Monday, June 6, 2016

Investing in Death

Companies die all the time. Until recently, it’s been a quiet process. One recent example is the grocery chain A&P, originally known as the Great Atlantic and Pacific Tea Company.  Growing up in the 1960s in NJ, my family frequented A&P as our everyday grocery store. Back in the day, A&P was “Walmart before Walmart.” In 1930, it had 16,000 stores around the country and, at $2.9 billion in revenue, was the largest grocery retailer in the country. Decades later, high costs, sub-scale stores and lagging innovation led the company down a long, slow path of decline. When it filed for bankruptcy protection in 2015 and closed the last of its supermarkets, no one heard a pin drop.

The quite deaths of companies like A&P have so long gone unnoticed that investment advisors effectively urge you to ignore the phenomenon of death itself. The conventional narrative goes like this. In the “circle of life,” the inevitable process of “creative destruction” clearly favors investing in “disruptive innovators” as they take their rightful place at the top of the league tables. The best way for an investor to manage the gloomy reality of corporate demographics is to focus on growth and dividends via long positions, ignore (for the purposes of investing at least) the inevitability of death (or senescence) and cross your fingers that some portion of the long portfolio will hit it big. Like the quarterback in a street football game who has never heard of the West Coast offense, the favored route is always the deep pass: “you go long.”

“Going long” is the default strategy of any investor looking for returns above the T-bill rate. Even if some of those long positions don’t pan out, the thinking goes, the winning positions, especially returns from the big winners, should outweigh the losers in the long run. Jeff Bezos makes the standard argument for long investing this way: “Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time.” Sitting in Bezos’ shoes, that’s an easy thing to say. After all, he counts himself among one of a handful of entrepreneurs who lived that dream, faring much better than even that 100 times payoff.

Still, making bets on just that 10% leaves a lot of money on the table, not to mention the higher risk of premature death in the high flying segment.  And further, what about the other 90%? While some might generate a modest return, many of those long positions will generate flat or negative returns for a long time. More to the point, for both investment types, why should investors accept long positions as the only option? Why not make returns on the downside as well?

Why not invest in death?

How would you do it? First, you need to abandon the almost universal default in portfolio management to long positions (whether via individually held securities or managed and index funds) and recognize the massive and largely untapped opportunity to build portfolios that include short positions in parallel. Investors routinely seek portfolio diversification, so why not seek to diversify one of the most basic forms of risk, the long form?

Such portfolio strategies would make sense even if short opportunities were a niche asset class, but what if they’re not? For a long time, there’s been an implicit assumption that the “circle of life” for companies is some kind of biological constant. But what if death investing opportunity is growing? As it turns out, the ratio of company deaths to births has been rising rapidly as a number of imbalances in the global economy are creating a fundamental shift in the circle of life for companies.

These shifts include:

General investment forces
  • Low interest rates globally. Zero and negative interest rate policies are forcing investors out of fixed income investments with long equity investment as the dominant alternative, forcing individual company valuations ever higher in aggregate.
  • Peak equity market values. With equity markets rising to historic peaks, peaks reached in only a handful or previous bubbles, there is little room for widespread new sources of alpha within those positions. Even the most promising investment candidates are fully priced.

Technology investment forces
  • Renewed boom in venture capital. As part of the general move to equity, the search for that “100 times payoff” has sparked a new boom in the venture capital cycle, with equity oriented investors looking to push money into technology investments that historically have offered the best odds of that kind of return.
  • Rushing start-ups to market. With money flooding into startups, strange things are happening to their governance.  Technology companies--which need to strike a delicate balance between the need to grow quickly and the need to avoid chaos--are facing increasing pressure do stupid things. This race for return has an inevitable consequence in the venture board room: more demands for pre-emptive strategic behavior, a well-known recipe for disaster in emerging companies.
  • More binary outcomes, especially on the downside. Part of the argument for pre-emptive strategies comes from a reasonable place. Many technology industries increasingly face a winner take all dynamic. For the winners in such races, the binary nature of the competition raises the reward. At the same time, there is another side to the “winner takes all” coin:  “loser loses all.” As competition becomes more binary, the likelihood of death rises along with it.
  • Less organic growth. The dynamics in emerging technology companies spill over into larger players. Large companies, which manage high-speed dynamics poorly, are simply choosing not to compete in the traditional way and aren’t investing less in the R&D required for organic growth. Instead, in a search for sure things, they acquire fledgling businesses, effectively buying the most promising R&D projects. For venture investors, strategic acquisition by large players in lieu of organic growth investments offers an exit path for capital that simply transfers the death risk inside the larger organization.
  • The rise of the unicorn. As venture capital has flooded into the market and startups have been pushed too quickly to scale, the world of startup valuations has seen its own microbubble: the unicorn. By definition, a unicorn is a pre-IPO venture-backed company with a theoretical value that exceeds a billion dollars. In an older world, one in which the discipline of public markets was part of the rite of passage for successful startups, such lofty valuations were vanishingly rare. Yet in just the last two years, over a hundred unicorns have been spawned.

