August 16, 2021
I am excited to send you this second issue of An Entrepreneur’s Perspective.
Before we dig in, I want to highlight my new @RagingVentures Twitter handle. I am now regularly sharing ideas on Twitter (a selection of which are included at the end of this newsletter), and I am proud that I was recently named as one of Bear Cave’s Top 100 “Must Follow” Financial Twitter Accounts. Please follow me and enjoy!
The highlight of this issue is an interview with Raj Shah, Managing Partner of Shield Capital and Chairman of Resilience Insurance. Raj is an amazing entrepreneur, investor, and fighter pilot! We are lucky to have him share with us his process on identifying winning ideas. He also talks about what the battlefield of the future looks like, the current state of play with China, and some of his recent investments. Additionally, he tells us about his new venture firm, Shield Capital, which is focused on investing in these key themes. All very exciting stuff!
David vs. Goliath
To set the table for Raj’s interview, George Friedman’s Geopolitical Futures (www.geopoliticalfutures.com) letter (which I highly recommend, along with his podcast) recently discussed the life cycle of modern warfare in the context of David vs. Goliath. I thought a few of the passages (edited for brevity) provided interesting context:
“Goliath went into battle, “He had a helmet of brass upon his head, and he was armed with a coat of mail.” Goliath was therefore burdened with a fundamental weakness: a defensive weapon system that protected against the enemy but limited his mobility. The weight of the armor meant that the fighter could not move with the agility and speed required on the battlefield. This would not be a problem if his enemy were also burdened with such weight, but he wasn’t. David was not a professional fighter, so he was not weighed down with established beliefs about weapons or tactics. He was free to choose the technology and tactics best to defeat the enemy. David was mobile.”
“It should be remembered that each weapons system (and its entire family) has a life cycle. A weapon appears when an offensive weapon is required, and ends its life when it has become so complex that it needs to be defended rather than used for an attack. Winning wars creates the illusion that certain technologies will always be effective. This illusion is mixed with the interests of the military, political and industrial leadership and of specific politicians and interest groups in the political and social system. All these subconsciously allied forces create a sense of technical greatness by focusing on technology as a “miracle.”
I hope you enjoy the interview with Raj as well as the rest of the newsletter. I very much welcome your feedback and ideas. Please feel free to drop me a line. To subscribe (it is free), please click here.
Enjoy the rest of summer!
William C. Martin
Topics in this Issue of An Entrepreneur’s Perspective:
- Interview with Raj Shah, Shield Capital — Investing in the Battlefield of the Future
- Liberty SiriusXM: A Very Cheap Stock with Catalysts
- Favorite Books & Media
- Recent Tweets from @RagingVentures
I’m excited to interview my friend, Raj Shah, Managing Partner of Shield Capital and Chairman of Resilience Insurance.
Raj attended Princeton University before joining the Air Force and then serving three tours in Iraq and Afghanistan as an F-16 fighter pilot. After graduating from Wharton, and seeing firsthand the rise of cyber-hacking by nation states, Raj started Morta, a cybersecurity company that he later sold to Palo Alto Networks (PANW).
Later, he spearheaded the launch of DIUx, which is effectively the Pentagon’s venture capital arm. DIUx assists a range of early stage companies that are focused on the battlefield technologies of the future, including AI, drones, autonomy, software, and the like. Raj is also a visiting fellow at the Hoover Institution at Stanford where he co-hosts, with H.R. McMaster, the leading private forum for senior defense and tech leaders.
More recently, Raj started and ran Resilience (he is now Chairman), a fintech that is focused on the cybersecurity insurance market. Resilience has raised more than $50 million in capital to date from investors including Founder’s Fund and Lightspeed and has become the world’s fastest growing cyber insurer.
Raj’s current project is Shield Capital, a venture capital firm focused on backing frontier solutions for cybersecurity, AI, space, and autonomy that serve both government and commercial enterprises. Notably, one of Raj’s partners at Shield is my good friend Sumit Agarwal, who co-founded Shape Security (acquired by F5 Networks). Shield is backed by a major defense prime and a “who’s who” of Silicon Valley entrepreneurs and anticipates closing its first fund in the near future. To learn more about Shield, feel free to email me for an introduction to Raj and his team.
Raj, you are unique in that you’ve both started successful companies as an entrepreneur and backed many dozens more as an investor. What are the necessary ingredients for a winning idea and investment?
