A Few Things: What Is Happiness?, Goldman & JPM on Energy, The American Gas Crisis, Why Women Are Poorer Than Men, a16z on Crypto, The SaaS Crash
May 21, 2022
I am sharing this weekly email with you because I count you in the group of people I learn from and enjoy being around.
"You need focus to become exceptional at anything.
Massive amounts of time and energy are wasted optimising things that should be left undone.
You have to be great at saying no."
- James Clear
A. A Few Things Worth Checking Out
1. NYT article on The Rich Are Not Who We Think They Are. And Happiness Is Not What We Think It Is, Either, by Seth Stephens-Davidowitz, a big data researcher who looked at a number of happiness studies.
The most important happiness study, in my opinion, is the Mappiness project, founded by the British economists Susana Mourato and George MacKerron. The researchers pinged tens of thousands of people on their smartphones and asked them simple questions: Who are they with? What are they doing? How happy are they?
From this, they built a sample of more than three million data points, orders of magnitude more than previous studies on happiness. So what do three million happiness data points tell us?
The activities that make people happiest include sex, exercise and gardening. People get a big happiness boost from being with a romantic partner or friends but not from other people, like colleagues, children or acquaintances. Weather plays only a small role in happiness, except that people get a hearty mood boost on extraordinary days, such as those above 75 degrees and sunny. People are consistently happier when they are out in nature, particularly near a body of water, particularly when the scenery is beautiful.
Big data tells us there are very simple things that do make people happy, things that have been around for thousands of years. After reading all the studies on happiness, I concluded that modern happiness research could be summed up in one sentence, a sentence we might jokingly call the data-driven answer to life.
The data-driven answer to life is as follows: Be with your love, on an 80-degree and sunny day, overlooking a beautiful body of water, having sex.
Thank you Imran for flagging.
2. Goldman Sachs and J.P. Morgan had two great reports on Energy last week. Some charts that stood out:
It always surprises me how little energy the rest of the world uses versus US & Canada.
This is who owns our Natural Resources:
We have a very large supply / demand mis-match ahead of us on Oil:
This is primarily due to a lack of capex in the Oil industry:
3. The Gas Crisis Coming to America.
Great Q1 letter by Goehring & Rozencwajg, a natural resources asset manager.
The upheaval impacting international gas markets has largely bypassed North America over the last 12 months. US natural gas briefly surpassed $6 per mmbtu last September before falling back to $4 by December. At the same time, European gas reached $50 per mmbtu, twelve times higher than in the US. The natural gas crisis gripping huge swaths of the world has so far showed little inclination to move across either the Pacific or Atlantic ocean. “Gas crisis? What gas crisis?” might be something asked by North American investors today.
In this essay, we explain why North American investor apathy is foolish. Our models suggest the decades-long protection from international price swings, enjoyed by the North American gas market, is about to change. Slower-than-expected shale growth will push the US market into structural deficit for the first time in 15 years. Almost immediately following the shift, US prices will converge with global gas prices. Given today’s $35 per mmbtu international gas prices, prices could surge by almost four-fold.
Most investors can only extrapolate a trend. In this case, the trend has been near endless growth from the shale gas basins.
The idea that gas supply could falter and as a result that US gas prices could nearly instantly rise four-fold is completely off any investors’ radar. And yet, this is exactly what our models are telling us could happen within the next six months.
The world has enjoyed a decade of cheap, abundant energy and nowhere has that been truer than in US natural gas. We consume nearly as much energy via natural gas as we do via crude oil, although it is usually an afterthought. The rest of the world is in the midst of an acute gas shortage that has grabbed everyone’s attention. We believe the same is about to happen in the US -- much faster than anyone realises.
4. An interesting question to ask at this point in the cycle:
B. Why Women Are Poorer Than Men
I read this book over last weekend and it really changed my view of the world.
For the last few years I have espoused the Jordan Peterson’s view on this subject, but after reading Annabelle Williams well researched message on this issue, I can see where the JP version is both inaccurate and sensationalist.
There is a lot we need to do about this.
Here is 2 mins with the author to get you started:
C. The Tech and Crypto Section
1. The biggest news in Crypto over the last two weeks has been the collapse of the Terra/Luna ecosystem.
It will go down as one of the most painful and devastating chapters in crypto history. Over $60 billion market value has evaporated, and numerous retail investors are nursing major losses.
