Weekly Briefing No. 133 | X is Too Damn High

This week, we found ourselves rueing the rising threat of volatility and instability on several fronts. Indeed, many things besides the rent are too damn high. So with a nod to Jimmy McMillian, founder of the Rent is Too Damn High Party, we thought we’d break from our format and dedicate this issue to some things within our scope that are also too damn high.

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Note: We are taking a publishing break next week. We'll be back on June 16th.

  • College and graduate school tuition
  • The price of sell-side research
  • Days to settle leveraged loan trades
  • The effort needed to keep qubits stable
  • Healthcare as a percentage of the economy
  • The attention to coastal VC deals
  • The EOS ICO fundraising
  • Softbank’s checkbook
  • Senior citizens’ vulnerability to financial scams
  • Pastrami sandwich prices

X = The cost of education...

Here’s a story in the (not failing) New York Times drawing the connection between America’s soaring student loan bill ($1.4 trillion) and our three-decade low in homeownership for Americans in their 20s and 30s. But while one of the principal subjects of the story, Rebecca Mills, is grappling with $60,000 in debt accumulated from the University of Massachusetts and Rutgers, her woes pale in comparison to those of Utah orthodontist Mike Meru and his family. Meru earns a nice living, drives a used Tesla and owns a home along with his wife. But according to The Wall Street Journal (subscription), Meru is one of 101 people who owe at least $1 million in federal student loans. Of course, Meru could be driving a used Toyota rather than a Tesla, but the point remains that student debt represents a significant economic headwind to younger Americans. One company fast at work in addressing this topic is Guild Education, a three-year-old Denver-based start-up that announced a new partnership with Walmart this week. Under the program, Walmart’s employees can earn their undergraduate degrees in either business or supply chain management at one of three colleges for a contribution of just $1 per day.

X = The price of sell-side research...

On Tuesday,  JP Morgan’s Daniel Pinto dished on a host of interesting topics in a Q&A with Deutsche Bank’s Matthew O'Connor at his bank's financial services conference. The most interesting exchange during this upbeat conversation involved the impact of MiFID II, in which Pinto suggested that the MiFID margin pain felt by some firms is his opportunity. Pinto also confirmed that while some clients were opting out of receiving JP Morgan’s research, clients were attending the bank’s conferences in greater numbers as a more efficient way to take in investment ideas.

X = The number of days it takes to settle a leveraged loan trade...

We don't think that blockchain technology is going to upend the leveraged loan trading market tomorrow. Yes, the manually intensive process associated with settling transactions, which can often take weeks, is fundamentally antiquated. However, as PIMCO's Beth MacLean points out in the Bloomberg article below, banks play an important intermediating role when it comes to KYC and handling borrower requests that simply can't be blockchained away. Still, we think companies like Synaps Loans and fintech giant Finastra are worth watching, as they are shining a light on the old school ways that govern the asset class. Over time, we think their efforts stand a good chance of achieving their core objectives of bringing more transparency and efficiency to the loan market.

X = The amount of kilowatts needed to reach 20 millikelvins...

That’s the very cold temperature required to keep some forms of qubits stable. And while we know for certain that a few major US banks are exploring potential applications of quantum computing, we’re pretty sure that these firms are leaving the underlying hardware and software development to the likes of IBM, Intel, Google and the increasing number of quantum computing start-ups that have been funded in recent years. So, how much progress is being made by the quantum computing ecosystem? Check out the recent interview with Jim Clarke below for some clues. Clarke, the director of quantum hardware at Intel Labs, uses a great metaphor to simplify quantum computing, explains why qubits are so fragile and discusses how many years away we are from world-changing quantum innovations.

X = Healthcare as a percentage of the US economy...

Nobody knows how to fluoresce innovation better than KPCB’s Mary Meeker, whose annual internet trends deck should be required reading for anyone interested in technology (and for every elected official and regulator too). In her recently published 294-slide 2018 vintage, Meeker sheds light on too many important innovation trends to mention here, but we are taking special note of her slides on healthcare spending (Slides 132-140). As we’ve said ad nauseum, healthcare, not software, is eating the world. We’re glad to see that Meeker has a) included slides that are sympathetic to our position (See Minute 19.15 for her discussion on this topic) and b) pointed to some of the trends on the horizon (i.e, the consumerization of healthcare) that could help tackle this ornery wildebeest before it’s too late.

X = Attention paid to East and West Coast deals...

Yes, meaningful deals like this one for Tradeshift and this one for Paxos happened on the US left and right coasts. But this week, we thought it would be nice to turn our gaze elsewhere. So we're noting that China’s AI powerhouse SenseTime raised more than $600 million and London-based roboadvisor Moneyfarm took in £40m in new funding. Across the channel, Paris-based QuantCube Technology, a provider of AI-based predictive analytics, closed on a $5-million round, and Copenhagen-based Pleo, a provider of smart payment cards for employees, announced a $16-million Series A. Meanwhile in the American heartland, Minnesota-based Channel Partners Capital announced a majority equity investment from Elliott Management to boost the company’s SME lending activities. Finally, Dallas-based Neighborhood Goods took in $5.75 million to further develop its community-based, experiential approach to reinvigorating America's stagnant mall sector.

X = The total size of the EOS ICO...

A $4-billion ICO orchestrated by a Cayman Islands start-up that hasn’t launched a product or specified how the capital will be used… Really? The folks behind Block.one, including Brendan Blumber and Daniel Larimer, may be geniuses, and perhaps they can avoid the founder trainwreck that is now jeopardizing the Envion project. But if there were a show entitled ICO Shark Tank, and EOS was featured, and we could play the role of Mr. Wonderful, we’d be out even before the brilliant founders began to speak.

X = Softbank’s average check size...

Softbank’s shock and awe checkbook was once again stroked, as its Vision Fund dropped a cool $2.25 billion into GM Cruise Holdings, which gave GM’s autonomous vehicle unit a valuation north of $11 billion. With this new investment, Softbank’s latest portfolio company will join a group that includes Uber, Didi Chuxing, Grab, Ola, Nauto and 99. (Complicating matters even more is GM’s nine percent ownership in Lyft.) It’s hard to know how Masayoshi Son’s from-the-gut investment style will fare in an eventual economic downturn. We are also keenly aware of his legendary $20-million investment in Alibaba, which at the time had no business plan or revenues — just Jack Ma’s shining eyes. Still, it seems like Softbank is putting an awful lot of capital to work in several richly valued companies over a fairly short period of time.

X = The vulnerability of senior citizens to financial scams...

It’s a true shame that older Americans are the most vulnerable subset of the population to phishing scams and other tricks to separate them from their money. As such, we’re taking note and applauding Banco Santander’s Scam Avoidance School, which we hope spreads to the US.

X = A genuine pastrami sandwich at an iconic NYC deli...

As Mary Meeker pointed out on Slide 81 in her internet trends deck, an increasing percentage of consumers are willing to commit to subscription-based business models for a host of products and services that used to be pay-as-you-go. Perhaps next year, Meeker will have cause to add Katz's Delicatessen to the venerable list of brands she references. That’s because the iconic 130-year-old deli on East Houston Street, which charges 21.45 (dollars, not shekels) for a pastrami on rye, just announced a clever new program to turn its pastrami sandwiches into a recurring revenue stream. Hopefully, the program will reduce the cost-per-delicious-bite metric that is closely watched by venture capitalists in the deli sector.

QUOTE OF THE WEEK

“Negotiations are a euphemism for capitulation if the shadow of power is not cast across the bargaining table.”

~ George P. Schultz