PE is the new great villain
Consolidation vs transformation, the intelligence arbitrage, and an upcoming abundance event
In the 2010s, gig/sharing economy companies became the great economic and cultural villains. Companies like Uber promised “entrepreneurship for all” but delivered indenture and a low wage grind.
Now the same thing is happening with private equity in skilled professions and small businesses. As the US economy private-equitizes, the path to ownership and wealth is getting cut off for skilled pros. Private equity will become the next great economic villain as financial owners consolidate industries and squeeze labor, customers, and communities.
When it gets too much to bear, talented people with valuable skills will leave and go solo whenever they can.
It's already starting to happen at the margins. Therapists and skilled tradespeople are looking for life rafts to escape their ruthless owners. If the capital, support, tools, are there for skilled pros to strike out on their own more will follow.
The next great investment in the real economy is decentralized orchestration and systems of ownership: powering business formation and independence while providing the benefits of consolidation and scale across tools (vSaaS, fintech, etc.), orchestration and aggregation (marketplaces) and systems (franchises and biz in a box).
The opportunity for tech founders is transformation, not consolidation. Push the productive frontier of an industry, economy, or business - don’t just squeeze customers and labor.
Skilled professionals need a path to building real equity and we want to help build it for them.
Intelligence Arbitrage
In a viral mini-essay, Surya encourages readers to “raise $100mil seed round [to] buy up service businesses and roll them up with models.” The essay is generally quite good is an important contribution to Venture’s Age of Acquisition super cycle discourse:
But the headline is directionally correct and specifically wrong.
As we've covered pretty extensively before (including here) I think raising that much money out of the gate is a mistake. It's akin to raising $100 million to scale up sales and GTM before building a product.
Value creation (product) and value capture (biz model/cap structure) are independent of one another. Going straight to scale up before proving you have something differentiated (worth scaling up) just doesn't make sense.
Secondly, I am pretty skeptical of rollups specifically. Buying a company has transaction costs (beyond the price you pay directly). Source, diligence, negotiate, closing/legal, finance, integrate, etc. all take time, effort, money. At small scale transactions, they represent appreciable parts of the asset value - that's why smaller deals trade at a "discount" (they're also generally lower quality assets that may just collapse without the owner/operator).
So buying tons of companies doesn't scale well - you get to a certain size where you need to buy a company a week to keep growing and paying heavy transaction costs each time or you mean revert to zero growth. That's why PE rollups don't generally work that way: they top out and sell to a larger aggregator.
Without changing the physics of a rollup (as Teamshares has done) that's where the venture backed rollups are headed.
I Wrote
Abundance
I use this word “abundance” a lot and I think it’s worth talking about what I really mean. In short, abundance politics focuses on increasing supply good/important things (housing, energy, transit, healthcare, education) rather than managing scarcity and restricting/rationing good things. This kind of supply side liberalism is a path to growing the pie while improving equity. We can improve living conditions without sacrificing democracy, the environment, or equality by embracing innovation and improving government efficiency.
I’m planning an event with Abundance New York for January. If it goes well (why wouldn’t it?) I’d like to do more. Stay tuned.
I Read
Why Democrats Got the Politics of Immigration So Wrong for So Long. This is one of the most concrete examples of how “the groups” warped dem politics. It’s also a painful example of how my own politics (extremely pro immigration) are out of step with mainstream America. Ironically, GOP strategists took a more Marxist position of class solidarity while Dems implicitly were on the side of racial solidarity over class consciousness. A mistake not to make again. Solidly dem voters care about immigration much more than Latinos.
Pornhub Sees Surge of Interest in Tradwife Content, ‘Modesty,’ and Mindfulness - 404 Media. This report is great every year.
The Venture Capital ‘Regatta’ is what is Replacing The VC Factory Model.There's two important takeaways here: 1) seed ➡️ A ➡️ B isn't a smooth progression but rather a step change from risk and proof to execution and scale. 2) the optimal (our) approach to follow-on funding at seed is premised on getting to and over that line in tranches. But what could possibly be more venture than an over-wrought sailing metaphor? We’re so back.