My longtime business partner, fellow Canadian, and maverick CEO of our independent financial research firm Keith McCullough bought a bunch of copies of entrepreneur Peter Thiel’s book Zero to One and handed them out to our management team a couple of weeks ago.
Now, before I weigh in with the one important, fundamental flaw in his book, let me just say that I really enjoyed reading it—Thiel wrote a fun and insightful page-turner, filled with tales of immense entrepreneurial success, Silicon Valley insider baseball jargon and motivational life quotes.
Thiel begins his book with a question. It’s a thoughtful, rather interesting question that he normally starts every interview with job candidates or CEOs seeking financial investment:
“Tell me something that’s true, that almost nobody agrees with you on.”
In the interest of full disclosure, while I’ve never personally interviewed with him, I did apply for a job at Thiel’s hedge fund Clarium Capital many years ago, and if I were to sit down with him today, and he asked me the same question, my answer would be:
“Your book, Zero to One, is discouraging to aspiring entrepreneurs.”
Now why would I go and say that? For starters, because I believe it to be true. And based on glaring reviews from entrepreneurial notables including Mark Zuckerberg and Elon Musk, almost nobody agrees with me!
Look, I recognize and appreciate Peter Thiel’s success. Only a fool would question his business acumen, visionary insight and non-conventional thought leadership. That said, I don’t think his book is helpful to aspiring entrepreneurs. In fact, his advice can actually be discouraging and counter-productive. It encourages would-be entrepreneurs to singularly focus upon the one great, elusive, multi-billion dollar idea. Or as he calls them: “secrets.”
This is bad advice for a number of reasons. First, aspiring entrepreneurs will spend sleepless nights staring at the ceiling, racking their brain searching far and wide for the “perfect idea,” rather than just getting going on their idea. Here’s a question: Instead of trying to identify the next “grand slam” idea, what’s the problem with a “double” or “triple”?
Second, while there are only so many Facebooks, Twitters and PayPals in the world, there are plenty of other product and company ideas that fall somewhere between “working for someone else” and taking the leap of faith and initiative to do your own thing and starting a viable business. Thiel’s book discourages smaller scale entrepreneurship. What’s wrong with starting a restaurant? (See Danny Meyer).
Over the course of the last decade, I’ve been involved in a number of start-ups or turnarounds. My “day job” is Director of Research here at Hedgeye, which Huffington post recently called the ESPN of Finance. I’m an investor and board member of Sauce Hockey, which creates trendy apparel for the hockey market and recently became a part owner of the NHL’s Arizona Coyotes. I also sit on the board of FarmLead, which is North America’s only fully transparent agriculture marketplace and am an investor in FireFly Space, a revolutionary new space rocket company which is a derivative of SpaceX.
None of these companies currently boast billion-dollar valuations (although some do possess that potential down the road). Moreover, none of these companies, which have all been successful in their own right, would have ever started if the founders got hamstrung overanalyzing the uniqueness of their ideas.
As the famous quote goes:
“Twenty years from now, you will be more disappointed by the things that you didn’t do then by the ones you did do, so throw off the bowlines, sail away from the safe harbor, catch the trade winds in you sails. Explore. Dream. Discover.”
My humble advice to an aspiring entrepreneur is simple and can be summed up in three words:
Just get going.
Recognize that there is no such thing as the “perfect idea.” There never will be. And there is no perfectly uncompetitive market. There is only lost time and opportunity. Maybe you’ll hit a grand slam like Thiel or Zuckerberg. Maybe you’ll hit a double. Who cares? At a bare minimum, you’ll be in the game, on base. So again, just get going.
Having said all that (and even if I disagree with Thiel’s initial premise), he does offer some useful advice. From my own experience, here are three I would emphasize:
1) Distribution matters – This is perhaps the most critical lesson I’ve learned over the past six years. Simply put, it doesn’t matter how differentiated or proprietary your product or service is, your customers will not find it on without a cohesive sales and marketing effort. Definitely invest in a sales team.
2) Have a plan – Even though he is clearly a “big idea” type of guy, Thiel also emphasizes the importance of having a plan and measuring success against it. The plan can always change, but there has to be a benchmark for success or failure. A simple business plan (no matter how brief) with key metrics is critical to any business.
3) Cultural – Thiel calls the Silicon Valley computer science culture nerdy. Whether that is true or not, his point about knowing your partners very well and having similar backgrounds (at least when the companies are small) is critically important. When the going gets tough, and rest assured it will, it’s better to know the stuff your partners and colleagues are made of in advance.
