Ask Us Anything: Programmable digital currency and selling a small VC-backed business

0:00I'm Adam Schwab. I'm Adir Shifman. And this is The Contrarians with Adam and Adir.

0:09And we're back. Episode 204, Ask Us Anything. We ask us any question you want, really, and we'll answer it as best we can. Michael, chief question asker. First question this week comes in from Terrence. Thank you so much, Terrence. With the People's Bank of China rolling out a programmable digital currency, there has been increasing discussion about its potential to influence the velocity of money and enable more precise economic intervention, such as targeting stimulus to specific sectors, regions, or cohorts, and even applying expiry to funds. As the Reserve Bank of Australia explores similar applications, how do you view programmable digital currency as a fiscal policy tool?

0:52I've never felt so unqualified to answer a question. Do you have views on this? you want to share? I've actually got minimal views on it. Although my headline view is the reason why certainly China and potentially Western governments like this is they want to control all kinds of money. So the moment – I totally agree with that. So the moment the problem with some – and now Bitcoin's becoming much more controllable, but a lot of cryptocurrencies, governments have no idea what's going on and they hate that. They want to be able to – and that's why sort of the tap and go and the shift away from cash to credit cards has been such a boon for governments.

1:19They capture everything. They reduce the leakage to cash and you can't – you lose anonymity. So I'm very much in favour of maintaining cash. We saw there was an article in Financial Review last week saying that cash use amongst Gen Z has actually slightly increased. Obviously, it had dropped significantly, but slightly increased again. So that's actually, I think, a positive sign. And we've seen the whole issue with Armourguard and how the Fox family don't want to keep running it because it's losing too much money because no one's using cash. You just have that discale problem. So I'm not a big fan of digital currencies controlled by governments.

1:50I think it's problematic. And I think just give governments too much. And we saw what Canada did during COVID. So we saw how bad Victoria and Australia was in COVID. Canada was almost worse. Remember when those Canadian truckers protested the COVID stuff? So what did Justin Trudeau, that scumbag, do? He started stealing money from their bank account and freezing their bank accounts, which is just outrageous. The more control governments have with digital currencies, the more that can happen. I'm not saying people are going to be as bad as Justin Trudeau, who's now sort of just floated off to the sunset with Katy Perry after destroying Canada, but that's what can happen when you've got these kind of politicians in power.

2:21No, that's true. Maybe I'd say these high-level comments. One is most currency today is already digital in nature. That means almost all of your cash wealth is sitting as bits in a bank account that you access digitally. Like you don't own cash or gold bars. That's not the majority of your wealth. And so this is turning that presumably into a crypto-style currency. And my starting point in general is this point that you made, which is there is a line – I don't think you should completely distrust government and leaders because then you're in anarchy. That's a bad system. But you should have a healthy scepticism of leaders and government because predominantly what they are in it for is themselves.

3:08And so the Canada example is a good example. Like you don't want to give them too much control over things and I think that anything that increases their control over money flow and whether you get money, like I'm generally not a fan of that. The only, I mean, the thing is this. This is how I feel about, you know, there's this whole Tabcorp thing that's going on with more Austrac problems, right? And the thing is this. Tabcorp gets Austrac problems because all of their money is so traceable and they're in the system. But actually vastly more money laundering is happening through cryptocurrency.

3:46Totally. Vastly more money laundering is happening through cryptocurrency. Totally. than it is through these kind of old school channels. And so the other issue that I've got with this is I'm not sure most of these changes really capture where most of the problems are going on. But I don't think, I think I need to learn more about this. Like I haven't paid much attention to it. My view with China is that most of the things that they do is about exerting more control over what's going on in their economy. So I think it's logical that they do it. and I've never heard anyone come up to me advocating that Australia desperately needs to follow the lead.

4:23It's also a bit weird given that we know with certainly Bitcoin and most other cryptocurrencies aren't great means of exchange. You can argue they're somewhat of a store of value. You can argue not. But as a means of exchange, they're highly inefficient, which is why you can't tap and go Bitcoin or very hard to. So it makes no real sense. The only point, the reason governments want to do it is for control. Remember we saw Cyprus in 2010 or 2009 when everybody just lost 10 % of money they had in the bank. And that was a form of digital theft. And the more that governments can control your money through these cryptocurrencies, the worse it is.

4:55Well, that's absolutely correct, right? Because usually if you're going to destroy people's money with inflation, like the whole of society has to conspire to do it. Yeah. No, you're absolutely right about that. I generally am cynical about governments having more control. Yeah. Michael, question number two. Okay, question two this week comes in from an anonymous question asker. Hey, Adam and Adir, I wanted to ask about what your advice is on the pathway for selling small businesses. I run a VC-backed business, which is small in nature, steadily profitable, but not currently growing at the rate required for venture capital investors.

