Batch brew #1

GM, this is The Caffeine Capitalist. We tell you what opportunities are brewing in Central Europe, what is hot & what's not in VC & Boring business spaces.

Estimated read time: 7 minutes and 49 seconds

Here’s what we got for ya today:

• ❓ Metaverse bottlenecks and virtual worlds

• 💸 Property management companies, the ultimate boring business.

• 👀 Market transparency & why is it important when buying anything from tokens to small businesses.

Before we kick-off, special thanks to over 200 new subscribers from last week 🙏🏻

Department of Venture Capital

Metaverse, metaverse, metaverse - a word you hear daily even in a taxi cab nowadays (remember the crypto peak in 2017?). Even though we hear about it everyday, what is metaverse actually, where is it?

This definition comes from the original tweet of Shaan Puri here. If you are traveling for your weekend retreat today, the podcast might be a nice addition to your ride!

More and more social interaction switches to digital channels and virtual worlds. But what is the biggest bottleneck for a real metaverse adoption nowadays?

1. Customer experience and ramp-up (interfaces, VR/AR goggles and glasses) for a deeper digital and VR/AR experience

2. Fast and cheap 3D asset creation to create either vast newly rendered virtual worlds or digital twins of the existing ones.

At ZAKA in Q1, we closed our seed investment in Alpha AR, an amazing 3D creation AI company from Estonia 🇪🇪. ArcticStartup wrote a detailed article about the investment here.

What was our conviction at ZAKA to invest?

Alpha AR is creating 3D assets cheap and fast from few 2D photos using its proprietary neural network. Customers can upload a product photo of let's say a sneaker, the AI creates a 3D representation of the 2D photo and a 3D artist adds final touches to create a photorealistic 3D sneaker model. Faster, cheaper, scalable and mostly used for ecommerce use cases now.

The demand for 3D model creation is huge but cheap and fast production of realistic 3D assets is the real bottleneck. When solved, we will see a real surge in adoption of metaverses. Do we really want to move around a low-quality rendered virtual worlds with funny little low-res facebook avatars or rather to move around in near photorealistic virtual worlds?

Speaking about metaverse projects. Yuga Labs, the creator of famous Bored Apes Yacht Club NFTs raised a 450mil. USD investment at 4bil. USD valuation from 36 investors led by a16z. This announcement came weeks after Yuga Labs acquisition of Crypto Punks and Meebit from Larva Labs, an ambitious move to consolidate the NFT space and move into metaverse with their own ApeCoin and Otherside virtual land project.

Curious about pitch deck of Yuga Labs? It leaked. You can find it here.

This week, Yuga Labs minted and sold first 55ths. land plot NFTs in their metaverse world Otherside and raised 320mil. USD from it with additional 300mil. USD of secondary sales on Opensea. This was the largest NFT mint in history. Compared to their pitch deck, they raised nearly two times more what was anticipated but not without problems. The demand was so high that Ethereum gas (transaction) fees increased to 4ths. USD for virtual land NFTs valued at around 5800 USD (305 ApeCoins), with more than 200mil. USD worth of ETH gas feed lost due to failed transactions.

Is there any utility in owning virtual land NFTs? Why buy it and what are the use cases?

1. Gaming - your virtual land might have a use in a play-to-earn game. For instance land in Axie Infinity provides extra tokens, resources and ingredients for the owner.

2. Advertising - owners can charge for advertising space if he owns virtual land in a popular area on the map.

3. Socialisation - hosting events and conferences on your virtual land.

Future use cases are yet unclear but if you are interested about virtual worlds, check at least these few projects - Otherside, The Sandbox, Decentraland, TCG World, NFT Worlds.

Department of Boring Businesses

Everyone likes the sound of "boring businesses" & everyone follows up right away with a question asking to explain the concept. If you want the short version, look at this picture:

If you want the longer version with an example, read on 👇

They are not sexy, but they make money. Among other things, they give you an array of levers that you can pull to digitise them, improve them operationally or expand them organically or via micro M&A. For us, we consider boring each company that ticks these four characteristics:

Simple = this is a business that is simple but needed, not flashy, not sexy, steadily operating for years.

Regional = there is no winner takes all in the field, these companies are fixed to a region a usually compete with similar companies in terms of size.

Longstanding Cashflow = generating positive earnings over long term, having a steady growth both in revenue & profit. No big exits and IPOs here, but solid and steady cash cow 🐮.

Stuck = they are stuck using legacy software, digitalisation has not reached them yet, unwilling to change things.

Let us take another sip and apply this framework to an example. Out of our opportunity hat full of ideas, I decided to pull Residential Facility/Property Management Companies. Those of you who live in apartment blocks each have an experience, at least once a year, with these companies. So, is it a boring business? 🥱

Simple? This is the company, that takes care of your apartment building's heating, cleaning, gardening, repairs & other maintenance for about 5-10 EUR per month per flat. Then once a year gives an account statement and thanks you for using their services. Operations focused business, but simple. Check ✅. Regional? Quick research says that only in Slovakia we have over 900 of these companies, pretty regional I have to say. Check ✅. What about Longstanding cashflow? Almost all of them are generating steady growth both in revenue and profit. Majority is chucking out about 20-30% EBITDA margins. Check ✅. Are they Stuck? Majority are running legacy software, excel in better cases, largely unwilling to upgrade their operations. Check ✅.

How is this opportunity size-wise? Take a pick, anything from 100k to few 100k a year in revenue. In the next issue I want to explore how to actually buy such a company, how to calculate the valuation & what levers to pull once you are a shareholder.

How to play this opportunity?

• If you want to play it the VC way, there has been some buzz recently with these three companies: Resitech (SK based), Sousede (CZ based) or Spoločné bývanie (SK based). Get your funds ready and be on a lookout for new investment rounds.

• If you want to play the boring way, then you can start by asking your own residential facility/property manager and lookup their company financial using this or this other tool. If you want to map the market, there is a public list of Slovak residential facility/property management companies here, thank us later.

• Other ways to play this opportunity would be to invest in some of the legacy facility/property management softwares, which there are plenty of in the CE area.

Dept. of Twitter Thread Research:

Do you think about investment opportunities in terms of how transparent the whole market is? If so, then it's worth catching up with this 11/11 thread from Regan Bozman. Contrary to the sale of tokens, boring businesses are the definition of in-transparent, cloudy markets. Meaning, that with few caffeine shots and good negotiations you can get to around 2-4x EBITDA multiples (more on this in the next issue).

Dept. of Visual Research:

Issue #1 of The Caffeine Capitalist summed up in a scribble, not much more to add 👇

News from our portfolios & where to shake hands:

• At ZAKA in Q1, we closed our investment in Alpha AR, an amazing generative AI company from Estonia 🇪🇪. ArcticStartup wrote a nice article about the investment here, CzechCrunch here.

• Staying with Estonia, you can meet Andrej @ Latitude59 in Tallinn (16-20. May), or Slavo @ Podim in Slovenia (16-18. May).

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Enjoy your coffee fresh, allocate capital, repeat! See you in few weeks 👋

What do you think of this issue?

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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.