Madera Capital October letter to investors on the washing machine of the future and what Bill Gates told him
Madera Technology Master Fund, our concentrated long/short equity strategy, up 1.2% in October and up 17.8% year to date
We recently visited with more than 100 private companies to help shape our vision of the future. One dynamic that struck us is the chasm between the reality companies know to be true and the false reality public market investors perceive. Technology is driving change at an accelerating pace, pushing this gap wider than ever. To encapsulate why more than $2.5 trillion of enterprise value cares a lot about this (and why investors should care too), we present to you the washing machine of the future.
Public market investors tend to believe:
- The future is wired
- The future will be run by historical business leaders they know well
- More expensive is better
- Consumers are not smart
- The future is wireless
- The future will be run by those companies driving innovation
- Technology is deflationary
- Better, faster, cheaper wins
- Consumers are smart and will do what is in their best interests
- Enhanced by wireless connectivity
- Supplied by a utility model, where consumables are delivered as needed
- Maintained by an as-a-service model, where breakdowns are proactively addressed before they happen
- Delivered by a subscription model, where a customer’s upfront capital outlay is replaced by ratable payments
- Customer satisfaction goes up
- Customer loyalty goes up
- Relationship with the customer deepens
- Stores selling to the old model likely get completely disintermediated
- Companies enabling this paradigm shift win a customer for 30 years or more
- And probably cleaner clothes
- Washing machines are an expensive up-front cost: $1,000
- Detergent is expensive: $17 a bottle
- The machines tend to break down every 10 years, or sooner
- Repairs take time and are expensive
- Dirty clothes and upset family members
- $1,500 twenty-year cycle net present value
- The machine is enhanced by wireless communication (Internet of Things, IoT) and can phone home
- Performance and reliability are monitored in real-time, and repairs are proactive (no downtime, clean clothes, happy family)
- Consumables are sent as needed (no rush trips to the store, precious weekend time is freed up, less storage space is taken)
- This generates a 100% increase in revenue compared to selling a washer in the old model
- $3,100 net present value
Now turn this into a washer-as-a-service model (147% higher net present value)
- The key business outcome: when things break, there is significant risk of losing a customer for life
- The key financial implication: detergent is an incredible profit driver
- Innovations keep customers happy and boost profits
- $3,800 net present value
This next generation model is enabled by wireless spectrum—the invisible space in the air through which electrical signals travel (television, radio, GPS, cell phones). The best, fastest, and cheapest supply of this scarce resource is controlled by one company: Dish Network (DISH).
In an extremely competitive retail world, it is accretive for companies to make decisions enabling $3,795 in high margin sales compared to $1,534 in the traditional model. That means owning Dish. Importantly, if you own Dish, you keep this resource out of the hands of your competitors.
In enterprise technology, companies spend a significant portion of the sales motion getting to the right buyer and retaining that entry point into the enterprise customer. The washing machine is the same. This overlooked item buried deep in the closet or basement is a hidden piece of strategic real estate that can be the gateway to the rest of the house.
When we spoke with Bill Gates about what is next a few years ago, it was clear that the home will be the next strategic battle ground for companies. Amazon, Apple, Google, and Microsoft have spent tens of billions of dollars fighting to secure this gateway to the consumer. For this reason, innovators like Amazon and Walmart care a tremendous amount about the washing machine of the future. We care a tremendous amount about the wireless real estate underpinning the future.
The washing machine of the future is here.
Feel free to reach out anytime if you'd like to discuss. Thank you,