2017 was another excellent year for Avory & Co. as we continued focusing on our mission of finding value in a world of innovative growth. We saw exceptional operating performance from our companies, which ultimately led to outsized returns. We attribute this success to our consistent process. Just in 2017 alone, we reviewed more than 270 companies through in-person meetings, conferences, annual reports, initial public offering documents, phone calls and other dedicated mediums. Our overall success led to exponential asset growth, fueling our future investment opportunity set. While we do not focus on calendar years, we wanted to send an updated Avory Letter as we believe the future investment landscape remains robust. We are seeing transformative innovations, legacy solutions being uprooted by software, continuous connectivity and a retail sector that is more resilient than originally perceived. Despite the encouraging innovations that are creating the investment opportunities of tomorrow, our disciplined investment philosophy is recognizing the value of an asset relative to its future cash flows. Before we move into the themes, we wanted to thank all of you personally. We view you, our investors as stakeholders and long-term partners of Avory & Co. To 2018 & Beyond!
Long term themes
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It's not as bad as it seems
INITIAL PUBLIC OFFERINGS
Companies we are enthusiastic about which could go public in 2018-2019
The median time between first funding and IPO for US venture capital backed tech companies that went public in 2017 YTD was nearly 8.9 years as per CBInsights. We think companies like Uber which is the 2nd highest valued private company behind ride sharing company Didi Chuxing will look to go public as it is harder to raise private capital at a $48B valuation. Another interesting trend is direct listings, which Spotify already subscribed to. This will bypass typical IPO process. Dropbox continues to be an early 2018 candidate which if successful will likely set off a list of others names to follow. Below are some of the names which we believe are strong candidates to be public in the next year or two.
Dead on arrival companies
The companies listed either saw significant declines in stock price, deteriorating operations, or flat out went bankrupt. The typical failure was that they were in low margin businesses and had zero economic moats. For example, GoPro manufactures hardware, but they failed to create any network amongst users. Juicero made a hardware product that did not work as advertised and charged too much. Blue Apron’s economic model was easily replicated and the switching cost is low which is evident by their high churn rates. Some may question the Magic Leap addition here as it has not failed. The rationale is that the company has raised nearly $2B in 6 years and has still yet to create a commercial ready product. They did unveil a hardware product that will look to ship in 2018, however we think that this product will run into heavy competition. Toys R Us failed to adapt to Amazon and digital solutions, ultimately filling for bankruptcy. Pandora is a fine music service, however they failed to see the benefits offered by Spotify and Apple Music as users want sophisticated curation but also choice. These are some of the recent stories we look to learn from.
Sources: Within the documents above there are superscripts which display sources. The sources are listed below.
1. Data traffic, Ericsson:
2. Telehealth Patients, IHC. World Market for Telehealth - 2014 Edition:
3. Healthcare industry revenue: U.S. Census Bureau (Quarterly Services Survey)
4. Education classroom utilization rates:
5. Views on digital learning technologies (DLT) as an academic tool according to college students in the United States as of August 2016: McGraw-Hill; Hanover Research, Hanover Research.
6. Company cash and equivalents: Company financials, Bloomberg, Avory & Co summation.
7. Share of small business owners in the United States who accept digital and mobile payment methods as of October 2017: Released November 2017, Wells Fargo; Gallup,
8. Millennial preference: Harris Survey.
9. $354B IT spend on enterprise software worldwide: Gartner IT Spend.
10. Share of consumers likely to continue with their product subscription in the United States as of February 2017, by product category: Vantiv; Socratic Technologies.
11. 20.8m11 is the predicted number of autonomous vehicles by 2030: PWC.
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Sources within this presentation are mainly through the use of Bloomberg database. However we may use other sources for illustration purposes.