FF Daily #544: The internet’s underbelly

December 9, 2021: How to discern a good tech company to invest in; Why Bill Gates is optimistic; Inflation is certain

Founding Fuel

[From Unspalsh]

Good morning,

Right now, we are reading This Is How They Tell Me the World Ends by Nicole Perlroth, cybersecurity journalist at The New York Times. This book was named Best Business Book of the Year 2021 by Financial Times and McKinsey. It is a meticulously researched account of how the internet’s underbelly operates. We picked this passage that highlights one of her many encounters between law enforcement agents and the creators of malware.   

“After several tense moments, Luigi finally murmured, ‘I could answer your question, but I would much rather talk about my salmon.’ 

“To my right, I could sense the German fidgeting in his seat. Two years earlier, Ralph Langner had been among the first to crack the code and unveil the plot behind Stuxnet, the most sophisticated and destructive cyberweapon the world had ever seen.

“Stuxnet—as the computer worm came to be called—had been discovered in bits and pieces in 2010 as it slithered its way through computers around the globe, using an unheard-of number of zero-day exploits, seven to be precise… Others allowed it to crawl across the network from there, climbing ever higher up the digital chain of command in search of its final destination: Iran’s Natanz nuclear plant, where it burrowed deep into the offline, or ‘air-gapped,’ computers that controlled the rotors that spun Iran’s uranium centrifuges. And then, by remote command, Stuxnet silently spun some of Iran’s centrifuges out of control, while stopping others from spinning entirely. By the time Iran’s nuclear scientists discovered that a computer worm was responsible for the destruction of their centrifuges, Stuxnet had already destroyed a fifth of Tehran’s uranium centrifuges and set Iran’s nuclear ambitions back years...

“The Stuxnet code could work just as well in an attack on a power or nuclear plant, or a water treatment facility in the United States… 

“The longer Luigi stared silently at his salmon, the more visibly clenched Langner’s jaw became. Finally, after several tense moments, he shifted his chair away from the Italians to face me directly.

“‘Nicole,’ he said, loudly for the others to hear. ‘These men are young. They have no idea what they are doing. All they care about is money. They have no interest in learning how their tools will be used, or how badly this will end.’ Then, shifting his gaze back to Luigi, he said, ‘But go ahead. Tell us. Tell us about your fucking salmon.’”

The book reads like a thriller!

In this issue

  • How to discern a good tech company to invest in
  • Why Bill Gates is optimistic
  • Inflation is certain

How to discern a good tech company to invest in [FF Exclusive]

As a slew of Indian internet companies look to list on the stock market, Haresh Chawla, partner at True North, and Saurabh Mukherjea, founder of Marcellus Investment Managers, unpacked the phenomenon last month in a conversation anchored by Indrajit Gupta, co-founder, Founding Fuel. The session was part of the Morningstar Investment Conference, 2021.

One of the questions they explored was what to look for in a tech company before putting your money into it. Here are some of the key points that emerged during the discussion.

  • Accounting transparency: [For traditional brick-and-mortar companies] you can see where cash is being generated and where it is being invested. That diligence is not possible with tech companies. It is difficult to tell which areas of their operations are cash generative—or even that they are indeed cash generative.
  • Be sceptical if they are looking to raise a lot of money: Historically, the best tech businesses don’t need much capital. For example, Naukri became cash generative on a couple of million dollars. More recently, Nykaa has come to profitability on well below $50 million; Policybazaar promoters say they built on $70 million.
  • Stable leadership: Fundamentally a sound business with strong moats. And with corporate governance, succession planning, and team dynamics nicely in place.
  • The tech basket you need to look at is not just startups, but also older companies that are using tech and digital in a big way. Look at digitally powered data businesses; they will create enormous value.
  • Price multiples (ratios such as price-to-earnings (P/E), price-to-sales (P/S), price-to-book (PB)) have no utility at all—even for the Old Economy. Instead, try and judge how long the company can sustain its cash flow generation.

Dig deeper

Why Bill Gates is optimistic

Even as the mood across the world appears somber as the Omicron variant raises its head and stokes concerns of a third wave, an essay by Bill Gates that reflects on 2021 and attempts to look ahead struck a cheery note. We liked it because in this essay, Gates reflects upon his personal journey through the year, the changes he has had to make, how he has adapted since Covid happened, and attempts to look at how the near-term future may unfold and what trends he thinks will surface in the longer term.   

“I am hopeful, though, that the end is finally in sight. It might be foolish to make another prediction, but I think the acute phase of the pandemic will come to a close some time in 2022.

“There’s no question that the Omicron variant is concerning. Researchers—including a network called GIISER that is supported by our foundation—are working urgently to learn more about it, and we’ll have a lot more information (like how well vaccines or previous infection protect you against it) soon. But here’s what we do know: The world is better prepared to tackle potentially bad variants than at any other point in the pandemic so far. We caught this variant earlier than we discovered Delta because South Africa has invested heavily in genomic sequencing capabilities, and we’re in a much better position to create updated vaccines if they’re needed.”

As for the second order outcomes in the longer term, he does a deep dive into three areas and goes to point out why the first and most significant change will happen in how we work. Then there is education and health that digitization will impact the most. 

Dig deeper

Inflation is certain

(Via WhatsApp)

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Warm regards,

Team Founding Fuel

(Note: Founding Fuel may earn commissions for purchases made through the Amazon affiliate links in this article.)

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