Building better businesses
First Principles Reasoning Series
Fellow Partners,
We learn through experiment.
At the start of this year based on your feedback I committed to publish shorter updates on a more frequent basis.
A weekly cadence seemed reasonable, and while you have heard from me more regularly this year, this forced cadence has proven to be at odds with my insistence on publishing only what I deem worth your valuable time.
Adapting a popular quote: in some months nothing happens, and in some weeks months happen. I seem to have learned what Howard Marks has been proving for decades: write constantly; publish when ready.
Going forward you can expect to hear from me as often as needed. Sometimes this will be multiple times in a week. Other times it will be monthly. As always you can expect me to be available to speak at any point.
On to the update.
Building businesses
Good investment analysis helps companies raise the world’s standard of living. Enterprises work best when they have access to capital priced to reflect the value they can create. Index funds, by the way, do not price capital; they only mimic the actions of those who do.
Abdiel Capital
The actions of this partnership help build businesses. This point is often missed.
The capital markets we participate in are: (1) the aggregation of capital, (2) provided by allocators, (3) to businesses.
The actions of our partnership and other market participants create the prices at which businesses can access capital to serve their customers, invest in their businesses, and pay their employees.
Our partnership is centered on buying fractional shares of wonderful businesses. Over the long run these businesses flourish by meeting the needs of those they serve. To do so they require capital, and when we provide it at prices that approximate the value those businesses can create the collective output of the businesses themselves and the market as a whole improves.
Our desire for good returns incentivizes us to allocate our capital towards businesses that can create more value than is recognized by the market and away from businesses that can create less value than is recognized by the market.
Building better businesses
Quality is a phenomenal strategy.
Walt Disney
This is a happy reality. The means through which we seek to grow our capital over the long run also help shape the world we want to live in.
Putting this into practice requires thoughtful, patient, and humble action. Where would Amazon and its 1.3 million employees be if all investors abandoned them after their shares dropped 90% in the early 2000’s? Why did Enron flourish in accounting fraud for so long?
Wise capital allocation matters.
It is unsurprising that this partnership focuses on allocating capital to wonderful businesses, as over the long run businesses that create more value for their stakeholders than they consume will flourish in many ways — including financially.
Jeff Bezos’ recent shareholder letter (an excellent 22-minute read) illustrates this well. In 2020 Amazon:
Produced $21 billion in net income (value to shareholders)
Paid $91 billion in competitive wages and benefits to 1.3 million employees, including 500,000 new employees hired throughout the year (value to employees)
Provided a marketplace for 1.9 million small and medium businesses to sell their wares, which produced an estimated $25 billion in profits for these businesses (value to business customers)
Decreased software development costs by about 30% and increased software development speed through their AWS platform (value to business customers)
Saved 200 million Prime members an estimated 75 hours in shopping time (value to retail customers)
The point is not that Amazon is a wonderful business (though I believe the world is better for it), but rather that effective capital allocation is a necessary ingredient to enable businesses to reach the full potential of the value they can create — and the results over decades can be enormous.
Capital allocated well improves the average quality of the world’s businesses which raises the standard of living for the people those businesses serve. Capital allocated poorly lowers the average quality of the world’s businesses and reduces the standard of living for the people those businesses serve.
Closing thoughts
Index funds have created an enormous amount of value for their investors — especially for those that would otherwise treat capital markets like casinos — but they do not price capital for businesses. They simply follow the market participants (like us) that do.
Wisely priced capital is a key ingredient to effective business building, and when done well our world is better for it.
All the best,
John
Founder and Managing Partner