Investing in Tik Tok US | Erik Averill, Brandon Averill, Justin Dyer | AWM Insights #30

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Episode Notes

Investment in Tik Tok is starting to make headlines across the US while President Trump is being asked to defend his stance on Tik Tok to a US District Court. Meanwhile, Apple’s app store charges are back in the news as well.  Spotify, Fortnight’s Epic Games and Tinder have all partnered with the non-profit coalition called the Coalition of App Fairness to bring legal action against Apple to see if they can bring down their charges.

Brandon and Erik Averill, co-founders of AWM, are joined by Justin Dyer, Chief Financial Officer at AWM, to discuss these headlines and address questions like:

·       Average Joes vs Pros: What does Tik Tok news mean for investors? Should you go buy Oracle and Walmart stock with their investment to Tik Tok US?

·       What does Tik Tok news mean for the private markets?

·       The best way to approach stories like these as it relates to your portfolio

Resources

Judge says U.S. must defend or delay TikTok app store ban by Friday

+ Read the Transcript

Erik Averill (00:03):
Hey everyone, welcome back to AWM Insights. It's your power three. Two CPWAs and the CFA, Erik, Brandon and Justin.

Brandon Averill (00:13):
Erik, I've got a question for you. You think you're going to be able going to log on to that Tik Tok on Monday? Seems like Trump and the commerce department sure don't want you to. We've got a court standing in the way. So what do you think?

Erik Averill (00:24):
I know people are excited to see my new videos. Before I answered that question, Justin, you shared some interesting news with me about Apple.

Justin Dyer (00:34):
Apple is always in the news, whether it's their iPhone or new product they're coming out with. This past week there's been a lot of noise around the App Store and their charges and whether they're fair. Spotify, Epic Games, which is the maker of Fortnite and Match Group, the parent company of Tinder have joined a nonprofit coalition called the Coalition of App Fairness, which are bringing some legal action against Apple to see if they can bring down their charges. It seems like they're having an immediate impact. Apple actually today came out with some concessions to certain companies providing apps on their app store, namely those that have been impacted by COVID, they're waiving the 30% app store fee for them.

Erik Averill (01:17):
It's always very interesting to hear. You've got these big companies crying a foul of Apple, which really brings a question of antitrust laws. There's been a lot of coverage of, do they have a monopoly? Brandon, Tik Tok, the reason they're in the news right now is all around government issues. Can you fill our audience in what's the latest with Tik Tok?

Brandon Averill (01:39):
Unless you've been hiding in a hole, I think you probably have heard that Trump's on a mission to get rid of Tik Tok here in the US or at least dissolve it from his Chinese owner ByteDance. So far that's been the rhetoric force in a sale. We're going to shut you down. We're going to pull you off the app stores. He's got a judge standing in the way. We got US district judge Carl Nichols on the flip side is telling Trump, "Hey, play by the rules." This has got to be a legal threat. You need to file some legal papers defending this decision by Friday, or we're going to let this app continue on here and let Tik Tok and everybody that's enjoying it keep uploading those silly videos.

Justin Dyer (02:19):
You can add to that Tik Tok crying a foul and claiming around 40 to 50% of its monthly users could be at stake here if there's a two month ban at minimum. If there's a six month ban, they could see something like 80 to 90% of their user base dropping off there. There's some high stakes here. Politics are getting involved. Courts are getting involved and multinational cross border issues are coming to the forefront here. So this is a complicated story going on.

Erik Averill (02:50):
So really my question for you guys is, as I flip open my a Robin Hood, Dave Portnoy playbook, as the Average Joe investor. If I'm not mistaken, Oracle and Walmart now have some ownership in Tik Tok. The play has to be go buy Oracle and Walmart stock, right? Is this the right move?

