Why its so hard to hit investment ‘home runs’

Readers may recall I had launched an experiment just over 18 months ago, focussed on building wealth as a start up employee. There has been an interesting update to this experiment now.

I previously wrote about what a lottery it is to build start up wealth. Employees need to suck it up for some period of time, slave away with an employer, build up some equity and hope their company makes it big so that they can convert their time and hard work into cold hard cash!

Start up wealth creation is such a gamble. It all depends on being in the right place at the right time and circumstances and good fortune favoring the business that you have thrown your lot in with.

So what if you could handicap this process and pick an early stage business with favorable prospects and ride your luck? That was the basis of my decision to plonk down large sums of money into Aconex and Wisetech Global, 2 emerging businesses that I believed had very strong potential to provide solid growth over the medium term.

I put in material amounts of money in both business. It’s really been a tale of 2 very different journey’s for both since the time I invested. In any event, Aconex’s journey as an independent business looks to have come to an end. The company received an acquisition offer from Oracle a couple of weeks ago for $7.80 a share.

It was a fairly troubled journey for Aconex in the time that it was an independent company. A profit downgrade, coupled with a  moderation in revenue growth expectations for the business  (from 20% to 15% ) saw the company get attacked by short sellers and its share price cut by almost 40% in a single day in early 2017.

I personally believe that the business owners were making the right moves, and taking a long term approach to steadily growing a business in the construction collaboration market, an area that is ripe for disruption, with good long term growth prospects and a huge market opportunity. They were implementing changes in pricing and business models which had the impact of hurting near term revenue, with the trade off of higher medium term growth.

Clearly I wasn’t the only one who thought that. Oracle also had the foresight to see the strategic value of an asset with the prospects for very solid medium term growth, and actually picked up Aconex for what I believe was a steal. With no real prospect of a counter offer insight, I disposed my holding and  I ended up netting about $17,000 profit for my investment in the business.

This episode illustrated some valuable lessons in how hard it is to hit home runs. Its entirely possible the owners of Aconex grew weary of managing a public company. They may have been tired of the constant sniping and the efforts of short sellers to knock down the share price. They may have been also caught in a pincer move by Oracle, and the threat of ‘its either you or your competitor that we buy’. In any case, lesson number one is that you need a management team that have the stomach and the appetite to manage a public enterprise with all the scrutiny and pressure that comes with it.

Secondly, if you happen to build anything of value early enough, you’ll have strategic interest swarming you from all angles which you will have to be bloody minded enough to resist or repel. It happened to Facebook early on (who rebuffed an offer by Yahoo) and it also happened to Google early on as well (who rebuffed an offer to buy Yahoo also!).  Founding teams need to have a clear long term vision of how they will shape an industry and what their strategic value is.

So even in spite of being in a high growth industry, with good prospects and good assets, so much of an investors ability to hit home runs from early stage businesses is going to be tied up in a founders appetite for success and their desire to maintain their independence, which is just something that’s so hard to control. I don’t begrudge the Aconex founders their well deserved exit. Though I do shudder to think at the potential wealth creation had they been fixated on independence for even the next 5 years though.

My journey with Wisetech Global has been a different experience thus far. Wisetech Global is in the logistics collaboration business, offering a platform for all those providers in the supply chain to track movement of goods across countries at different stages of the logistics cycle. In this case, we have a singularly focussed CEO who still retains a majority of the stock with no liquid supply for short sellers to mount attacks. It of course also helps that the business has been humming along well, and results have been comfortably beating expectations.

My initial $48k investment here has grown to in excess of $110k. I feel that if Richard White can be at the helm of Wisetech for another 5 years, then some seriously material wealth creation may well be possible. Another doubling of that position from here in that time frame would certainly have made this experiment a very worthwhile one for me.

Happy new year to all of you!

 

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