• Value investing framework solidified by Benjamin Graham and tech truisms epitomized in “growth” stocks, such as Facebook, Apple, Netflix, Microsoft, Amazon and Google (FANMAG)

    • Enterprise Value (EV) = Earning * Growth * Moat

  • In VC, it should be more about the potential of the startup.

    • Enterprise Value Potential (EVP) = TAM * Moat

  • Instead of TAM, “revenue opportunity” because TAM receives disproportionate attention. The total current market size doesn’t mean the startup has that much potential.

    • Opportunity = Value - Perception

  • After modification to our VC value model

    • Opportunity for VCs = (TAM * Moat) - Perception

  • Our job is to maximize this equation across each fund’s portfolio.

  • Moat: popularized by Warren Buffett, refers to a business' ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms.

  • “The categorization of businesses and investors between “value” and “growth” is a misnomer, and that the difference is simply in the multiple each is willing to pay for staying power”

  • Network economics refers to business economics that benefits from the network effect. It is also known as Netromix. This is when the value of a good or service increases when others buy the same good or service (i.e. eBay, LinkedIn, Facebook, etc.)

  • Long term defensibility drivers for moats are network economies, intellectual property (IP), supply-side economies of scale, switching coast, brand

  • 7 Powers, a framework known as “Silicon Valley’s best kept secret”, is the theory that unifies the technological driven moats

    • Enterprise Value Potential = Market Scale * Power

  • Execution of the founding team is arguably the 3rd variable in this equation

  • The 7 Powers, paraphrased by Ian and bolded for highest important to Cantos philosophy:

    • 1.) Scale Economies: This is the widely understood notion of supply-side economies of scale, where making more of a thing reduces its unit cost, purchasing more of it improves purchasing power––or, and this is Helmer’s contribution, it increases the amount a company can spend per customer relative to its fixed costs such that it delivers more consumer surplus vs. the competition
      • Examples: Intel, most manufacturers, Netflix, Walmart, Robinhood
    • 2.) Network Economies: The product improves the more customers use it, accruing nearly insurmountable barriers to competition at a certain scale. In many cases, network economy businesses exhibit winner-take-all dynamics, which puts such an onus on expansion that it may be logical to operate unprofitably for a portion of time. (This explains two venture truisms––winner-take-all, growth-over-profitability––and why they are only true in certain cases.)
      • Examples: LinkedIn, Facebook, Airbnb, Y Combinator, Knowde, Clara Health
    • 3.) Counter-Positioning: Where a new and superior business model would actively destroy value if pursued by an incumbent, or would at least do so for the incumbent’s executives. Counter-positioning is often made possible by new technology. Helmer calls this power his favorite as it is the one he originated.
      • Examples: Vanguard, Netflix, SpaceX, many Google products, Solugen, Mission Barns
    • 4.) Switching Costs: Self-explanatory; what I like to call “enterprise stickiness” though it applies to consumer businesses as well.
      • Examples: Operating systems, most enterprise software (esp. systems of record), Spotify, Helium Health, Symbio, ALICE
    • 5.) Branding: When the signaling or search cost of a product is reduced by the target market’s perception of the brand.
      • Examples: Many apparel, jewelry, and alcohol brands; Apple
    • 6.) Cornered Resources: Intellectual property and trade secrets, uniquely qualified people/teams, government licenses or other regulatory favor, and other proprietary assets.
      • Examples: Most biotechs, specialty chemicals, Pixar in the ‘90’s & ‘00’s, most “deep tech” startups––Skyryse, Prellis, Eridan, Chameleon, XGenomes, CurieCo
    • 7.) Process Power: When a company through its experience has aggregated such institutional knowledge that it exhibits discernibly higher efficiency vs. its competitive set. (I view this power as a technicality and largely write it off as it is idiosyncratic, difficult to identify, and accumulates so late in companies’ lives as to be irrelevant to startups.)
      • Example: Toyota in the ‘90’s & ‘00’s, Bridgewater Associates

    We at Cantos believe the 3 most relevant powers to seed investing ( in ascending order) are cornered resources, counter-positioning, and network economies. They are relatively capital efficient to produce, near improbable barriers to entry, and their presence is easily distinguished at the earliest stages. Our holy grail is when a cornered resource produces network economies, counter-positioning, and/or high switching costs.