Post Corona: From Crisis to Opportunity

by Scott Galloway

The charismatic founder speaks in a characteristic dialect: yogababble. That’s our term for abstract or spiritual-sounding language in IPO’s S-1s, a company’s formal disclosure before going public.

Yogababble basically translates to “We are fascinating people,” rather than “This is a solid company that makes sense for the following reasons.”

Stock return 1 day post IPO: –11%. Granted, after being mostly even for the first 6 months since its IPO, Peloton has shot up during the pandemic as people move to working out from home.

In any event, it’s possible the market will continue to overvalue recent IPOs, but to me many of these companies have valuations that don’t make sense.

One of the key factors in a company’s success isn’t the company itself but the incompetence of the incumbents.

Casper went public in February 2020, squeezing out the door at a valuation below their most recent funding as a private company, $1.1 billion—and fell 30% in the first week of trading—where it sits as I write this in August 2020.

Private investors—traditional venture capitalists, but also institutional investors whose appetite for risk has increased with their assets under management—are signing up for more and larger financing rounds, and using the public markets as an exit, instead of as a financing event.

Abundant capital permits a heft of financing rounds previously only available in the public markets, and a robust secondary market provides liquidity to shareholders. A major reason we are seeing so many unicorns is companies stay private longer. This has the benefit of reduced overhead and regulatory compliance costs, as well as less scrutiny. The company captures more of the upside for its private-market backers.

Another change has been the increased potential for another form of high-return exit—acquisition by one of the me...

Now, just as the private capital markets can match the public markets, big acquirers can as well.

The pandemic may birth the best-performing IPO class in several years, as the market’s valuations are based on a firm’s perceived performance 10 years ahead. The same is true of the downside: as firms that are struggling are issued a do-not-resuscitate order from the markets and are valued at their (remaining) cash flows.

Sectors that have raised prices faster than inflation, without an equivalent increase in innovation, are the sectors where disruption is more likely.

The T Algorithm, which I developed in The Four, and have refined since, defines some of these key qualities. The T stands for “trillion”—these are the traits that give a company a chance at a trillion-dollar valuation. The eight elements of the T Algorithm are as follows: Appealing to human instinct Accelerant Balancing growth and margins Rundle Vertical integration Benjamin Button products Visionary storytelling Likability

Accelerant. A firm that serves as an incredible springboard for a person’s career.

Only some exceptional firms, like the Four, are able to combine high growth with high margins.

Rundle. A bundle of goods and/or services that justifies recurring revenue.

Vertical integration. A firm’s ability to control the end-to-end customer experience by controlling as much of the value chain as possible. Companies that control distribution reap huge benefits.

Benjamin Button products. Products or services that age in reverse (get more, rather than less, valuable to users over time) due to network effects.

Visionary storytelling. The ability to articulate or demonstrate progress against a bold vision for the company to shareholders and stakeholders.

Likability. The ability of a company’s leaders to insulate the firm from government and media scrutiny, strike favorable partnerships, and attract top talent.

The pandemic’s immediate impact on Airbnb was a significant decline in revenue, but its asset-light model means the disruptor’s costs can be variabilized, since unlike hotel firms, they have no interest on mortgages, upkeep costs, or expensive employee benefits costs. In sum, Airbnb can roll with the punches, while peer hotels just get punched.

Airbnb is expected to file to go public before the end of 2020, and we believe it will likely be one of the most valuable firms in travel/hospitality on the offering.

The Fulops, a husband-and-wife team, had secured orders online before the cotton was purchased. This is the definition of good marketing and business strategy—finding products for your consumers vs. finding consumers for your products (piling stuff high in a store and hoping people buy).

The cruise industry was the fastest-growing segment in the leisure travel market, with demand increasing 62% between 2005 and 2015.

Rookie marketers think people want choice. Consumers don’t want more choice, but more confidence in the choices presented. Choice is a tax on time and attention. Customers want someone else to do the research and curate the options for them.

Lemonade. A quintessential 2020 disruptor.

And Lemonade has a rundle, a recurring revenue relationship with customers, who pay monthly premiums. Its likability is strong—the CEO has deftly incorporated a social mission that refunds unused reserves for claims to a charity of the customer’s choosing.

In June I said that Lemonade’s IPO would be a “monster,” and it was the best performing IPO (to date) of 2020, repricing up just before it issued, and still increasing 140% in the first two days of trading.7

Netflix has made equally staggering investments over the last decade. The streaming video firms accomplished something only Amazon has managed in recent years: first they achieved a near-zero cost of capital through exceptional storytelling, then they maintained that superpower while shifting from a growth story to a margin story. This is hard. It’s relatively easy to get super-low-cost capital when you’re growing like a weed. The challenge is when the growth peaks and capital markets begin looking at the bottom of the income statement.

