With the "semi-official" announcement of Guerilla Gravity shutting down on the other site today (yes, I know, Vital had it a month ago), the glut of inventory held throughout the industry, slowdown in sales and potential for consumers to be hitting the end of their "credit rope", will we see more companies in the industry hang it up for good?
I've long been skeptical of just how many capital intensive, high risk, low growth companies exist in the "specialty cycling" industry. To add, the number of very intelligent people figuring out how to make two wheels go down (or up) a dirt path better has lead to incredible gains from an enjoyment perspective, but is expensive and coming with fewer and fewer real world returns as we reach a plateau of sorts.
So what will happen? Will there be room for the boutique manufacturers of _______ out there? Can a small operation make it work in a sea of competitors (with far more money)?
I predicted 15 years ago we'd see a consolidation, similar to moto, but it never happened. Yes, the big players are doing "better than ever" (in quotes for a reason), but there are arguably just as many small time companies such as Reeb or up and coming companies such as WeAreOne.
I want to be clear, this is not a hypothesis that the *industry* is in trouble. Its not. It'll be just fine. There are arguably more passionate mountain bikers in mountain biking now than any other point in history, so I feel strongly we'll continue to see the sport thrive. I'm just wondering about the competitors who don't *really* have some kind of moat (which is basically all of them).
I'm frankly not sure, but I do think it'll make for a good discussion.
I think we'll see some more companies go under in the next year, and I think the number that will seal the fate of companies in our beloved bike industry for the next 12-24 months is debt. AKA how did you ramp up or cool down investment and spending as the Covid months and the bike boom dragged on?
I predict that some people got a little too optimistic in the last 3 years and partied like it was gonna be 2020 forever. Any company that borrowed money expecting the graphs to keep going up and who's sitting on lots of debt right now is in trouble. If you don't have a ton of debt, you can probably ride out an overstock problem, but if you borrowed a ton of money during the boom that means you need to somehow have another record quarter to keep the lights on, even as sales are dropping everywhere else. You're going to have to sell everything you have like a meth addict selling their wedding ring just to pay your debtors, and then somehow figure out how to come up with even more money to manufacture your 2024, 2025, and 2026 orders. Which probably means borrowing even more money, likely at higher and higher interest rates.
I keep thinking about financing and debt whenever I think about Guerrila Gravity. They seemed to have a great product and a dedicated customer base, I don't remember hearing a bad thing about their bikes or company, but I think I heard they sold out to private equity or something? The thing about financing is it doesn't even matter if you have a great product, customer service, sales team, etc, if your financing and cashflow model doesn't add up you're never going to get in the black. If your owner or debtor is expecting big consistent returns from the little old bike industry, you're in trouble.
Just to add a little more broad business nerd color and context to what Robot is saying, there are two ways to raise capital for any business. Take a loan (debt) or sell "part of your company" to investors (equity). TBH, I don't know if many companies were really ever able to take on much debt, being banks usually secure their long term notes in one way or another. Maybe a handful of companies are way out over their skis with respect to their credit facilities, but I'd bet this is not the contagion in the bike industry we'll see come crashing down (if at all). It might stall a business, but I don't think it'll ruin it.
Let me take a second to comment on those who contribute to a company's balance sheet in return for equity, as this is where I think the real problem lies. First, why do this? 1) if you strongly believe the company is going to outperform on a risk adjusted basis (you are crazy) 2) you love the sport and just want to do it (charity) and/or 3) you are so wealthy you like lots of irons in the fire for the hell of it (kind of charity/bored)
When interest rates were low, every capital allocator was willing to do all sorts of crazy stuff to find *some* level of return. This is why the GGs of the world were able to secure some financing (along with any other company that had the word "technology" somewhere on their website).
What happened next was everyone got sober, realized most companies are not going to turn into the next ____ (insert famous tech company here), and learned (the hard way) just how hard private market investing really is (especially relative to the S&P or even a 2023 money market account). When a GG type company goes back to the well to make their idea work, they are (finally) getting a hard "no" from investors. As a result, one of four things happens (remember, borrowing from a bank is very unlikely to be an option).
