- The Caffeine Capitalist
- Batch brew #5
Batch brew #5
Millennials going on vacation, Apple kicking a** & our take on Klarna getting hit!
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. After our summer break, we are back in full strength! ☀️
Estimated read time: 10 minutes and 57 seconds
If ya only have a minute, the TL;DR actionable insights:
📉 Rise and fall of the largest European unicorn and the big move of Apple into finance sector. You surely heard about the epic valuation crash of Klarna, but what is more interesting behind the scenes? Read four of our takes on this.
🏡 Its holiday season, let us have a look at holiday vacation rentals. We see an opportunity in the Tiny Home industry. This is mainly driven by Millennials entering the travel market with their specific behaviours and expectations. They look for remote places where they can work & relax, with the ability to turn it into a long-stay.
🔗 Building syndicates? Scroll down to our Twitter threads section & bookmark a nice playbook with experiences of building syndicates written by Johnnie Ryu.
Before we kick-off, special thanks to 42 new subscribers since last issue 🙏🏻
Department of Venture Capital
You surely didn't miss this one. Klarna, once the biggest unicorn in Europe dropped from it's valuation of $45.6 billion to $6.7 billion, down around 85%.
The buy-now-pay-later (BNPL) giant is another example of drastically decreasing valuations in both the public and private markets. As closely described in our second issue of Caffeine Capitalist, the revenue multiples in fintech dropped severely from around 25x (October 2021) to under 5x (May 2022), around 80% decline. 🤯
Klarna's BNPL competitor, publicly traded company Affirm also experienced around 80% decline of it's stock price, from it's peak valuation in November 2021 (AFRM.O).
Klarna raised $639 milion in June 2021 led by SoftBank's Vision Fund. This June, they raised $800 milion with Sequoia and Silver Lake on board among other investors and founders were also participating as investors in this round. There were media rumours that Klarna had struggled to attract new funds, with its valuation steadily decreasing as it engaged with investors.
Accoring to the CEO Sebastian Siemiatkowski in May this year, Klarna's focus shifted from growth to short-term profitability. They also slashed 10% of it's workforce.
This is all in line of the current market sentiment:
Get to profitability as quickly as possible as no one knows how long this downturn will last. You want to be around when all is over and wait for the next IPO window of opportunity.
Growth is great but Cash is King. Positive cashflow is the KING-KONG.
Finance your path towards profitability even when that means a downround or a valuation reset. Klarna's position is also weakened by global recession and worsening consumer balance sheets.
From our perspective there are four interesting stories behind Klarna to look at. 📜
1. Another fiasco of SoftBank
Klarna is another example of an investment miss of SoftBank besides WeWork and Greensil Bank. SoftBank is driving valuations exceedingly high to get into deals and in these, cases also writing down most of its investments after the valuation crash. What is also interesting is that SoftBank did not participate in the latest 6.7 bilion valuation round - this could give them a dollar cost averaging opportunity.
WeWork was a scarier example - slashing the valuation from 47 bilion to 2.9 bilion. On 31 March SoftBank reported only 0.8 bilion investment gains out of it's 56 bilion fund. The current investment returns are likely to be wiped out given the Klarna's write-down. (Read the investor briefing presentation of Softbank for Q1 2022 here).
SoftBank is for sure not the only predatory investment fund getting into most interesting deals by pushing valuations and ticket sizes exceedingly high.
Tiger Global is also an investment fund with predatory valuations and ticket sizes to get into deals. But their approach is different. Tiger Global tries to index the late-stage private companies. Investing across hundreds of companies and diversifying it's risk. Until now, they invested into more than 1000 companies, mostly active between 2020 and 2022. They are for sure feeling the valuation crash as well but the diversification play is very important. You can find an interesting follow-on read about Tiger Global on The Generalist. 👈
2. Sequoia playing it right
Sequoia was backing Klarna as early as of 2010 and led it's funding round of 1.4 billion valuation in 2014 and of 3.5 billion valuation in 2019. They did not participate in the 45.6 billion round in 2021 but did participate in this one currently being the largest shareholder. Looking from the hindsight - "common sense investment approach".
3. Apple weighting into the buy-now-pay-later game
What is the most interesting story is Apple here. In June Apple announced its biggest move into finance by offering loans directly to consumers for its new buy now, pay later product. Apple integrates it's buy-now-pay-later service directly via Apple Pay.
This is huge. Given the user base of Apple Pay this is a real blow to other BNPL players as Klarna or Affirm on the market. Just imagine how much work Klarna or Affirm has and how much do they need to invest to sell and integrate it's solutions to ecommerce stores or to onboard users directly.
Apple is on top of the value chain "owning" the customer via Apple Pay.
Another example how a tech giant platform decides to move into a new sector and completely turns it upside down.
And this is not the only fintech play of Apple 🍏
4. Downrounds from founder's perspective
Usually within the standard venture capital investment documentation, founders are getting diluted in the event of a downround (when the valuation of current investment round is lower than of the last one).
What does it mean?
Founders are compensating the investment loss done by the downround to the previous investor. This investment clause is called anti-dilution. If the previous investor invested 10 milion at 100 million post-money valuation (10% equity), his 10 milion investment is worth only 5 million when the valuation of the next funding round crashed from 100 to 50 million. Founders are then giving up their equity to compensate the loss of the previous investor. There are several mechanisms in what extend this could be done. In Klarna's case surely not only SoftBank felt the valuation loss but also founders, who got diluted by the anti-dilution clause in the investment docs. Pretty much like drinking your coffee cold and trying to feel good about it ☕.
