One Step Up #58
Formula 1 tech in everyday use, how to never get distracted, why SaaS is like Walmart, $POSH + more
As I woke up this morning, I read Elon Musk has built a 9.2% stake in Twitter
Expect some shakeup there.
S&P 500 Real Returns for each year beggining 1871 if held for 20 years
In the mid-90s, a Children’s Hospital in the UK improved its ICU hand-off process by consulting with the Ferrari F1 pit crew team.
The hospital recorded its surgery room operation and Ferrari suggested a new protocol. One big change was for the hospital to have the equivalent of a pit crew “lollipop man”; this is the individual that holds a sign on a long stick and only waves a driver through after making sure everyone else on the team has put the tires on.
After changing its protocol, the hospital’s error rate dropped from 30% to 10%.
There is mroe food for thought here than any other article I read this week.
“If you can get your work life to where you enjoy half of it, that is amazing. Very few people ever achieve that.” - Bezos
“Some things have to be believed to be seen.” —Ralph Hodgson
“No amount of sophistication is going to allay the fact that all your knowledge is about the past and all your decisions are about the future.” – Ian Wilson
Fast forward to today, and SaaS or software-as-a-service companies, appear to have absolutely nothing in common with Walmart.
Except in many ways, they’re exactly like it. Rather than investing through the cash flow statement and showing accounting profits, though, SaaS companies present a double challenge to analysts: they invest through the income statement and show neither accounting profits nor free cash flows.
Instead of building stores, SaaS companies acquire customers. For enterprise software companies, customers might be large contracts with corporations, or “seats” adopted bottom-up in different company departments. Either way, there is a cost to acquire those customers, which shows up in the sales and marketing line item.
Once the customers are “in,” they pay back the investment through software subscriptions that only flow through the income and cash flow statements over time. Walmart had expenses to build the stores and stock the shelves; SaaS companies have sales and marketing and importantly, software engineers to keep the software running and always updated with new features and functionality.
Like Walmart, SaaS companies consume large amounts of cash, and appear to lose money the faster they grow. Like Walmart, the unit economics are critical in the evaluation of a SaaS company. What is the return on investment on those acquired customers? What is the payback period on sales and marketing? Does the company have a “leaky bucket” problem, acquiring customers only to see them leave (“churn”)?
These questions all have answers. But it’s not possible to glance at an income statement and answer them. An analyst must do the work, but that work is rewarded.
In marketplace businesses, scale begets scale, and Poshmark is the biggest player in apparel resale. As Poshmark has gotten to 3x the size of platforms such as Depop and Tradesy, Poshmark is now operating at a significant advantage relative to its smaller competitors.
The first advantage comes from scale and liquidity. This means that sellers are likely to make sales more quickly and to obtain better prices. For buyers, this means that there will be a much greater depth and breadth of items available for sale.
Secondly, Poshmark has more resources to spend. On the R&D side, Poshmark is better able to continue to add valuable features that take the friction out of buying and selling – for instance, rolling out bulk listing features for sellers, introducing seller analytics, etc. Poshmark can also leverage its size and take-rate to provide better customer support. From my chats with resellers, Poshmark was consistently mentioned as the platform that provides the best protection in cases where something went wrong with a transaction. Ultimately, this makes the service a lot more valuable to both sellers and buyers.
Poshmark was designed to be the app that brings a treasure hunt experience to online apparel. While generalist platforms like eBay and Mercari can be “good enough” for apparel resellers, it is nonetheless difficult to compete with some of Poshmark’s key features that have been designed with apparel resale explicitly in mind.
A core feature of the Poshmark app is the social element. When Poshmark users join the app, they join a community where buyers and sellers can follow each other, style each other, create bundles for each other, and so forth. There are constant “parties” where casual users can share items of their closet with interested parties. The advantage of Poshmark’s social features is twofold: 1) it helps with item discovery (buyers might not necessarily know what they’re looking for ex-ante), and 2) it creates stickiness within the app, where users often spend a significant amount of time (on average, about 30 mins per day). Time spent on Poshmark is time not spent on other marketplaces.
Till next time.