Bill, as you well know, entrepreneurship can be a risky and difficult endeavor. It really is the modern day David vs. Goliath story. A young entrepreneur, with limited resources, has to convince customers, employees, and investors to join them on a mission towards a distant vision and then deftly execute through a raft of obstacles. And so they must arm themselves with dedicated investors to help guide, encourage, and gain as much advantage as possible.
In my mind, a winning early-stage startup, and thus a winning investment, has a superior team, market opportunity, and technology advantage, in that order. At Shield, we aim to partner with the best teams, in growing markets, that have a unique technology approach. My partners and I have all been entrepreneurs ourselves, so we know the challenges they are facing. We are very engaged with our founders and try to provide the right type of help at the right time.
The #1 factor that drives a winning early stage investment, though, is the team. A team needs to be committed to their mission, able to attract others to their vision, and be pragmatic enough to navigate the art and science of building. Given the rapid changes in technology and the world, it’s an exciting time to be an early stage investor!
What is different about your approach?
We believe that companies successfully serving customers in both the commercial and government sectors will outperform those that are focused on just one sector or the other. Palantir (PLTR), Joby (JOBY), and C3.ai (AI) are among the first wave of “dual use” winners. As geopolitical tensions between democratic and authoritarian governments grow, US and Allied nations are starting to significantly increase their spend on modern technologies from the commercial sector. Capabilities such as artificial intelligence, cybersecurity, and space are fast becoming critical areas. However, the government has historically been a difficult customer for start-ups to reach. That dynamic is changing, and our team is uniquely positioned to assist our portfolio companies in being successful with government customers.
Collaboration between democracies and startups is both good business and vital to our national security.
Silicon Valley is overflowing with capital these days. How are you able to gain access to attractive deals?
The world is indeed awash in capital, particularly in the later growth stages. The world of technology can also be a very small place where relationships and reputation matter. Given our team’s previous experiences in both the commercial and government sectors, we are fortunate to have great access to talented young entrepreneurs. There is no easy solution to be successful in this regard – it requires focused effort and dedication to demonstrate to entrepreneurs that we are ideal partners for them and their companies. We want them to know that we are always thinking about how to add value and unique skills and relationships to help them succeed. Fortunately, our approach is resonating.
Can you talk about the battlefield of the future. What does it look like?
The one thing we can be sure of is that our predictions will likely be upended by new, unforeseen advances! That said, it’s clear that technologies with roots in the commercial world will play a decisive role on the battlefield.
Artificial intelligence will change how militaries command & control their forces and how quickly they can react to the enemy. Autonomous vehicles, on land, in the air, up in space, and under the sea will fundamentally change how force is delivered. Most importantly, cyber will be at the very forefront of any conflict. Why send a warship when a few strokes on a keyboard can have an even greater impact?
Technology will continue to advance — what will matter most is which country can incorporate and operationalize new technologies the quickest. These leading edge technologies are also more likely to come from the commercial, start-up world rather than traditional defense contractors. Advances such as smartphones, electric cars, constellations of small satellites, and cyber defense all originated from commercially-oriented tech companies. Thus, the connection between our national security institutions and Silicon Valley is critical to preserving democratic and free governments.
If you want to peer more into the future, one of Shield’s advisors, Admiral Jim Stavrides has recently authored a riveting book entitled 2034.
That is a great rundown. Can you talk about a company or two that you’ve invested in as of late that are tackling these areas?
There’s been an incredible growth in the number of companies focused at this intersection of commercial technology and national security. Two that we are particularly excited about are HawkEye360 and Snorkel.ai.
HawkEye360 has built and operates a constellation of satellites to detect and geolocate RF (Radio Frequency) signals. Once their constellation is fully operational, they will be able to collect signals on any point on earth in only 12 minutes. This capability has traditionally been only available to the intelligence agencies of major nations – they are the first commercial company to do this, opening up a wide range of opportunities with customers around the world. We’ve been investors for years and HawkEye is now raising their Series D to accelerate their constellation deployment. John Serafini, their CEO, is also a venture partner at Shield.
One of the greatest challenges in employing artificial intelligence is the labeling and upkeep of training data. The bottleneck is not algorithm development, but rather data-labeling. Founded by a group of PhD’s from Stanford, Snorkel.ai has built a revolutionary way to automate data-labeling. This capability is gaining immense traction in both the government and commercial sectors. Their most recent round of funding has given them a unicorn valuation. Shield invested in the previous round, and I also serve as an advisor to the company.
There is a growing “Great Power” competition with China. How serious is this threat and is America prepared?
