208: Constellation Software Launches VMS Venture Fund, Cloudflare & AWS, Shopify, Ocean Shipping SNAFU, Spotify's Tiktok, Amazon Holiday Logistics, and AMD & Qualcomm
"Yesterday could probably have started better"
Try to avoid making important decisions when you're angry.
Acknowledge the emotion. Recognize that it clouds your judgement.
Remember that angry people tend to sacrifice the long-term good in response to short-term provocation.
—Stoic Emperor
🦃 I’m sorry, was I supposed to take a day off because of Thanksgiving?
I guess I’ll be continuing my tradition of mostly pretending that holidays don’t exist, so here’s a perfectly normal edition for ya.
😕 Yesterday could probably have started better... But oh well, some things are outside of your control ¯\_(ツ)_/¯
🛀 What if next week there’s a fundamental breakthrough in AI/machine learning on the level of a new approach/technique being discovered (like deep learning, generative adversarial networks, unsupervised learning, reinforcement learning, whatever).
Let’s say this new approach produces significantly better results than the current state-of-the-art, but it’s very computationally-intensive and requires 10x or 100x the compute of current approaches, with scaling similar to other techniques as datasets and number of parameters grow.
What then? What would that do for semiconductor demand? 🤔
(Not that this is needed, as demand for compute for ever more gigantic models is already growing mind-bogglingly fast…
But what if there’s a huge financial pull — because better AI models have huge economic benefits — for a lot more compute on top of the existing bonkers growth..?)
🐦 I still miss Fleets.
It was much easier — or rather, it fit better — to share short videos of a walk in the woods 🌲🌲🌲🚶🏻♂️🌲🌲🦌🌲🌲 or whatever than in the main timeline... ¯\_(ツ)_/¯
I wrote about Twitter killing Fleets and what I think they should’ve done instead in edition #156, if you’re curious.
🐧 I don’t know about on your Twitter app, but on mine, that “Spaces” tab at the bottom-center is filled with such random crap…
It feels like there’s a liquidity problem with their recommendation engine, so they end up surfacing just whatever they have that has people in it.
It’s all a bunch of conspiracy theories, people talking about how rich they’re going to be thanks to NFTs, etc…
🚙💨 While stuck at a red light on a windless day, looking at the huge plumes of exhaust gases coming from the vehicles around me, I realized that living in a cold-climate country certainly gives you better visuals to really understand just how much CO2 is coming out of tailpipes.
It makes the invisible visible.
Another interesting fact: Each carbon atom from gasoline combines with two oxygen atoms from the atmosphere (duh — CO2), so there’s actually more “weight” in CO2 coming out the tailpipe than the weight of the fuel itself when you poured it into the tank at the station.
💚 🥃 🎄 So we’re getting to that time of year when people buy each other gifts.
Y’know, social conventions require it and all that..?
If you have a very special someone in your life — just the right mix of nerdy and eclectic and open-minded — maybe giving the gift of this newsletter would be appreciated.
Here’s a convenient gift-subscription button:
But if you haven’t become a supporter yet, put on your own oxygen mask first, as they say in aviation ✈️, and give yourself that gift:
Investing & Business
Mark Leonard on keeping the main thing the main thing
Friend-of-the-show Sleepwell Cap posted the above excerpt from the transcript of Constellation Software’s 2021 AGM.
I think it’s a good reminder to make sure to keep the main thing the main thing.
If you focus on creating value, you shouldn't target other things like organic growth or margins or whatever, even if these are often correlated with creating value, because that may exclude other good/better options.
For example, some companies with huge growth prospects may prematurely focus on profitability and leave a lot of value on the table over the longer-term. Some companies that focus on getting margins as high as possible may be creating a price umbrella under which competitors can come in and erode value over time. Some which are focused on growth in a slow growth market may be taking too much market share from competitors, triggering a lose-lose competitive response that destroys value for all involved when the alternative of growing more slowly may have let everyone win, etc.
The permutations are endless, and the only way to pull the right levers to optimize things is to keep your focus on the right thing, the end goal, and not some indirect KPIs that may be leading you in the wrong direction.
Constellation Software Launches $200m VMS Venture Fund, Topicus CEO to be GP, Robin from TSS Takes Over Topicus CEO Role
You know it’s a big announcement when there’s almost too many things for a single headline…
Constellation Software announced the creation of a two hundred-million-dollar venture capital fund (“VMS Ventures”). The Fund will provide financing for start-up and rapidly growing vertical market software businesses, most of which will have been either incubated or identified by a sponsoring Constellation business unit.
While Constellation regularly invests in dozens of small initiatives and will continue to do so, VMS Ventures will invest in larger initiatives and take a different approach:
The Fund will only invest in businesses that have the potential to become standalone business units within Constellation.
The managers and employees of the Fund's Investees will be significant shareholders in their businesses.
The Fund will not back start-ups that have to rely upon a Constellation business unit for on-going sales, marketing, customer support, development, etc.
Many of the Investees' staff will be hired from outside of Constellation.
The Fund's employees will be compensated based upon the Fund's results.