1) The company was always default alive (can live within cashflows) and was just looking for capital to grow the business. In this case, the company's growth slows/stops but nbd.
2) The company was out over its skis trying to grow too fast BUT can restructure its operations to be "default alive". In this case the company lays off employees, cuts non-core product lines etc but can live to fight another day..
3) The company needs capital to survive and either cannot restructure fast enough or there isn't a clear path to doing so. In this case, they close their doors.
(EDIT adding a 4th possible outcome) 4) The company needs capital to survive but has enough IP or something (really) special to be a takeout target by another brand or private equity. This is increasingly rare in the bike industry circa 2023.
So the big question I'm really asking is this, how many companies are like GG? IE, they have a good(ish) product, require more than 1-2 people to run, no real competitive advantage/moat and are not default alive.
Everything in this industry is pretty hush hush, and I feel I'd be a bit over-the-line to speculate as to who might fall into this camp (though I have a number of companies in mind).
One thing I'm having a hard time understanding is how this "...some people got a little too optimistic in the last 3 years and partied like it was gonna be 2020 forever." happened.
What kind of CFO/money person thought the boom was going to continue and was able to convince private investors, people who's whole job is figuring out market cycles, that it was worth taking a chance on?
Why/how?
The best case study in our world (sort of) for this is Peloton. They were the goldenchild of the pandemic, only to realize they literally made enough stationary bikes for the entire market and stopped production (fully). Stock was at $150 at the peak. $5.00 (not a typo) today.
Point I'm trying to make, most people in a position of management at any company wants to believe it is their operating ability, not market beta, that is the real cause for success. Add to this bonuses and incentives that keep the gravy train going and its hard to see why they wouldn't shoot for the moon...after all, you don't get paid handsomely the next quarter if you cut production and you are wrong.
OK, I get that, but what about the people making the loans? Same thing, scared to miss the boat? I'm just gobsmacked that more of these deals didn't get sanity-checked at some point but I suppose greed is a powerful blinder...
Investors are going to go to whoever is promising the most profits. So if your competitor is promising 25 percent growth you have to promise 25 percent growth or they aren’t going to invest in you versus your competition.
I clearly love finance Q&A way too much.
Disclaimer: I'm going to generalize a bit just so I don't turn this into a bigger dissertation than it already is.
Answer: Peloton, for instance, didn't have much long term debt relative to market cap/sales/net income until 2021. IE they raised $829B in 2021, then another $1.5B in 20222. I believe both of these deals were private market deals, which is not all that normal, with the likes of Apollo and Blackstone coming to the rescue. Why did they offer up the liquidity?
1) They have a wicked smaaat group of analyts who can underwrite the deal. I guarantee they have some pretty decent recourse if things go south and are always senior to equity holders in bankruptcy.
2) They were able to get a rate that paid them for the risk.
So in a sentence, Blackstone and Apollo bought the bonds because they offered a better-than-market return relative to risk (or so they thought). My bet would be they repackaged a lot of this and sold it into the private credit market. Again, they should be tied to some real asset, but I have no idea what that'd be nor what the "real world value" is of that asset.
Ultimately, its a different form of the same incentive structure. Blackstone/Apollo/etc have to go find a return in the marketplace and they also have the handicap of needing to deploy billions of dollars per year. That money sitting in cash is literally a real-world negative return.
Final point, do not underestimate the power of fees to certain power-that-may-be wanting to get a deal done. $2.3B in bonds could drive more than $40M in fees.
People are irrational. Isaac Newton may be the smartest analytical mind to ever live but that didn't stop him from, essentially, doing the 1720-equivalent of investing all his money in Peloton in 2022. "Isaac Newton is claimed to have said ‘[he could] calculate the motions of the heavenly bodies, but not the madness of people’, and supposedly could not bear to hear of the South Sea affair to the end of his life." https://royalsocietypublishing.org/doi/10.1098/rsnr.2018.0018
This turned into a great discussion. Jeff, you're right that I was a little careless with my use of the terms debt and equity, but what I was trying to get at was the idea that a business that takes a loan or sells equity is mortgaging their future and in the meantime someone else owns their ass. As you said "you're out in front of your skies." And on the most basic level, borrowing or selling equity both serve the same basic function: some external organization or individual is giving you a big chunk of money now in exchange for you paying them a smaller amount of money every year for a long time with the added bonus of punitive action if you fail to pay them back. I liked your phrase "default alive," which nicely captures what it takes to make it in the bike business. I don't think you'll ever grow yourself out of trouble in the little old bike industry if you aren't "default alive."
