Beyond Bullshit

Email agenda:

Estimated read time: 9 minutes 17 seconds

1. Beyond Bullshit

2. Asset Classes, Diversification, Illiquid vs Liquid Investments & Time Horizons

Good morning and happy Monday - let's get smarter

Beyond Bullshit

It's hard to find a company that has fallen in terms of consumers view and stock price as hard as Beyond Meat ($BYND)

When I was a senior at Penn State, I listened to the former CEO of Oracle talk about Beyond Meat and I honestly thought it was revolutionary

A burger that looks and tastes like a burger but is healthier because it's plant based?

Pure genius

The only issues they ran into were that the burgers are do not look like a burger and are not healthier in terms of calories than a real burger

So basically, just a great idea turned a terrible one

The only thing worse than their product is their financial performance over the past few years

(Picture from @ecommerceshares on Twitter)

Some facts from the P&L above

1. $BYND has negative gross margins, meaning the direct costs of the product are more than the revenue they are making from their product (I mean holy f***)

2. Their shares outstanding went up from 63.35m to 63.75m. This means they issued shares and some people were willing to buy them..... (who are you show your face)

3. They have a negative 84% profit margin. I mean if they are trying to be terrible than they deserve an Oscar for this performance

4. They burned through $310m of CASH

AHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH

The great SPAC boom of 2020 left us forgetting that the goal of a business is ultimately to make money to return to their shareholders

So why do people invest in companies that don't make money?

The belief is that at scale as the company grows, they will eventually make money and you are investing for the future value of the cash flows they generate

That's why one of the ways we have discussed to value a company is a DCF, or a discounted cash flows analysis

The basic idea behind DCF is that the value of a company is equal to the sum of its expected future cash flows, discounted to their present value using an appropriate discount rate. The discount rate reflects the time value of money, as well as the risks associated with the company's cash flows

In English - the more riskier the company or the more volatility in the expected cash flows, the higher the discount rate

Why?

Because the higher the discount rate, the lower the value. If it's high risk, you want to increase the discount rate to account for this risk which lowers it's value

That's why a fast growing startup may have a 20+% discount rate, while a boring predictable company that continues to grow year over year and has been around for 30+ years might have a 10% discount rate

A company like $BYND would have a high discount rate

Another way to assess valuation is based on multiples

Enterprise value / EBITDA

or Enterprise value / Revenue

If a company sells for 10x EBITDA, and their EBITDA is 5x, they are valued at $50m

A lot of companies that are growing and aren't cash flow positive trade based on their topline revenue because there isn't any EBITDA yet

Remember - EBITDA is a proxy for cash flow

Net income or "profit" can have expenses in it like depreciation that aren't actual cash expenses

You don't pay depreciation expense, it's an accounting expense, not a cash outflow

Cash flows are what can get distributed back to investors by way of things like dividends

That's why you will see multiples that have EBITDA in the denominator and not net income or profit

So early on for Beyond Meat, they were valued on a REVENUE multiple because the expectation was sometime in the future they would start generating EBITDA (this was the same idea with Uber it just didn't happen)

For fast growing companies, sometimes they even are valued on forward-looking numbers

This just means the multiple (4x revenue, or 4x EBITDA) is applied to a projected number in the future, rather than a current number

Example

Our current revenue is $10m, but we are projecting to end 2023 at $20m

We will sell on our forward looking revenue ($20m)

Doesn't always work, but often worth a try

Well our friends at Beyond Crap back in 2020 were trading at 18x forward revenue....

Today, they trade a 4.32x current revenue

And they don't trade on an EBITDA multiple because they don't have any

How do you fix a business like this?