Investing only $200 million over a three-to-five-year period, Constellation does not expect the Fund to add meaningfully to Constellation’s organic revenue growth rate. The Fund's objective is to develop and refine organic growth processes which can eventually be rolled out more broadly by Constellation's operating groups. Constellation does not anticipate that the Fund will detract from Constellation's existing initiative programs nor its acquisition momentum.
Planting seeds for the long-term 🌱🌱🌱🌱
Speaking of keeping the main thing the main thing, clearly Mark Leonard understands just how much value could be created at Constellation if they can keep deploying capital in M&A at high rates of return *and* also increase organic growth (which, itself, is a complex discussion, because the aggregate company-level organic growth number doesn’t tell you all you need to know — they sometimes buy businesses that are in runoff and distressed assets, and while they create a lot of value by buying them very cheaply, it can also makes organic growth look bad. They’ll also sometimes cut business lines that don’t create much value at newly acquired companies, like hardware sales or professional services, focusing on the license and recurring/maintenance revenue where most of the value is. That can also make organic growth lower, even if more value is created. That’s why I tend to primarily track the “maintenance & recurring” organic growth line).
Here’s what Mark wrote in his 2013 letter to shareholders on the importance of organic growth (context is he was looking at DCF models of CSI and tweaking them in various ways to see which variables mattered most to long-term value creation):
The more interesting part of the experiment was using the Consensus Model to do some sensitivity analysis and to look at alternative strategies. In all of the following examples, we assume that only one variable changes. In reality, our businesses are dynamic and changing one variable has an impact throughout the business.
Varying the organic growth assumption has a tremendous impact on the intrinsic value of a CSI share. Add in another 2.5% organic growth to the base line assumption and you get more than double the intrinsic value. Subtract 2.5% from the base line organic growth assumption and you lose almost half the intrinsic value of the stock. You can see why so many software company CEO’s are growth junkies.
For anyone who’s studied the industry, it is difficult to imagine a 5% perpetual swing in organic growth that doesn’t have an offsetting impact upon operating margins. That said, there’s still tremendous valuation and strategic leverage if organic growth can be increased with reasonable levels of investment. If managers have the discipline to monitor the IRR’s on their investments in organic revenue growth, then they’ve taken a critical step towards understanding the most powerful lever in software.
(Historical trivia: Around the time this letter was published, Constellation’s stock price was around $150 CAD per share)
Increasing organic growth in the VMS space isn’t easy because they’re operating and buying businesses that are inherently niche, have small TAMs, and are often in oligopolistic situations that make it hard to grow much faster than the space without triggering a lose-lose competitive response…
BUT, as Topicus has shown over the years, there are ways to grow VMS organically, either with new startups or by expanding existing lines, and based on what I’m seeing here, they’re taking organic growth as seriously as ever and are ready to keep experimenting with new ways of making progress on that goal.
Speaking of Topicus, another big piece of news:
The Managing Partner of the Fund will be Daan Dijkhuizen. In addition to managing the Fund, he will continue to be the CEO of the Topicus Operating Group within Topicus.com, but will resign his role as CEO of Topicus.com.
Robin van Poelje will take on the role of the CEO Of Topicus.com in addition to his current position as Chairman.
Mark Leonard, President of Constellation stated: “Organic growth will be a critically important part of CSI's enduring success. I’m delighted that Daan will continue to lead TOG and will take on the additional responsibility for the Fund. TOG has one of the best track records of sustained organic growth at scale that I’ve seen in the VMS industry. I’ll personally support the Fund and Daan as he focuses on leading Constellation’s larger organic growth efforts.”
They’re still hungry, still trying to improve their game! No complacency at CSI — love to see it 🏋️♂️
Update: If you want more, I wrote about Mark Leonard’s 2021 shareholder letter in edition #92.
Shopify’s Black Friday/Cyber Monday Live Map
‘Spotify confirms it is testing a TikTok-like vertical feed of music videos, called Discover’
Not a bad idea to experiment with, could help discovery.
But are music videos going to be made with vertical ratios now? Or are existing music videos just going to look like crap? 🤔
(Probably annoying to dyslexics to have stories about Shopify and Spotify one after another… Sorry!)
Primer on Ocean Shipping & Current SNAFU
Traffic is an exponential problem. When 1 lane of a 4 lane highway is closed, travel time takes more than 25% extra.
I love how they follow a single container ship’s whole journey across the Pacific, back-and-forth. Great way to learn how it truly works. Great use of aerial/satellite imagery too.
‘Amazon’s $4 Billion Holiday Fix’
Speaking of shipping and logistics, Bloomberg has a piece about how Amazon is trying to keep things smooth for this holiday season:
By chartering the Olive Bay [container ship] and dispatching it to a relatively sleepy port a few miles north of hometown Seattle, Amazon did an end-run around the shipping snarls that have stranded holiday inventory in Los Angeles and other ports. Besides Everett, the company has also docked at the Port of Houston. Such extreme measures have given Amazon executives confidence they’ll have adequate inventory to meet yet another record-breaking holiday shopping season [...]