Also, this: "Do not underestimate the power of fees to certain powers-that-may-be wanting to get a deal done. $2.3B in bonds could drive more than $40M in fees." AKA your basic everyday moral hazard. An everyday example of this moral hazard principle is real estate- just because the real estate broker tells you "it's a great buy," or "has great bones," or "this is a buyer's market" does not make these statements true. Strangely, it's always a great time to buy and sell if you ask your average real estate broker.
Watched The Big Short?
Read it, and part of of why I'm so surprised is that it wasn't that long ago and we seem to have already forgotten those lessons...
The circle of...finance?
i think part of it is too much focus on short term, not enough focus on long term.
This is a noteworthy sentiment that ultimately proves untrue for two big reasons. I only mention it because it could have saved me a lot head scratching had I figured it out sooner...
1) Savvy investors are not looking for the largest return. They are looking for the largest *risk adjusted* return. I know this may seem implied, but this is exactly why the specialty bike industry likely looks so incredibly bad to any real investor with sophistication. The risks are very real, moats very tiny, elasticity very high and TAM not-so-big (which limits growth/exit).
2) Madness of crowds. Markets are far less rational than we were taught. Emotion and behavior finance is a force that is very difficult to rationally understand. As a result, you indeed will see terrible capital allocation, even by some of the most "savvy" allocators in the world.
Fun case study on some of this is VanMoof, the "Tesla of E-Bikes". They failed not too long ago - and their cap table suggested everything we are writing here is wrong (and VC can apply to bikes). https://www.vanmoof.com/news/en-GB/202064-vanmoof-raises-128m-to-make-i…
...again, echo chambers, circle jerks and "madness of crowds" is one helluva drug.
EDIT: Anyone who wants to read my "sweet blog post" as to why VanMoof failed (written months ago), you can find it here. Below poster is correct that warranty was part of it, but there was a lot (lot) more as to why they didn't survive.
In the case of Vanmoof, they were offering a really good warranty, but it turned out that so many bikes needed fixing under warranty that the cost of bike build + repair was higher than the sales price...
There are a lot of brands I wonder about, but one more than any, since they have existed, is Atherton bikes. They can't be shifting that much volume, and despite the high price, the margins can't be as high as others due to the frame construction. On top of that, they are supporting a WC winning level DH team as title sponsor. I remember reading when it all got announced that an angel investor was backing them out of pure passion.
Highly anecdotal, but this summer while in the Alps I have seen, on at least 5 separate occasions, groups of multimillion euro cars (lambos, ferrari, mclaren etc). In the past I have seen 1-2 of these types of groups per summer and often it would be a group of somewhat less bonkers Porsches or Audi R8s. It really makes you realise just how much money is out there being thrown around for the fun of it.
Can we identify some key characteristics of companies at risk? Based on previous points:
- lots of debt / high debt servicing cost
- high manufacturing costs compared to peers
- lack of differentiation compared to the market
- weak market share
- mediocre value proposition
- ???
This is a great discussion, BTW.
You would think that planning for that bubble burst would be a no-brainer, but I worked for a bike manufacturer during 2021-22 and the talks of growth just didn’t stop. “We’re gonna double our team size.” “We’re gonna double our output.” All the leadership bought fancy trucks in advance.
When I left, the shelves were full of inventory that wasn’t moving. The employee turnover was ridiculous. Every one of us actually getting our hands dirty knew that bubble was gonna pop long before it actually did. The leadership just refused to accept it. The idea of increased profits really can and does blind people and companies.
Looks like we've got ourselves an old-fashioned smart-off in here. Great points above.