The answer is it's almost impossible

With negative gross margins, you can cut overhead like payroll and other operating expenses all you want and you still won't make money

Not to mention they also have sales slowing instead of growing, so they can't even preach the growth company narrative

If you are a fast growing company losing money, you can say you are reinvesting all of your cash back into the growth of the business (more employees, more marketing) and that's the reason you aren't profitable, but you will be

That's fair

Beyond Meat isn't growing, they aren't winning market share, and they have a dog shit product that no matter how many operating expenses they cut, they will still be bad

Maybe that's why their COO got arrested for biting someone's nose?

He was able to bite off about $6 billion of valuation over the past few years!

Quite impressive

I would bet that the nose probably was better than a beyond burger....

This is a reminder that it's super important to pay attention to math and numbers in markets over stories

PROFIT does not mean they were cash flow positive

Jury says.... Beyond cannot compete

It's a classic story of a company that sounded like a great idea, but the numbers and success were never there to show true changes in consumer behavior

I can't even tell you if/when was the last time I ate a beyond burger

If I see it on the menu and I want a burger I wouldn't even blink twice before picking the real burger

Beyond Meat is the definition of......

Maybe this garbage company will be the next game stop pump and dump from Ryan Cohen?

I think that's the only way investors will get a return on their capital

Illiquid vs Liquid Investments & Time Horizons

The are so many different investment vehicles nowadays, that it's important to understand the differences between various asset classes

One of the most important aspects of an investment is liquidity or lack thereof

In English - how easily will it be to access this money if I need it?

When it comes to investing in a private equity or venture capital fund, there is typically a lockup period where you cannot get your money back

For venture, this could be 7 years

For a real estate investment fund, this could be 7-10 years

So why would you invest in something like this?

It goes back to a discounted cash flows!

Your belief is that over the course of time, this investment will generate significant amount of cash flows to compensate you for the long lockup

The returns being offered outweigh the lack of liquidity aka, you'll generate me enough of a return on my investment that it's worth me not being able to pull out my money for years and years

In venture, some funds can 10x your money over that 7 year horizon

If you don't need that money and can pretend like it doesn't exist, it may be worth having a small percentage of your capital in longer-term higher upside investments

Typically however, these private funds have an investment minimum (could be $50k, $250k)

Additionally, most of these funds require you to be an accredited investor

To qualify as an accredited investor, you must meet at least one of the following criteria:

• Have an annual income of at least $200,000 ($300,000 for married couples) in each of the two most recent years, with the expectation of earning at least the same amount in the current year.

• Have a net worth of at least $1 million, either individually or jointly with a spouse. Net worth is calculated by subtracting total liabilities from total assets.

• Be a general partner, executive officer, director, or a related combination thereof for the issuer of a security being offered.

• Be a business in which all the equity owners are accredited investors.

If you become an investor in one of these funds, you are considered a limited partner

A limited partner in an investment fund is just an investor that has no say over the investment decisions of the fund, that would be what they call the general partner of the fund itself

A good strategy that I like to think about is having various different asset classes with different horizons and expected returns

Having liquid investments like stocks and bonds in Vanguard that I can access at any time

Will get back into crypto that will be higher volatility and risk, but liquid because I can sell to another person on an exchange like Coinbase

Having venture investments that are illiquid that could 100x or go to zero

If you are in a venture investment, unless you get it approved by the company and find someone to buy your shares, you will not get your money back until there is an exit or liquidity event of some sorts and this usually takes 7-10 years

Having hospitality investments that pay dividends quarterly

And then looking to add in real estate next

This diversifies me across asset classes when there are economic downturns, and gives me cash flow from some investments and high upside but no cash flow from others

Thinking through your current setup, are you over allocated to one asset class that could drastically impact your returns if the market dynamics change?

Don't let yourself be that guy or gal!

This week, I went to a coffee shop in Scottsdale and overheard 2 founders discussing their startups

They both came and talked to me later during the week to pitch investing in their fintech startups

You'd be surprised how many opportunities are out there if you keep your head on a swivel and some of them do not require you to be an accredited investor

Don't have all of your eggs in one basket, especially with things in the global economy getting awfully spooky

- Dev

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.