Month: March 2021

Moat is not enough. Social responsibility is better.

Internet & tech companies are facing increasing pressure from regulators across the globe.

Moat is not even a good word now – as it may imply reduced competition. Lawful practices don’t mean they won’t attract criticism.

What’s a better strategy?

1/ Being socially responsible for the future by investing in R&D seems to be a good choice. Ali Cloud is even more important to Alibaba now than its e-commerce business.

2/ Being socially responsible for the current by providing services for free and improving them overtime, e.g. Tencent’s chat apps. Although sometimes”free” is part of the business model, it does create value for users.

3/ Being socially responsible for the unmet demands. It seems to me that ByteDance’s education business is falling into this category.

 

 

Relationship-based Economy and Tax

It’s fair to say that relationship-based economy is a bit like barter-based economy, where a “double confidence of wants” is usually needed.

It is less efficient, compared with the modern economy where a mutually agreed intermediary “currency” is used.

And relationship-based transactions can often span a very long time frame – any immediate “payment” is not required. Although this can be see as a “credit”, usually it can not be used to “pay” for other things. Thus, one person is actually “maintaining” many accounts with people around him/her, where bilateral relationships are recorded.

One reason that relationship-based transactions have been popular in Asia cultures might due to the taxes.

In ancient times, when taxes could be high and unpredictable, relationship-based transactions are not obvious to others outside the transaction.

Technically speaking, it’s probably not a “transaction” under modern definition. It’s just “I help someone and he/she might help me some day”.

Current State of Covid

I found this graph a good illustration of what has been happening in the past year – “Zoom” vs. “Vaccine” on Google Trends.

Source: Google Trends

Meanwhile, trend only illustrates new changes – “zoom” has permanently entered people’s life although the number of searches for it lowers overtime.

Purpose of Regulation

We had an interesting discussion today on the purpose of regulation. The case in point was the banking and securities regulation in 1933 & 1934.

Three key purposes:

1/ To ensure fairness, leveling the playing field – e.g. information disclosure, less friction

2/ To manage externalities – e.g. systematic risks or spillover effects

3/ To build public confidence – although it may create some enduring wedges as well

On the third point, the banking or securities act is not the perfect example; but in healthcare/drug, FDA seems to deliver a better outcome.

Also today, China’s State Administration for Market Regulation issued statement on fines over grocery group buying companies.

In the long run, good regulations are helping the industry grow – it encourages balanced growth, instead of growth at all cost.

Rule of 40 & Valuation

For SaaS companies, rule of 40 is a quick back-of-the-envelope calculation, to measure the healthiness of the business.

Score = top-line growth + bottom-line margin

Score of 40 or above is good – e.g. a business grows at 40% with 0% adj. ebitda margin.

The valuation for those businesses, which usually starts at 10x revenue, is assuming a maturity stage of 0% growth and 40% profitability.

10x revenue @40% profit margin = 25x P/E

8x revenue @40% profit margin = 20x P/E