Part 2 Eventbrite Qualitative Analysis

Valuation Context, What is knowable and important?

Qualitative Analysis 

Although the quantitative data generated some red flags, at the end of the day it is quite limited since it only shows what is happening and what has happened. Without a large quantity industry and historical data, it is very difficult to tell where things are going. 

To know where things are going we need to answer the question.

“What is knowable? What is important?”

To answer what is knowable and important we first should know the context that determines the current valuation.

The contextual background that determines valuation for the mature and immature industry is completely different. 

If this is a traditional industry, it would have an investor pool with a depth of understanding of the price and valuation which will control the distribution of pricing action based on the fluctuating conditions connected to business fundamentals.

Immature businesses on the other hand have limited historical background, the economic potential of the business unknowable, it allows justification of value for a business like this to become very wide as both arguments can be feasible. Without historical experience and institutional memory, any projections can be justified, the price of the stock can help win an argument.

On top of what is mentioned, there is an institutional imperative that supports over valuation since a bull market or bubble is great for Wall Street in terms of fee generation.  

The conditions above make embedded optionality highly valuable and the pricing action of these stocks highly volatile. (the business economics is uncertain and volatile, the valuation conditions are uncertain and highly volatile, and demand for the is uncertain and highly volatile.)

“In a mature market, there is no free lunch implying that In an immature market there might be.”

The high volatility embedded in investments like Eventbrite and also tech, in general, distorts the prices of these investments on a quantitative basis since much of the value implied in the price is based on possible outcomes in different sample paths.

(Ie, Business payoff, Valuation Payoff, and/or investor mania.)

A stock can be fairly priced even if it looks expensive from a traditional value perspective. This does not mean you will be making money in them if you buy them fairly priced. Value can be created and destroyed rapidly.  

Money comes and goes at the end of the day it is important to focus on what is knowable and important. And not simply make a punt with your entire portfolio. In an investment career of half a century, all the stupid risks you take will eventually blow you up if you do not hedge your tails.

What is knowable and important?

With the contextual background cleared up, this brings us to the question of what is important in investing in Tech? Outside the momo where is the real alpha?

Normally this will start a time-consuming research project to understand the entire industry but luckily there was already someone to copy off to bring us straight to the point. 

What is important when investing in tech?

As pointed out in Peter Thiel in Competition is for losers’ lecture.

When investing in tech companies you make the real money by buying Monopolies as laws of economics apply here too.

What is interesting with technology companies, is because of the high fix cost low variable cost nature of this business the consumers will not feel the economic effects that come with traditional monopolies as the company grows bigger in scale the value offered by the product will grow at a far greater rate than the rate of pricing increase if any. (Simply look at Facebook and Google value adds today vs five years ago.)

It is also of political importance for individual nation-states because a dominant tech monopoly with a free open market can capture a large portion of the economic activity of the world. (Ie Apple, Google, and Facebook) 

Back To Eventbrite Simple answers 

It is okay that Eventbrite has been burning all this money, if it grows into a monopoly one day Why not burn some more if we can get there quicker? Buying into Tech monopolies early is how you make. 

So will Eventbrite become a technology monopoly? 

A: Let’s find out if it meets the qualities of technology Monopoly? 

(Proprietary technology, Network effect, economies of scale, and Brand.)

Proprietary technology

In the case of Eventbrite, it has a full-stack to integrate with major players in exclusivity. There are many competitors it does not seem it offer significantly great value as compared to its smaller competitors. 

The event management and ticketing can be segmented into three groups. Small Mid and High. Although the services offered by their business is significant and of value, it is not a good fit for the current market dynamics and its needs to create high returns on capital. 

Small size events do not need much support simply pay & go and the customers mostly come from their existing contacts and word of mouth for marketing. (they are cheap to acquire, they do not take overhead to maintain and they prove low volume in revenue.) 

The midsize events market which Eventbrite dominates needs more support which Eventbrite doesn’t have the business capability and economics power to fully support. If they did they will need to run at a greater burn rate as seen in Ticketfly. (Midsize market are higher in revenue volume as compared to small but they are low in earning quality and higher in acquisition and maintenance.)

The high-end market is mostly dominated by ticket master with a low cost of financing for advance payout for contracts and business capabilities to help with the variability inherent in events management. (this part of the business is capital intensive, takes a long time to build, and requires economies of scale to maintain.) 

Overall i do not see the current market dynamics change in the recent future. Yes to having Proprietary technology but it has yet to create a competitive business edge.  

Network Effect

Although Eventbrite is large in scale as compared to its competitors but offers little benefit as implied by the numbers. Many facts show Eventbright has a network but at the end of the day, it did not create the economic and/or structural force that will force an event creator to chose Eventbrite over any others. 

Simply put the discovery function and network benefits are marginal at best. There are no hands over knees group of event creators flocking to it because it adds so much value, instead it has to run a consistent cash burn at bad economics to grow.

Although there is a benefit of commitment and consistency where it is easier for an event creator to host another event on its' platform once it did it before. But the economic benefit is yet to be seen. Event creators are overall low earning quality businesses due to the fragility of the events business as a whole. 

Economies of Scale

It has scaled, but it does not have economies. 

An interesting signal one of the founders was talking about Europe having better margins because it has lower payment fees. And a statement that the economics of the business getting better once the business in Europe gets bigger. Implying the US business is not so good and would not improve over time. 

In my view one of the only possible ways that economies of scale can work for Eventbrite. Is regional dominance, this is because live events are mostly regional depended activity. If Eventbrite has an entire region then it will be able to produce great business economics as it will no longer need to spend a lot of money on customer acquisition and its administrative support to event creators can be correctly allocated.

Part of this was tried with its' ticket fly acquisitions which got crushed by Ticketmaster’s better financing and business competitive advantage. Because its' scale is so much bigger it can bid negative business economics just to keep the business. Eventbrite doesn’t have the same business capabilities.  

Simply put this is not happening because the business economics on the operational level is shit. Implying that unlike Facebook or Google Eventbrite's business has low fixed costs and the variable cost is high and is likely completely uneconomical if they want to grow. The variable costs are fixed costs.   

Branding 

It has a brand it is generic. It does not have many points of interaction to take on risk for the consumer or create trust. Marginal at best. 

Short answer and easy short cut it is not making fuck you money if you compare its rate of growth and profit with Facebook or Google, It is a shit business as compared to other tech companies. 

Conclusions

Quick and to the point this business has a broken business model. 

Low and Mid events markets are not good businesses as they are inconsistent in bring in revenue as compared to the high market. 

High addressable market and cheap and consistent revenue growth are what is needed for a variable technology company to thrive. In the current business conditions, this is not possible. 

Eventbrite does not have competitive economics to compete with TicketMaster. Unable to obtain regional dominance based on the current trajectory Eventbright will remain a player with scattered customers, bad financing prospects, and uneconomic business. It is highly doubtful this thing can survive in the long run without more outside money. 

take everything with a grain of salt this is a view of a generalist. I could spend more time on this but the return to brain damage is too low. Although this was an empty hole Interesting insights about market dynamics came out of this write-up. 

Stay tuned for Part 3 Implied Market Dynamics Where I share interesting findings on market dynamics that i discovered from looking at this.