The 3 Stages of a Maverick (Part 2)
Stage 2: The Contenders - Companies defending their turf to prove their legitimacy to the world.
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. Note: I’ve decided to take on more risk in this basket, so to account for that, it may end up having more stocks than the past few. Let’s see how it comes together.
Today we will discuss:
Stage 2 Mavericks: The Contenders
Thoughts on Slack (Ticker: WORK)
Last week I introduced the notion of Stage 1 Mavericks: The Disruptors, that is, innovative companies who are approaching their end markets in brand new ways, thereby delivering great products and experiences much better than the status quo.
After Disruptors have demonstrated initial success, they graduate to Stage 2 to become what I call Contenders.
Just like the Theory of Evolution has three elements (variation, selection and replication), so does Business Evolution. It includes:
Variation that comes from entrepreneurial experiments in products and business models
Selection of successful adaptations by customers and investors
and Replication of the best proven ideas, by competitors
I believe Stage 2 is the most dangerous of the 3 stages.
Valuations are high. Expectations are high.
And lastly, if they haven’t already done so, Competition is taking direct aim.
As a result, this is where most Mavericks fizzle out. When it becomes apparent that Contenders are unlikely to move onto Stage 3, the stock market’s response can be lethal.
The best companies however are able to defend their turf, continue to innovate and ultimately prove their legitimacy to the world. This can take years or it can happen quickly, but during this time, there is always doubt. Why wouldn’t there be? Contenders are doing something that’s never been done before.
The hard part about investing in Contenders is that their sources of competitive advantage are usually not well understood (and perhaps not fully developed). Peter Thiel refers to these as “secrets”.
“Great companies have secrets: specific reasons for success that other people don't see.”
— Peter Thiel.
One of my former bosses used to say: “Being an investor is like being a private detective.” Just like detectives seek out truth, we as investors must seek out company secrets. As investors, that is our job.
A secret however can be devilishly hard to uncover. One reason: Secrets often don’t seem like much, even once they are out in the open. Thanks to the media, the world lives in a constant state of paranoia. As a result, even when a secret is revealed, it can be under appreciated for very long periods of time. Until one day however, when suddenly, that changes.
Here’s a secret for you:
I believe that you don’t always need to know a company’s secret in order to benefit from it’s stock price appreciation!
I’ll leave it to you to figure out why.
Current Contenders:
From the investments I have shared on my Performance Scoreboard so far, I’d consider the following to be Contenders:
Axon Enterprises (AAXN)
Bitcoin (BTCUSD)
Cloudflare (NET)
MongoDB (MDB)
Pinterest (PINS)
Slack (WORK)
I’m excited about what the future holds for these investments. But only time will tell us which of these move onto Stage 3.
Update: Click Here to Read about Stage 3 Mavericks
Speaking of Slack: The Secret’s Out!
Slack (from the list above) is a Contender, and it is one of the companies in Coffee Can 4, which I created for our Stock Market Contest (apologies, I know I owe you an update on this!). Although my cost basis is slightly lower than this, the Scorecard will track performance based on a purchase price of $26.55 on May 4 (because that’s the date the contest started).
With that said, I wanted to share a few thoughts on Slack.
To start: Stratechery’s excellent recent article “The Slack Social Network” let Slack’s secret right out of the bag:
“Slack has made chat itself into a moat,
not just by being better at it,
but by expanding who it is you can chat with.”
— Ben Thompson
Chat is the killer app that Slack believes can help it build an enterprise social network. And Shared Channels are its secret weapon: These allow you to chat with others not only within your organization, but also outside of it. As a result, not only can you have multiple companies in one channel, you can also manage the flow of data between different organizations. This is becoming more and more important as team workflows become increasingly complex and distributed, and require collaboration with several job functions, both inside and outside a company.
If Slack’s Shared Channels succeed, they could play a very important role in how distributed cross-company collaboration takes place. Stratechery serves as a good example of this:
“It is hard to imagine how the Stratechery podcast service would have been built without shared channels”
“Stratechery LLC is already tied into 4 other companies, and that number will only go up.”
— Ben Thompson
On Competition
As I wrote above, I believe Stage 2 is the most dangerous of the 3 stages. One big reason: Fierce Competition.
Microsoft is seen as Slack’s primary competitor. And they’re a formidable one.
That said, Ben Thompson said something really interesting in his article:
I pay for both Microsoft 365 and Slack, and happily so.
Moreover, I can’t imagine ever not paying.
This may not seem like much, but it is actually quite an important comment. It demonstrates that Stratechery receives different value from Slack than it does from Microsoft 365. As a result, there may in fact be room for both Teams and Slack to co-exist.
According to Ben, Microsoft is a “vertical company” building an enterprise operating system that tries to provide a unified experience across contacts, files, conversations, etc, while Slack’s attempt at an enterprise social network is a “horizontal approach”. This should be a light bulb moment: recall that Mavericks approach their end markets in completely new ways! And Slack is doing just that.
Of course, this does not guarantee Slack’s success. Yesterday, Slack filed a complaint against Microsoft with the European Commission, accusing Microsoft of unfair competitive tactics. Specifically, Slack believes that Teams prevents Microsoft customers from even trying Slack.
This is a big deal. This is hindering Slack’s growth.
But, on the positive side, it is actually good news to see Slack finally going on the offensive here. Plus Slack continues to innovate, has built a great product, one that is resonating well with knowledge workers, and despite that competition, has grown its enterprise business 12X over the past 3+ years.
If interested, I’d encourage you to read more about it directly from Slack’s CEO.
Lastly, Microsoft is not Slack’s only competition. For example, Discord may become a real threat in the coming years, not to mention earlier stage companies continue to get funded.
But… if Slack is able to successfully leverage shared channels to create and improve their cross-company network effects, they may just become a very important global company for many years to come.
It will be interesting to see how things play out.
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