To Our Investors and Friends,
The S&P 500 advanced to a record high in July, finishing up 1.3% after a sell off on the last day. Oil prices (WTI) remained at the same $58.50 level. The 10-year Treasury Bond moved up modestly 3 bps to 2.04%. The spread between the 2- and 10-year narrowed to 17 bps. On the last day of the month, the Fed lowered rates by 25 bps, acknowledging that their previous moves may have been too aggressive. The Russell 1000 Growth index expanded 2.3% and the Russell 2000 Growth index grew .9% in the month, both continuing to beat their respective Value indexes by about 1% each.
The market has been volatile since the start of the year, which we think is, in part, due to an underlying shift in the economy. Shifts like this can lead to significant change. There have been many Golden Ages throughout history, but one of the most notable took place in Spain after Christopher Columbus returned from the New World. In his book Secrets of Sand Hill Road, Scott Kupor describes Queen Isabella of Spain as one of the first venture capitalists. She provided capital in the form of money, ships, supplies, and a crew to Columbus to do something very risky that most would not have attempted. In return, she wanted all trade from the New World to go through Seville, Spain as well as a cut of the profits. The Golden Era that followed lasted for more than a hundred years, only ending after the river to Seville began to silt up and could no longer accommodate ocean vessels.
Although there are huge differences between this first venture capitalist and today’s VC community, there are certainly some similarities. Several hundred years ago, Europeans used technology to change the course of history. Today, new companies are using innovative technologies and creativity to devise better customer solutions. These solutions attract new customers, who both happily abandon their previous solution and tell all of their friends about the better solution. Like the spice traders failed efforts to hold onto their trade routes, the product-centric businesses of the industrial revolution are struggling to hold onto their customers.
I experienced this customer struggle first hand coming back from Seville a few weeks ago. Traveling on a major airline back to the US, the final leg of the trip was cancelled due to poor weather. Originally scheduled to arrive in New York by 6 pm Thursday, the airline rescheduled me to arrive at 10 pm the following day. Only three hours by car from home, I first inquired at a number of rental car firms about renting a car. Seeing the opportunity to capitalize on the weather, the rate doubled from $200 to $400 while I was waiting for confirmation. Disappointed, I was able to find an Uber driver happy to drive me in stormy weather the three hours home for $300. This is a clear example of the superior customer-centric solution taking business away from the inferior product-centric model that seeks to maximize profit at the expense of the customer. Guess who I am calling first the next time I am in a similar situation?
As we spend more time cultivating our growth strategies, we have begun to specifically seek out customer-centric businesses. It is no surprise that some of the best emerging business missions are centered around helping customers succeed. Shopify (SHOP) reported their results on the first of August, and spent a significant amount of time discussing how they are developing tools with the sole purpose of making their customers more successful. Don’t you wish all companies ran their operations with a similar mindset? It helps explain the wild success they and other customer- focused businesses are having.
All the Best to You,
AKW