Funston Brief (Issue No. 6)
This month, our featured stories dive into the latest metaverse developments and their implications for business owners. We also discuss the recent M&A landscape.
Similar to most other areas of finance, mergers and acquisitions tend to slow pace during economic downturns as corporate executives, boards, and private equity companies become pickier about large purchases. However, this year, the tech sector has offered an intriguing exception to this norm. Just recently, Amazon disclosed that it had paid $3.5 billion for the primary care provider One Medical. That comes after other high-profile purchases made in the tumultuous markets of 2022, including Broadcom's acquisition of VMware for $61 billion, Microsoft's purchase of Activision Blizzard for $69 billion, Google's purchase of Mandiant for $5.4 billion, Thoma Bravo's purchase of Sailpoint for $6.9 billion, and, of course, Elon Musk's bid-turned-saga for Twitter for $44 billion.
Higher interest rates, supply chain problems, and geopolitical conflicts are all predictors of a drop in M&A activity. However, the increase in money spent on tech acquisitions contrasts with trends in worldwide M&A. An underlying factor is that during the recent boom times, many buyers, notably large tech firms, have become rich with cash. Most acquirers generally take a wait-and-see approach when asset values initially start to fluctuate, but some may speed up their buying when they spot lucrative prospects with low valuations. When buyers are well-capitalized, they are more focused on following their long-term strategic aims than worrying about the short-term implications of an economic overhang.
The largest competitive market shifts happen during times of turmoil, and we are living through an era of instability. In general, businesses that invest continuously outperform those that invest irregularly in terms of returns. Remember this time around there’s a wild card as well: rising interest rates, which might increase borrowing costs for PE firms and businesses compared to prior economic cycles. The PE business was only getting started the previous time inflation was a problem, in the early 1980s. So, it’ll be interesting to see how things fare this time around.
ACTIONABLE INSIGHTS.
Seven essential ingredients of a metaverse: A16Z, the VC firm that recently announced it will be moving its HQ to the cloud, explores seven necessary components that are integral to achieving a "genuine" metaverse, i.e., one that is open as opposed to closed. They contend that these are required to satisfy the prerequisite for being referred to as a metaverse. The firm developed a framework for assessing early metaverse endeavors and to dispel the misinformation about what is and isn't a true metaverse for builders and would-be participants.
Key Insight: According to A16Z, an open metaverse is decentralized, allows users to control identity, enforces property rights, aligns incentives, and ensures value accrues to users (not platforms). An open metaverse is also transparent, permissionless, interoperable, and composable (others can freely build within and across metaverses), among other criteria. Link
Metaverse of madness: CB Insights examines the 13 major businesses that the emergence of virtual worlds may affect. Their analysis examines the sectors that the metaverse is ready to reshape, from retail to finance to advertising. Check out this market map as a supplement to this research.
Key insight: The final form of the metaverse is far from certain, but fundamental shifts in consumer values regarding their online personas and financial decisions are already generating enormous potential and difficulties. Link
EAR TO THE GROUND.
Podcast Episode: At the Edge - What is the metaverse - and what does it mean for business?
Guest: Cathy Hackl
Takeaway:
There is no disputing that we are already catching glimpses of the metaverse and what it might turn into, even though no one is exactly sure how to define it precisely. Whether the metaverse is for entertainment or for everything else is a topic of discussion. The fascinating thing is that while the aspirational perspective ought to be the more enticing one, entertainment often bleeds into other areas of life (one big reason computers found their way into homes was for video games, and that was part of the early adoption of smartphones, too). Guest Cathy Hackl tries to clarify the implications of the metaverse for businesses in this McKinsey podcast. Enjoy!
“No official definition yet exists for the metaverse, but companies can’t afford to wait until one does or the metaverse fully evolves to start experimenting and investing in it. If you wait a year and a half or two years to do something, to have a clear strategy, and to start testing these assumptions, it might be a little bit too late.”
- Cathy Hackl, Futurist, Metaverse Expert, and Author
$11.3 billion
In an effort to jumpstart the VR/metaverse market, Meta, the parent company of Facebook, spent $11.3B on VR and related costs in the last 12 months (selling $2.5B of hardware and software.)
PROFILE.
Matthew Ball, a venture capitalist and writer, has been heavily influencing the debate around the metaverse during the past few years. Matthew has recently published a new book that’s a must-read for enthusiasts and business leaders - Metaverse: And How it Will Revolutionize Everything. To complement it, I suggest listening to this podcast where Matthew discusses the types of companies that stand to do well under a shift to the Metaverse. Enjoy!
“A live 3D version of the internet as we know it today is the best and simplest way to think about [the metaverse]. Why? Because it not only explains how it's a little bit different visually but experientially. It keys into [...] how it might be more intuitive. Of course, we didn't evolve for thousands of years to tap the glass, interact with 2D interfaces, and static information. We explore, we immerse in 3D. It's a much better interface for many tasks. Far from all, but many tasks. But most importantly, we take for granted the interoperability of the internet and how important that is to everything we do and create. [...] We have a lot of 3D stuff today. There's a tremendous amount of time being spent on 3D platforms. What we don't have is a scalable network that actually interconnects. And as we've learned from the global economy, world trade, as we've learned with the internet at large, the utility that comes from that is extraordinary.”
ON MY RADAR.
Meta’s policy chief Nick Clegg published a long essay on “what does ‘metaverse’ mean?” Link
About
Funston Brief is a newsletter by Funston Capital, LLC. We’re an investment company located in San Francisco, CA looking to acquire an already profitable and growing tech-enabled business. If you or anyone you know is interested in selling a business, please reach out to me at alex@funstoncap.com!
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