What we can learn from seeing businesses as organisms in an ecosystem ... using the particularly odd example of HEICO as the barnacle to TransDigm’s whale.
Interesting read complementing this premise:
Interesting case as well. I’d also point out I came to this idea of economic gravity, but in a different way. In Lessons from the Titans, Larry Culp had an interesting view of Danaher’s M&A:
Separately Culp came to understand that DBS worked better with businesses with a high gross margin, especially those with a big spread between gross and operating margins. The wider the spread, the more opportunity for Danaher to take costs out with DBS. Culp had learned through operating experience that it was easier to improve the gross margin of a high-margin company versus a low-margin one. Low margins usually meant that customers saw the product as low value. Culp’s judgment ran against the consensus view, as M&A bankers and business schools often presented low-margin businesses as opportunities, particularly for those good at taking out costs.
The takeaway here is there is a reason for economic gravity to make gross margins low for reasons of market structure and perception of product. These businesses likely had little in the way of moats, easy entry, etc. This is unlike what I am starting to call “protected markets” – like the ones of Transigm / Heico and Roper. As a company and investor, you want to find these “weird” markets.
Another member emailed me vouching for the Bionomics book you shared here, @ajzitz, so I wanted to register my interest — I just bought the book before writing this comment. I’ll paste the bit from the book that he pitched me with, in case other members might be interested in reading:
To give you an idea, there is an entire chapter titled “Economy as Ecosystem,” where he writes “[b]y contrast, ‘niche players’ survive by avoiding head-to-head price competition…. Attempting to escape scarcity, species as well as industries fragment into ever more-specialized offshoots. By adapting to the peculiarities of their niches, ecologic and economic life forms become more efficient at making offspring and products. Lacking any grand design other than the urge to escape threats to their continued existence, genes and technology spontaneously weave living webs of ever more-intricate filigree. The future details of these stunningly complex systems are unknowable, but their basic architecture and historical direction are quite clear and similar.”
I’m looking forward to reading this now!
There’s another disturbing thing from this ‘high interest rates ecosystem’ style of thinking that I implied but didn’t touch on in the essay: all investors who started their funds or their careers post-2008 are immediately suspect. Not to say that they’re bad — just that we don’t know, and can’t know for awhile. This is quite discomforting to me, because there are plenty of investors I read and like and respect who seem to have a track record only in the ZIRP years. To make this concrete, even vaunted VC firms like a16z should be considered unproven by this lens, which is pretty scary. And whilst some businesses are going to be excellent regardless of the interest rate regime, they probably won’t be as excellent, which is something I now always have at the back of my head.
Related, unstructured thoughts:
The list goes on. ZIRP is this thing that haunts me, and I think it should haunt anyone who’s reading about investing performance, or taking advice about ‘founder mode’, or reading about businesses grown in the past 15 years.
Thanks for the book rec, very interested in checking Bionomics out now as well!
Strongly agree with many of your ZIRP thoughts, here’s my 2c though:
FIRE is a ZIRP thing only because seeking yield was harder in lower interest rate environments and therefore required more aggressive cost cutting of daily expenditures; in higher interest rate environments, saving was more rewarded and savings could yield more cash flow which reduced the austerity required to become financially independent without taking on additional risk.
Most VCs underperform regardless of macro environment so not sure tbh, but possible.
No idea regarding Automattic vs WPEngine, could go either way imho; I’ve seen this spats in ZIRP environments as well fwiw.
ZIRP has been haunting me for awhile as well…
Moore’s Law had a multi-decade run before ZIRP, which included stretches of time with double digit effective Federal Funds rates:
Cost of capital always matters - big picture case studies of Apple and Microsoft ought to include treatment of the high cost of borrowing during their founding (mid-1970s) and takeoff growth (early 1980s) periods - but if Moore’s Law stops working, I suspect it will come down to a convergence of phenomena we don’t see coming.
Great point, thanks for bringing the receipts!
It’s not right to judge investor skill in the context of low interest rates because they have to be judged by the castles they build in the sandbox they have chosen for themselves. It would be ridiculous for a VC to say “I skipped Stripe/OpenAI/Anthropic/etc.'s last round or Perplexity/Traba’s Series A because of the shape of the yield curve” even if the yield definitely impacts their investments- VCs are supposed to source and invest in the best tech deals - this is the asset class’s JTBD. If VCs have an edge in forecasting the yield curve they should have a global macro HF; LPs get their macro exposure elsewhere and not from VCs. Hence, to evaluate private market investment, stack ranking VC firms for relative performance is reasonable.
It makes sense that a lot of new VC firms get rekt and many juniors move out of VC - I wonder if the # of “good companies” is fixed regardless of the availability of capital and if the VCs outside the top 20-30 are all a deadweight loss in LP portfolios and on society. Extending this to startups beyond the top 20 each year would be possible only with hindsight because that would mean correctly guessing which startups end up becoming huge.
For PE, it has always been a levered beta play and an arbitrage between the cost of debt and cost of equity, so low IR/ZIRP just amplified that.
I think you’re not looking at the game many investors and especially VCs are playing. If you want a hint, start by thinking about why it’s called the “investment management” business, and not the “investment performance” business 
Oh dear. 
Shots fired, as they say.