The burgeoning ‘great power competition’ or ‘new cold war’ with China is a very serious matter and one of the few areas our partisan political parties agree on. China has a worldview where the Chinese Communist Party reigns strong and controls the levers of the world’s economy, data, and regional territories. The most pressing challenges for free nations are China’s cybersecurity campaigns and open desire to reclaim Taiwan.
China’s offensive cyber activity continues to siphon off critical data from US companies and our government. On the commercial side, there are vigorous campaigns to steal critical intellectual property as well as give private Chinese companies unfair advantages in deal negotiations. In contrast, while the US also collects intelligence on foreign nations, it expressly does not share that information with private companies. Our free and open society is by design more vulnerable to these types of espionage and so investments in cybersecurity for both the US and our Allies is critical.
China’s designs on absorbing Taiwan are long known. Beyond the human tragedy that such an invasion would precipitate, the impacts to the global economy and our national defense cannot be overstated. Over 65% of the world’s advanced semiconductors are manufactured in Taiwan – without access to those foundries, our ability to compete and defend would be put at significant risk. The good news is that Washington has finally awoken to this threat and have put forward bi-partisan plans to invest in domestic semiconductor production capabilities.
Cybersecurity has been in the headlines yet again as of late, due to a slew of ransomware attacks. Tell us about Resilience Insurance and what problem the company is solving.
Cybersecurity remains one of the greatest threats to enterprises. Today it’s ransomware, tomorrow it will be a new threat vector. Solving cybersecurity will require more than technology, it will require behavioral change and a fundamental shift in the economics between attackers and defenders. Most breaches occur because of blocking and tackling errors – i.e., poor patching or cyber hygiene. Today, it’s far cheaper to launch an attack than to try and stop one.
At Resilience, we have taken a novel approach to cyber by combining security with insurance. We help companies by integrating our cyber insurance policies with active monitoring and response. We are building a “Cyber HMO” where we serve as the trusted Cyber Physician to coordinate specialists (vendors), emergency response (IR and claims), and to perform continuous health monitoring. We also take care of payments and maintaining electronic records. For an upper mid-market enterprise, we help bound and manage the financial risk posed by cyber crime. This approach is resonating with customers and we have quickly become the fastest growing cyber insurer in the market.
Cybersecurity is one of the few asset classes where the liability of product failure is wholly borne by the buyer.
What else keeps you up at night?
I spend a lot of time thinking about human capital and the divide between our national security professionals and technologists in Silicon Valley. Unlike in previous decades, our best engineers and scientists don’t often join the government. If you were the best aerospace engineer in the 1960s, you went to NASA. Today, you likely head to Joby or Google. Further, so few of our Fortune 500 CEO’s (or even Members of Congress!) have served in uniform (currently 4%, down from 59% in 1980).
This growing civil-military divide has longer term implications for our nation’s ability to come together, particularly in response to a military crisis. If our public and private sector leaders have not walked in one another other’s shoes, how can they develop the necessary empathy and mutual understanding to navigate such thorny issues as the ethics of AI or the appropriate level of collaboration between the tech sector and the military?
The good news is that we are seeing strong momentum in both Silicon Valley and DC for deeper, sustained connections. Both worlds are full of inspirational, mission-driven leaders that care about our nation and free societies. I’m grateful to have the opportunity to sit between those worlds and help facilitate greater dialogue and tangible collaboration.
If you are interested in more of my thoughts on the intersection of national security and technology, I recently penned this article and co-taught a course at Stanford on this topic. I also testified before the House panel on the Future of Defense.
Raj, this has been great. Thank you for spending time with us and for all of your service to America.
Bill, thank you for the opportunity – always a pleasure to speak with you.
John Malone, aka the “Cable Cowboy”, is one of the greatest capital allocators and strategic thinkers of this era (he is also America’s largest private landowner!). Malone has dominated the cable industry in recent decades via TCI and Charter, in addition to playing a major role in media with companies like Discovery, InterActive, Sirius XM, and many more. He hates paying taxes and is known for the complexity of his holding companies.
Liberty Sirius (NASDAQ: LSXMA/LSXMK, hereafter “LSXMA”) was borne out of one Malone’s all-time great investments: injecting $530 million into the liquidity strapped Sirius XM (NASDAQ: SIRI) satellite radio monopoly in February 2009 in return for a 40% ownership stake. After some initial bumps in the road, SIRI has since blossomed into a cash flow machine, generating over $10 billion in free cash over the past decade and $1.7 b in 2020 alone. SIRI has used these cash flows to steadily buy back its stock, in the process increasing Liberty SiriusXM’s (NASDAQ: LSXMA) current ownership to over 78% of SIRI.
