Ezra Galston

Meaning that if you have $100 in your company bank account and no other assets, you are functionally required to have either $100 in some form of accounts payable, or else $100 worth of equity, from say a fundraise. And assuming you’ve paid cash for this company, your liabilities haven’t changed one bit, but your cash position is now short $1B, so you need to find another line item to increase in order to balance out that formula of Assets = Liabilities + Equity. Enter Goodwill. Which means: building better brands, for example launching a hot dog that consumers love more than Oscar-Meyer, a cheese better than Kraft, or a coffee better than Maxwell House unlocks $85B of asset value. Well, Unilever has $28B of brand intangibles, GE has $84B, Proctor and Gamble has $80B, Newell has about $10B, and the list goes on and on and on.

But you’d also be remiss if you didn’t study the business: at a $1B+ GMV run-rate, with large marketplace take-rate margins, and sub six month payback periods, it’s one of the few truly globally scaled digital marketplaces operating today. At 11 years to IPO, FarFetch actually slightly lags many of its peers in time to IPO – likely reflecting the emerging reality of mega-rounds and increased availability of lightly dilutive capital (the Company has raised upwards of $700M, including $387M from JD.com): As an aside, while debates around Uber and Airbnb’s time to IPO have raged since 2015, they are actually roughly on par with their peers’ time to IPO, Airbnb having been founded in 2008 and Uber in 2009.) These margins are possible because of the nature of the luxury industry, where brands typically command 65+% gross margins when selling direct to consumer: Given that FarFetch manages all demand generation, content creation, logistics optimization and customer service, these brands are willing to eat in to their extremely healthy margins as those are costs related to goods sold they would otherwise bear on their balance sheet. These native sales in fact appear to be increasing, with a 400% increase in Company cash outflows in the first half of 2018, compared to 2017 – “Net cash outflow from operating activities increased to $106.0 million in the six months ended June 30, 2018 from $26.0 million in the six months ended June 30, 2017, an increase of $80.0 million, driven by an increase in the loss after tax from $29.3 million to $68.4 million and anincrease in net working capital due to an increase in first-party inventory prepayments or deposits ahead of the autumn/winter season.

Formerly of @Chicago Ventures, Young Entrepreneur @Foundation Capital, Class 18 @Kauffman Fellow, and Chicago Booth MBA. One of the common mistakes I continue to see in secondary and tertiary markets is a tendency for startups, in an effort to tell their Company’s narrative, to prioritize (both financially and with human capital) artificial growth and vanity metrics instead of the product itself*. I suspect that this tendency has evolved as a function of less experienced investors with shallower pockets pushing founders towards quantifiable (and therefore, assessable) metrics instead of trying to build demonstrable product/market fit alongside a long term vision. It’s not surprising to me that the Country’s leading advocate towards bootstrapping emerged from my own secondary market of Chicago and co-founded an iconic product in Basecamp (likely in reaction to these observations). But there has been a significant correction in primary markets over the past 18 months to re-calibrate away from a reliance on paid marketing which has not filtered down to secondary markets.

Now fully legal and regulated in three US states – Nevada, NJ and Delaware – online poker revenues in those states are about as disappointing as possible. When online poker launched in 2013, The NJ state’s Treasurer initially estimated that online gambling would generate $180 million in tax revenues in its first fiscal year; that number was subsequently revised downward to $34 million in March 2014 and hasn’t recovered. In fact, nearly all casino gambling is commoditized*. Las Vegas casinos correctly recognized this risk in the early aughts and invested heavily in entertainment, food and retail complements to their gaming operations in order to differentiate their brands; Since 2004, gaming revenues have represented less than 50% of Las Vegas casino revenues and the trend is accelerating every year. If there is any digital analog to Vegas casinos, I suspect it is these DFS operators that already provide real-time, 2nd screen entertainment for sports games and are likely to be the beneficiary of much of the increased focus on real money sports wagering.