Bottom line: Thiel’s book is well worth reading. Download a copy when you have a minute. But take it with a grain of salt and remember, there is power in action. Take your $100,000 idea, $1,000,000 idea or $1,000,000,000 idea and just get going for Pete’s sake!
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Have a great weekend,
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Takeaway: Mgmt gave us zero comfort that this can be a ‘big idea’ in the $60s. It needs to shake the etch-a-sketch on its business model.
On Tuesday we took LULU off Hedgeye’s Best Ideas list, and today we’re taking it off our Retail Long list altogether. We’re out.
In our BlackBook on Tuesday (Link: CLICK HERE) we said that there’s $4.00 in earnings power hidden in there, but we need the conviction that management could find it. After today’s call, we we’re far from convinced – even farther than we thought we’d be just a few days ago. In order to justify a 30x p/e and give anyone hope of something in the $70s or $80s (presumably what you’re playing for in buying it today) we think that the company needs to completely reset its business model.
By ‘reset’ we think it has to stop focusing so much on a) improving gross margin and b) building out its North American real estate market.
a) First off, we’re hard pressed to think we’ll get much pushback from people saying that they’ll pay up for a higher margin. That might be the case for KATE (6% on its way to 19%) and RH (9% going to 16%), but not for LULU, which is 21% down from 29% -- and probably belongs in the high teens – which is NOT a bad thing. Management made it clear that a key area of focus remains driving Gross Margins. That’s a #mistake – from both a tactical and a communications standpoint. Laurent noted how “we don’t drive our business with markdowns.” Well, unfortunately he competes with brands that do. As long as this team hangs onto this mentality, there’s a greater risk of an unexpected slowdown in quarterly revenue.
b) As for real estate, we outlined in our Black Book on Tuesday why moving into so many new markets in the US will prove to be dilutive to both productivity and comps. But that’s exactly what LULU double downed on. Management discussed adding another 100 stores in NA (US, mostly), some of which will be larger-format stores that will deleverage occupancy costs (and are untested)
Is Lululemon a great global brand? Absolutely. But Lululemon Athletica, Inc is not a great global company. It’s not even a good global company. Let’s be clear, it absolutely can get there. But it has to break out of this North American owned retail-centric model and follow companies like Kate Spade, Kors, Nike, Ralph Lauren, and Under Armour (KATE AND UA are the most appropriate comps for many reasons). That means aggressively building out its international model – not by adding a token store in Dubai or ‘doubling’ its presence in Singapore by adding one more store. It needs to own the customer relationship by producing different product for different customers at multiple price points and distribute where the consumers shop. It’s not enough anymore to build up stores in new markets (or fill-in markets) and expect consumers to come shop. They need to be where the consumer shops. That means selling at Retail (which they do), e-tail (they’re getting there), and importantly – wholesale (zero presence).
It was pretty clear that this team collectively is focused on doing the same thing it’s done all along – just better. That’s not enough for us. We need it to think bigger. The brand can handle it, and stockholders deserve it.
The other key factor was new CFO Stuart Haselden, who has only been on the job for about six weeks. There are a lot of puts and takes here.
- The guy sounded like he’s been at the company for six years, not six weeks. He had an extremely strong control of the numbers for someone who was put in front of shareholders for the first time.
- As he reviewed the numbers, I scratched my head wondering how he could sound so comfortable in such a short time. Then it hit me…he was literally reading the script that former ‘cfo’ John Currie used for years.
- He sounded more convincing than Currie, which is a plus. But we wonder what kind of mandate he has to illicit change and build a finance culture inside a company that was built specifically to box out any kind of ‘finance culture’. (NOTE, both UA and KATE have one).
- The Q&A was a bit redeeming, in that Stuart answered 75% of the questions. He literally took over from Laurent, and it was difficult to tell who was running the show. Either a) he’s the more dominant personality, b) Laurent – who is naturally uncomfortable with analysts after his disastrous first outing last year – asked Haselden to take the lead, or c) The Board – who we think is Haselden’s REAL boss, told him to dominate the call.
- Either way, the dynamic was very notable. We can only hope that this results in a material change in the decision making at LULU. That has yet to happen. But in fairness, it is way too soon to happen. We’re inclined to think we’ll be looking at more meaningful changes in the functionality of this leadership team later this year. But again – we need draconian changes in the model as outlined above to make this a great stock. We’re comfortable revisiting it when the research suggests that’s happening.
Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.
LONG SIGNALS 80.52%
SHORT SIGNALS 78.68%