How to Burn $75m: A Venture Capital Masterclass
A big (maybe the biggest?) part of investing and having other people managing your capital via active management is their ability to complete effective due diligence, both via a reproducible, uniform process to assess investments, and a capable manager who has some talent in picking up things that cannot be deduced on a spreadsheet. The reproducible process part has been empowered with the use of tech today (Excel to Bloomberg to quant models), but the "meat" part of the equation is much harder to judge.
Over time, the quant wars have reduced the edge of mathematical and financial models and people have become wary of the manager part too - the industry has had many individuals who depicted themselves as clever managers but were simply good marketers.
These factors have led to the spread of passive management - why pay for active management when the index removes the quant part of the equation and picking managers is hard.
Funding the Delivery Startups
I'll use Milkrun as the most obvious example, this is a 2-part issue.
Firstly, from an underwriting perspective. Milkrun very publicly scored $75m of funding largely from Tiger, but also Airtree, Skip Capital and Grok Ventures (among others?). What legends. If you can raise $75m for a start up, well done. I have absolutely no problem with this and is an amazing outcome.
Venture investing is really about managers who have vision and can allocate capital to the next big thing. In my view, there is not much quantitative reasoning in start-ups other than the ability to understand margins (this is important, keep this in mind). However more importantly, it is about assessing founders who have an edge and can bring their experience to create a novel market solution in their industry.
As a reference, Tiger Global who provided a chunk of funding here have attempted to apply a quantitative model to the "meat" part of investing by outsourcing it to Bain. I question the conflicts as a result and the ability to make effective decision making if you are outsourcing your due diligence. Red flags in my view but I'm happy to be corrected.
I don't think Aussie VC firms have any excuse either, if you have money invested with them and they deployed to any of these kinds of investments, you need to sit them down and really drill into the why here because I'm going to move onto the second part of the Milkrun issue - margins and business model.
The current industry – Coles and Woolworths
I'm going to make the following comment based on absolutely no further research and simply the model I have in my head about delivery and consumer staple margins.
Australian consumer staple businesses (Woolworths, Coles) operate on lets call it 2% margins for the purpose of this discussion. To even begin to compete with the giants without scale is insane; you don't get the benefit of volume discount on goods in the first place which kills your margin already.
Woolies and Coles use 2 different models for online sales, both have their benefits and drawbacks.
- Store as a distribution centre (WOW) –
- Woolies will distribute right out of the store, can meet demand very quickly and use existing infrastructure.
- But their store employees literally need to walk through the store to fulfil orders and this is not a scalable solution and has high variable costs.
- Separate distribution facility (COL) –
- Coles on the other hand built large distribution centres to fulfil orders, a very scalable solution as distribution centres are roboticized and can meet demand changes rapidly.
- But this is capex heavy and there is a lag to meet demand immediately. The lag is a killer because market share is so important to the big 2.
As a side note, I'm not 100% sure but I think Woolies are going hard at it and are going to try and automate fulfilment at each store. I think this is the first time in a long time where the 2 retail giants deviate in strategy.
Milkrun
Milkrun surely was flawed right? Building "dark stores" that you can't actually shop at, are manually fulfilled and I question whether they had the ability to scale at all. Further, you are competing in a market of convenience where Uber is the incumbent since 2021 (they partnered with Woolworths back then) to utilise the scale of the existing Uber delivery business for fast delivery.
Did anyone wonder why Woolworths or Coles do not do this in the first place? Fast delivery is a premium product in a world of consumer staples where each cent matters for the bottom line.
I repeat again, consumer staple logistics are a cost centre for Woolworths and Coles.
Further, we are no longer forced to stay at home and can literally go to the shops. Building & monetising a cost centre without any novel solution and founded by someone who doesn't have domain expertise (appreciate lots of staff were guns though).
Back to the VCs
I appreciate that the above is likely error ridden and out of date but this doesn't pass my sniff test at all. If my very basic knowledge of consumer staple logistics can pull this apart, what the hell was everyone else doing??
So, bringing it back to the earlier observation on active management. There is no passive index in VC land so once again, finding a capable manager who has some talent in picking up things that cannot be deduced on a spreadsheet matters more here than anywhere else.
(Although Milkrun should have been picked up on a spreadsheet in the first place!)
Please note that I am not trashing Milkrun here - we should be encouraging people to have a go and frankly if you can raise capital (let along $75m) to have a crack at something novel, then good on ya. I lament the loss of jobs from these companies shutting down I do hope everyone does okay.