In today’s Money Morning…hindsight, regret, and inevitability…venture capitalists and unicorn hunting…assessing an idea’s worth like a venture capitalist…imagining the future…and more…
Marvel’s Avengers: Endgame is the second-highest-grossing film ever, only about US$50 million shy of toppling Avatar off the summit.
A further three Marvel films reside in the top 10 of the highest-grossing films of all time. So if you had the chance to lob a bid for the rights to Marvel’s intellectual superhero property, how high would it be?
In 2009, Disney was successful, with a bid of US$4.3 billion.
But what if you could have bought the rights for US$25 million?
Yes, US$25 million.
Sounds ridiculous.
But that’s exactly how much the opportunity was worth once.
In 1998, Sony had the chance to own nearly every Marvel character for a fraction of the price Disney ended up paying years later.
As The Wall Street Journal reported (emphasis added):
‘In 1998, a young Sony Pictures executive named Yair Landau was tasked with securing the theatrical screen rights to Spider-Man. His company had DVD rights to the web slinger but needed the rest in order to make a movie.
‘Marvel Entertainment, then only a famed name in the comic-book world, had just begun trying to make film deals. The company was fresh out of bankruptcy and desperate for cash, so its new chief, Ike Perlmutter, responded with a more audacious offer.
‘Sony, he countered, could have the movie rights to nearly every Marvel character — Iron Man, Thor, Ant-Man, Black Panther and more — for $25 million.
‘Mr. Landau took the offer back to his bosses at Sony, whose response was quick and decisive, he recalled in an interview: “Nobody gives a shit about any of the other Marvel characters. Go back and do a deal for only Spider-Man.”’
Hindsight, regret, and inevitability
Sony’s missed opportunity is a common story of regret.
In 2000, Blockbuster had the chance to buy Netflix for US$50 million.
And — most egregiously — Excite, one of the original internet portals, was approached by Google’s founders, who were willing to sell the then-budding start-up for US$1 million.
Excite turned them down.
Of course, hindsight is very perceptive.
Knowing what we know now, how could Sony and Excite pass on such enormous opportunities?
But hindsight also has the tendency to gloss everything with a sense of inevitability.
Yet was it inevitable in the 1990s that Google would become the tech behemoth of today?
Was it inevitable that Marvel superheroes would come to dominate modern cinema? After all, when Sony was propositioned to acquire rights to a slew of Marvel characters, Marvel was cash-poor, recovering from bankruptcy and, to boot, ‘nobody gave a shit about any of the other [non-Spiderman] Marvel characters.’
Who would’ve taken the chance in that moment?
And that got me thinking…
How do you spot generational opportunities?
If you were offered the chance to buy early-stage Google for US$1 million, would you have the foresight to accept?
Similar questions are mulled over daily by analysts at venture capital firms.
Venture capitalists and unicorn hunting
The investors who’ve made it their mission to hunt down ‘the next big thing’ are often found in venture capital firms.
Places like Sequoia Capital, Andreessen Horowitz, and Tiger Global.
Venture capital isn’t satisfied with outperforming the market by a few percentage points by parking billions in blue chips.
It chases bigger gains by incurring bigger risks in the pursuit of the next groundbreaking business.
As financial historian Sebastian Mallaby wrote in his recent book, Venture Capital and the Art of Disruption (emphasis added):
‘When today’s venture capitalists back flying cars or space tourism or artificial intelligence systems that write film scripts, they are following this power-law logic. Their job is to look over the horizon, to reach for high-risk, huge-reward possibilities that most people believe to be unreachable.
‘“We could cure cancer, dementia, and all the diseases of age and metabolic decay,” Peter Thiel enthuses, dripping with disdain for incrementalism. “We can in- vent faster ways to travel from place to place over the surface of the planet; we can even learn how to escape it entirely and settle new frontiers.”
‘Of course, investing in what is categorically impossible is a waste of resources. But the more common error, the more human one, is to invest too timidly: to back obvious ideas that others can copy and from which, consequently, it will be hard to extract profits.’
I found the last point illuminating.
Venture capital firms do not go gentle into that good night.
