My Ethereum Investment Thesis: Fundamentals and Flows

I am invested in Ethereum for similar reasons that I am invested in Amazon Web Services, Microsoft Azure, and Shopify. I want to own the platforms that internet businesses are built on top of. One of the reasons I am attracted to these types of platforms is that customer stickiness is very high. When a company has built their business on Amazon Web Services, switching to a competitor is risky, time consuming, and expensive.

Just as important though, the businesses built on Shopify have a vested interest in making Shopify better and more successful. And this same dynamic is seen with Ethereum. Ethereum is by far the most popular blockchain in the crypto economy, and thus has the most projects and people working to make it successful.

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Burford Capital is By Far the Most Undervalued Company I Know Of

Burford Capital is the largest legal finance company in the world. While Burford is mostly known for funding lawsuits, they provide legal capital in a variety of ways. In the simplest example though, Burford funds a plaintiff’s lawsuit by paying their legal expenses. If the case is lost, Burford loses their entire investment. If the case is won, the plaintiff pays Burford a share of the winnings. I believe there are numerous benefits for plaintiffs to get funding from a company like Burford.

At a high-level, litigation funding can flatten the legal playing field. Lawsuits are expensive. Many legitimate lawsuits are never filed because the potential plaintiff cannot—or does not want to—pay for the legal expenses. Plaintiffs often do not like the traditional hourly billing model that many law firms operate on. But working with a litigation funder allows a plaintiff to exchange having to pay their own legal expenses for a percentage of their winnings if the case is victorious. To date, many plaintiffs have welcomed this trade-off of less downside, less upside, and more flexibility.

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Shopify and its Strong Competitive Advantages Continue to Take Market Share

Shopify is a commerce platform that helps merchants sell across all their sales channels: online, physical retail, social media, and marketplaces such as Amazon and eBay. In 2004, Shopify was founded as an e-commerce platform for new entrepreneurs and small businesses. While that is still a meaningful part of their business, they have moved upmarket via Shopify Plus, which is a higher-end platform that starts at $2,000 per month and manages commerce for brands doing up to around $1 billion in revenue per year.

Tobi Lütke, founder and CEO, has made the comparison that Shopify is like an operating system for retailers. I think this is a good analogy. The platform that runs a merchant’s sales is arguably the most mission-critical system that company has. Like the Windows operating system, once a merchant runs their business on Shopify, they are unlikely to switch to a competitor.

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Spotify’s Moats, Management, and Unit Economics

Spotify has the most global market share of any music streaming service. In 2018, Spotify accounted for roughly 70% of global streaming revenue and 33% of all recorded music industry revenue. Given there are only two other sizable music streaming services, this is a hint that there are large barriers to entry in this industry.

The only three companies with meaningful market share are Spotify, Apple and Amazon: one dedicated streaming service founded in 2006 and two tech giants. Spotify has the benefit of brand name, reputation, network effects, and being synonymous with online music. Apple and Amazon have the benefit of hundreds of millions of users they can cross-sell music to. It would be much more difficult to start a dedicated streaming service today now that Spotify already exists and has scaled globally to over 200 million users.

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How Incentives Can Improve Congress

These are ordinary people responding logically to powerful incentives. There’s nothing else to do.” – Republic, Lost

The above quote is very important to remember. Like all humans, politicians do what they are incentivized to do. Maybe I’m an optimist, but I refuse to believe the popular narrative that a group of 535 public servants doesn’t care about the average American. I bet the vast majority of Congress are decent people who want to make the United States a better place. Unfortunately, the structure of our political system does not incentivize that. I don’t believe America will get a Congress it approves of until the system is changed. Don’t hate the player, hate the game.
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What Makes a Great Business

A great business is like a great money manager. They take money in, invest it, and turn it into more money. In the case of a company, it can invest its money into manufacturing plants, marketing, hiring employees, or a variety of other things. If those investments return more money than they cost, the company’s value increases. If investments return less money than they cost, the value of the company decreases. Thus, building a successful business can be boiled down to investing money at high rates of return.

But there are only so many high return investments that a business can make. Just as finding undervalued investments became more difficult for Warren Buffett as Berkshire Hathaway grew, traditional businesses can only invest their capital at high rates for so long.
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Zooplus vs Amazon in Battle for the European Pet Supply Market

Zooplus is the largest e-commerce pet supply company in Europe. If you happen to be familiar with in the US, Zooplus is the European equivalent.

Like Chewy, Zooplus has built up significant market share compared to both Amazon and the traditional bricks and mortar pet supply stores. The total pet supply market in Europe is still very fragmented with over 50% of pet supplies being purchased in grocery stores. Including bricks and mortar, Fressnapf is the largest pet supply company, but Zooplus is #2 and should surpass them within a couple years.

If we zero in on e-commerce, the pet supply market is much more concentrated. In 2018, Zooplus had 52% of online market share, followed by Amazon at an estimated 17%, and then the traditional pet supply companies behind them—Fressnapf and Pets at Home. Not surprisingly, e-commerce as a percent of total pet supply sales has increased every year, and I expect this to continue for many years. I don’t see any reason that online can’t make up 40%+ of pet supply sales in the future. E-commerce going from 10% industry penetration to over 40% is a major tailwind for Zooplus.
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Why Public Companies Should Put More Effort into Investor Relations

A private company that has long-term investors who add value is going to have an advantage over a competitor with less knowledgeable investors who pester them about hitting short-term numbers. I doubt anyone is going to disagree with that. I’ve met plenty of small entrepreneurs who list their investors as either a huge advantage or one of their biggest sources of frustration (sometimes, both). A public company may have far more investors, but it’s the same dynamic.

I believe investor relations can be a legitimate advantage for a public company. Unfortunately, very few CEOs put in the effort. Most public companies file a 10-K that was written by a team of lawyers, don’t write an annual letter, don’t post anything helpful on their investor relations site, and their conference calls are the bare minimum quarterly updates followed by vague answers to analyst questions.
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Interactive Brokers Maintains Its Strong Moat, But KPIs Worsen

Interactive Brokers is an automated electronic broker-dealer. Because they automate virtually everything they do, their cost structure is lower than their competitors. This results in Interactive Brokers having the lowest prices and highest margins in the brokerage industry. They also have fewer conflicts of interest than their competitors. All orders are sent directly to the exchanges or internally matched between clients. They don’t sell orders—like the retail brokers—and they don’t trade against their own clients—like the big banks.

Interactive Brokers is more akin to a tech firm than a traditional retail broker such as Schwab or TD Ameritrade. Interactive Brokers was founded by a programmer, Thomas Peterffy, and the man overtaking him as CEO, Malin Galik, has been a software engineer at Interactive Brokers for 28 years. Peterffy has said before that around 50% of all employees are programmers.
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Will Zillow Homes Build a Durable Competitive Advantage in the iBuyer Market?

In 2014, Opendoor started buying and selling homes online. While many other companies have since entered this growing industry, Opendoor remains the leader in what has become known as the iBuyer market. For an extra ~$6,000 (on a $300,000 house), a homeowner can be out of their house in a week or two and avoid the normal selling process—listings, showings, dealing with a realtor, negotiating prices, and months of uncertainty.

In April 2018, Zillow entered the iBuyer market. On their Q4 conference call two weeks ago, they made it clear that their new segment, Zillow Homes, will be the main focus of theirs going forward. Not very often does an $8 billion-dollar company that dominates its niche (real estate traffic online) announce a strategic shift as big as this—especially when the new business is going to be low margin, capital intensive, and cyclical.
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