
MBAs are a serious bunch. They like to have meetings, talk about action items and key takeaways; and they’re always trying to either think outside of the box or search for really elusive things like alpha or (competitive) edge.
I know because I have an MBA. Most of my career has been spent straddling the line between quantitative and qualitative, data and Business, inside the box and out. So my fellow data scientist, that makes me probably the fifth most qualified person in existence to explain to you how the business world works and what all that business jargon means (FYI, if you haven’t already noticed, this post is mostly sarcastic with a tiny dab of insight). Today, I will focus on explaining the business concepts that annoy me the most (so that you can join me in disliking them).

Blue Ocean Strategy
I really hate this term. I understand what the creators were trying to say – instead of playing in existing competitive markets, you should build a product or service that’s both new, differentiated (MBA jargon that means the product is somewhat unique), and low cost. In other words, invent a new market away from all those crappy competition filled red oceans and you will rake in the dough! If only things were that easy and the world was filled with blue oceans for all of us to play in (I don’t mean literally, and yes I know the Earth’s surface is 71% water).
Really it’s nothing that Warren Buffet hasn’t already said – companies should always be improving their economic moat (the thing that gives them a sustained advantage over their competition and pricing power over their customers). Honestly, you could probably learn 99% of what I learned in my MBA just by reading Buffet’s shareholder letters.
But when I hear the term, I can’t help but flash back to a meeting I sat in on where one fellow was lambasting the other for his "lack of business vision". I distinctly remember him saying, "unlike you, I’m a blue ocean thinker." Shudder. I am actually quite upset at that "blue ocean thinker". I like oceans; but now instead of thinking of whales, dolphins and poke when I hear the phrase blue ocean, I only see his face…
My Thoughts: Having a better product that’s also cheaper is ideal but not always realistic. Not every company can or should seek the mythical blue ocean. For every Google (which actually offers a better product, search ads, for a lower price thanks to its massive scale), there are dozens of Krogers. And just because Kroger plays in a commodity market (a so called red ocean) doesn’t mean that it can’t turn a profit (it just needs to prioritize volume and not do dumb things that waste money). If you compared all the money burned blindly chasing after blue oceans versus the value created by actual blue oceans, I would bet the former is significantly larger – so pursuit of blue oceans has probably been a net negative in aggregate. Even Google, despite repeated attempts and billions and billions of dollars spent, has never been able to replicate the blue ocean-ness (and success) of search.

Disruption and Disruptors
There was probably a time a few years back where merely mentioning the word disrupt in your investor pitch deck guaranteed at least $50 million in funding (from SoftBank). And if you could explain with a straight face how your company was basically the AirBnB of say fountain pens, that would get you another $50 million, funding secured.
For the uninitiated disruption theory, pioneered by the late Clayton Christensen, describes the situation where a smaller company wins substantial market share away from its more (initially) dominant competitors. It successfully does so by first focusing on delivering a cheaper/simpler product (that’s good enough) to overlooked and underserved buyers before eventually moving up-market by refining the features of its still cheaper product. The incumbents are slow to react because they’re not built to compete on cost. Ultimately, the disruptive upstart ends up with not only a lower cost product but also a more fully featured one as well, and ends up dominating market share (until it itself is disrupted at some point). Now that I think about it, disruption is kind of like applying a blue ocean strategy in a red ocean… so a purple ocean?
For better or worse, the flush times are no more. Most startups attempting to disrupt ended up being disruptive only to the cash invested in them (by burning it up). The venture capital boom was undoubtedly good for the consumer – it helped grow cool and useful businesses like Uber, Slack, Flexport, Airbnb, and Instacart (though some of these firms may not survive the current recession).

