In this podcast, Motley Fool analyst Asit Sharma and host Deidre Woollard discuss:
- If consumer spending will remain strong over the holiday season.
- The impact of the rise of mobile shopping.
- Whether retailers can trust the supply chain.
Founders and investors sit on opposite sides of the table, and they don't always agree. Venture capitalist Jerry Neumann and serial founder Liz Zalman look at both sides in their book, Founder vs Investor: The Honest Truth About Venture Capital from Startup to IPO.
Access a Motley Fool Stock Advisor discount here: www.fool.com/mfmdiscount
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Oct. 9, 2023.
Deidre Woollard: It's only October, but let the holiday shopping begin. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with Asit Sharma. Asit, how are you today?
Asit Sharma: Deidre I'm doing well. Thanks. Enjoying some crisp fall weather where I live. How are you?
Deidre Woollard: Good, the weather has suddenly gotten crisp. It's not Halloween even yet, but the holiday season kicks off this week with Amazon Prime Days. Adobe puts out an annual holiday e-commerce forecast. They're calling for 4.8% growth this season. On our show on Friday, Dylan, Ron and Bill, they talked about consumer spending concerns and the Adobe report talked about the use of buy now pay later services. Should we be worried about consumers getting overextended?
Asit Sharma: Maybe a little bit Deidre I'm not very concerned about this. But there are some things to fret about. Total credit card debt in the US now exceeds a trillion bucks. On the other hands, consumer debts slowed a bit in the last month we have reporting for which is August, it shrunk by 15.6 billion. That's a function of those higher interest rates finally kicking in. Also, consumers getting ready to start making student loan payments again. I'll note that there is still a very tight job market here in the US. We added 336,000 jobs in September. If you read the news, you probably saw it described as like a blockbuster report or a stunning report and it is more than economists were expecting. The job market still remains very tight robust, so people are finding work, they have disposable income, but they're stretched at the same time. As for the idea of buy now, pay later, I think the balance still is in the format of pay and four. So when consumers are buying things online, they're choosing that no interest option which breaks the spend into four payments. As long as that's in place, I think it's OK to see some growth in this category where I start to get a little concerned though is the increasing optionality to take a longer term, buy now, pay later deal which has interest associated with it and may stretch out for a year or more. That's pretty much like credit card debt.
Deidre Woollard: I think there is a big concern there. You mentioned the interest rates keep going up on credit cards. It is something that I worry about, but it's very clear that consumers aren't really ready to cut back. In the study from Adobe, the big headline was, this is going to be the first year that mobile holiday shopping is going to overtake desktop, so I'm wondering, is this a tailwind for PayPal, for Shopify, for other fintech, and are you shopping mobile or are you still using the laptop for your e-commerce?
Asit Sharma: So I have this minimalist app installed on my phone to keep me from wasting too much time on it. I tend to shop on my desktop.
Deidre Woollard: Okay.
Asit Sharma: But I know the trend is going the other way and my take is that, yes, it's going to be a small tailwind. Four companies like PayPal and Shopify, etc. But they've been optimizing for this moment for years and years and years. PayPal itself has inducements to buy directly from merchants if you're on the app, if you're on their desktop experience, you really don't see that offer to go and get a discount at a merchant that's in its partner network. Of course, it has been utilizing Venmo as an avenue to e-commerce with a younger generation straight through mobile phones for some time now. We're going to see a leap this year because if you look at Adobe's report from last year when the season was over, mobile had some 44.5% share of the total spend. So what Adobe is saying this year is like the total pie is going to grow by 5% and mobile is going to be at 51% of total spend. That means it's going to have a jump in excess of 10% and we don't know what the final numbers will be, but I'm guessing mobile show growth in their report of anywhere 10-13%. That is a significant jump. But then again, some of this just trades hands. Some of the commerce that let's say PayPal might have seen on desktop is going to shift to mobile, but it's the same consume so it won't be a major push. We're not going to see earnings reports come out where the stocks are jumping because PayPal suddenly had the surge in mobile payments.
Deidre Woollard: I think the other aspect of it too, is the mobile experience is different. You have fewer options and the retailers have fewer opportunities to prompt you to be interested in other things. So I think for the retailers also, it seems like it's going to be a little bit of a push to figure out how to not just be mobile ready, be mobile fast, but also still be able to push consumers to buy other things.
