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Jurgis

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Posts posted by Jurgis

    Managing friends' money

    in General Discussion

    Posted

    For said tech friends, wouldn't the most critical investment advice be in the form of optimizing their 401ks, stock based compensation, startup equity, etc., rather than trying to beat the market by a couple % in their IRAs? Or maybe I'm incorrectly assuming that they're young and haven't accumulated much wealth yet

     

    This very likely. Handholding for 401ks, ESPPs, tax planning, asset balance, etc.

     

    I know it's cliche that good financial advisor is someone who does holistic work for client's financial situation covering all the areas. But IMO that's exactly what most people need - and not the CoBF "beat the market maybe" investment manager. But hey that's way harder work and probably requires way more skillz. And may take more time and effort and won't be cost efficient for not HNWIs. Unless you do it out of friendship and willing to help.

     

    And yeah a lot of people ask for TSLA tips or "double my money stat" tips rather what they should be doing with their 401k.  ::)

    Acceptable increase in commuting time for family folks who can now WFH 50%

    in General Discussion

    Posted

    However this is how I think this looks more in reality. In places that actually have those 30 minute commutes, I'm thinking here places like Raleigh, Pittsburg, Omaha, you could probably go an extra 15 minutes and get your dream house. But in those places housing is pretty affordable so if you really wanted to you could have done it where you are anyway.

     

    Places with long commute, I'm thinking here places like Toronto and Los Angeles, housing is really expensive so a somewhat longer commute doesn't really get you anywhere close to your dream house. That place would imply an untenable commute and you're likely already as far away from work as you can possibly take.

     

    This pretty much.

     

    Also, let me go with a personal anecdote that shows how complicated things are.

     

    My commute is about 20 min roundtrip (10 min one way) assuming not horrible traffic.

    OP scenario does not apply to me since I was already working from office 3 times a week and likely going to go back to the same after Covid.

     

    Actually, my situation is closer to 5 days commute that won't become 3 days commute: we also go to Tai Chi classes 1-2 times a week which is 30-40 minutes roundtrip. And occasionally some other trips with similar roundtrip times.

     

    Now, can I get something way better by adding 10 minutes one way?

    The answer is pretty much "No". The answer is doubly "no" if you take traffic into account, since 10 minutes one way is ~2 miles in traffic. But even if you assume no traffic, 10 minutes one way is below 10 miles or so. And 10 miles does not give you huge upgrade in Boston area. Especially if you start accounting for conveniences like keeping your doctor, having good restaurants nearby, etc.

     

    BTW, IMO OP overestimates cheap availability of land/water. If you want a lot of land, it's likely going to be away from freeway and streets add way more commute time than freeway. Water, especially desirable water, is very expensive. I doubt I'd be able to get the same house on the coast for cheaper if I went out 1hr roundtrip (that's 30 minutes one way). It's anecdotal, but I've looked at places for fun when we were going out with friends and "land+water" or just "land" in desirable small towns out 1hr roundtrip costs as much if not more than my house. So pretty much what rb said.  8)

    Managing friends' money

    in General Discussion

    Posted

    There's always two sides to this.

     

    There are good/great investment managers who started from friends-and-family and did great. Hey, Buffett is one of these. ;)

     

    There are good/great investment managers or just investors who never take friends-and-family money to avoid the issues that people describe.

     

    You just have to know the pros/cons and where you fall in this divide. Either can work, either can fail or lead to problems.

    Tax-Loss Selling Bargains

    in General Discussion

    Posted

    Yes, VSAT is interesting as Baupost has that board observer role. And with their recent investment in high 30s a 24% stake. So they’re not short on inside knowledge. Just wonder what they see of value given LEO threat.

     

    You could put high-powered lasers on the satellites and call them "Death Star"

    Valuing SaaS

    in General Discussion

    Posted

    Appreciate your thought processes on this.

     

    I don't know if this is the right way to think about it but here is my logic.

    Single customer in Y1 and Y2 provides $120 each year. Assuming that after year 2, it becomes an annual subscription renewal option with a 10% churn rate (ie 10% chance of losing them as a future customer), the expected revenue in Y3 ~ 90% x $120, then in Y4 ~ 90%^2 x $120, and so on and so on. After 10 years, the probability of this customer remaining will be ~ 35%, with an expected revenue of 35% x $120. It will take until year 25, for the probability to drop down to 7%.

     

    Taking this expected revenue stream, I discounted it back to present value (10% discount rate), which would give me a present value of ~ $600 for this single customer.

