Assets that don't earn

Investing is an exercise in evaluating how an asset's “intercept” — the current state of internal affairs, collection of assets, and known information about the competitive environment — will influence its future “slope”.



In the early stage market, this becomes especially challenging as there is necessarily limited and incomplete information about a company's intercept upon which to base the evaluation of what shape and grade that slope will take over time.



In more mature companies (think Coca Cola or Salesforce) there, somewhat obviously, tends to be a tighter band around how the slope will trend. With more information available about the company — long term contracts, benchmarks against competitors, established leadership teams — more of the slope is locked in (and priced in) over the next year and beyond.



The earlier in its lifecycle a company is, again somewhat obviously, the less locked in the pitch of the slope is for any period of time into the future. This same framing tends to apply to building products and companies in new markets with few predecessors upon which to accurately contextualize progress.



A company's journey from new to mature is a journey from hypothetical value to real value. Mature companies are valued on their ability to turn assets into cashflow while emerging companies are valued on what might be called "assets that don't earn".



Put differently, mature companies are valued on their accumulated advantage while startups are valued on their accumulating advantage.



Accumulating advantage is core to the investment philosophy of many top early stage investors— including Keith Rabois who discusses the concept on this great podcast with David Perell of North Star Media — but it remains a challenging concept to fully internalize and identify in real time when evaluating an investment opportunity or thinking through how to create a “rich get richer” virtuous cycle in building a company.



One helpful example to illustrate the idea of accumulating advantage is Netflix and the (painful) journey that public market investor Bill Nygren took to finally understand how to assess the company's strategy and, by extension, the pitch of its future slope and its valuation.











In addition to analogies like this, I've also found it helpful to develop a few supporting questions (incomplete and constantly in development) that I ask when trying to understand if a company has a valuable accumulating advantage.



  • Is this company making tradeoffs that its competitors are unwilling or unable to make?

  • Why is the business “easier” now than it was 6 months ago and what will make it easier 6 months from now?

  • What unique bundles is this company built on? (Note: An example here might be a team competing for similar customers with a similarly featured product but gaining an advantage because of a proprietary distribution channel enabled by founder domain expertise and experience. Put differently, what "secrets" is the company founded on?)

A company's accumulating advantage and its “assets that don't earn” (yet!) represent the tip of the sphere behind which all the power of all of its resources should be aligned. For any capital allocator — an investor evaluating a company or an executive making decisions from the inside — cutting to the core of what drives a company's accumulating advantage is crucial to sustaining success.

I am a Paris-based early stage venture investor at TechNexus where we invest globally in companies transforming the way we work and live.



You can email me at brett.bivens@gmail.com

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