Financing industry forces
  • Jumping ahead of the queue. Instead of watching all the fun from the end of the funnel, powerful equity investors, long restricted to public market investments, have been finding ways to move upstream in the investment process. In the last couple of years, we have seen a sharp rise of late stage venture rounds, with mutual fund titans like Fidelity and Wellington jumping the queue ahead of the IPO stage and becoming new entrants into the venture investing game. 
  • Limited short-side opportunities. Despite the obvious presence of technology overvaluation, most investors continue fill their portfolios with long positions, in large part because they have few practical alternatives. It’s one thing to be right when “everyone knows it’s a bubble,” it’s quite another thing to miss the party and far easier to go along for the ride as long as you have confidence, however, misplaced, to call the peak. This is especially tempting when the alternative is so hard to execute. Short investing involves substantial trading complexity, a willingness to say negative things about public companies and has produced relatively few viable managers. So even those who want to invest in death have relatively few good options.

If the quiet death of A&P exemplifies the old pattern, consider a more recent example of a company we believe is dying: GoPro, the wearable camera company. Founded in 2002, GoPro went public in 2014 at a valuation of $3 billion, quickly saw its stock price triple. But as sales growth slowed, profit margins have tanked and the stock has collapsed, now trading at over 85% off its peak value in a strong market. GoPro represent the leading edge of the unicorn phenomenon; post-IPO, it has also been one of the first to falter.

But even as individual companies lose their luster, the broader bubble remains in place. The powerful appeal underlying the unicorn hype is well stated, again by Jeff Bezos: “In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it's important to be bold. Big winners pay for so many experiments.”

Perhaps. But if even a normal market produces far more big losers than winners, why not place short bets alongside the long ones? And if market forces are creating an abundance of microbubbles that are increasingly ready to burst, why not find a way to invest in their negative inevitability? Take the short side as much as, if not more than, the long side. Get away from the bubble economy and the unicorns.

Invest in death.
Read More

Monday, December 7, 2015

The Lords of Strategy Have No Clothes

There’s a dirty little secret inside the premium strategy consultancies. They don’t do strategy. At least, not anymore.

What is it that they do instead? They sell--over and over--the same project plans that large corporate clients like to buy in volume. Across dozens of offices, years of experience, and millions of highly-educated man-and-woman-hours, they’ve accumulated a treasure trove of project designs, complete with tested managerial hooks, client friendly value-propositions, and confidence-inspiring project plans: all of these in pitch decks generously populated with detailed task lists, abundant supplies of sample infographics and disciplined-looking Gantt charts. Cumulatively, this trove of PowerPoint files generates billions of dollars of revenue for these firms every year.

This is the core competitive advantage of firms like McKinsey, The Boston Consulting Group and Bain and Company: their proprietary repositories of intellectual property, trade secrets that capitalize the labor of thousands of Harvard MBAs and allow special ops teams of selling partners to appear as if they’ve solved a number of knotty problems many times before. These repositories (we called ours KM at BCG) empower, as one example, a partner in Hamburg to sell a million dollar project based on the three year old experience of a partner in Dallas she’s never met.

It wasn’t always this way. Back when the early strategy firms opened up the market for premium advisory services, partner groups took a far more restrictive view of knowledge sharing. At BCG, client presentations were rigorously destroyed, all except for a single copy retained in the aptly named “inviolate file.” New consultants were instructed never to dare to even breathe a client name to family members. Client relationships with a firm like Bain and Company were even offered exclusively within an industry. Their clients viewed the fact that they had engaged the consultancy as a competitive advantage, one that shouldn’t be disclosed lest it betray the bold strategic thrusts that were under development.

Finding deep strategic insights based on original, quantitative analysis was the work of the strategy consultant. Once upon a time.

But as years passed and as the firms grew, repeating the heroic quest for insight became exhausting for the premium strategy firms (one business journalist famously labeled them The Lords of Strategy). Magical insights were tough to schedule onto a project timeline. Larger consulting staffs lost the requisite mentorship to recognize insights as they served an apprenticeship in the craft of strategy. Most importantly, consulting partners learned something important about their own business. Insight was far less profitable than copying the tried and true.

Moving away from the real practice of strategy was a good business decision for these firms. But for all kinds of reasons—the pitch to fresh-faced new recruits, maintaining the price premium, brand consistency—the premium segment firms continue to dress themselves up in the mythical finery of “strategy.”

Truth be told, it’s not true. The Lords of Strategy have no clothes.

