleblurb write-up
I really liked this NVIDIA write-up from Scuttleblurb (subscription required – but well worth it, in my view). It put the value proposition of GPUs vs. CPUs in layman terms. NVIDIA started making GPUs for the gaming industry - which was small at the time (GPUs lend themselves well to parallel processing tasks which happen to be good for 3D image rendering for games). They then opened GPUs up to be programmed, giving away their CUDA platform for free. This enabled customers to find use cases for GPUs beyond gaming. I personally know a few developers who early in their career were programming GPUs using CUDA. This is a huge advantage for the long-term user adoption of the ecosystem – a bit like how everyone (at least in New Zealand) from school and university had to use Microsoft Office - getting us all hooked early.
Later, it turned out that some users found huge savings and performance gains in data centers by replacing large numbers of CPUs with GPUs. Data centers became a huge end market for the company along with their strong gaming business.
Though I have no opinion of the stock price relative to its value, I can say that NVIDIA is a very strong company with double digit revenue growth tailwinds ahead – and still has the founding CEO who seems to still have a lot of energy left in the tank, and isn’t interested in retaining golf buddies by avoiding tough choices (as explained in my last post).
Chart of the Week: Music Industry Revenue
Inspired by @TSOH_Investing on Twitter - though the chart was a US based one.