Some people obviously saw it coming, and understood it to be a disaster in the making.
Odd Lots spoke to Kevin Zhou, the founder of the crypto hedge fund Galois Capital. He began warning about Terra publicly earlier this year, and was short Luna starting in early May. He explains the exact mechanics of the coin's implosion.
Thank you Yuriy for flagging.
2. a16z has a Crypto Startup School - with lectures from Chris Dixon, Brian Armstrong, Balaji Srinivasan, Brian Brooks and others.
Here is the opening lecture from Chris Dixon on Crypto Networks and Why They Matter.
Thank you Yaser for sharing.
4. Meritech Capital had a useful analysis on the 2022 SaaS Crash.
Meritech Capital is a shareholder in Amplitude, Braze, Datadog, Okta, Snowflake, Twilio and UiPath. Meritech was a former investor in NetSuite and Salesforce.
The average SaaS public company market cap is down 57% from its 12-month highs. Forward revenue multiples – the primary valuation methodology for public SaaS companies - have fallen on average by 67% from their 12-month highs and for some companies by almost 90%. The fastest-growing companies, which traded at the highest multiples before this sell-off, were hit the hardest.
The chart below compares the peak NTM revenue multiples over the last twelve months to today. The peak NTM revenue multiple median was 50.8x and that median has dropped 80% to 8.8x today. The companies are sorted by peak NTM revenue multiple.
The chart below compares the peak market cap over the last twelve months to today. The peak market cap median of this group was $31.2B. The median has dropped 67% to $7.7B today. The cumulative market cap of this set of companies has dropped almost 70% from $1.1T to $379B. The companies are sorted by peak market cap.
Their Framework for the Future:
Every SaaS company (and any company with negative free cash flow) should prepare for a scenario in which they trade at 10x NTM revenue steady-state. This might mean that a private company with a high valuation will need to grow its revenue much more than their investors initially anticipated to be “in the money.” Private companies receive well-deserved premiums, but if a company raised money at a $1B valuation and is at $10M of ARR, you likely have to get to $100M of ARR and still be growing quickly to be worth that same amount in today’s world as a public company. Right now, public market investors are not valuing growth at all costs. Growth and efficiency together are the most important determinants of valuation. Public and private SaaS companies alike will have to rethink operating plans to gain leverage and efficiency. While many companies (private too) are planning for potential further reduction in value, what if there is a degradation in the top-line assumptions companies are using for their plans? Every company should scenario plan for impacts at the top of the funnel – the goal is to understand not only the cost side of the equation but also the demand due to potential changes in macro factors.
Thank you Wouter for sharing.
5. My friend Jamie Montgomery at March Capital has been investing in venture and technology for decades. I’m a big fan of both March Capital (disclosure: I am a LP in March Capital VC funds) and his annual Montgomery Summit in Santa Monica.
He recently spoke to dot.LA about on the Intersection of Innovation and Creativity.
The best investors and leaders have an innate inquisitiveness about the world around them, and seek out opportunities not just based on market trends but genuine observations about problems in desperate need of solutions.
“You sort of have to be a very heuristical thinker,” Montgomery said. “Sometimes I find some people I talk to are very smart and interesting, and I think, “That person’s very thoughtful. They’re going to be a good investor.’ Sometimes you meet people and you think ‘Well, they come across smart, but they’re always preparing what they’re going to say in response to what you have to say, they’re not really listening.’ Being a good investor, you’ve got to be a good listener. You’ve got to figure out, what’s the signal and what’s the noise? Filter out the noise and say ‘What’s real?’”
Thoughtfulness, attentiveness and curiosity are typically the sort of attributes that we think of as innate, as opposed to skills you can improve via on-the-job training. Montgomery noted, “I always ask entrepreneurs why rather than what. You get a more interesting answer.” Reading and research and investigation can help, but innate curiosity remains an essential ingredient in business success.
“If you’re investing, you have to look at something that’s inevitable,” Montgomery explained. “Is it gonna happen or not. If it’s inevitable, then the question is, is it imminent? And is it investible? Start with inevitable. Eventually you’re going to have quantum computing, and that’s gonna create an existential threat to cybersecurity. Is that imminent?... What is the post-quantum cyber world like, with all this information that’s been siphoned out of America by China… what do they have and how do we prepare for a post-quantum cybersecurity? It’s almost existential.”