Does anyone really care? Perhaps not. But to the extent there is demand for insight based strategy work, however small it might be, there are other options. If your business is part of this demand, one of those options might be XLP.

At XLP, we strive for something different in our advisory work. First of all, we don’t seek strategy work in large volumes. We don’t aspire to being all-singing, all-dancing jacks of all trades. We don’t need to feed a voracious billability machine with an endless supply of moderately difficult tasks. Most of all, we’re not looking to build our teams’ nest eggs with consulting profits. We have no intention of competing with McKinsey, Bain or BCG.

Instead, we do advisory work to keep ourselves sharp. We price our engagements (true quests for insight) at a discount to the premium consultancy billing rate. We place the burden for partner wealth generation on the capital-based legs of our business. Our incubation and investment legs look to derive value from our advisory work based on the quality of the analytics and the original nature of the insights we often (but not predictably) can uncover. As a consequence, our partners only seek a selective profile for our advisory clients rather than trying to profit from a global sharing network. And unlike the global consultancies, we happily offer within-industry exclusivity; we don’t want to leak our (or our clients') experience to competitors like a sieve. This puts pressure on us to distill non-obvious solutions from our analysis. We welcome it.

We realize that many, perhaps most, clients will be in the market more for reliable deliverables than for unexpected insights. But what about the small set of clients who are looking for real strategists and who believe our cutting-edge, quantitative approach provides novel insights for their business? Well, you might not want anyone to know you’re working with us, because the strategic insights we develop together just might become a part of your competitive advantage.
Read More

Wednesday, December 2, 2015

XLP Publishes Report On Venture Deal Sourcing

XLP Strategy Research Group announces today the release of a research report addressed to venture capital fund managers, fund administrators, managing directors, family offices, and institutional investors. The report describes the dynamic and changing nature in which tech venture funds must stay competitive for proprietary deal flow. The report draws heavily on case and project experience gained by working with several large, high profile tech companies and institutional investors within the past few years, as well as first-hand experience within XLP’s in-house venture fund, the Lambda Prime incubator.

While traditional deal flow channels involved walking the halls of trade shows, networking with other investors, and chairing or observing venture pitch contests, an increasing percentage of deal flow does not originate through these channels at all. Instead, they are “pre-pitch” or “proprietary channeled” throughout their life cycle, meaning traditional venture capital managing directors see deals too late in their fund raising process and are not able to gain competitive positions on cap tables. This 25 page report addresses this changing deal flow channel and describes several cutting edge methods for advancing venture and high tech deal flow.

Selected analyses from the research include:

  • Overview of big data sources and databases in venture capital across the value chain from seed and angel to late stage
  • A prioritized, downloadable list of all major databases and platforms most frequently utilized for deal flow, including a side-by-side comparison of each platform
  • Top 10 list of novel data sources not known to be widely utilized by venture capitalists for generating deal sources
  • Strategies for efficiently resourcing and automating deal flow generation across fund sizes and lead frequency needs
  • Reviews and ranking of deal flow platforms and software systems for organizing and managing the deal flow pipeline
  • Case studies of competitive advantage and lead times offered by novel data channels in generating new tech investment leads vs. traditional channel navigational methods

Included with the report are access to web and data scrapers for harvesting, collecting, and structuring these proprietary datasets in Excel spreadsheet formats. A complimentary copy of the proprietary tool Metascrape (retail licensing in excess of $2,000 / seat or over $10,000 / year for site licensing) is included with each report. XLP Strategy Group research analysts are available for interview and further discussion.

Request More Information

Due to the competitive nature of XLP Strategy Research, distribution will be limited. Please contact XLP Strategy at info at for more information and pricing.
Read More

Thursday, November 19, 2015

XLP Publishes Web Scraping and Data Aggregation Technology Report

XLP Strategy Research Group announces the release of a technology report, entitled “The Data Scraping Marketplace.” The report describes the rapidly growing marketplace for software known as “data scrapers” aka "web scrapers" which are capable of taking unstructured data from websites and converting it into structured data output for further analysis. Nearly unknown to the current business strategists and managers, data scraping has grown from an obscure back office tool or software developer method to the forefront of desk traders, market analysts, and competitive intelligence and strategy professionals. The report follows recent revelations that many of the world’s largest hedge fund managers have developed sophisticated tools for web scraping and the automated aggregation of data previously undisclosed.

The 30 page report provides a detailed description of the leading technologies in the market for “scraping” tools, as well as the technologies now used and deployed for “anti-scraping” (and associated techniques to prevent the harvesting of data from web sites). The report is written for Fortune 500 executives and strategists to understand the practical implications and opportunities for the automated collection and structuring of web based data for use in investment decision making, M&A diligence processes, and competitive intelligence. For professionals, the research report also includes a detailed terminology appendix providing the many technical names that “web scraping” is called internationally, including "data munging", "web harvesting", "data aggregation", "automated aggregation", etc.

