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Four Things I’m Excited About: Part II
Investing in growth is, in large part, betting on what’s going to be big before it gets big.
There are four major trends that I’m getting increasingly excited for over the next decade:
The Aligned Identity
Rational Clean Energy
Last week, I wrote about using performance enhancing drugs, psychedelics, and avoiding fake meats to be a Quality Time Billionaire (QTB), which is a person who optimizes their life to reduce or even reverse aging.
Quality Time Billionaire is a powerful identity that says I take health seriously, I’m strong, I’m fit, and I feel great. Few do the hard work it takes to be a QTB, which makes the identity special. And that’s the point of every identity — to feel special in the context of one’s financial and social capital investments in being unique.
That concept is the basis for big idea two: The Aligned Identity.
The Aligned Identity
Last June, I wrote that identity would be the tech mega trend to define the 2020s. I’m amending my prediction.
Identity will the mega trend that defines the 2020s. Period. It’s not just about tech. Businesses built specifically to foster identity will drive massive value creation and force many traditional businesses to rethink how they compete.
Of the four growth trends I’m excited about, identity is the most uncomfortable one. Even more uncomfortable than the QTB’s steroids and psychedelics.
Identity is Inequality
In the June piece, I offered a basic definition and framework for identity:
Oxford offers two definitions for identity: the fact of being who or what a person or thing is, and a close similarity or affinity. As such, identity creates a paradox that represents the intersection of individuality and conformity. It is the tension between individuality and conformity that demands persistent action by the individual to reaffirm both their uniqueness and alliance. Both uniqueness and alliance require the presence of others. Uniqueness must be relative to someone else, and alliance must be with someone else. Identity is both how we see ourselves and how others see us, even if those two don’t always match.
Expression and cultivation of identity was a relatively simple matter before the internet. It was dominated by visual cues that broadcast status and membership to certain groups. The clothes you wore, your physical appearance, or wearing a mask as mask mandates cease. Those things could say you’re a blue-collar worker, you’re a fit athlete, or you’re a Democrat. Immutable genetic characteristics like race and gender also powerfully shape offline identity.
Since the visual aspects of the latter category cannot easily be changed, investment in identity pre-Internet was primarily in physical goods, especially luxury goods. Brands convey a message about the patron of the brand. Louis Vuitton says I’m rich. Nike says I’m athletic. Lululemon says I’m rich and athletic. A brand doesn’t even necessarily have to be expensive. A $30 Nascar race shirt or concert shirt is a powerful indicator of identity and a relative luxury for the stereotypical blue-collar owner.
Intentional expression of identity need not require luxury brands, but it does require disposable time or stored units of time (money) from the person trying to shape their identity. Expressing one’s identity in an intentional way is the ultimate luxury. This will remain true, perhaps even more so, as the importance of online identity grows.
As I’ve continued to think about investment opportunities in identity, my greatest philosophical evolutions is this: Identity is about the embrace of inequality.
Told you identity gets uncomfortable.
Inequality, at its basest definition, means a “difference in size, degree, circumstances, etc.” Since identity depends on individual uniqueness as in differences from others, then it must depend on inequalities.
When most of us hear inequality, we think about financial or economic inequality, so let’s start there. Louis Vuitton doesn’t just say I’m rich. It says I’m rich, and so are the other people who have Louis Vuitton bags. Those who don’t have those bags aren’t rich. They’re not part of the club. They’re not economically equal.
But inequality is not just about economic differences. When we explore inequality beyond mere financial capital, we see that social capital is growing in importance to define inequality. These kinds of inequalities can be physical, educational, religious, moral, or otherwise.
The muscle-bound meathead’s physique says I train my body hard, so do other meatheads, and you don’t. The Ukrainian flag in the social profile says I care about geopolitical violations, as do the other Ukrainian flag bearers, and you don’t. Laser eyes in social used to say I’m a crypto believer, so is everyone else with laser eyes, and you’re not. That one died a fast death. Identities can change quickly.
Whereas the financial capital required to buy a Louis Vuitton bag creates the brand’s identity as a rare luxury, the bigger opportunities in identity over the next decade will start with social capital as a mechanism to accrue financial capital through unique brand.
There are three broad categories across which I expect this to happen, two of which I’ve described before in the original identity piece:
Micro luxuries (the new idea)
Individuals are becoming more important than brands. Again. This is the natural evolution of things.
In the earliest days of economy, individual small business owners — the blacksmith, the printer, etc. — existed as individuals with a reputation for their work. The Industrial Revolution brought us into a world where corporations produced things at scale, usurping the individual craftsman via superior cost structures. We’ve just lived through a century long era of personalities lending their brands to corporations making mass market products.
Michael Jordan with Nike. 50 Cent and Vitamin Water. Matthew McConaughey and Lincoln.