Department of Boring Businesses
In the past issues we looked at unsexy industries such as Property Management, Sauna Chains or Performance Marketing. We thought let's mix things up a little & see whether the hot trend of Tiny Homes as Vacation Rentals can be considered a boring business.
Let's set the mood:
Yup, vacation rentals is a big market, in 2021 almost $75 Billion big, but one would expect that. One would also expect a modest long term growth of about 5-6% CAGR, but on the inside, there are drivers shaking up & changing the industry.
Most of the trends below are driven by different consumer behaviour of the 200 million strong global tourist segment of "Millennials" , spending around $180 billion yearly on travel (roughly $900 per person per year). So, what do Millennials want?
"Go rural for an escape" - Millennials run away from the busy urban areas into quiet rural & mountainous areas where they have privacy & the possibility to "switch off". AirBnB data claims 400% increase in rural travel in Europe.
"Bleasure = Business + Leisure" - Return to offices is slow, digital workplace is remote & available pretty much anywhere where there is good internet & batch brew, of course. 81% of travellers state they would continue to work remotely in the post-pandemic times. Think of it as digital nomad lifestyle for the masses.
"Long-stays in private accommodation" - take both of the trends above & you end up with the strong growth of "long-stays". Double the amount of millennials prefer to stay in villas/estates/cottages compared to Gen X & Boomers. They value privacy, being in the nature while having good connection with their professional world.
Based on the initial data we came up with a 2 hypotheses:
Remote Tiny Home - Ark Shelter
Let's say you found yourself a plot to build something like this. Once you dig deeper into the options, you discover that based on local regulations you will have the decision on whether to build a Micro Cottage vs. Tiny/Tree House vs. Regular Apartment/House. Hostfully is a property management platform and they team has a nice take on this topic:
Once you nailed this dilemma, the remaining questions on the table are: The Business Model, Operations & Financing. The options are multiple, you could build & operate or just casually invest into a unit built within a bigger project. Based on the business model choice, your operations & financing options will present themselves. Our prediction is that managed vacation rentals, in great locations within larger projects will prevail. This is mainly due to the fact that not all operators are able to create solid digital & analogue experiences, thus the better operators will grow their market share. We could even imagine that Millennial focused accommodation chains will appear in the market.
Boring Business Checkbox summary:
Simple? This is relative, operations excellence & amazing experience is required. Questionable ❓. Regional? Yup, very regional allowing you to built a local MOAT. Check ✅. What about Longstanding cashflow? Same as with "simple", if you can ensure operational excellence & good customer experience then yes, otherwise questionable. Questionable ❓. Are they Stuck? Not in the traditional sense, but considering the new trends stemming from the expectations of millennials, one could consider that a traditional industry will need to make adaptation. Therefore a check ✅.
The Caffeine Capitalist collective awards this opportunity blend a solid 2 out of 4. Consider your unfair advantages & experience which might turn it into a 4 out of 4.
How to play this opportunity?
Buy a property & run it yourself on AirBnB.
Buy a new property on a managed site & split the income with operator.
Become an operator & manage multiple units which you do not own.
Develop a whole site, sell units & build a management company. Most operationally heavy, but also potentially the most rewarding.
Dept. of Twitter Thread Research:
1/ Johnnie Ryu shared his notes on leading syndicates, we recommend bookmarking it & you can thank us later once you closed your first syndicate:
I've finished compiling pretty much everything I've learned about syndicating in the past year 🏎
I honestly haven't come across anything this complete and nuanced, so I hope it helps a lot of you out.
s/o to @AngelList for support in running spvs!
— johnnieryu.eth (✨,✨) (@johnnieryu)
Jun 30, 2022
2/ We are sure you know The Generalist, well, now they launched the Generalist Capital. Refreshing take on VC, worth reading.
I am so excited to introduce Generalist Capital.
It's been a long-time coming!
We're a $12.25M fund designed to help a small number of epic startups maximize the power of storytelling.
Here's what you need to know 👇🗻
— Mario Gabriele (🦊, 💭) (@mariogabriele)
Jul 10, 2022
3/ Yes it's summer, why not include some more vacation rental stuff. This is not a thread, but check you the comment section where you can find interesting takes on Andrew's question & bunch of new people to follow.
I want to deep dive:
What is the best breakdown on how to build a high end AirBnB rental business?
— Andrew Wilkinson (@awilkinson)
Jul 3, 2022
Dept. of Visual Research:
Some in US suggest that the current VC cooldown has brought us back to 2019 levels in terms of SaaS valuations. We suggest printing this & sticking it on the wall 👇
Since we're back to 2019 valuations, may as well bring back the #SaaS Funding Napkin via @chrija of @PointNineCap#vc
— Jacob Shea (@JacobShea)
Jul 8, 2022
News & where to shake hands:
Just last week, Slavo got accepted to take part in the Venture House residency in LA, which will happen later this year & is organised by The Launch House. If you are in LA or just interested in the program, feel free to reach out!
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Enjoy your coffee fresh, allocate capital, repeat! See you in 2 weeks 👋
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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.