Why LSXMA is a Timely Investment Opportunity
As the buybacks continue apace, LSXMA’s ownership of SIRI should cross 80% sometime later this year. This important development is what makes LSXMA a timely investment opportunity.
At 80% ownership, LSXMA will be able to consolidate SIRI on a tax basis, eliminating any double taxation and expanding the flexibility of Malone and his partner Greg Maffei to allocate SIRI’s prolific cash flows. We think this will lead both to an increase in SIRI’s current 1% dividend yield, as well as continued SIRI stock buybacks that LSXMA will likely sell into on a pro-rata basis.
With this resulting increased cash flow at the LSXMA corporate level, Malone will be free to meaningfully step-up the pace of stock buy backs at LSXMA, which trades at a -25% discount to its net asset value. This would be very accretive for LSXMA holders, and also likely lead to a narrowing of that discount. This is a solid one-two punch of value creation on top of the nearly 10% free cash flow yield that you are effectively buying SIRI at via LSXMA.
The Bear Case on Satellite Radio
The bears on SIRI point to the rise of Spotify, Apple’s CarPlay, and podcasting as threats. We recognize these concerns, but we believe that investors are ignoring the durability of SIRI’s “long tail” content model as well as other growth opportunities on the horizon.
Having pioneered the modern cable industry, Malone understands how to leverage niche content better than anyone. This is why SIRI’s service is worth its weight in gold to someone like me: old Bruce Springsteen and Dave Matthew concerts, a feed of CNBC and Bloomberg, a golf community on PGA Tour radio, and so on (You can see why my kids refer to me as an honorary “Boomer”). Similarly, my wife enjoys her Christian radio channels. Other SIRI listeners have their own affinities, but this is why, along with a reasonable consumer price point, that the service’s churn rates are at record lows (less than 8% annually).
SIRI’s Future Growth Opportunities
SIRI is also building its business for the future. It is increasing the amount of proprietary content (including podcasts) that is available on its app, adding to its stickiness and creating a deeper digital connection. It owns one of the industry’s largest ad sales platforms, which includes key ad serving tech in the podcasting space. SIRI’s new radio tech (available in many new cars today) allows for targeted ads, which should improve monetization. SIRI has also said that it is exploring rolling out a free, ad-supported version of its service in the future.
Interestingly, LSXMA owns a foothold stake in iHeartRadio (NASDAQ: IHRT), the nation’s largest radio platform that is run by Bob Pittman (listen to this excellent podcast interview with Bob Pittman). We would not be surprised to see SIRI owning IHRT in the future. Similarly, LSXMA owns a 33% stake in Live Nation (NASDAQ: LYV); is there a live music tie-up to come?
A Double Valuation Discount
SIRI currently trades at around a 7% free cash yield (via LSXMA you are effectively buying it at almost a 10% yield), which is a low valuation in this market for a recurring revenue business with steady growth, strong operating leverage, and reasonable balance sheet leverage. Notably, one reason for the valuation discount at SIRI is that indexes and passives are limited in how much of the stock they can own due to the small float (the free float after Berkshire Hathaway’s position in SIRI is sub-$5 billion).
While many investors disregard LSXMA as either too complex, or have become fatigued waiting to get to this point, we think the opportunity is now starting to ripen. Finally, I would note that I successfully experienced a similar trade many years ago when Malone collapsed Liberty DirecTV (“LMDIA”) into DirecTV, thus removing the substantial discount on LMDIA shares that previously existed. Later, Malone sold DirecTV to AT&T, getting out of the way of DirecTV’s emerging fundamental challenges.
To conclude, we think SIRI is a cheap stock in an expensive market, and LSXMA gives you a discounted way to buy in. As this discount begins to narrow, which we believe is relatively imminent, an investor in LSXMA has an opportunity to get paid twice. Good luck!
|Sirius XM Holdings (SIRI)
|Live Nation (LYV)
|Other (IHRT, FWON, etc)
|Total Asset Value
|Net Asset Value
|Net Asset Value per share
|Current Discount / Upside
|-25% discount (+33% upside)
Editor’s Note: Podcasts dominate this list, as it has been a slow reading summer!
Raging Capital Founder Bill Martin, an Investor and Entrepreneur – Growth Cap Insights RJ Lumba
A short interview with Growth Cap’s RJ Lumba that covers my entrepreneurial and investing background. We also discuss bitcoin, emerging alt investing platforms, managing through 2008, and what I learned from someone I admire.