Now influencers launch their own micro brands rather than lend their celebrity to mega brands. It’s more authentic and more lucrative.
Mr. Beast has a chocolate line, Feastibles, and a ghost burger kitchen chain, Mr. Beast Burger. Kylie Jenner sold a majority stake in her Kylie Cosmetics at an enterprise value of $1.2 billion. Mark Sisson, a health and wellness blogger, sold Primal Kitchen to Kraft for $200 million.
These examples aren’t just niche influencer brands. They’re luxury goods companies that target a specific and loyal fanbase. The only reason to leverage an influencer’s social capital for a micro brand should be to create something uniquely relevant to the influencer’s audience who is willing to pay a premium to be associated with it.
For a traditional luxury, the buyer pays a premium for the frequent recognition of financial inequity. For a micro luxury, the buyer pays a premium for the occasional sharing of social inequity.
You can buy sugar-free ketchup for a third of the price of Primal Kitchen’s version, but then you aren’t primal. And who doesn’t want to be primal?
Maybe you don’t, but Sisson has an audience of hundreds of thousands of people that do. That’s enough to scale a few hundred million dollar consumer product brand tailored to the needs of that specific audience.
Tailoring is important. For a micro luxury concept to work, it has to have high relevance to the influencer’s brand identity. Sisson could have made a Primal apparel line, but that wouldn’t have been that relevant to his audience because the primal lifestyle is more about what you eat, not what you wear. He spends half his time running shirtless outside anyway.
It remains to be seen how acquired micro luxury brands stand the test of time. The acquisition of a micro brand by a larger company forces the brand into a new phase of maturity that demands it expand beyond its core audience. For Primal Kitchen, the success of the acquisition depends on Kraft’s ability to extend the brand to a wider audience interested in general health but perhaps not primalness.
While most everyone recognizes a Louis Vuitton bag and what it costs, few would recognize Primal Kitchen ketchup. When the latter scenario does happen, it can create an immediate social connection between primal lifestyle advocates. When it doesn’t happen, it gives the primal advocate a reason to evangelize to someone else the benefits from a position of knowledge, and perhaps in the primal case, diet superiority.
That’s identity, and specific expression of identity is a micro luxury.
The Make America Great Again hat represents the perfect segue from micro luxury (the authentic hat costs $50!) to the Political Corporation.
There is no stronger demonstration of identity today than political allegiance.
Identifying as a Republican or Democrat immediately aligns you with millions of likeminded people and puts you in opposition with millions that disagree with your tribe. That’s the power of mainstream political parties.
All media, and social in particular, has heightened political tribalism to levels that certainly feel worse than ever before. Under this searing lens of political tribalism, American corporations will be forced to make a choice: Either align specifically and unashamedly with one political ideology or stay out of politics altogether.
This is not a prediction. It’s already happening.
Just this week, leaders from America’s biggest banks testified before both House and Senate banking committees in Washington. During the House testimony, Michigan Congresswoman Tlaib asked banking leaders whether they have a policy against funding new oil and gas products after an interlude about global warming. JP Morgan CEO Jamie Dimon told her that barring new investment in oil and gas would be “the road to hell for America.” It would seem a sane answer given that we just lived through $5 per gallon gas prices because of severe global supply constraints, and the world isn’t going to stop using oil any time soon. Tlaib didn’t think so, responding that JP Morgan customers should pull their deposits from the bank.
On the other side of the aisle lives Strive Funds, a new asset management firm dedicated to pushing public companies to eschew politics. They stand in specific opposition to the ESG demands levied on corporations by BlackRock, the world’s largest asset manager. This week, Strive sent letters to Disney and Apple demanding that they eliminate political influence in hiring, public activism, and other business practices.
As we ramp toward what will certainly be a heated 2024 Presidential race, consumers will have politics more top of mind than ever. Demands on corporations to align or stay quiet will grow accordingly.
The Trafalgar Group published a study earlier this year suggesting that 87% of Americans were very likely or somewhat likely to stop using a product or service from a company that open advocated for a political agenda they disagree with. Republicans in the survey were slightly more likely to stop patronizing a disagreeable company than Democrats.
It makes logical sense that consumers would avoid companies that don’t share their values, but action matters more than words. Procotts — doing business with companies you like — are always stronger and more sustainable than boycotts. That’s the opportunity in creating Political Corporations.
I first wrote about the Political Corporation a year ago in my original identity piece, and I’m surprised we haven't seen more of them emerge. Other than Strive and Jeremy’s Razors (a conservative razor brand), Rumble is the only other political corporation that has emerged of consequence, although it’s far from a new platform having been founded in 2013.