Netflix has used that capital not just to build out its streaming infrastructure (which is impressive enough), but to recast what “value” means in entertainment: For every dollar per month, the consumer receives a billion dollars’ worth of content. A $10 movie ticket to a $100-million movie gets you a mere $10 million per dollar, and you can only access it for two hours. Netflix gives you a 100 times the value with on-demand access in a theater that has captured more capital investment and innovation than any chain of multiplexes: your living room.

Netflix has busted free from the narcissistic U.S. belief that the world wants to keep seeing American actors. No, they want American scale and cheap capital with regionalized talent.

One Medical is a disruptor and has many of the features that signal potential for extraordinary returns. Some of the weapons of mass entrenchment in healthcare (like HIPAA compliance) have been somewhat eroded due to the urgent need to streamline healthcare delivery.

The aspects of healthcare that stands to recognize the greatest benefits of Covid-inspired innovation are those where change has been resisted through inertia. Innovative service delivery is one such area. One Medical offers healthcare through the channels the industry has resisted—specifically, the handheld phone. The technology removes friction, costs, stigma, and increases privacy.

Peloton. This rally will outlive the coronavirus. The $1 billion revenue firm defines the T Algorithm:

YOY growth of 69%. Recurring revenue is at the heart of its business model, and there’s nothing like a $2,000 bike to make a $39 monthly fee seem reasonable. Benjamin Button (network) effects are at work—the more customers, the greater the benefits from the (rabid) community.

Peloton is approaching 1 million connected subscribers, with a Netflix/Prime-like 93% retention rate,8 better margins than Apple, and vertical control over its offering. Because it can leverage its instructors across so many more customers, Peloton is a career accelerant for its instructors, whom it poaches from the likes of SoulCycle and Equinox, offering triple the compensation, equity, and a platform that offers exposure to thousands online.

Investing Apps: Public and Robinhood. Financial services is an industry ripe for disruption, and the pandemic has boosted personal stock trading activity as many people have more time on their ha...

Robinhood is the big name here, and when it introduced commission-free trading, established players were forced to respond and abolish commissions. This likely prompted the merger of industry leaders Charles Schwab and TD Ameritrade. Robinhood also added fractional share trading, letting its ...

Gamification is an exploitation algorithm, as is the enragement algorithm that controls the Facebook newsfeed.

communication among users in public forums and private chats. At sufficient scale, a network of connected users becomes an asset, and one that—at a certain scale—competitors will struggle to match.

Shopify is the most impressive tech company of the last decade, and perhaps the most courageous.

Unlike Amazon, however, Shopify’s CEO could honestly tell Congress it doesn’t use the data it collects from third-party retailers to inform its own competitive product sales.

Shopify disrupts Amazon by offering customers the service and value of Amazon without the data and branding exploitation.

Spotify still has all the makings of a potential trillion-dollar firm. They have recurring revenue and a Benjamin Button product—it ages in reverse and appreciates, rather than depreciates, with time and increased use.

The gangster move? Netflix and Spotify merge and acquire Sonos for vertical integration. The two mob families of subscription media consolidate to control video and music.

“I’ve always thought of Tesla as a story stock. It’s the story that drives the price, not the news, and not the fundamentals. . . . If you’re trading Tesla based on expected earnings or cash flow, you’re trading it for the wrong reasons. People trade Tesla based on mood and momentum.”

Tesla is benefiting from the fact that Covid-19 has had a disproportionately negative effect on older, capital-intensive companies. In a sense, the virus has handicapped Tesla’s competition.

Twitter commanded the space it occupies, it would be a $100-billion-dollar company (vs. $30 billion). The microblogging platform has become an iconic brand and the global heartbeat for our information age. The only firms with the reach and influence of Twitter (Tencent, Facebook, and Google) register 17, 24, and 39 times the market capitalization, respectively.

Twitter is stubbornly clinging to an advertising business, but it doesn’t have the scale or the tools to compete with Facebook and Google. As a result it has all the problems of being in the free/red/Android camp, without the scale advantages.

Twitter needs to go iOS—charge for value vs. exploit for data. It needs to move to a subscription model, as I described in chapter 1. Free for accounts under 2,000 followers, then a sliding scale that starts small, but as the value to the user of having a big audience starts to kick in, the subscription fees rise accordingly.