Friday, Dec 4th 2020

Taking on Big Co.

Commentary

There's an old saying in technology: "every market is a race between a new entrant pursuing distribution, and an incumbent pursuing product innovation."

Or put differently, will Fast Growing Co. be able to become big before Big Co. modernizes its product enough. If Big Co. does, Fast Growing Co. could experience major challenges.

Take Zoom vs. Microsoft.

Many investors would argue that Zoom has built a sleeker video conferencing product (it works seamlessly) while Microsoft has more dominant distribution (millions of enterprise customers already using Office 365).

As Zoom shareholders know well, fast growing companies can yield exceptional investment returns, but for true marketplace durability, the company needs to find the path to get really big. Distribution.

We're seeing the same in travel. Earlier this week, we published a deep dive on Airbnb. What we found was an innovative company that had the right "bone structure" to potentially be a good investment (one we're considering). Yet despite billions of dollars in funding, Airbnb has fewer active listings than the incumbent, Booking (a Titan Flagship holding). Airbnb is going up against Booking's 12-year head start which has yielded massive scale advantages.

Travel startups have come and gone, and yet ~24 year old Booking.com continues to chug along quietly, delivering +26% annualized returns to its shareholders over the past decade. 

Some investors salivate over innovation, but distribution advantages are harder to win and identify early. The prize is large for those who can.

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