Asit Sharma: I think so Deidre and one of the solutions that many companies have been examining is the use of generative AI to be able to understand where those offer points could be. Generative AI is pretty good at analysis. So there are some companies that are studying this, you only have so much information as you point out, how do you make that interface ready to entice somebody at the right time, point of sale. Now, we're not going to see a lot of this in this holiday season, but fast forward to a year from now. That might be a technology you see employed more and more to hit Deidre or Asit or anyone listening right at their vulnerable point on their mobile phone.
Deidre Woollard: So the other part of this is that flatter for longer season. So retailers have been destocking the inventories down. That was the big story in 2021-2022. Too much inventory. Now, they're waiting, being more patient. One of the things I'm thinking about is how do the shippers deal with this?
Asit Sharma: Totally, it's been such a hard year for shippers really. We could go back 18 months. The macro picture has been one of like drag and uncertainty and this has been very pronounced for FedEx in particular, which had a great business while conditions were favorable and then saw its volumes decrease and became a company that's optimizing the way it ships. We see this change in narrative, where FedEx and UPS are offering discounts to customers. They used to up price during the holiday season.
Deidre Woollard: Yes.
Asit Sharma: But the industry has become fragmented. There are more third party shippers around with great technology, so smaller and smaller shippers can work with different retailers. Also Amazon is ever-present they have actually the largest logistics network in the world, so they're a competitor and we've got this consumer, which as we've discussed, has money, but it's a little stretched. So to entice that, both companies will try to be competitive this year. But you'll note what they're seeing on the ground, which is less spending, particularly in goods that have to be shipped is contradicting what Adobe is seeing. That this will be a season of 5% growth. I wonder if some of that is the expression of what you were talking about. Just now Deidre that increasingly we see experiences on sale [laughs] that don't have to be shipped. You can buy a travel package during this season. I wonder how much of that is in play here.
Deidre Woollard: Yeah, I don't know. The other thing I'm thinking about too is that we went from having just in time was very important. We had just in time inventory holding, and then we went to just in case, which is having a lot of inventory. Now, it seems like we're getting back to just in time. So it's been this back and forth in terms of how much companies are trying to hold and how much they are now like being well wait and see. We can wait a little bit longer if we don't have to worry about the supply chain. So I think that's what, when I look at companies like Walmart, I feel like that's a little bit of what they're doing, is they feel confident enough about the supply chain. They don't have to put everything in the stores. They know that they can get more fast if they need it.
Asit Sharma: I think retailers and even manufacturers who hold inventory would love the good old days to come back. Where the shipping environment, the supply environment, the commodity environment, all that was very stable so you could just focus on the right amount of inventory to optimize your profit, bring it home to the bottom line. But the fact is, we live in such a volatile world now, even post pandemic, we still see small disruptions into supply chains and just look what happened over the weekend in the Middle East. It is a world with a lot of chaos you can wake up any day and there's an earthquake somewhere, a natural disaster, war. So I don't know if we'll ever return to a scenario where retailers and manufacturers can optimize solely based on profit. There's got to be some thinking of how externals can come into play. It's super interesting for those who nerd out on [laughs] supply chains and ordering patterns.
Deidre Woollard: Absolutely. That is an important point, is that we never know what is going to happen next. So the other side of all of this e-commerce is of course, the returns, which is a big part of the e-commerce thing these days. Uber announced last week they're going to be doing returns with packages. I think this is really interesting because it's not a big part of the business. It's going to be like $5 flat rate. I think it's $3 for Uber one members. Basically, you can just have your packages taken back to UPS, or Postal Service or FedEx. But I'm wondering why is Uber doing this? Because it doesn't seem like a big jump for them. But I'm wondering, is it either A, a step toward the super app or B, is this somehow going to be connected to their Uber freight business, which needs a boost. I'm wondering, what do you think of this move? What are they trying to do here?
Asit Sharma: Well, Deidre, I really like both of those suppositions and I think they're both in play. The first is at $5 price point and I think $3 price point if you are like a premium subscriber to Uber service. This is not going to be a huge or a hugely margin-additive exercise for Uber, but it is one more step to make them more and more part of your life wherever there's a delivery concern. They can certainly give up some margin in order to do that to plunk in one more piece into the super app puzzle. Now, about this freight thing, there is a huge business around the world in reverse logistics because we buy so much stuff online now and we return so much stuff. There's a company that I follow very interested in GXO. This is a company that specializes, among other things, in automating reverse logistics. When you think about the global flow of goods and how much we become dependent on having goods come into the home and then having the ability to send them back. Uber freight, which is a logistics company, it's dealing with shippers, those who need to ship rather than potentially you or me, has a part where it could connect to our doorstep. Maybe this piece is a test case to start playing in that reverse logistics market, which is an expanding market. It's a lucrative market. I hadn't thought of that. But in the notes leading up to the show and you suggest that, I thought, that makes some sense. Maybe this is a test case.
