BIG IDEAS AND BOLD DISPOSITIONS
I first met Alec Slocum, founder of Abodo, at a Milwaukee entrepreneurial event in January 2014. It was packed house, the kind in which who you meet is more a function of who you bump into in route to retrieving a cocktail at the bar. As we chatted and he shared what Abodo was trying to do, the idea of bringing a better online platform for finding apartments, I asked him, “That’s a pretty daunting endeavor taking on an entrenched player like Craigslist. You up for it?” He replied and smiled back, “Yes, and we are going to kick their ass!” And with that bold statement a great professional relationship as an investor and friendship began.
Over the course of the next month, I had the opportunity to meet with Alec and his team – to learn more about the business – to engage in a vigorous question and answer exchange I like to employ, and ultimately, frame in my mind what they brought to the table and what challenges lay ahead. Certainly, the idea of replacing a market leader like Craigslist that was ignoring user design and functionality was front and center. The idea of focusing on Tier II cities, when that strategy was less popular, resonated. Their team also had a tremendous complementary set of skills and capacities that would be an asset.
THE EFFECTS OF CHEAP MONEY
However, there was another key thought I kept coming back to – one totally disconnected to Abodo’s direct work. One of my professional interests is in following the twists and turns of macroeconomic policy and its impact on our country, industries, and businesses. I spent many years as a partner for a derivatives trading firm in Chicago and our job each day was to piece together how the decisions of economic leaders in Washington, D.C. would affect the lives of people and companies in places throughout Main Street America, places like Madison, Wisconsin where Abodo is based.
In early 2014, the Federal Reserve and Ben Bernanke were busying taking a victory lap having saved the global economy from the Great Recession. For those less familiar with the economic sausage-making business of our government, the Federal Reserve is the institution that sets monetary policy for the country and is responsible for the lowering and raising interest rates via the Federal Funds Rate. They add a little elixir to the economy when it slows and take away from the punch bowl when the “party”, the economy, gets too hot.
In late 2000s and up to this day, the Fed has reduced and maintained interest rates down at zero percent/ultra-low rates to liven up the economic party and provide a support-mechanism to impaired companies and balance sheets. You may feel the effects of this policy every month when you look at your bank savings account statement. This has done wonders in giving the country time to recover. It gave a “pep to the step” of the stock market over the years through higher valuations, allowed banks that were carrying bad loans access to capital, and provided deeply discounted money for people willing to speculate and chase opportunity.
Source: Fed Funds Rate Chart: FRED
Now, unfortunately, not all angles of this policy are positive and one of the conundrums is that for large asset holders – people that have to invest large pools of money (pension funds, institutional investment companies, family offices, insurance companies, etc.), the asset class of bonds, one that predictably provides interest income, diversification, and steady return has been taken off the table as a productive investable asset class. “Where do I invest and where can I find safe and steady income when interest rates are so low?” This question and predicament have forced fund managers to stretch and invest into activities in new and creative ways and over-allocate in asset classes that have similar investment characteristics to bonds.
So how does this all tie back to Abodo? Apartments have very similar cashflow streams to bonds – consistent, low volatility and time centric. And if we conclude, apartments would be/are a natural replacement to bonds for asset managers, it is not surprising to have watched all the cranes in the air, the associated construction over the last 10 years, and a huge supply of apartments brought to market as risk-takers took advantage of the “cheap money” and asset managers fueled the activities by underwriting all the projects.
THE RAW MATERIAL NATURE OF VACANCIES
Connecting the dots…If we think about apartments, their associated vacancies, and the apartment listings that are connected to them as “raw material”. And, if we envision Abodo as an intellectual processing agent – an online marketplace and “refinery” of vacancies. And finally, if we believe the world is producing “too many apartments” for the long-term equilibrium of the market because of low-interest rates.
It presented in 2014, and still presents to this day, a unique and timely opportunity for Abodo and others to strategically position and take advantage of a world that is producing too many apartments because of cheap money and an over-allocation to the real estate asset class. Those types of supply/demand anomalies do not arise every day and have provided Alec and his team with “the foundation of a secular force” to fuel growth for years to come.
Would other traditional VC investors have connected those dots in 2014…maybe, but probably not. It was my varied set of experiences, my broad prism, and my non-conventional way of thinking about the company, that recognized a timely and structural element to the startup’s future.
THE BIG FINISH TO 2019
I share this story to showcase an important link within innovation, entrepreneurialism, and disruption, and venture capital investing. Most big ideas, the next generation in how the world will work, initially come with a lot of pushback from society. Innovators tend to think about problems in unconventional ways and buck the status quo of life. In many cases, these initial ideas are met with deep skepticism and resistance and as a result allow a startup the necessary head-start and time to build out their new businesses, create new industries, and outpace entrenched players. In many cases, it takes years for popular sentiment to change and Joe Public to recognize the disruptive force’s importance.
Certainly, industry expertise and the associated conventional thinking are essential pieces to considering the future, solving big problems, and originating new ideas. One sees how it touches our lives each and every day and how society values it with monetary reward. However, when we look at the nature and underlying core of what drives innovation, there is a deep root of contrarianism embedded in its foundation. More importantly, the types of individuals willing and able to play in that spectrum need to have a qualitative vein and the courage to weather the conditions that come in that disruptive discourse.
Bold Coast Capital will look at the world through a broad and unconventional prism. We will use varied personal experiences and a team comprised of individuals with different backgrounds and industry expertise to look for opportunities in ways and areas others are not. We believe this process is essential in appreciating and aligning with people that are thinking about problems in unique ways and that take the world to a place that is distinct from practice today.
Over the holidays and into 2020, I would encourage everyone to read David Epstein’s book Range – Why Generalists Triumph in a Specialized World. Certainly, one could say Bold Coast is drinking Mr. Epstein’s Kool-Aid on some the themes and assertions shared within. He sheds light on many interesting empirical studies, anecdotes, and bodies of research around the generalist/specialist debate and suggests the ability to solve difficult problems and create significant new avenues of growth is deeply rooted in having a diverse set of experiences in your pocket. This discussion and idea is not absolute, but it is a provocative concept to deliberate as we think about innovation, its origins, and how it affects our local entrepreneurial ecosystem.
I look forward to engaging with the community on this and other big and bold ideas in the future and wish all of you the best professionally and personally in the new year and decade ahead!
Bold Coast Capital