Marc Andreessen presents an interesting contrast between the type of early-stage venture investing done at Andreessen Horowitz with the value investing popularized by Warren Buffett in public markets:
He’s betting against change. We’re betting for change. When he makes a mistake, it’s because something changes that he didn’t expect. When we make a mistake, it’s because something doesn’t change that we thought would.
In Andreessen’s eyes, venture capitalists are betting on the future while value investors are betting on the past. But between those two spectrums I have found there’s a middle ground of investors like Modest Proposal who are, as he put it on the Invest Like The Best podcast, betting that the future might get here a little slower than everyone thinks:
The technologists are almost always right about the end state. But the frictions between here and there are often greater than anticipated.
One way I attempt to express Modest Proposal’s view in my portfolio is through Busted IPOs. These are companies that have been public for a few years and are trading substantially under their IPO prices. Most of the time the companies’ poor public market performance is warranted — whether it be upside down unit economics, no competitive advantages or a host of other legitimate reasons.
However every once in a while I will come across a Busted IPO that catches my attention. My favorite screen is for Busted IPOs experiencing revenue growth deceleration. No, I’m not specifically looking for companies with revenue going the wrong way, that would be silly since revenue growth is one of the most important attributes of stocks that go up.
Instead, I’m looking for situations where revenue growth starts to decelerate and the market is inaccurately pricing in continued deceleration. I’m searching for conditions where revenue growth will reaccelerate, usually because there are certain industries where Internet adoption is happening at a much slower pace than the technologists and other investors had expected.
Eventbrite’s Busted IPO
Eventbrite is one such Busted IPO that I have been following since the company’s public debut in the fall of 2018.
The first time I bought Eventbrite stock was in November of last year. This was about when investors could see a light at the end of the tunnel after Eventbrite’s mangled Ticketfly acquisition.
Ultimately I sold the stock 10 days later for two main, and related, reasons:
I couldn’t get comfortable sizing small- and mid-sized live event market (more on this later).
Despite the ill-fated Ticketfly acquisition, management’s focus appeared to be shifting away from its small- and mid-sized event organizers to the “sexier” music category, which has a bigger and more easily calculated TAM but is dominated by Ticketmaster and LiveNation.
As stay-at-home orders were issued in light of COVID-19 I had largely written off Eventbrite as a prospective investment. That was until I saw @NonGAAP (henceforth referred to as Mike) write about Eventbrite on his substack, which motivated me to take another look at the company.
Quick interlude: With permission I’m going to post a few excerpts from Mike’s Eventbrite post below. It is behind a paywall, but I HIGHLY recommend subscribing to his premium substack. Mike writes about corporate governance in a way that is both easily digestible and actionable for even an amateur investor like myself. His posts have given me another valuable arrow in my quiver.
Here’s Mike with an overview of Eventbrite’s business:
Eventbrite offers event management and ticketing services to event organizers in over 180 countries. In 2019, the company helped more than 949,000 event organizers issue ~309 million free and paid tickets across ~4.7 million events, generating $4.6 billion in gross ticket sales and $327 million in revenue.
Substantially all of Eventbrite’s users create and manage events without the need of human service or support. In 2019, more than 98% of event organizers signed themselves up to Eventbrite’s platform, with the company deriving 51% of net revenue from these self sign-on organizers.
It is not crazy to suggest that there has likely never been a more challenging time in the company's existence. Eventbrite’s livelihood depends on in-person events, which declined as much as 90% in March compared to the same month a year ago. Paid tickets in May were down 82%, improving from an 88% year-to-year decrease in April.
In my view there were three areas I needed to get comfortable with before investing in Eventbrite:
Liquidity —> Eventbrite management must protect the enterprise and investors must determine if that can be accomplished without destroying equity value.
Refunds —> Refunds are a mess right now and present a further vulnerability when running liquidity scenarios. Eventbrite is in the middle of a class action lawsuit from ticket holders demanding refunds. If event organizers don’t refund customers themselves, Eventbrite is subject to credit card chargebacks.