In addition to chartering ships like the Olive Bay, Amazon hired 150,000 U.S. seasonal workers to help pick, pack and ship items, boosting pay and offering signing bonuses of up to $3,000. It’s dispatching half-full trucks to get packages to customers on time. The logistical effort’s projected $4 billion cost threatens to wipe out the company’s profit during its most important three months of the year. But for Amazon, which burnished its reputation serving as a lifeline during the Covid-19 outbreak, the holiday season is an opportunity to extend its advantage over rivals. [...]
“Amazon has its own transportation network, it has access to all the carriers. Multiple ships, multiple factories.” [...]
Knopfler says Amazon’s prices were “phenomenal,” $4,000 to ship a container from China compared with the $12,000 demanded by other freight forwarders. Amazon also simplifies the process since it oversees the shipment from China to its U.S. warehouses. Other services have lots of intermediaries where cargo swaps hands, presenting opportunities for miscommunication and delays. “It’s a one-stop-shop from Asia to Amazon”
Science & Technology
Cloudflare Poked the Bear
Today, as part of our long tradition of AWS price reductions, I am happy to share that we are expanding the Free Tier with additional data transfer out, as follows:
Data Transfer from AWS Regions to the Internet is now free for up to 100 GB of data per month (up from 1 GB per region). This includes Amazon EC2, Amazon S3, Elastic Load Balancing, and so forth. The expansion does not apply to the AWS GovCloud or AWS China Regions.
A 100x increase in free egress transfer. Not bad.
Similar deal for their CDN, Cloudfront:
Data Transfer from Amazon CloudFront is now free for up to 1 TB of data per month (up from 50 GB), and is no longer limited to the first 12 months after signup. We are also raising the number of free HTTP and HTTPS requests from 2,000,000 to 10,000,000, and removing the 12 month limit on the 2,000,000 free CloudFront Function invocations per month. The expansion does not apply to data transfer from CloudFront PoPs in China. (Source)
Looks like the big ruckus that Cloudflare made about egress fees, and the launch of their zero-egress service R2 really got AWS’ attention.
Cloudflare has put itself in a nice position, because if AWS kept its high egress charges, Cloudflare’s services look more attractive to potential customers, and if they cut them, then Cloudflare can do more business as the network stitching together multi-cloud deployments that are now economic.
AMD and Qualcomm Going to Samsung for 3nm Chips
Rumours concerning TSMC’s and Apple’s close relationship continue to bubble up in Taiwanese media. A freshly-baked industry-sourced confection, from broadcaster TTV, suggests that both AMD and Qualcomm are now so fed up with TSMC’s purported “Apple-first” policy that they have decided to transition their businesses to Samsung Foundry services for 3nm. (Source)
The piece above makes it sound like this is some kind of principled boycott of TSMC or something, but it’s basically just that Apple has the buying scale and money to buy a spot in front of the line, leaving others no choice but to wait or look for alternatives.
And Apple isn’t just any random passive customer. I’m pretty sure that they work very closely with TSMC and a lot of TSMC’s capex is directly linked to deals with Apple, a bit similar to how Apple is also making deals with other suppliers to build capacity and buy specialized equipment just for Apple, a lot of it paid for upfront by Apple.
The Arts & History
🗡🧝🏻🛡Ray-traced, re-shaded Zelda: Breath of the Wild
Ok, this is pretty cool.
As far as I can tell, they’re using a Wii U emulator running on a PC, and because BotW was also released for the Wii U (not just the Switch), they’re able to run it…
But then they do some crazy stuff.
The GPU is a Nvidia 3090 and the CPU is an AMD Ryzen 9 3900x 4.5Ghz, so they are running this at 8k resolution with RTX ray-tracing and a bunch of shaders that weren’t in the original game.
Looks pretty sweet, especially the ambient lighting. The video covers a bunch of different environments, so if you can’t watch all of it, at least click around to see what different places look like.
Nathaniel Rateliff & The Night Sweats — The Future (2021)
Ooh, new album.
I quite dig both of his previous albums with the band (the self-titled from 2016, and Tearing at the Seams from 2018), as well as his solo stuff (Falling Faster than you can Run from 2013, and And It’s Still Allright from 2020).
You can imagine the nice tingle I got when I saw that The Future had come out (is that title an homage to Leonard Cohen?) .
Too early to know how much I like the album, and by track 2 I can already tell there are changes to their sound, but it’s always fun to discover a new album by artists that you like.
If you don’t know Nat, let me suggest a track with the band that moves, and a quieter solo track to get started:
🤠
Thank you for these amazing work Liberty!
Is there any post or deep dived to learn more about Constellation and what do they do? I did skim through your past notes about them. Thank you and appreciate it.
'I Need Never Get Old' (Nathaniel Rateliff & The Night Sweats) is a personal favorite. https://youtu.be/-2hxU4UG3dA
A good way to conceptualize CO2 production is to associate it with the mass/volume of fuel:
https://ecoscore.be/en/info/ecoscore/co2