Pro tip: If you ever need a good pick me up, just shut down your business and very publicly announce it…
In all seriousness, I am blown away by how supportive you all have been over the last two weeks. I was not expecting the kind of outreach I received. I think I’ve finally responded to everyone and just want to thank you all again for your kind words, support, and sharing your stories with me.
I’m so appreciative.
As you can tell, Candid will now be coming from my new personal email address: email@example.com. If you ever need to get a hold of me, you can email me there. Please add it to your safe sender list so you keep getting my weekly newsletters.
Now, to the newsletter:
Topic of the Week: Losing Scarcity Value
No individuals wielded more power in the mid-’90s than gift store owners.
With the dial of their cordless phones, they controlled the financial fortunes of thousands of individuals, for they alone determined who had access to the sacks of beans, known as Beanie Babies.
This power was short lived. Beanie Babies lost their scarcity value as every kid in America had tubs filled with them. With that scarcity value, the power of the distributors evaporated.
Scarcity value is a basic economic concept. It is a premium applied to a good or service, just because there is higher demand than there is supply.
There are many examples of this in the business world.
Companies offer “limited releases” even though they have ample production capabilities to make more.
Natural resources are intentionally undermined to prevent higher supply and lower costs.
Excess inventory for designer goods is burned instead of going on sale.
Creating scarcity value isn’t that difficult, but maintaining scarcity value is a delicate balancing act and incredibly hard to support long-term, for two reasons:
Greed and innovation.
Beanie Babies were killed by greed via a massive increase in production.
New fracking technology created new supplies of oil and gas.
Greed and innovation are the enemy of scarcity value and usually win in the end.
These same trends are unfolding in the private equity market.
Private equity used to be a small group of firms. Companies looking for liquidity had few options, which meant private equity firms could buy companies for reasonable prices, generate high returns, and investors paid a lot of fees for access to these returns.
Private equity firms controlled the supply of capital into private businesses.
But capital allocations to private companies have dramatically increased over the last ten years.
There are more PE funds, more family offices, more corporate investment arms, more angel investors and more money chasing private company investments.
There is more supply, more competition and an inevitable downward pressure on returns, so how much longer will private equity be able to maintain its scarcity value?
That’s all for today. Have a great weekend everyone!