Deceleration of Self Sign-On Paid Ticket —> Eventbrite’s primary differentiator in the event space is its self sign-on platform but year-over-year paid ticket volume growth for this segment decelerated to 21% in Q4, 2019 from 60% at the time of its IPO.
Liquidity & Refunds
Based on my calculations Eventbrite's liquidity was ~$461 million as of the end of Q2 ($111 million in cash plus $350 million in new credit facilities and convertible offering).
Meanwhile management noted that recent layoffs reduced cash operating expenses through the end of the year:
Specifically, we expect that cash costs excluding processing fees which totaled $57 million in the first quarter will decline to less than $40 million in the second quarter and then to between $33 million and $35 million by the fourth quarter of this year.
The company seemingly shored up liquidity (~461 million vs ~$127 million in cash outlay), but it comes at a cost. The convertible notes carry a 5% interest rate and the risk of dilution is real (the $130 million principal balance on the converts based on today's market cap is about ~15% of the company). The credit facility from Francisco Partners, meanwhile, carries 12.5% interest (4% paid in cash and 8.5% paid “in-kind,” per the credit agreement).
As of early June, the outstanding balance of ticket refunds stood at ~$267 million. An unexpected judgment on the aforementioned class action lawsuit could drain Eventbrite's newly-acquired liquidity. It’s also not a great look that chief legal officer Samantha Hartnett resigned effective June 19th.
Despite the liability of potential refunds, I believe Eventbrite has ample liquidity to make it through the other side of COVID-19 while preserving the value of its equity. But I acknowledge there’s uncertainty here.
Self Sign-On Paid Ticket Deceleration & Betting on the Long Tail of the Live Event Market
Eventbrite’s core addressable market is the long tail of the live event industry, a cohort of businesses uniquely enabled by the Internet. But as mentioned earlier, year-over-year paid ticket volume growth for this segment decelerated to 21% in Q4, 2019, a significant drop from the 60% growth rate at the time of Eventbrite’s IPO in September, 2018.
The self sign-on software business has attractive ~60% gross margins and is incredibly capital efficient. The challenge is sizing the opportunity and its long-term growth trajectory.
This is where reading Mike’s post prompted my lightbulb moment:
In my opinion, most productized internet payment businesses are perpetual motion machines which operates at its own pace. Yes, they can grow quite fast but it’s also hard to forcibly accelerate its trajectory. Acceleration and inflection requires developing certain human network effects and habits that you just can’t rush.
It’s like Andy Dufresne chipping away in Shawshank Redemption. A quick path to freedom is impossible, but after 17 years of persistence and patience Andy tunneled out of prison with a little rock hammer.
I think a similar level of persistence and patience is required for most productized internet payment businesses. If you’re going to beat an incumbent, it’s going to look a lot like a rock hammer chipping away at a wall for decades.
The challenge is it’s hard to wait that long so companies end up selling themselves before breaking out (i.e. PayPal to eBay, Xoom/Venmo to PayPal, etc.) or pursuing adjacent opportunities to accelerate growth (i.e. Eventbrite enters traditional tickets market).
The risk with pursuing adjacent opportunities is it can turn into a distraction and detract from the core business and its long-term opportunity. I think a lot of Eventbrite’s pre-COVID issues can be explained by this dynamic.
If Eventbrite’s core addressable market is the long tail of the live event industry, a cohort of businesses uniquely enabled by the Internet, then by investing in Eventbrite I’m betting there will more of these small- and mid-sized event organizers to come in the future.
COVID-19 has forced Eventbrite management to refocus on its self sign-on business and I was able to buy stock at what I believe to be an attractive price ($6.67 cost basis) given the risk/reward.
Eventbrite falls into the same “Arm the Rebels” category of companies like Shopify, Square, and Stripe that provide software and payments infrastructure for small and mid-sized business to thrive in our evermore digital world. Internet adoption might be happening more slowly in the long tail of the event industry but it is inevitable. Eventbrite seems as good a candidate as any to capitalize on the opportunity.