The 3 Stages of a Maverick (Part 1)
Stage 1: The Disruptors - Companies approaching their end markets in new innovative ways.
I buy and share baskets of stocks called Coffee Cans. You can see the most up to date list of stocks and their performance here on my Scorecard.
Coffee Can 5 is now under construction. I’ve decided to take on more risk in this basket, so it may end up having more stocks than the past few. Let’s see how it comes together.
Many years ago, I came across the following question:
What important truth do very few people agree with you on?
Unfortunately, I didn’t have a great answer.
But over time, as my passion for investing grew, I started paying more attention to the world. My experiences, observations and learnings while working in Venture Capital and also while building innovative products at Facebook, Microsoft and Groupon led me to the following truth: I believe approaching stocks like Venture Capital can beat the market.
I hope to prove and codify this over time. Wish me luck!
I briefly described this investment approach earlier, here: Investing in Mavericks
Today I’ll talk about the 3 Stages of a Maverick.
So, what’s a Maverick?
Mavericks are innovative companies that are bringing the world forward, that is, they are companies poised to one day become the greatest companies of our time. Think Starbucks or Netflix in the early days. Companies that, IF they succeed, have the potential to 10X in 10 years.
Stage 1 Mavericks: The Disruptors
In business, every industry does things a certain way. These “industry conventions” are determined by the leaders of that industry. To prosper, innovative companies must therefore change the game entirely and create new ways of doing things.
Companies who approach their industries in a completely new way are what I call Disruptors.
By taking a unique approach, over time, a few things happen:
To stand out in a noisy world, Disruptors exhibit extreme focus and attention to detail, thereby delivering much better customer experiences. After all, why would they enter a competitive market without being convinced their approach, product or service is better than the status quo?
Over time Disruptors create internal competencies, including processes, data and technologies that either don’t exist outside the company or are very hard to copy. This can lead to competitive advantages.
Last but not least, this usually leads to rapid deployment of new products and services. This again is difficult for incumbents to replicate: they’re either not paying attention, discounting the efforts of lesser known companies, or are simply unable to adjust to a new way of doing things.
Disruptors start out small, but if successful, have the potential to one day gain massive scale, size and efficiency, and in the process create enormous value for its customers, employees, shareholders, and the world at large.
As an investor, what’s exciting about Stage 1 Mavericks is that they exhibit tremendous upside possibilities. But given they are usually attacking unproven markets, their future can be hard to predict, which also makes them risky investments.
Disruptors Are Staying Private Longer
Disruptors, unfortunately, are staying private longer than they used to, so, as public market investors, having an opportunity to invest in them has gotten harder.
When companies came Public earlier in their lives, investors used to get many years to observe their operating performance, learn about their markets, and develop conviction before investing in them. When important companies stay private, such information can be harder to obtain or to appreciate.
On the positive side however, by staying private longer, important risks are likely removed by the time such companies go Public (although not always).
Unfortunately, I think this is a net negative (and extremely frustrating) because a large portion of upside potential is now captured by the Private markets.
But all is not lost. There have been some wonderful winners despite this trend. A few in my portfolio off the top of my head. Etsy has 10X’d as a public company. So has Teladoc, a company I have written about here and here. Tesla and Shopify have been even bigger winners.
Uncertainty Unlocks Opportunity
All of these companies have one thing in common: when they were small and emerging companies, there were tremendous questions about their future.
For most investors, this uncertainty can be terrifying. For many, not having “the answer” is unacceptable. But to Mavericks, uncertainty is a calling. It is the beginning of an important exercise in curiosity and problem solving. Mavericks recognize that uncertainty is the path to innovation and forward progress. As a result, it is uncertainty, the open questions about the future, and the willingness of Disruptors to engage in the discovery process that creates our investment opportunity.
Of course, such uncertainty is also unpredictable, so we must be careful. Unlike the above success stories, several other companies have not lived up to their potential. Therefore, in order to buy Disruptors, we must be very comfortable with uncertainty and with the likely prospect of several failed investments. We must therefore seek to spread our risk appropriately: Portfolio diversification is a good idea.
Current Disruptors
From the stocks I have shared on my Performance Scoreboard so far, I’d consider the following to be Disruptors:
Appian (APPN)
Baozun (BZUN)
Eventbrite (EB)
Fiverr (FVRR)
Upwork (UPWK)
That said, a few have graduated to become Stage 2 Mavericks, or what I call “The Contenders”.
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