Deidre Woollard: I think that, that's the fascinating thing about studying e-commerce in general, because it's not just the retailers, it's the logistics, it's everything. It is this global movement of goods and services around the globe. I think it's fascinating for me to nerd out on too.
Asit Sharma: Totally. I do want to let's touch base after this holiday season and see what happened with all this conjecturing we're trying to make.
Deidre Woollard: Absolutely. Thanks for your time today Asit.
Asit Sharma: Thank you so much, Deidre.
Deidre Woollard: At Motley Fool Money, we love talking stocks and looking for the next big thing. That's why we bring analysts like Asit Sharma on the show. By day, Asit is also part of a team picking stocks and providing coverage for the Motley Fool suite of premium investing services. If you're looking for investing ideas, we're offering Motley Fool money listeners a discount on our flagship service, Stock Advisor. With Stock Advisor, you get two stock recommendations per month. Access to analysts like Asit Sharma, our members only livestream, Motley Fool Live, and Stock Advisors full scorecard of stocks generating market beating returns. To learn more, head to www.fool.com/mfmdiscount.
Let's start with the dating process a little bit. Jerry, one of the challenges for venture capitalists, you got to kiss a lot of frogs, you know? You got to go out there. Most of your investments don't work out. There's a larger pool of founders you have to meet with. How do you become a better sifter? Everybody wants money, but maybe not everybody should get money.
Jerry Neumann: I think the basics of sifting are pretty well understood. You're looking for companies that can scale for great founders, for a product that customers will actually pay for. Those things are pretty well talked about. I think for me there's a couple of things that are different. One is I'm looking for people who have a bigger mission than making money. Making money is great, everybody wants to make money. That's your baseline. But unless you have a bigger mission, you're not going to build a big company. There's just easier ways to make money than to go in a start up. Then the second thing is I'm looking for people and companies that can go all the way. I'm not looking for a company that will be built and then sold. I'm looking for a company that in some scenario, can eventually go public. The person who's running it can be the person running that company when it goes public. That doesn't always happen. In fact, it rarely happens. But that's what I'm looking for. It's a shoot for the moon land on the roof strategy. Once in a while it works, sometimes it doesn't work. But if you're looking for small exits, you're going to get small exits. Or maybe no exits. If you're looking for a gigantic exit, you'll get some gigantic exits and a few small exits.
Deidre Woollard: That makes sense. For Liz, for you on the other side. The searching for funding becomes an additional full time job. If you're a founder, you're out there presenting, going for meetings, all of that stuff. How are you able to narrow the funnel as you start that process?
Liz Zalman: It's a common mistake that many founders make where they just go out and they're talking to everybody and to your point, it just becomes this morass. I think it behooves the founder to create that funnel from the start. My subject matter, my area of expertise is B2B enterprise software. If I'm going out to raise a Series B, and I have a B2B enterprise software company and specifically an infrastructure security. There are a finite number of firms that make sense to write that check. The first thing that I do is I say, who are those people? I go to Crunch Base and I create the list of VC's. It's probably no more than 50 or 60. Then I figure out who the right partner is to talk to. I rank them based upon who I most want to work with. I typically put sort of the lower tier firms first and the higher-tier firms later. I do a wave of a VC's a week. I'll probably do 10 a week or 15 a week because you want them all to hit and offer you term sheets or partner meetings at the same time. That's how you create the fear of missing out the FOMO. The beautiful thing about putting the folks that you don't necessarily want to work with earlier and the ones that are much sexier later is that by the time you get to their first wave, you've already gone through all of the objections you can possibly get. Your data room is full of the most beautiful graphs that anybody could ever ask for and you are ready to go and you're just crushing every single call. Then I think finally, founders can get into this loop of diligence. One more call, and let me talk to one more customer and I want to get to a no as quickly as possible. If I'm going into four or five calls of the VC, I actually pick up the phone and called the partner. I was like, there's some sticking point somewhere, what is it? Because let's just put it out there and if it's a no, that's OK. You can move on with your life and I can move on with mine. No's are good.