     

    Assuming that there is no significant CAC, and the net profit margin once stabilized is 30% (you are right, will likely be much lower if the gross profit margin is 50%), each customer would generate a present value of ~ 30% x $600 of value = $180. If the payback period is 1 year, then the CAC will ~ $120 and the value per customer would drop to $144 or [($600-120)*30%]

     

      (This number is an over-simplication as it doesn't account for growing cash flows with increasing deferred revenues, maintenance R&D, S&M to update software versions, subscription vs usage revenue models)

     

    So in 3 years, with 100,000 customers, $180 * 100,000 = $18 million of value on $12 million of revenue or $3.6 million of earnings on a 10% churn rate. It would be more valuable if they can reduce their churn rate over time (if they can drop their churn rate to 0%, then maybe you can think about a value of 10x $3.6 million earnings = $120/0.1 *30% x 100K customers = $36 million)

     

    If there is a possibility that the churn rate increases significantly after Y3, then the product is no good, led by an incompetent management team and it would become un-investable. SAAS should be inherently sticky because it allows businesses to see how their clients are using them and give them the ability to layer on needed/desired features. If they can't do that, then trying to sell their poorly functioning intangibles is likely an impossible task.

     

    Figuring out their growth rate is more difficult and probably more qualitative than quantitative. This is where I think about the quality of leadership, focus on experimentation, innovation, solving difficult problems, customer focus and delight, open source innovation vs proprietary, degree of industry collaboration, ability to not only grow vertically in their software stack but also to adjacent markets, ease of customer adoption, organizational structure, very large TAM etc.

     

    So if I can buy it at $18 million discounted back by 7.5-10%, or at $13-15 million today coupled with a judgment about their ability to reduce their churn rate and skill to grow in a manner that it unexpected (via the above qualitative features) as the free option beyond year 3. Then there is a greater probability of having a reasonable return. (aka Shopify --> Shopify Capital, Amazon --> AWS)

     

    Welcome any push-back on my logic.

     

    Thanks. I agree with Spekulatius that this is a good analysis.

     

    The only part that I would push back without going into concrete details is that I disagree with blanket statement that SaaS has to be inherently sticky and that the only reason for SaaS to collapse is incompetent management selling poorly functioning software. There are a number of SaaS markets where the offerings are very competitive and it is possible to lose market while having OK software and OK management. One example would be no-moat games.

    Valuing SaaS

    in General Discussion

    Posted

    Thanks jfan.

     

    I am not sure how you get to "It would take ~ 25-30 years to lose that customer." from 10% annual churn. Seems to me approximately all customers will turnaround in ~10 years.

     

    I am not quite sure how you get to $18M value in 3 years.

     

    This # doesn't account for any customer acquisition costs.

     

    I'd say that net margins account for CAC, no? Although it might be not the best way to account for it. And likely CAC will push down margins way lower in a growth phase than I wrote.

     

    You probably should have pushed back on my "then a wide distribution of outcomes: drop, plateau or capturing up to 100% of TAM", since it's so wide as to possibly make this un-valuable and un-investable.

     

    So Y3 sales are: 12M. Y3 earnings are 3.6M.

    I realize now I am probably way too generous with 30% net margins in 3 years for anything realistic, but maybe. Otherwise we can drop this lower.

     

    Post Y3, I'd probably go with some distribution:

    25% chance drop off after year 3, value at ~5M or likely zero to shareholders (they may sell to salvage, but may just fizzle off).

    25% chance muddle through, not significant growth, so whatever value we put at slow/no growth 12M sales/3.6M earnings company.

    25% chance of continued 15-20% growth. Value that at 3-5x Y3 sales - and here we have issue that 3x sales is 10PE because of high margins (/shrug)

    25% chance of 20%+ growth. Value that at probably 10x+ Y3 sales. At some point the risk becomes that company get close to TAM which kills growth.

    Value these separately, then get estimated value across all of them and discount to Y1.

     

    Unfortunately figuring out the distribution is likely very hard.

    Valuing SaaS

    in General Discussion

    Posted

    Looking at some ideas, input, etc. on valuing a SaaS company.

     

    For simplicity sake assume monthly $10 fee per customer ($120 yearly).

    Assume 2 year+ contract, i.e. no churn for 2 years, then possible churn at 10%+.

    Assume TAM 1M customers.

    Assume company starting with 10K customers now and growing to 100K in 3 years. And then a wide distribution of outcomes: drop, plateau or capturing up to 100% of TAM (unlikely).

     

    If needed, assume 50%+ gross margins, 30%+ net margins on 100K+ customers.

     

    How would you broadly value this?