Selected analyses from the research include:

  • Overview of major software and web technology trends that enabled the creation of sophisticated data scraping platforms
  • A prioritized list of all major commercially available and open source software packages, tools, and platforms providing data scraping capability (e.g. Connotate and
  • A feature comparison of the most popular scrapers, including an assessment of which are best suited for various common data types and datasets
  • A technical and architectural analysis of common data scraping methods, including related technologies required to defeat anti-scraping technology
  • Prioritization of some of the most valuable business data sets utilized by XLP Strategy Group for its competitive intelligence and research services
  • Ranked and sorted patents and patent claims pertaining to data scraping, including the most commonly cited, potentially infringed, and directly relevant
  • A series of opinions and interview notes from technical engineers identifying which patents are most likely infringed by certain data scraping software products
  • Price list of common scrapers, and an estimation of which features in scraper platforms are most commonly priced as “premium”
  • A list of the most frequently mentioned clients in financial services, tech, software, and consumer goods who purchase data scraping software
  • Reviews and ranking of features and technologies for the top 5 anti-scraping and web data protection companies on the market
  • A landscape of scraping technology investors, venture capitalists and capital market players acquiring scraping companies
  • A review of the leading data scraping trade shows and big data conferences in which technologies are often featured and announced
  • Wallstreet equity analysts covering companies that offer data scraping services, including the companies they cover, their sentiments on publicly traded companies
  • A review and assessment of all known (over 200) strategic partnerships struck between corporations and data scraping providers
  • Overview of the leading publications, and authors frequently carrying articles and reviews on data scraping methods, tools, and applications

Included in the report are 30 page analyst report, all accompanying raw data in Excel spreadsheets, and interview notes with industry professionals and investors. XLP Strategy Group research analysts are available for interview and further discussion.

Request More Information

Due to the competitive nature of XLP Strategy Research, distribution will be limited. Please contact XLP Strategy at info at for more information and pricing.
Read More

Sunday, November 1, 2015

XLP Publishes 2015-2016 Bitcoin and Blockchain Technology Report

XLP Strategy’s Research Group is pleased to announce the release of the first annual cryptocurrency and blockchain technology report, entitled “Bitcoin and Blockchain Technology Landscape.” The report reflects increased interest in the state of software, hardware, and algorithmic technologies driving tools, open source software, and technology companies. The report follows increased coverage of blockchain technology in financial services, fintech professional communities, and in emerging venture capital funds.

The 50 page report provides and in-depth review of all technologies involved with delivering blockchain functionality. The report is geared at executives of leading financial service institutions and investors hoping to capitalize on emerging fintech opportunities. XLP Strategy utilized its cutting edge “big data” analytical methods and visualization tools to reverse engineer the bitcoin source code, prioritizing and ranking the sub-technologies required to implement and translate the blockchain algorithm to other generalized commodities and securities. Special attention is paid to applying blockchain toderivatives markets, oil & gas, commodities, and dark pool trading consolidation opportunities.

The report attempts to “de-jargon” an already complex field and translate the technical language of bitcoin and other cryptocurrencies (including Ripple and Litecoin) into financial service language used by executives, IT professionals, and traders of today’s leading firms. Consequently, the report is designed for an executive audience.

Selected analyses from the research include:
  • A ranked list of all prioritized conversations, debates, and opinion leaders on the bitcoin wiki
  • Architectural analysis of the blockchain algorithm, including proximate technologies required to implement a new chain
  • Extraction of the ~30 key files and functions in the leading cryptocurrency source codes required to port to a new commodity
  • Overview and summary of the relative patenting levels in the cryptocurrency technology area, as well as adjacent technologies
  • Prioritization of the leading blockchain patent holders, non-obvious technology holders with rights and potential infringement claims on blockchain implementations
  • List of leading granted patents and applications covering transactions, blockchain-enabled exchanges, security and ewallet technologies
  • Market size of all leading cryptocurrencies, including analysis of buying power, liquidity, units, market cap, and differentiating technology features
  • Table and visualization of venture capital investment into the cryptocurrency market
  • Prioritization and ranking of leading venture investments, venture funds, entrepreneurs, and acquisition candidates
  • Overview of next-gen technologies that will support blockchain implementations by leading financial service institutions
  • A survey of the ~10 emerging business models, including a list and review of potential business opportunities and strategic scenarios for leading financial service institutions

Included in this report are a 50 analyst report, all accompanying Excel spreadsheets with original data, and scheduled interviews with XLP Strategy research analysts.

Request More Information

Due to the competitive nature of XLP Strategy research, distribution will be limited. Please contact XLP Strategy at info at for more information and pricing.
Read More