Instalco; Metaverse; Reasons to Sell #114
Reflecting on a few interesting reads and listens over the past week
Instalco
This is another great post featuring the thesis for another serial acquirer in the Nordics, called Instalco, from the folks at Canuck Analysts.
"Instalco is a Swedish installation company that’s active across the Nordics. Their 3,000+ installers do all sorts of work that’s needed to make buildings functional, such as electrical wiring, heating & plumbing, ventilation, cooling systems etc." They've made over 100+ acquisitions in a relatively short time frame with the intent to expand their services and technical consulting arms as well.
Instalco appears to have a CSU-like philosophy - with an incredible discipline around executing acquisitions, managing margins, and building a decentralized structure.
Personally, I never quite considered installation businesses as a business that could be accumulated by a serial acquirer. I assumed it's more likely to be a lifestyle business given the number of 1-10 employee shops I have personally encountered.
However, as pointed out in the post, the upside is also quite clear once you think through the economics.
"The upside is that capex and working capital requirements are low, so if you run the business well, it generates tons of free cash flow, and organic growth requires very little incremental capital. Since it’s a tough business with a plethora of competitors, acquisitions of even the strongest players come cheap. A highly free cash flow generative business in a fragmented industry with low acquisition multiples of course makes for a great serial acquirer opportunity."
Reading through the post, a couple of risk factors come to mind:
The lack of barriers/low cost to enter the market creates a relatively high risk of competition and copy-cats looking to emulate Instalco's model. This will likely raise multiples/compress IRR fairly quickly.
Instalco's expansion into new verticals (while perhaps necessary given the risk above) does present a distraction as the organization scales. One of the underappreciated strengths of CSU is their unwavering focus on VMS businesses - it's very easy to figure out which businesses should warrant interest (vs. ones that don't). A more narrow focus essentially makes the business less reliant on the drive of the average employee.
Metaverse
It's probably inappropriate for a Substack newsletter to not mention Facebook's rebrand to Meta and Mark Zuckerberg's presentation on how 10-year vision for the organization.
If you haven't checked it out already, I'd highly recommend going through his actual presentation below and the interview with Ben Thompson on Stratechery.
A couple of excerpts from the Stratechery Interview that I found interesting were:
"One of the lessons that I’ve taken away from the last five years of some of the issues that we’ve struggled with as well, is that it’s not enough to just build a product that people love. There needs to be an ecosystem that’s built around it where a large number of people have a stake in the success of that thing, and are benefiting not just as consumers, but also economically as it grows in order for it to be a sustainable enterprise in the world at the scale that we’re talking about."
'Build a product that people love' is probably one of the most commonly said phrases when it comes to founding startups. While it is a bit ironic for this statement to come from Mark Zuckerberg, the need to also have an ecosystem that helps create many winners (vs. a small group of winners e.g. founders/investors) will be and perhaps already is a defining characteristic of successful businesses today.
"Our next goal from a business perspective is increasing the GDP of the metaverse as much as possible, because that way you can have, and hopefully by the end of the decade, hundreds of billions of dollars of digital commerce and digital goods and digital clothing and experiences and all of that. And I think the best way to increase the GDP of the metaverse is to have the fees be as low as possible and as favorable as possible to creators."
This is quite similar to how Stripe and its mission of maximizing the GDP of the internet. Taking the point above into account, the idea of measuring the GDP generated by a product/business is an interesting way to assess the potential of a platform. It certainly makes sense to consider GDP as a metric of early-stage companies that have yet to monetize their platform.
On another note, Mark's presentation felt quite similar to how Walt Disney talked about the City of Tomorrow in his presentation back in 1966 (see below). The sheer ambition behind builders like Mark Zuckerberg, Walt Disney and Elon Musk is inspiring. As a shameless plug, here's my 10,000 word essay on how Walt Disney's thinking on cities is still relevant today. I wonder if our view on Mark Zuckerberg will shift in future generations (similar to Disney).
With that said, I'm still skeptical on whether Facebook can actually execute with this vision and become the sole/main platform behind the 'metaverse.' It will require a fairly drastic shift in public trust in Facebook along with significant technology investment.
Reasons to Sell
Over the course of time, we come across a number of compelling reasons to sell - whether it's due to economic factors (interest rates, inflation, government debt), societal (COVID-19, natural disasters) or political (US/China relations). 'Experts' all give a fairly strong take as to why any single event could be the lead domino to several, more severe consequences. However, it is quite rare to see the actual consequence equate to the anticipated reaction. The graphic below is a good reminder of how inconsequential many of the events are (from an investing perspective).
It also gives credence to the idea that investors need to place a higher emphasis on optimism vs. falling into the trap of buying into day-to-day headlines. This is where private/real estate investors have an inherent advantage. Once you make a bet, it is very illiquid - whether you like it or not you need to stay the course. While the illiquidity may be seen as a risk at an institutional level, it also can be seen as an advantage for individual investors who are forced to stick with it and fix the underlying problems.