Stephen Mandel – Investing Behind Change
One of the great investors of our time, yet who remains under the radar, Steve Mandel discusses how his firm Lone Pine looks to invest in “change”, why the short side has become more difficult, the characteristics of great business managers and investment analysts, and more.
Eli Casdin – The Thematic Case for Biotech
Leading biotech investor Eli Casdin of Casdin Capital speaks to Ted Seides about the increasing predictability of life sciences innovation and how that will translate into attractive investment opportunities in diagnostics and therapeutics over the coming decade. He also discusses how he has built his team and business.
Orlando Bravo – Private Equity Masters
Unlike many interviews with private equity investors, which I often find boring due to a lack of detail and critical commentary, this interview with Orlando Bravo of Thoma Bravo is actionable and very interesting. Bravo discusses how they manage and turnaround software businesses, and how he manages his own team.
Crypto, an Oral Essay
A great primer on the history and current status of the entire crypto eco-system, ranging from bitcoin and Ethereum to tokens, DeFi and NFTs. The podcast also looks at the future of decentralized networks and “web3”. Put together by the team at Andreesson Horowitz, which is a clear thought leader in this area.
Don’t Be Good, Be Great – Against the Rules with Michael Lewis
One of my favorite authors, Michael Lewis, tells the story of a baseball coach who changed his life and makes the case for the tough-love approach to coaching. I also recommend Tim Ferriss’ lengthier interview with Michael Lewis: https://tim.blog/2020/05/01/michael-lewis/
John Malone – Discusses WarnerMedia-Discovery Deal with David Faber
Echoing my comments from above, John Malone is one of the greatest capital allocators and strategic thinkers from this era. His recent CNBC interview highlights how thoughtful he is. At current stock prices, although one will have to wait for some time before the deal closes (and there may be an overhang of AT&T shareholders who will sell the spin-out), I think both DISCK and DISCA are interesting longs.
Maffei on $LSXMA / $LSXMK conf. call on NAV discount to $SIRI: “Well aware of discount.” Thinks “Good things will come to those who wait.” With $LSXMA nearing 80% (now at 78%) of $SIRI, Maffei notes $LSXMA “will have more capital coming” to buyback stock.
— Raging Capital Ventures (@RagingVentures) August 6, 2021
20 years in the making, $FPH‘s Valencia is finally ramping: sales started in mid-May that annualize to 1,200 units once all 18 communities online. Great Park is gangbusters, and Candlestick is starting to inch forward. Market hopefully re-rates stock as cash flows inflect. https://t.co/QaSSLfClwR
— Raging Capital Ventures (@RagingVentures) August 6, 2021
Now trading back to Oct prices, $UBER notes its “very very significant” earnings power:
Mobility: $5b ($50b w/out COVID @ 10% margins)
Delivery: $2.5b ($50b @ 5% margins)
Says it can “keep growing, growing and growing”
$80b cap w/$14b investments & $7.5b debt pic.twitter.com/pprNRvF3Bh
— Raging Capital Ventures (@RagingVentures) August 5, 2021
A sleepy NJ water utility, $MSEX, is a poster boy for the misallocations resulting from Fed policy and passive indexing. Up 14% today on being added to the S&P Small Cap 600, $MSEX trades at ~50x (temporarily inflated) earnings and a 1.1% yield. Look for another secondary soon.
— Raging Capital Ventures (@RagingVentures) July 13, 2021
Value guys love The Outsiders book by Will Thorndike. Few are aware that he is Chairman of $CNX, an unconventional nat gas co: it owns its midstream, generates FCF, pays down debt and buys back stock. Worth reviewing their earnings today, call at 10 am: https://t.co/0wV9wc2jst https://t.co/yaKSs7BOYM
— Raging Capital Ventures (@RagingVentures) July 29, 2021
$IWM rebal weighing on $GSIT, w/ 9% of co. to sell. Mgmt is mixed, but
$70 mm EV is too cheap for SRAM biz & optionality on exciting new AI inference chip. Similar AI chip startups – with less technical chops – are raising VC $$ at much higher values. Long $GSIT as a trade.
— Raging Capital Ventures (@RagingVentures) June 23, 2021
$YEXT trades punk, but earnings setup is compelling. Listings biz is reopening beneficiary; Answers gaining steam; and expectations were reset in March. CFO Cakebread in his new book “IPO Playbook” emphasizes importance of managing the Street. Let’s see how he plays ball.
— Raging Capital Ventures (@RagingVentures) May 26, 2021
Fortuna Audaces Iuvat – Fortune Favors the Bold!