Balaji Srinivasan’s Prediction On China’s Role in Crypto Crash and His Top 5 Investments

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In this article, we will discuss the top 5 investments of Balaji Srinivasan. If you want to read our detailed analysis of these companies, go directly to Balaji Srinivasan’s Prediction on China’s Role in Crypto Crash and His Top 10 Investments.

5. Earn.com    

Earn.com is a California-based company that hands out digital currencies in exchange for certain internet-based tasks. It was founded in 2013 and is ranked fifth on our list of top 10 investments of Balaji Srinivasan. Srinivasan was a founding member of the firm which asked users to reply to emails or do other tasks in exchange for payments in cryptocurrencies. The firm raised more than $121 million in funding over two rounds by 2015, with Andreessen Horowitz, where Srinivasan worked as a partner, as well as Yuan Capital in China leading the investments into the startup. In 2018, Coinbase bought Earn.com for $100 million.

Another company to watch out for in the same space is Amazon Mechanical Turk, a website owned by Amazon.com, Inc. (NASDAQ: AMZN) that gives businesses the opportunity to hire remote workers for discrete on-demand tasks. Amazon.com, Inc. (NASDAQ: AMZN) is one of the largest technology firms in the world.

Out of the hedge funds being tracked by Insider Monkey, London-based investment firm Crake Asset Management is a leading shareholder in Amazon.com, Inc. (NASDAQ: AMZN) with 146,000 shares worth more than $452 billion.

In its Q1 2021 investor letter, Hayden Capital, an asset management firm, highlighted a few stocks and Amazon.com, Inc. (NASDAQ: AMZN) was one of them. Here is what the fund said:

Amazon (AMZN): We sold our last remaining stake in Amazon this quarter. Amazon was our longest-running investment holding, after having originally purchasing it at the inception of Hayden in 2014, at a price of ~$317.

I gave some details of how Amazon has progressed over these past 6.5 years in last year’s Q2 2020 letter, which partners can find here (LINK). The company has executed amazingly well over this tenure, with revenues up ~3.3x and since our initial purchase, and reported operating income up ~30x over that period.

Generally, I believe there are three reasons to sell an investment: 1) we recognize our initial thesis is wrong (sell out as quick as possible), 2) we have a significantly higher returning opportunity to redeploy the capital into (sell-down to fund the new investment), or 3) the company is maturing and hitting the top part of it’s S-curve / business lifecycle, so the business has fewer places to reinvest its capital internally. As such, the future returns will likely be lower than the past. This investment thus becomes a “source of capital” in the future, as we fund earlier-stage investment opportunities.

In the case of Amazon, we decided to sell due to the third scenario. I’m sure Amazon will continue to generate value for shareholders and continue to keep pace with the broader technology sector. However, I’m just not confident it’s as attractive an investment as when we first invested.

With ~51% of US households having an Amazon Prime account (and with very low churn), each of these households continuing to increase their annual spend with Amazon, and few / no real competitors in sight, Amazon is a dominant force that will only continue to accrue value as consumers continue to move from offline to online purchases for their everyday needs. Likewise, the “cash-flow machine” of Amazon Web Services is in a similar position of strength, with AWS now having ~32% market share and continuing to grow at +30% y/y. Because of this, I think Amazon is probably one of the safest investments in the technology sector today.

So why did we decide to sell the investment then? Simply put, Amazon is in a much different place than when we initially invested. Back in 2014, investors were starting to question whether Amazon’s promise of future earnings potential would actually come to fruition.

Operating income had declined from ~$1.4BN in 2010, to ~$676M in 2012, to just ~$178M by the end of 2014. Expenses were outpacing revenue growth, and investors were questioning whether Amazon’s expenses were truly “investments” as they claimed, or whether it was a structural necessity of the business and thus would never flow to investor’s bottom line.

The critical question was ‘what portion of expenses are truly growth investments vs. structural expenses, and as a result, will Amazon ever be capable of generating significant profits?’

Our analysis indicated that these expenditures truly were the former, and led to the belief that the business’ structural margins would inevitably increase over time. This was our differentiated insight / investment edge.

Fast-forward to today, and our thesis proved correct with operating margins having increased from ~0.2% to ~6%. However due to this success and proving this facet out to investors, Amazon investors have much higher confidence and a better understanding of the company today. I’m not sure we have the same level of differentiated insights, as we did back then.

In addition, I believe the departure of Jeff Bezos and his long-time lieutenants signal a regime change. Perhaps it’s now “Day 1.5” instead of the Day 1 mentality that made Amazon so successful (LINK)… The departures within the past couple years include:

• Jeff Bezos – Founder, CEO, Visionary. Started Amazon in 1994.

• Jeff Blackburn – Joined Amazon in 1998. Oversaw Amazon Marketplace, Advertising,
Amazon Studios, Prime Video, Prime Music, M&A.

• Jeff Wilke – Joined Amazon in 1999. Oversaw Amazon Consumer (ecommerce)
business.

• Steve Kessel – Joined Amazon in 1999. Oversaw Physical Stores, Kindle, and Whole
Foods.

Blackburn, Wilke, and Kessel have each arguably created hundreds of billions of shareholder value. On top of this, Bezos is the visionary and culture-setter behind Amazon. When he and his long-time lieutenants take their hands off the wheel, it is probably time for us to as well.

We sold our remaining shares at an average price of ~$3,240. Based on our initial investment, we made a ~10x return in a little over six years, for a ~45% IRR7. We reinvested the proceeds into our existing portfolio, taking advantage of the prices offered by this latest market draw-down.”

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