Rumble is a free speech alternative to YouTube. It recently went public via SPAC (ticker: RUM). The platform has attracted Donald Trump (who is banned on many social platforms), Russell Brand, conservative commentator Glenn Greenwald, and controversial influencer Andrew Tate (who’s also banned on several social platforms). In the past year, the company almost doubled monthly active users to nearly 50 million and minutes watched to eight billion.
As to why we haven’t seen more Political Corporations, I go back to one of the founding principles of The Deload: Extraordinary outcomes require doing something that’s either unlikely or uncomfortable. Building a business that caters to a specific political audience is a painfully uncomfortable proposition for most. To build a Political Corporation requires a commitment by the entrepreneur to stand in the arena against opponents that will cast you as evil. That’s the nature of politics.
Further, the most attractive opportunities in Political Corporations are likely to be unsexy, non-tech businesses. Insurance, financial advisory, mortgage lending, banking — any category that has minimal product differentiation and moderate to minimal switching costs. In the glamour of high tech, these aren’t the kinds of businesses that entrepreneurs are naturally drawn to.
Perhaps surprisingly, Political Corporations may offer sexier margin profiles than many tech businesses for two reasons. First, it should be relatively easy for these kinds of businesses to find aligned customers — there’s certainly a class of consumers on both sides that is hyper sensitive to politics. This should yield lower costs of acquisition and more loyal customer bases. Second, Political Corporations should need minimal R&D compared to “innovative” companies since they are simply leveraging political branding as the innovation.
If both of these hypotheses on Political Corporation cost structures are true, eventually some daring entrepreneurs will gravitate to these businesses. The best ideas always look unattractive at first.
NFTs seem dead. Trading volume on OpenSea, the largest NFT exchange, was down 90% to $500 million in August from $5 billion at the January 2022 peak. September will probably end in the $300 million range. Sane NFT believers knew the heights weren’t sustainable, but we also hoped it wouldn’t get this dire.
Despite the massive decline in interest, NFT volume still runs at around $4 billion per year. The lowest level Bored Ape NFTs trade for $100k and the lowest level Cryptopunks trade for $85k. While down 80%+ from highs, we’re still talking about six figures for ownership of a JPEG.
NFTs aren’t dead yet.
Nothing has changed since I outlined why I believed digital luxuries would be a huge growth area last year as NFTs were just emerging in popularity. We still spend more of our time online than ever. Our online identities matter as much, if not more for younger generations, than offline identities. It stands to reason that a significant portion of the money spent on luxury and discretionary activities offline, which all contributes to identity formation, will find its way online.
Art, collectibles, luxury goods, gaming, and gambling remain areas that I expect NFTs to reinvent. That, too, is already happening as large companies experiment at the intersection of these categories.
Nike made nearly $200 million in NFT revenue over the past year, almost 8x more than the next closest luxury NFT experimenter, Dolce & Gabbana. Tiffany, Gucci, and Adidas have also each generated over $10 million in NFT revenue playing at the intersection of collectibles, gaming and luxury goods.
DraftKings launched a new NFT-based fantasy game called Reignmakers that combines collectibles, gaming, and gambling. Players collect digital cards similar to popular sports video games like NBA 2K or Madden, but in Reignmakers they set lineups and score points based on player performance, just like daily fantasy. And players can trade their cards in the DraftKings marketplace.
People can dunk on the failures of experiments like Axie Infinity, but the that game isn’t dead yet either. There will be more successful NFT-based games that follow. For the record, I always believed a sustainable play-to-earn game must figure out how to offer a great experience so that some players play merely for fun, not just profit. No digital economy is sustainable without a class of tourists that play for fun and leave money in the economy, same as any physical tourism-based economy. Maybe Yuga Labs (Bored Ape creators) will get it right with their metaverse play, The Otherside.
I expect interest in NFTs and digital goods to remain slow for awhile. Grand failures, and there have been several in NFT land, tend to do that. But that’s not the death knell for NFTs. It is, as the crypto trope goes, still early.
NFTs and digital goods will serve as the digital representations of identity that micro luxuries and Political Corporations provide in the physical world.
Lessons of History
If identity is about inequality, then accepting identity as the mega trend of the decade demands an increase in inequality. That may seem depressing if you spend enough time listening to the inequality Olympics on Twitter and other social media.
I see it differently.
In one of my favorite books, Lessons of History, Will Durant wrote, “Freedom and equality are sworn and everlasting enemies, and when one prevails the other dies.”
If freedom and equality are mortal enemies, then 2020 could just as easily be called the decade of freedom given that identity is the intentional embrace of inequality, and inequalities only exist in states of freedom. I think that’s a hopeful message, not a depressing one.
Disclaimer: My views here do not constitute investment advice. They are for educational purposes only. My firm, Loup Funds, may hold positions in securities I write about. See our full disclaimer.
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