Deidre Woollard: One of the things that I've noticed in the book too is that there is this dance and there seems to be a lack of frankness to some extent. Jerry, what do you see when you're interviewing founders? How do you get past the hype part where you're each trying to present your best face?
Jerry Neumann: There's a joke in venture capital that you go to your first board meeting and find out what you really invested in It's true. I often tell I teach a class in entrepreneurship at Columbia University. I tell the people in my class, don't go out there with your conservative business plan. Don't pitch somebody with what you are sure is going to happen. Go out there and tell them what you want to happen. What the best case is here, don't make things up. But if everything works, here's how well we can do. Because when I look at your business plan, that's what I'm assuming you did. If you show me some this is a conservative estimate. I'm going to be like, this is the best they can possibly do. I think if people are lying to me that that's disqualifying. But if people are telling me what they really want to happen, their aspirations, that's great. That's what I want to hear because I want to know the best this company can do so that both I know that that's the best this company can do, but also B, so that when the founder is running the company, I can go back and say, hey, you said you were going to be $1 billion company. What's the hold up? I want them to tell me what they want. I think it's really important to find people who want to build and run big great companies.
Deidre Woollard: Which is true. But also that's one of the things you talked about in the book, which is the total addressable market thing. Because it's one of the things I notice as an investor, that people have this total addressable market that seems like it's the whole world. Sometimes that can seem a little bit too large. How do you consider that if you're looking for someone to shoot for the moon? Do you want that big total addressable market, even if maybe it's not quite believable?
Asit Sharma: Yes and no. I want to have a big total addressable market, [laughs] but I don't really believe it. Also, I think the problem with markets that are really big and really well known is that you have a lot of competitors. There was a wave a few years ago of delivery companies. People starting delivery companies to deliver food to people in their homes. That was, it's obviously a huge market. It's an enormous market. Everybody could see that it was an enormous market. There were literally hundreds of people trying to enter that market. Even so, one or two might be successful, the chances of me investing in that one or two that are successful is pretty low. I want to find people who are going after a market that may someday be big. They can grow and make big, but it isn't big yet. This is like, it maybe it sounds like a catch 22. But I need people who are going to grow a market, who can figure out a way to then become dominant in the market they have grown. In that case, they have a barrier to entry where delivery companies just don't.
Deidre Woollard: Well, Liz, you had a different take in the book you called out total addressable market as a little bit of a fiction, especially in a fund raising deck. How do you look at it?
Liz Zalman: Well, I think it's funny that Jerry just said, and I don't believe it. It was one of the first. [laughs] Thank you for that kind, sir. I mean, the theory is that if you have a large number and there's one slide, it says Total Adjustable Market. And I always just put a giant number on it. It's 70 billion or 80 billion, or 50 billion. The idea is that if you capture even one percent of that, then you're an IPO-ready company, and you're just making oodles of money. I think that part of the deck, like most parts of the deck, you're storytelling, and what you're trying to do is check a bunch of boxes for investors, for the partner to go back to their partnership and say, hey, I think this company has checked all these boxes and TAM, Total Adjustable Market is one of them. The example that I gave in the book had to do with birthday candles. Everybody in the Wi-Fi I had decided to start a birthday candle company, everybody in the world has a birthday. My total addressable market is how many people in the world now? Thirteen billion, 80 years of life. It's just incredible. In fact, my last company was a database company. When I went to create the total addressable market slide, I was like, wait a second, everybody in the world has a database and so everybody in the world is going to need access management for databases. It was an incredulous number. I didn't understand why we needed it.
Jerry Neumann: But the problem is, I've been doing this twenty-five years, I've looked at hundreds and thousands of companies. I suppose very few of them do what they set out to do. Even of the companies I've invested in, hundred or so companies, maybe two have gone to do what they told me they were going to do initially. I think in both cases, it was probably an accident. If you don't tell the story, then you're not going to say anything. Nobody knows what's going to happen. But I want to see how you think? What your ambitions are, who you think your customers are? If you don't build up a TAM, then I can't know any of these things. If you can't build a TAM like that, then maybe you don't know these things either.
Deidre Woollard: Liz, I want to bring up something that you talked about in the book which is, you know, it's not just getting the money but it's also what you do with it. You've got two examples of successful companies, Okta and Datadog. What is the difference that made those companies successful and get to IPO versus some of the other companies that were raising money at the same time?