    I won't post my thoughts for now to avoid too much anchoring.  8)

    Martin Gurri interview

    in General Discussion

    Posted

    People seem to worry a lot today about the rise of authoritarianism or the return of fascism.  I honestly don’t get that.  The digital tsunami has produced a crisis of authority for all forms of power.  How a Mussolini could arise in the age of social media, and overthrow democracy without an organization, a program, an ideology, or even a Mussolini, is something I’d like to have explained to me.  (And if the answer is Trump, forgive me if I snicker.) 

     

    I guess he has not heard of Putin, Erdogan, Venezuela, Hungary, and Poland.  ::)

     

    ....

     

    and now this thread can be moved to Politics section, kkthxok.

    Could any US parents give some tips on kids going to private schools?

    in General Discussion

    Posted

    We're facing this same question currently with two little ones about to start their school careers. Our main driver towards private school is that most districts in this area (Mass) are in hybrid or full remote "school" which isn't satisfactory for us. We'll likely end up sending them to Catholic school for K-8 and then re-evaluate for keeping them in for HS, or make a push for one of the more prestigious schools in the area.

     

    The fact that public teachers unions are pushing this remote model of school is troubling, and sadly hurts those who need school the most. I am concerned that this will wind up becoming a regular occurrence, with hybrid/remote school from Nov-March each year to avoid cold/flu seasons.

     

    So basically you want teachers to die for the privilege of teaching your kid?

    401k Rollover Help/Questions

    in General Discussion

    Posted

    Still for the life of me I can't fathom what foreign investing in hedge funds and startups have to do with RRSPs.

     

    ./shrug. It's just that if you search for "US person investing in Canadian companies / hedge funds" (or some variation thereof), you get a bunch of posts/threads talking about issues of US-Canadian person having RRSP. I think it's because US tax lawyers writing about US persons investing abroad also write about a (common?) situation of US-Canadian person having to deal with RRSP and US taxation.

     

    To be clear: I am not US-Canadian person. I don't have RRSP and I don't know anything about it. I have looked into investing into startups abroad (there's a bunch of landmines) and into hedge funds abroad (there are way more landmines, but the first one is that they are likely PFIC so don't). None of this is aimed at rb who probably can recite relevant tax issues while drunk racing me in his Ferrari. Just at random people reading CoBF.  ::)

    401k Rollover Help/Questions

    in General Discussion

    Posted

    rb, pardon too personal question: IIRC you're outside US. How the heck you have 401(k)? Were/are you working in US position while being outside US? Or are you asking for a client/friend?

     

    I'm asking not just out of curiosity but also since this may affect your conversions into Roth/etc. IIRC US accounts and non-US accounts and taxes can get way complicated really fast.

     

    Feel free not to answer though.  8)

    Yes. Among other things I had a position with a company in the US while also not being in the US. And yes, I am well aware of how complicated the international tax stuff gets. Right now I file taxes in 3 damn jurisdictions.

     

    I was just slightly concerned about this 401k rollover as I've never been in this position before and I'm not as familiar as the locals for which I assume this is a fairly basic subject. We just don't have the 401k vs IRA distinction in Canada. So I thought it prudent to reach out to my CoBF brethren.

     

    Got it. I believe you got correct information from this thread. You are possibly at higher risk of audit and therefore backdoor Roth conversion - though legal - might be another risk factor. Also, as currently-not-in-US-person, you most likely cannot rollover work 401(k) into individual (self-employed) 401(k) that has advantages in certain situations (including backdoor Roth). So forget last sentence. And good luck.

     

    OT: I was looking at investing abroad (outside US) into startups and hedge funds. During that I ran into the long threads about taxation and in particular US and Canadian RRSP entanglements. Not for faint hearted apparently.

    401k Rollover Help/Questions

    in General Discussion

    Posted

    rb, pardon too personal question: IIRC you're outside US. How the heck you have 401(k)? Were/are you working in US position while being outside US? Or are you asking for a client/friend?

     

    I'm asking not just out of curiosity but also since this may affect your conversions into Roth/etc. IIRC US accounts and non-US accounts and taxes can get way complicated really fast.

     

    Feel free not to answer though.  8)

    Coronavirus

    in General Discussion

    Posted

    Hording confirmed from my wife‘s sources in the Bay Area ( Asian people tend to be early). Long lines in grocery stores & Costco, some paper goods and Ramen noodles sold out etc.

     

    Very few people in Wegman's store Saturday morning. No lines to get in, not many people in store, and very short lines at registers. Last time we went to Wegman's (I think in June/July) there were lines to get in, store was crowded, and huge line at registers.

     

    Saturday nobody was hoarding at all. Huge selection of toilet paper, paper towels, etc. We bought some since hey Spekulatius told us to hoard  8), but we were the only ones buying. Some guy even made fun of our paper towels pack on the cart. ::)

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