Brandon Averill (03:16):
We're going to see average joes all over the place trying to get this done. Every broker is calling up their favorite client and trying to sell this. At the end of the day, we don't even know what Oracle and Walmart are buying. Their speculation maybe this is just the rights but they're not getting the algorithm. Speculation that this is just Trump's buddy, Larry Ellison bailing him out. We don't even really know yet. If you're rushing into that judgment, that's certainly not the way that to go about it. As we all know, as we flip on our pro hat and become the pro investor here, what's the first question we have to answer? That's where does this fit within your financial structure? Should you even be out there trying to gain outsize returns or do you have better priorities that are helping you engage and achieve your goals? That's question one and then you've heard it from us on previous podcasts talking about the private markets. If you are going to go after some outsized returns that that's probably the best place, the odds are in your favor as opposed to the public markets. It brings me up to a conversation I just had with an investor that is invested in ByteDance, the parent company of Tik Tok. It's not as clear of a picture as most would think. He was explaining to me nine months ago, if everybody, if we were to told everybody, "Hey, we can get you in on Tik Tok." How pumped would people be? It's a popular app out there. People are using it. That age-old wisdom of the average joe, go buy what you like. It doesn't always kind of flush out that way. So there's obviously a lot more that goes into evaluating a proper investment. If you look at it today those investment returns that everybody we're excited on the horizon or the potential for, for ByteDance. Unfortunately, given this they're dissolving their most important division Tik Tok potentially. The financial picture is totally changed and this is not an easy game to go play. Private side is great, but it's not always a clear path.

Justin Dyer (05:31):
Yeah. Brandon and also ties back into to the diversification conversation we had a few weeks back. That same logic applies in the private markets as well. You don't want to necessarily be concentrated into a single company, especially in the venture capital space. If you look at the data from C Company to Series A companies, only about 4% of startups that started out as were funded in a C round make it through that to a Series A round. There's a lot that fail and you don't know. You want to remain diversified. You don't want to chase these, these one-off Tik TOK deals, even if you can get access to it. The better approach in the private markets, as well as the public markets, is to be diversified, take a fund to fund approach, or spread your bets out across a number of different startups. If you can get access to the high quality ones as well. One other thing about this whole deal that comes to mind is not only is it complicated because of all the political machinations that are going on here, it's also a fire sale. Maybe you could argue that that brings some value to it because ByteDance has to sell at last minute. They also are incentivized to make the deal structure really convoluted and complicated as you've already mentioned. You don't even know what you're potentially buying and there's a deadline here that's really pushing people to do potentially shoddy due diligence with the whole deal.

Brandon Averill (07:08):
So what you're saying, Justin is it's never good to rush into something. That kind of goes back with the age old wisdom there it also, you brought up a fantastic point, I was having a conversation with another venture capitalist, sort of a very well-known VC firm. He pointed out that when you go into these individual deals, remember who you're playing against. Where are you going to fit on that cap table? There's stories all over the place of, we're all in ByteDance, but we're all in at different spots. If you find yourself too far down on that cap table, you could certainly find yourself in a world of hurt. I think we're seeing that right now with a company Palantir, that's preparing to go public and in their latest revision to their S-1 filing, it states that the Class A common shares are only going to have about a 3.4% voting power in the company. How much power do you actually have? Where you at? What's your investment get you? If things go bad, are you going to get any money out of the deal? As we all know, the private side could potentially have big outsize returns, but there's a lot of complexity there. If you're not with the best of the best, those venture investors that are continually repeating and have that persistence of performance, you're probably going to get caught, when the tide goes out, with your pants down.

Erik Averill (08:28):
I love this information. It's super helpful to know. For our audience, we're always trying to protect you from making those mistakes that we see so many amateur makes when it comes to your portfolio. Just as a recap, I think here with this news about Tik Tok is we don't trade headlines. We ultimately believe that it's very difficult to know which individual stock is going to produce returns without really any evidence there. Stick with diversification, both in the public and the private markets. We would always say, make sure that we're asking the next level of questions. It's not only did I get access, but why did I get access? And what type of access did we have in that investment? Make sure that you guys are getting all the up-to-date releases on the information we're providing and any extra resources by heading over to awminsights.com. Make sure you sign up for the newsletter. We'll get everything into your inbox. Until next time, stay humble, stay hungry and always be a pro.