5:28It seems wrong to simply shut down what is a profitable business that has significant branding in the industry, simply due to lack of growth. However, investors are wanting to return their capital, and our team internally feels we have given the business the best chance of life we have to achieve the position we are in today. It's not a standard business that I feel would sell on something like Flippa. It's niche in nature. So finding buyers is hard. Do you have any advice on if we should sell the business and how to do so given your experience selling in the past? Definitely don't shut it. You know who they should talk to?

6:02Scott from Town Capital. Of course. It could be a bit small for Scott. It might be. But I think this is what the nature of his business is. This is a big problem. So there are lots of venture-backed businesses. When venture capital invests in businesses, they say, we only care about the mega winners, and they call that the power law, and nothing else matters. Definitely, even if the business was growing strongly but wasn't one of their mega winners, they wouldn't care about that business either. And so venture capital, I mean, I don't say this in a nasty way to venture capital, we all like them.

6:36But like they love you on the way in and then they love you if you stay in their top few performers. Yeah. And so this is not – I mean the first thing I'd say to the anonymous question asker, I get why it's anonymous. Yeah. It's not Mike Cannon-Brooks, is it? I think he's got liquidity. I think he makes profit so I can't remember. He's got liquidity. So the first thing is this founder should not feel bad because this is a common situation. Yeah. most venture-backed businesses do not become one of the power law successful startups. The argument in favor of power law, and there's a mirror in there, is the power law allows VCs to take a lot of bets on companies that have high risk.

7:15Yeah, it's a smart thing they do. Yeah, but it just creates these situations. And so I think, I mean, it said profitable, right? Yeah. Yes. I mean, I find that astonishing. Yeah. That's remarkable if that's true. He said profitable but not currently growing at the rate required. Which might still mean growing. Yeah. Like a business that's profitable and let's say a business is doing, I'm just going to pick some numbers, random numbers, 20 mil of revenue, keeping 1 mil in profit and growing 20%. I think he's probably going to get less on that, but anyway. 10%. No venture capitalist has 1 % interest in that that's put money into it, right?

7:52But that business is still worth some millions of dollars. I think the logical thing to do in that business, like structurally, someone has to buy out these venture capital investors. And there might be some seed funders in there before the VCs. There might not be. And so these venture investors, you would say they should be very keen to sell out and let the business go on to a happy life. My experience might be they're always keen to sell until there's a buyer they think is smart. And then they're not as keen to sell. but they should find someone that is prepared to buy out the minority stake that the venture investors have and support the next stage of growth for this business and i think the founders should stay in the business and they should keep growing the business if they're interested in doing so because that's the way they'll get the best return out of it so yeah i absolutely think they should find someone to yeah the other thing is potentially the founders themselves can potentially buy out the the problem with the venture capitalists have to borrow money yeah well the problem with venture capitalists and we talk about supply and demand a lot here but But this is a reverse to – usually when VCs are buying in, they've got completely the upper hand.

8:54They've found an assessment for money. They'll take often a pretty average deal. In this case, the VCs are reaching the end of their fund. They're in a bit of a pickle. They've got to sell their stage. Well, you should explain that because one of the lines in this is the investors want their money back. Yeah. So what does that mean? VCs and private equity as well have – generally you have fund terms. So you can have – sometimes some funds go forever. Evergreen, like TDM. Some funds go forever when they weren't intending to go forever as well. Yeah, but some funds that intentionally go forever.

9:18but most funds, whether it's SPV, so a fund investing in one asset. Or a special purpose vehicle. Or it's just a callable blind fund where you put, so you might give, I might invest a hundred grand in Paul Nathalaya's round percent. And Paul says, this is a five to seven year fund. We'll get your money back in five to seven years. They can always extend it, but then investors probably won't give you money again. Unless there's a great reason for it. So basically VC firms need to give money back to investors. And when they reach the five, six, seven year period, especially if it's a five year fund, some of the investors are going, hold on and we call these people limited partners limited partners LPs are going hey VC you told me it's been five years it's been seven years I've only seen 30 % of my money I could have put it in the bank and got a better return give me money back give me the rest of my money and VCs go okay okay and then they go to the poor founder and say hey founder you need to sell and the founder goes well I can't sell and then you can founder then go to the VC okay I'll give you 20 % of what you paid me because the VC needs something or what VCs can do is continuity funds which you can probably explain what that is which is a different take so they'll do a continuity fund or a continuation fund or a follow-on fund.

10:19If a business is going really well and they don't have any more money to invest in it, but they want more money to invest in it, they'll go and raise a little special fund just to invest more in businesses. Well, the main reason they – a growth fund's different. The continuity fund is where they need to close that fund and they can force it on some other investor. They can sell their shares from the fund they want to close to their new fund that has another seven years in it. And they make money on both hands, which is beautiful. But one challenge of buying it for 20 % of what a VC put in is that a VC will have marked that up.