They seek out the unheralded, the un-talked about, the new ideas yet to hit the financial press.
They may also have a longer time horizon, which can help in forecasting eventual earnings others may not see due to present low visibility.
As my copy of Paul Samuelson’s long-running Economics textbook noted:
‘To have unusual performance, you must be able to predict increases in the per share earnings of companies before the marketplace in general is aware of them.’
In all this lies risk…and reward.
Assessing an idea’s worth like a venture capitalist
But how do you go about assessing an idea’s worth, originality, and potential?
Famed venture capital firm Sequoia Capital provides one way.
In his book Crowd Storm: The Future of Innovation, Ideas, and Problem Solving, Shaun Abrahamson described a common process at Sequoia to assess ideas:
‘To evaluate ideas, Sequoia asks those who submit their business plans to anticipate a number of questions, including:
- Is the problem well understood?
- Will the solution solve the problem?
- How big is the market (and, thus, how big might the business become, if it succeeds)?
- Why is now the time for this (since business is often too early or too late to address an opportunity)?
‘While some of the best ideas began as scribbles on napkins, evaluating and testing these ideas requires much more work. Most pitches Sequoia receives will fail to meet one or more of the criteria they use to filter ideas.’
Why do most pitches Sequoia hears fail?
‘A working prototype might prove that a company can solve a problem; however, there might still be questions about whether the market is ready for the idea.
‘Or a business might be operating well, but the market might not be large enough to enable a good return.
‘A prospective firm might offer a valuable service, but the cost to sell and market it might make it too expensive to provide value to enough customers.’
The ability to pinpoint a societal problem and assess whether a business can address it in a dominant way can be lucrative.
Harvard Business Review cited research from Play Bigger, a Silicon Valley consultancy, on post-IPO value creation.
As HBR reported (emphasis added):
‘The group scored the companies in its sample on the basis of whether they were trying to create entirely new categories of products or services in order to fill needs that consumers hadn’t realized they had. They looked at whether firms are articulating new problems that can’t be solved by existing solutions and whether they are cultivating large and active developer ecosystems, among other criteria. They found that the vast majority of post-IPO value creation comes from companies they call “category kings,” which are carving out entirely new niches; think of Facebook, LinkedIn, and Tableau. Those niches are largely “winner take all” — the category kings capture 76% of the market.
‘“We hear all the time, Oh, this is going to be a huge market, room for lots of players,” says Lochhead. “But that’s actually not true.”’
In reading about methods applied in venture capital firms, I realised how much weight is placed on long-term thinking…and imagination.
Transformational businesses take many nights to become ‘overnight’ successes.
So one must have a long view and the patience to see it through.
But what partly informs the long view is a capacity for imagination.
Imagining the future
Philippe Laffont runs Coatue Management, a hedge fund and venture capital firm focusing on technology.
Laffont is also known for being a ‘Tiger Cub’, having worked with Julian Robertson’s famed Tiger Management hedge fund.
In 2021, Laffont spoke about how lessons of private market investing can benefit public equity investors.
He mused (emphasis added):
‘Patience, and confidence in the 7-10 year story will drive the stock so much higher than one can process during painful stock fluctuations.
‘Private investing is about imagining the future as there is less data to analyse than as a public company, and that foresight usually compounds the variant perception with time.
‘Conclusion: imagination is the skill. Uncertainty is the opportunity. Data is important but so is the story. Patience is way underrated.’
Part of the reason why imagination is so important is that finding the next ‘category king’ can’t be done via extrapolation from past data alone.
In many cases, the transformational ideas — and businesses — represented a step change, rather than something incremental.
As Mallaby aptly noted in his book on venture capital firms (emphasis added):
‘Extrapolations from past data anticipate the future only when there is not much to anticipate; if tomorrow will be a mere extension of today, why bother with forecasting?
‘The revolutions that will matter — the big disruptions that create wealth for inventors and anxiety for workers, or that scramble the geopolitical balance and alter human relations — cannot be predicted based on extrapolations of past data, precisely because such revolutions are so thoroughly disruptive.’
Imagination is the skill, uncertainty the opportunity.
Regards,
Kiryll Prakapenka,
For Money Morning