The Internet is Rockin' with Rollups - what's so special about them?

One of the places we are spending a lot of time at Crossbeam, where I invest, is thinking through the value of novel assets that live within platform economies.

The way we* like to think of Novel Asset Classes are potentially cash-generating entities that would otherwise not have existed if it weren't for one or more of the following:

• The existence of a new platform or enabling technology e.g. monetized Instagram accounts

• The emergence of new behavior, often because of a new platform e.g. Robinhood's 'gamification' of trading

• The evolution of previously unobservable or inaccessible data e.g. music royalties relative to # of plays on major streaming platforms

Novel Asset Classes may not exist at scale

Perhaps because of their novelty, many of these assets do not exist at scale today (although counter-examples include Facebook groups - which are already large 'assets' if proven monetization strategies are deployed)

Investing in a single unit of a new, but small cash-generating asset is unlikely to achieve the returns we seek in venture, i.e., it is difficult to imagine investing $10M in a single Instagram account in hope of a 30x+return. But what if we could buy multiple accounts, consolidate the backend, and deploy a proven value creation playbook i.e. execute a 'rollup'? This is exactly what some of the companies we invested in are doing:

• Wave.tv: buy and build Instagram, Snapchat, and other social media accounts focused on sports;

• Acqu.co: help third-party Amazon sellers exit their brands and build a collection of these businesses.

• StealthCo: LBO micro-assets that show royalty-like characteristics over time

In just two months, I have seen or heard about entrepreneurs trying to consolidate social media accounts, Substack subscription fees, and even land earmarked for cremation, where your ashes turn into trees after you pass away... And it doesn't seem like this trend will slow down anytime soon.

But what makes rollups on internet platforms different, and what are some factors to consider?

Here's a framework that may be helpful:

Platform Viability and Tailwinds:

Crypto lives on the blockchain, real estate seekers on Airbnb, communities on Discord, gig workers on Uber, third-party sellers on Amazon... Each platform has different characteristics relative to each other, but each platforms' underlying assets and value drivers are relatively homogenous to others on the same platform. This is why, in our* view, buying a collection of third-party FBA businesses on Amazon is a better idea than buying independent eCommerce sites, where the top sellers continue to compound their moat through reviews, better SEO, and scale benefits. We* like to think of it as paying a fair price to buy stores in the world's best mall — and the "foot traffic" is only going to accelerate in the near future.

The current wave of growth on the internet has come from platforms themselves, the next ones are going to come from those who live on the platforms. See Part 2 in this article by Ali Hamed, and think of these comparisons:

• The world's biggest mall ≠ The Dubai Mall = Amazon

• Best place to put a billboard ≠ Highways, near schools, city centers = Online communities like Facebook groups that aggregate people with similar interests and intent to purchase

• Largest media influencers ≠ AT&T = Instagram / TikTok

• Biggest hotel ≠ First World Hotel in Malaysia = Airbnb

Physical constraints are being taken down, and we are entering a new era of platform-based economies. The number of platform companies in the S&P 500 went from 40 in 2008, to 100 in 2020 — and there are about 500 more in the private markets today. Here's a brilliant Twitter thread that dives deeper into the phenomenon.

One way to think about these platforms is in terms of time allocation, i.e., eSports is taking away from watching and/or playing football outside, Zoom parties or communities in Discord are taking away from in-person hangouts, and so on. For a platform to be successful, it must fill a need that allows it to take 'time share' away from current behavior.

Predictability of monetization:

Some asset pools are extremely large, but the monetization piece has not been fully cracked yet. Since a lot of these assets are acquired with debt, cash flow is often a key prerequisite.

• Wait for stakeholders in these assets to figure out monetization;

• Get creative with how you monetize around the asset. MrBeast leveraged his large following on YouTube to simultaneously launch Burger joints in 300+ locations, which took the internet by storm. The desire to support small businesses / give back (every burger bought contributes to charity) and order from delivery apps have enabled them to continue growing even after the initial hype subsided;

• Finance the underlying value where the disparity is caused by time/financing terms e.g. earned wage access, employee stock options.

It's hard to tell how exactly things are going to get monetized - my guess is that we are going to see more branded offerings like MrBeast’s and more rewards-based models where loyalty or views/attention will be compensated back to users - I am confident that it will be discovered, and smart capital will be ready to serve that demand.

Depth of purchasable asset pools and motivation for sellers:

“Never, ever, think about something else when you should be thinking about the power of incentives.” - Charlie Munger

Why would they sell? This is perhaps the trickiest part for many esoteric asset rollups. A lot of these novel assets have tremendous key man risk. As an example, this is why (at least for now) rolling up subscription fees from Substack accounts doesn't work at scale — those who want to sell want to quit writing newsletters for good, and those who don't want to quit just don't want to sell.

It helps to have a deep market like third-party Amazon sellers where, like any large market, many are looking for liquidity for reasons that may not relate to business fundamentals. Moreover, running a business, no matter the size, is hard work — some people just want a break. It reminds me of Bill Ackman's "return on invested brain damage" story, for some, the time and effort required to keep growing are simply not worth it, and selling is the most rational thing to do at that point.

In fact, if you are paranoid that entrepreneurs would be reluctant to sell, building tools for businesses in the platform or “the picks and shovels” strategy is another way to play it, although you are sacrificing the theoretical rapid growth from a quick buy-and-build strategy. For example, Yardline exists in the Amazon ecosystem for sellers who want to build on their own and grow organically — it feels like a great way to gain exposure to the underlying growth on the platform/trend.

Value Creation Levers:

Each of these new businesses on new platforms has new metrics and indicators that drive their business. The ones that are openly talked about include:

• SEO on Amazon

• The probability of making it to the explore page on Instagram

• Using APIs to automate certain manual tasks, etc.

However, I am always amazed at not only the creativity entrepreneurs use to extract value on these platforms, but also the order of magnitude these tweaks can have on their top-line, margins, and/or capital efficiency. And because they're so new, they're often misunderstood (e.g. a seemingly small marginal increase on an Amazon rating can have a double-digit percentage impact on your sales over time) — the rewards for those who do it well are going to be colossal.

As with any disruption, there's often a darker side as well - it's difficult to ignore the fact that consolidation often means reduced headcount or shifts in skills required. It's hard to imagine a world where people won’t develop new skills to adapt — companies like acloudguru are capitalizing on this trend by creating an ecosystem of education on platform-specific skills that are going to power the assets of tomorrow.

Parting thoughts: who's leading the charge?

These platforms have not been around for a long time. In fact, it's crazy to think how TikTok is eating the world when the platform didn't even exist when I first stepped foot in the U.S. back in 2015. Given how new the platforms themselves are, commercial players/creators/contributors are similarly nascent — but we often see the early members of a platform or beneficiaries of novel asset classes are the ones who truly 'get it' when it comes to roll-ups. It makes sense: if you've been selling on Amazon for 3 years, you'll almost always know the right people or processes to handle nuances unique to the platform (there are many) better than a new player.

As more and more platforms emerge and economic value gets distributed to assets that live on them, investors now need to think through a few things:

• What are the new platforms to invest in e.g. companies built on Slack? Kona (fka Sike Insights) is a cool one to explore;

• Who to invest in (I explained my bias towards existing participants on a platform), and

• What part of the capital stack do we use to get there - pure equity, or is there an opportunity to add some leverage? Or maybe we just go 'Cross [the Capital] Stack?

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* This is an independent blog, all mentions of 'we', 'us', and other pronouns cite the author(s) themselves and not the blog

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