10:51Also, if there's prefs, then you've got some real problems. Yeah, if there's preference, yeah. So if some people get the right to get money back first. So I think my guess is there's a deal to be done with a VC. If this business hasn't fired, and maybe it was on the books for$5 million, and you offer them one mil, and the VC is about to return 100 mil, they're not really going to care about the extra 1 % or 2 % that they're going to lose from this. So that might not actually matter. You might be able to give them something low. Presumably the VC's tried to dump the stock themselves already and no one's bought it off them, right?

11:22That's the first thing they'll try and do. So I think, I mean, my summary would be don't shut it, especially if it's profitable. If it's growing a bit and it's profitable, you'll find someone to buy that. Think about whether you want to keep going. If someone buys it, they might give you upside options if you keep going as well. You might be able to increase your stake in the business. I don't know. they're welcome to reach out to me if they want some advice on it. Well, the challenge is the devil here is so much. It's really hard for us to – The devil's in the details. Because we don't know what the terms of the share is.

11:50We don't know what the terms of the preference shares. We don't know how big the business is, what the property is, what the growth is. But this is – this would be, I don't know, like 40%, 30%, 40 % of a VC's portfolio. This conversation might be relevant. Because some percentage will just go broke. Yeah. And some percentage won't be the real winners. But someone will buy them for something, like a trade sale. but there's probably 30 to 40 percent of a portfolio that falls into this so okay but not a superstar yeah and like what do we do with it as a VC I think from Anon's question this is just what I'm sort of gleaning is this is probably someone who's so used to being sort of bullied by VCs because remember when you're like a young investor or young founder you're just going to take whatever you can because VCs have money you don't yeah and usually the power is always in the in the funder you want to have the money and yeah as in because you're the one with the power the The person asking for money is the one who doesn't have the power.

12:42And this is a revert. So the net had completely changed you. Do a one-ending thinking and now realise you now have leverage over these voracious VCs. And you can play them like they played you. Now, the caveat there is I haven't seen the terms. I haven't seen the other heavy preferences. This is a three times liquidation. Who knows what the hell is going on back here. But you need to realise that the business is much more valuable to you than them and you need to play on the leverage you have. Always think of what's your negotiating opponent's bat now. We'll have Vicky Medbeck on in a couple of months.

13:10She's the negotiation queen of the world. And what she always says is you need to understand what the best alternative position is for the person you're negotiating against. And it sounds like a non-you really need to think of what is the VC thinking, how can the VC get out of this, and you need to drive the best deal for you based on the VC's BATNA. And so BATNA, best alternative to a negotiated agreement. And what I'd also say is these things. A VC might not even be nasty. They might be nice. But what this founder will have certainly felt is the switch from love to not love. And that will be a painful experience for this founder over time.

13:47The other thing I'd say is this. VCs do not like it when startups bring on advisors. It's one of their most hated things. But now I would absolutely say get someone that has done some deals to at least behind the scenes. Yeah, someone that can take the emotion out of it and can go and stand toe-to-toe with the VC if need be. and get you a good outcome because, you know, there still is a perception mismatch in the mind of the VC and the founder and they need to try and eradicate that perception mismatch. You need a really strong lawyer who understands just what your rights are and can also get the – you don't want a flog of a lawyer who the VC might just have an animosity towards.

14:31Yes, that's right. A charismatic lawyer who can – but really understands what you can drive based on your bargaining position. You want Donald Trump, who seems unreasonable, but actually somehow always gets to a deal. And so you need to find that kind of – and yeah, I absolutely think that get an outcome here. Get an outcome. Yeah, totally. But don't give it away. We'll go to a super quick break, back with question number three in just a moment.

15:01We're back, Michael, question number three. Okay, final question this week, and I'm just going to read this verbatim. There's a bit of run up to the question, but I think it's fun. So my daughter and I were talking tonight and she mentioned that she was at Girl Bunnings today. I've never heard of this before. And she had completely overspent because the chemist warehouse, Girl Bunnings, at the Hyperdome in Brisbane had beautiful wide aisles and she was really happy shopping there because every other Girl Bunnings that she shops at has really thin aisles and she doesn't like shopping there. I swear Mecca is a much better girl Bunnings than...

15:38But maybe Chemist Warehouse is a more appropriate analogy because Mecca is kind of beautiful, whereas Bunnings is kind of like shoving a whole lot of stuff in there. I find Bunnings quite nice. Of course you do because it's like Adam Bunnings is Bunnings. I'll finish the question. I've never really thought about it before, but how much do you think the store layout actually affects the retail space? Great question. Can you give his eyes a lip up? Well, you know, I do like retail. That is a very interesting question. Someone who is very stylish and very smart said this to me. Well, you also are very stylish and very smart.

