Sunday Finds + 3 Thoughts From Last Week

Xbox + Verra Mobility

Sep 18, 2022

Welcome to Chit Chat Money’s Sunday Finds + 3 Thoughts From Last Week. In this newsletter you will find three topics I thought about last week, links to shows we’ve recently released, and links to some interesting articles, podcasts, and tweets. Check out the archive here.

1. Patagonia Founder Let Down

The Patagonia founder provided the makers of clickbait headlines a juicy story this week:

Patagonia founder Yvon Chouinard, his spouse and two adult children are giving away their ownership in the apparel maker he started some 50 years ago, dedicating all profits from the company to projects and organizations that will protect wild land and biodiversity and fight the climate crisis.
The company is worth about $3 billion, according to the New York Times.

When first reading this, I came away with a lot of respect for Chouinard. Unlike a lot of extremely wealthy people, the man understood that he has “enough” and that all the money assigned to him on society’s database should get redistributed.

And all going to the climate crisis? Talk about a noble proposition for a challenge that is going to need tons of funding.

But then I started reading into Patagonia’s stances on climate change. The company (and I’m assuming Chouinard, as well) has stated publicly that it opposes the build-out of nuclear energy because of its environmental impact.

What? It astounds me to find out again and again that people who claim to care about the planet are against carbon-free and low land-density power generation (nuclear power). Solar and wind both have environmental impacts (material inputs, huge land use, ecological destruction), but seem to be the only energy sources climate activists want to use. Frankly, I don’t get it.

Nuclear is staring us right in the face. Yes, it is “expensive” to build in dollar terms and has a (solved) waste problem, but the long-term benefits for society clearly outweigh any downsides.

8% of the United States’ energy is estimated to come from nuclear. This % hasn’t changed much over the last 50 years because of stances from people like Chouinard. If they didn't take these stances, I doubt both petroleum (36%) and natural gas (32%) would make up such a large portion of our nation’s energy sources, the exact opposite of what these people want.

It reminds me of when someone says they can’t eat a healthy diet because the food is too expensive. Yes, you might have a slightly higher grocery bill if you buy fresh fruits and vegetables, but the net benefit to your life (more energy, healthier body, clearer thoughts, etc.) outweighs this small inconvenience.

Sorry for the rant, but these are behavioral biases at their finest and with the most negative impact on society.

2. Adobe Acquires Figma. Remember Base Rates…

The biggest news across the investing landscape was the announcement that Adobe intends to acquire start-up competitor Figma for a whopping $20 billion. Here are the details of the transaction:

Under the definitive agreement, Adobe has agreed to acquire Figma for approximately $20 billion, comprised of approximately half cash and half stock, subject to customary adjustments. Approximately 6 million additional restricted stock units will be granted to Figma’s CEO and employees that will vest over four years subsequent to closing.

So this is a $20 billion deal plus some other dilution coming in the near future. According to Adobe’s press release, Figma is on track to do $400 million in annual recurring revenue (ARR) this year. From the wording, it looks like the business is growing ARR by 100% year-over-year.

I’m going to be honest, I have no idea what Figma does outside the fact that it is an Adobe competitor. But 50x forward sales (not including the granted RSUs!) is an extreme price to pay.

Unless Figma can continue growing at a high double-digit rate for a decade and achieve 30%+ cash flow margins, this acquisition will go down as a stain on Adobe’s history and a gift to the venture capital industry.

Maybe Figma will add that much to Adobe’s business and is that special of a product, but the likelihood of it generating shareholder value vs. the $20 billion price tag is low.

Remember the rationales thrown around the Square acquisition of Afterpay? Afterpay was growing at 100% year-over-year and Square acquired it at 40x sales because of the “synergies” and additions it could make to Square’s ecosystem. The potential of the acquisition has not materialized. Yes, it was a larger portion of Square’s market cap and was almost a merger, but the analogy fits nonetheless.

(Here’s the Square/Afterpay investor presentation, for reference. Looks promising for shareholders!)

How many years of free cash flow did Adobe management just give up to acquire this competitor at 50x sales? With $7 billion in trailing free cash flow, probably around three. I wouldn’t be surprised if the stock is dead money for three years based on the price before the acquisition was announced (~$375 a share) because of this.

3. Is there a proper way to do layoffs?

2022 has been a big year for layoffs in the software industry. Twilio was the next company to fall on its sword, with a recent letter from its CEO Jeff Lawson:

We’ve made the extremely difficult decision to restructure and reduce Twilio’s workforce by approximately 11% – teammates and friends who helped build Twilio.
I’m not going to sugarcoat things. A layoff is the last thing we want to do, but I believe it’s wise and necessary. Twilio has grown at an astonishing rate over the past couple years. It was too fast, and without enough focus on our most important company priorities. I take responsibility for those decisions, as well as the difficult decision to do this layoff.

I don’t know if there is a “good” way to do layoffs, because firing 10% of your workforce is firing 10% of your workforce. But I think there are some easy best practices that these letter and tweet thread writing founders could implement.

First, keep things as internal as possible. This may be tough to do if you are a larger company, but it is embarrassing for your employees.

If you have to file a document with the SEC, make sure to do it around a quarterly conference call so you can address the investor community directly and answer questions. Don’t beat around the bush with them.

Second, don’t make these classic excuses as Twilio did in its letter to employees. Lawson says he will not “sugarcoat” things but then basically goes on to do just that. If I was an employee reading that my uber-wealthy CEO said my firing was “wise and necessary” I think I would be very upset.

Just tell people you over-hired, that you don’t need this many workers anymore, and that you’ll set up a team for the next few months to help all these laid-off employees find a new job. Do as much as you can to not turn it into a news story.

And for the love of god, don’t address people as Twilions.

See you next week,

Brett

***Our fund, Arch Capital, may own securities discussed in this newsletter. Check our holdings page and read our full disclosure to learn more.***

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3 Good Reads

Profiting From Corp Governance “Dark Arts” - Nongaap Investing

If good corporate governance is about aligning and encouraging management to take actions that have a beneficial effect to all shareholders (and often extended to all stakeholders), the “Dark Arts” are actions that distort that alignment to primarily benefit insiders by giving them disproportionate control and/or influence over the governance process. (This is not the cleanest definition, but hopefully you will have a better understanding as we progress through the series.)

Failure to Launch - Vox

This mansion is the home of Launch House, which is both an incubator for startup founders and a social club of more than 500 20- and 30-somethings, many of whom are into crypto. There are two ways to join Launch House: One is to pay the $1,000 annual membership fee, which grants you perks like entrance to the group Discord channel, access to work at the mansion or the New York City location, and invitations to events — an NFT brunch, say, or a boat party during Miami Tech Month. The other is to pay $3,000 to join a month-long “cohort,” in which you and around two dozen other young tech founders live and work together at the mansion.

EA’s Vince Zampella Talks Call of Duty, Battlefield, and Star Wars - Barron’s

How does it feel to be the person that created Call of Duty and see Microsoft spend nearly $70 billion largely to acquire that franchise?
Yeah, it is little surreal. Even before this, people outside the industry, who don’t really play games, they knew Call of Duty. It’s something that everyone knows. I would be randomly watching TV and there would be a Call of Duty mention. Something that I created broke through pop culture. It’s humbling.