July 29, 2020

MFM #96: The Entrepreneur Betting Billions On American Passenger Trains

On today's episode, Shaan and Sam talk: Charter cities and planned communities, Wed Edens, the man investing billions in American trains, SPACs and the world of financial engineers, and building for the creator economy.

The business of cities 🏙️

Shaan and Sam discuss planned cities such as charter cities which are governed by a local charter rather than general law. Other examples include smart cities built with an emphasis on technology, and even a recent trend of buying old ghost towns and attempting to revitalize them.

  • Ryan Begelman: Co-founded Summit Series and Bisnow Media (sold for $50m). Summit Series organizes conferences and events for entrepreneurs. Summit Series also bought Powder Mountain ski resort in Utah. Begelman is attempting to build a town on the mountain.
  • Joe Lonsdale: Early employee at Paypal, and co-founder of Palantir. Joe’s a big advocate for charter cities.
  • 5 Minute City: Mini cities or communities where everything you need is within a 5- minute walk. Roads are built around pedestrian walking and autonomous cars.
  • Examples: Steubenville, Ohio is an example of a planned community started by 2 brothers. Sam also mentions how John Arrillaga, (Marc Andreesen’s father-in-law) helped transform Silicon Valley from farmland to towns. Many towns in NY were built because Cornelius Vanderbuilt built ferries going there.
  • “Sounds-cool idea”: Every few years a new set of “cool sounding” ideas emerge. Previously these included starting schools and satellite companies. Today starting new towns are in vogue. This was even the focus of Y-Combinator’s New Cities project. 

The billionaire betting big on trains 🚆

  • Wes Edens: Billionaire founder of Fortress Investment Group and owner of the Milwaukee Buck, who is trying to revitalize American passenger trains through his company Virgin Trains USA.
  • Why focus on trains? AmTrack has never turned a profit, but some of its lines are profitable. Wes Edens plans to focus on lines that can be profitable (currently serving South Florida and planning on serving LA to Las Vegas).
  • How to pull it off: Private and public financing is needed, so marketing and good press is key to the success of the project. Virgin Trains USA has also issued tax-free bonds. “The trick of this business is in the financing,” Shaan says. In other countries, trains are viewed romantically, while in the US it’s viewed as a poor person’s mode of transportation. It’s important to shift this mindset to succeed.
  • ✅ Lesson: Some of the best ideas are the most obvious. Hard problems to solve like trains are obvious, but few are willing to attempt because of the difficulty. 

Know your business 🔎

  • ✅ Lesson: It’s important to know what business you’re really in. For example, an educational startup won’t be able to beat Harvard by offering a better curriculum, because Harvard is in the credential, insurance, and social development business, not the educational business.
  • Dating apps are not about matching people. At their core, they are user acquisition companies. When building a dating app, good features are important — a great, sticky app is important to keeping people around — but the app lives or dies on user acquisition.
  • In the movie, The Founder, McDonald’s founder Ray Kroc is told “You’re not in the hamburger business. You’re in the real estate business.”
  • The opposite can also true, companies try to be in the business they are not in. For example, WeWork and Lemonade might claim to be tech companies and seek tech valuations, but that’s not necessarily the business they are in.

Financial engineering wealth 💸

  • SPAC (Special-purpose acquisition company): Is a shell company that has no operations, but plans to go public with the intention of acquiring or merging with a company, using the proceeds of the SPAC’s initial public offering (IPO).
  • Examples: Chamath Palihapitiya’s SPAC acquired Virgin Galactic and took it public. Bill Ackman on his $5B SPAC: “We’re in a unicorn mating dance and we want to marry a very attractive unicorn on the other side that meets our characteristics. And we’ve designed ourselves to be a very attractive partner.”
  • Sam’s take: ”How are these people so smart to come up with these things, and so bold to think it’ll work”.
  • Jay Gould: An American robber baron and one of the richest people ever. Sam brings him up as an example of someone who was able to creatively engineer business opportunities. He found a loophole to buy into the Erie Railroad without putting money into it. He convinced officials to change a law in 3 days that allowed him to issue new stock without telling anyone. Sam: “He made profits from thin air”.
  • Chris Sacca: A famous Silicon Valley investor and an example of someone creativite. As a college kid he went $4m in debt by trading with leveraged accounts. He renegotiated the debt down to $2m and started doing legal work on the side and created a fake consulting group, The Salinger Group, for credibility. He made millions by becoming an early employee at Google and an investor in companies like Twitter, Uber, Instagram, Twilio, and Stripe. 
  • SPV (special purpose vehicle): Funds for only one deal, not an ongoing fund. Chris Sacca used SPVs to buy secondary shares of Twitter and other companies. By the time these companies IPO’d he had massive stakes in them. His fund, Lowercase Capital, returned 225x on investor money.
  • Gigafund: Raising money just to invest in Elon Musk companies. Founded by former PayPal founders.

Other nuggets 🏆

  • There are 50m content creators, and if viewed as a group, they are the fastest growing small business right now. Shaan asks, “What are the companies serving these creators?”
  • Companies that serve creators are needed, because incumbent businesses usually don’t understand the creator economy’s business model. For example, Clearbanc became a bank for ecommerce, because traditional banks don’t understand ecommerce.
  • Daybreak Health: Mental health therapy app for teens. Anxiety and depression are  prevalent amongst teens and most aren’t getting help for it.
  • Companies are willing to pay for meditation apps like Calm and Ginger. It will become a faux pas to not offer employees these benefits. The same thing will happen with schools.

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