16:18I mean, you're not big on long pants, but apart from that, you've got it going. So I think this is what this person said to me, which kind of relates to this. if you walk into a store and all of the square meterage is packed with stuff and the shelves are shelves are all full it feels quite cheap but if you walk into a Louis Vuitton you'll notice there's just sometimes a table taking up space with flowers on it if you walk into the best perfumery stores you'll notice that there might be a shelf and maybe you could fit 10 bottles on but they have three bottles on there and so there is some emotional communication that says if we don't have to fill everything up to the max it comes across as more premium and more luxurious so that is like a first cousin to this question it's not exactly the same but if you walk into if you go into a luxury store you'll notice that it does not look like country road like there's lots of space doing nothing except feeling beautiful and making it feel premium and so the thing about wide aisles is it feels more premium it feels like you've got more space to make decisions and it feels like you've got more time to consider the merchandise it is a totally different shopping experience but um but on the flip side tight aisles can make things feel cheaper and so that's also a lot of stores will go for tight aisles deliberately like jb hi-fi historically had very tight aisles when they were selling cds a lot for example and because it just feels like It's all packed in and it's cheaper and you might find a bargain on the shelves.

17:55There is no doubt that aisle spacing, aisle fullness, what's at eye level, what's below, above, these all dramatically influence the feel that customers have when they buy and like the revenue per square metre of a store. Kmart's got very wide aisles. I presume Costco, just because you need big trolleys, has big aisles. Yeah, well, Costco has big aisles for big trolleys. That's right. And a lot of these do because they want it to be easy to get around and to get into all of the different places. Kmart has a lot of bulky goods. So they have different aisle widths in different parts of their store.

18:28If you go into the cosmetics area, which is now often behind a secure area because people steal all the stuff, they are narrower than some of the other aisles. Yes. So the short answer is there is a huge amount of thought put into by good retailers what the aisles feel like. I was in Mecca last week for Mother's Day. Mecca probably one of the best. Mecca does not have high shelving in the middle of the store. Do you notice that? It feels luxurious, Mecca, but there's a lot of stuff around. So when you go into a plane, and some of the new planes, I'm cautious in how I say this, some of the new planes have decided in their premium caverns to not have overheads in the middle of the cabin.

19:08They only have them at the side. The most premium cabins will not have any overheads at all. When you're in first class, you put your bag on there. And so even where there's no middle overheads, it feels much more luxurious because it feels like there's more space around your head. And so that is Mecca. Mecca has no high cabinetry in the middle of the store so that you feel like it's more spacious and more luxurious. But they'll have high cabinetry on the walls. That's right. And so all of this is part of the experience. Yeah, absolutely. Are you guys familiar with the Gruen effect? Do you know about that?

19:42Yeah, the TV show. No, but what it is. Isn't that how TV advertising impacts you or something? No, I think it's how a mall, is that right? How a mall tries to get you lost in order to make you buy more. Yes, that's what the show is named after, but the idea is the design of a shopping mall is supposed to confuse people to encourage them to make money. Wander around. I feel like that's adjacent to this. And it has no clocks, and the guy Gruen, who it's named after, was horrified that the effect was named after him because he designed malls and was basically a socialist and hated consumerism. It's very ironic, right?

20:17Is Jim Chalmers' grandfather? It's very ironic. But yes, that is true. I mean, also casinos have no clocks and no natural light. Like it's the same game, right? So I think this is the opposite of that. It's Mecca, for example, trying to make it feel more luxurious. The big question is why does Chemist Warehouse have a non-standard fit-out in this store? Maybe they took over another store. It's possible. I find Chemist Warehouse really busy. Obviously, there's no trolleys that can have super tight aisles. But these guys, like Jack and Mario, again, two of the best retailers Australia's ever seen.

20:51So they know what they're doing, these guys. But they've definitely gone for that discount feel, which I don't personally love. But I find I always buy a lot of stuff in there when I'm there. So they do have that great – they do make you think this is cheap. It's hard not to buy stuff in a chemist warehouse like a Bunnings. I think that analogy is good. I will say this. If people are really interested in retail fit-outs, if that's like, I don't know, your fetish, then you can go and do this. you can go and look at a Katmandu store anywhere and then go to the Katmandu store at Westfield Chatswood, which is their new store.

21:21Same merchandise, totally different fit-out. You can go to an Adair store anywhere and then go to the new Adair store in Bondi Junction, Westfield. That's a new fit-out, same merchandise, new fit-out. You'll see how dramatically the fit-out and layout of a store can affect the perception of the product. It's very dramatic. It's a great question. Thank you. Again, the super smart question. ask us three fantastic questions as always thank you idea thank you mike thank you joel we'll be back on tuesday for our regular episode great