But it also spawned a bunch of firms that could only be described as ridiculous wastes of investor capital. WeWork, the wannabe real estate disruptor, is probably the most famous one. As recently as last year WeWork held the top spot in my ranking of companies that paid software engineers the most as it prepared to fleece Wall Street for billions of dollars (via what could have been the most overvalued IPO in history). Now the company is on the verge of bankruptcy (and rightly so).
A really funny one was Juicero, the company that sold what amounted to $400 scissors (it was actually a machine whose only function was to open a bag of equally overpriced fruit puree). Before being laughed out of existence, the company managed to raise $120 million. What?? I would have loved to have been a fly on the wall when Juicero’s founders were pitching their investors. I imagine the conversation went something like this:
VC: So you're a company that sells expensive juicers?
Juicero: No, were a cutting edge tech company that's about to disrupt the market for fresh fruit and vegetables.
VC (suffering FOMO from not Investing in Uber): Tell me more.
Juicero: You know how many people eat fruits and vegetables?
VC: I would imagine a lot.
Juicero: EVERYONE eats them EVERYDAY! The TAM (business speak for potential market size) is infinite!
VC: So you're like Uber but for fruits and vegetables?
Juicero: Yes exactly.
VC: I'm liking what I am hearing but just for due diligence's sake, how are you better than say an Odwalla?
Juicero: Our proprietary deep learning algorithm uses AI and NLP to infuse every juice packet with the optimal combination of flavor, texture, and nutritional value. And we use blockchain Technology to ensure that every perfect packet is unique and can only be unlocked by the specific Juicer with the correct private key. It's truly decentralized nutrition for the masses.
VC: You had me at blockchain!
I’m actually a little sad that Juicero never made it to the public markets. It would have been an amazing short (shorting is betting that the price of a stock will decline).
The moral of the story is that disruption is hard. It’s not something that can be bought with millions or even billions of dollars. True disruption is usually born from a company’s desperate battle to survive against much stronger competition. It takes patience, countless iterations, and a deep understanding of customer needs to even have a chance to build something disruptive.
Distressed Buyers, Synergies, and LBOs
Private equity (PE)is the corporate equivalent of house flippers. They borrow a lot of money to buy a company, pretty it up, and flip it to the highest bidder. It’s great work if you can get it – successful PE fund managers make insane amounts of money.
Of all 3 concepts that we discussed today, this is the most currently relevant. Private equity funds are sitting on some $1.5 trillion in dry powder (a.k.a. uninvested cash). If the market takes another dive in the coming months, they will start putting all that money to work in earnest. That’s why they’re often known as distressed buyers – PE funds like to buy up troubled companies that have fallen on hard times (and then gut them).
You can bet that they’ve already started kicking the tires on battered tech companies near you (in April, Airbnb raised $2 billion in convertible debt from PE firms; convertible debt is debt with an attached option to convert to equity).
Private equity annoys me because of the way it pretends to help companies while secretly extracting all the company’s cash. In the investments industry, we often talk about "skin in the game", meaning are you invested such that your (financial) interests are properly and amply aligned with the company’s performance? Well PE firms actually have very little skin in the game on a per investment basis. To understand why, here’s the typical private equity playbook for acquiring a company:
- Identify a target company that has a lot of cash in its bank account and that generates a lot of cashflow.
- Use a little bit of its own money and a lot of debt, borrowed against the target’s cashflows and assets, to buy the target company. The use of all that debt is why the transaction is known as an LBO (Leveraged Buy Out). In business speak, leverage and debt are one and the same.
- Use the acquired company’s cash to pay itself a dividend – basically a huge financial self high five for doing nothing.
- Implement mass layoffs (the so called synergies) because the acquired company now has no cash and needs to pay lots of interest (to service its debt). Gee, I wonder where the cash went?
Because the PE firm uses so much debt (rather than its own money) to fund the acquisition and pays itself a dividend to boot; by the end of step 3, it’s got very little remaining skin in the game. The sliver of equity it invested at the start has already been partially paid back.
It’s truly a ruthless and coldblooded business. Yes, there are some private equity firms that truly leave their acquired companies better than they found them, but they are the exceptions to the rule. More typically, PE firms release companies back into the wild (via a new IPO) saddled with debt and perilously close to financial distress. They can get away with this in a bull market where rising prices and optimism about the economy help to hide the warts of bad companies.