Liz Zalman: Yes, in the example that I gave, I think Okta's main competitor at the time was OneLogin. And also in the single sign-on space, and Datadog I think had a few competitors. I picked Logly, and so I think in the cases of both of these companies, they won the market, and they won it for, in my opinion, a few reasons. Because in each of these cases, these companies started out at the very same time. They raised their seed round, at the same time they raised their Series A, and then the paths diverged. In the case of Okta and Datadog, both of them had, I would argue, the top product in the market. They did a very good job of deploying capital quickly. They executed better than the rest of the market. But then the downstream impact was as the funding path diverged and Okta and Datadog went to raise a Series B, a Series C. However far they went because they were raising more money, and they're the best product, and they're deploying capital quickly. They're entrenching by raising the next round, they're entrenching their space. They're cementing their space as the top dog and nobody wants to invest in Number 2. Actually later rounds of funding, from my perspective sucked the wind out of everybody else's tails, and they all became Number two. Number three. Number four and Okta and Datadog they were runaway trains.
Deidre Woollard: That's really interesting because you're absolutely right. You've got that moment where all of a sudden nobody does want to invest in Number Two. Everybody wants to invest in Number one. If you're Number two, it puts you, you don't have the money to get to the position that you'd like to get to. Sounds like.
Liz Zalman: That's exactly right. And even sitting internally at a company and watching my competitor raise a hundred million dollar round. You can see it on everybody's face as folks just get dejected, and they say, no, what's going on? Their bodies get small, like somatic representation of their depression. All of a sudden it's just suddenly come on because of a funding announcement that psychology is real.
Jerry Neumann: It's frustrating from a venture investor point of view because I've had companies that had real products, good products that customers liked. Then some big venture capitalists invests in a competitor who has a worse product. It makes it really hard to compete because customers also see that. They see that this company got a big round from some name, venture capitalist, maybe that's the one we should use. Then the company that didn't do that has a much harder time. Other venture capitalists may shy away from the company that didn't get that big round saying, well their competitor already has a ton of money to compete with them. How are they going to compete? It's frustrating because the people who are investing are often wrong, but it's still a little bit of a self-fulfilling prophecy.
Deidre Woollard: Let's talk quickly about a board of directors. Liz, I know you have some opinions on this. I'd love to find out from you, is there, what's the best thing you got from having a Board of Directors?
Liz Zalman: Well, I could say nothing and that wouldn't be inaccurate. [laughs] Jerry rolls his idea again to be look, I think the challenge with the Board of Directors is that at its core, it is designed to be a governance mechanism. Which means investors sit on it and say, hey, how's the company doing? Founders sit on it and say, hey, how's the company doing? My experience is that in reality that doesn't happen. Because investors are looking for return. Many of them are interested in their ego, and they're the only ones talking in a meeting and arguing against the founder perspective for a moment. Founders and especially founder CEOs care about their job, and they care about retaining control. In both instances, the company is what suffers. My reality has been over my two venture-back companies, and these board meetings have honestly been they've been a waste of time and folks haven't always been interested in the business. On neither of the boards of directors that I've had and there are many storied firms on each of those boards. None of them has ever cared enough to spend five minutes with me to see what the product does. It's just not the type of meeting I want to be in.
Jerry Neumann: Do you want me to repos?
Liz Zalman: Of course I do.
Jerry Neumann: Starting from the last thing first, it's not my job as an investor to tell you what product to build. That's your customer's job. Giving me a demo and showing me what the product does. I mean, I usually know what the product does. I think it's interesting what the product does, but who cares what I think about your product? I'm not a product guy, I'm an investor. I think the problem then becomes if you don't understand what the board meeting is for. If you want to go in there and give product demos to people who are like, look, I really want to know what the metrics, so I can judge how the company is doing, not how good your product is, which I can't judge. Then you're running the board meeting wrong.
And in the end, if your board meeting is useless. It is the founder's job to make the board meeting useful. It is their meeting. They're always, at least in this system, the chairman of the board. They get to decide the agenda. Make the board meeting useful. But keep in mind that it is a governance mechanism that the investors want to know whether or not you should be the person running the company. Keep that in mind. Also, they want to know how their investment is doing because they need to know that. At the end, I often refuse to invest in companies that won't set up a board of directors, even at the earliest stages, because to me it says they just don't want to be accountable.
Deidre Woollard: As always, people on the program may have interests in the stocks they talk about, and the motley fool may have a form of recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Woollard. Thanks for listening. We'll see you tomorrow.