Lenders, with exceptions made for some mutual and community banks who aren't incentivized by the next quarterly earnings report as with publicly traded banks, will generally lend as far, deep and wide as regulation will allow. As long as the bank's portfolio passes regulatory and FDIC (if applicable) fitness tests, anything goes.
Bankers are incentived on monthly, quarterly and annual bonuses, not multi-year performance of the loans they originated. Make of that what you will. On top of that, when rates are low, volume is king, so more loans get signed.
When interest rates are low, money flies out the door. Most of the time, this is reasonable for a going enterprise with an established revenue history. But for the new companies in our industry, even moderate debt service can be terminal when the market goes south. And by that time, interest rates have usually risen as correction against inflation. And in 2022-2023, boy did those rates really rise.
The going was good when the money was cheap. It was just too attractive for some. It was a speedball of optimism on market growth and nearly free money from banks. And with traditional, low-risk places to park money currently delivering very good returns, why look elsewhere on risky investments. The angel capital dries up, and the bond market pukes. The money is going to flow to the path of least resistance, which in this case is treasury bonds, and regular old savings vehicles. The dollar is no longer have to look for even moderate investment to get a return - and a guaranteed one at that.
Let's talk about net interest margin and interbank lending next.
If this is a dumb question I won't take it poorly. What exactly is a bike company, in this discussion? Like, how do you draw lines between them in a way that one is distinct from another so that we can say one failed, one survived? Whether it was purposeful or accidental, all the North American, English language, mtb marketing I've seen has portrayed bike companies as big businesses in Morgan Hill, CA, or Hausen, Germany, or the like, with a room full of shredders at Autodesk workstations dreaming up mountain bikes when they aren't on the company pump track. All the operation in Taiwan, Japan, China, Malaysia, Indonesia, Thailand (etc) is treated like it's a giant 3-D printer the bros send their files over to and then wait for the shipping container, like they're flunkies who are willing to weld and box up bikes for less money than North America and Europe. This defies belief, right? Manufacturing must be where much of the engineering happens, in developing materials and tooling and laying out what's possible (technologically possible and business possible), and design must be, to some degree, picking from a list of choices. Does that sound too dismissive of designers -- sorry -- 'creating within a design envelope of the possible'?
Guerilla Gravity/Revved made things, so that example seems more straightforward, but I wonder about the others, or how you'd judge how much consolidation has really happened. Example right off the presses: "Engineered by KISKA on behalf of GASGAS", "DVO powered by WP". Who exactly?
Specific to GG (and likely other small companies): I saw something saying their Angel investor capital dried up, I also seem to remember them getting some sort of big Grant or something from a local Municipality, somewhere in the neighborhood of $100k. From an outsider's perspective, it seems like they were using other people's money, gifted or otherwise, to ramp up R&D and production. I'm sure they had a graph somewhere showing that if they increased sales at X rate they would eventually be cash-positive without the need for any more grants or investors. The simplest explanation in their case would be that they weren't able to hit that X rate and once the outside money dries up, the writing is on the wall.
I'm a small business owner and I use a combination of a Bank line of credit and a pool of equity investors for most of my projects. Fortunately, I've never lost money on a deal, I've had a few where I didn't make as much as I hoped, but I have it structured so that the Investor gets all of their principal plus interest before I see a penny. I'm not independently wealthy so using other people's money is a necessity, at least at this point in my career. I don't begrudge any company for using investors or taking on debt, but at the end of the day, you still need to have a solid business plan that has realistic growth and returns.
Even Amazon fell victim to the overly ambitious growth coming out of COVID. They planned to develop a huge number of fulfillment centers and ended up shelving most of them including their new HQ in Virginia. It is so easy to get swept up in the wave of optimism and in large companies with siloed responsibility no one wants to be the one slowing down progress.
There will be some blood as the market corrects. Hopefully we don't lose too many innovators in the space before it is all over with.
Simpson's did it:
Forbidden will be next to go
A pretty good read is the book "let my people go surfing" by Yvon Chouinard about how he built the Patagonia company. I don't remember the exact numbers, but he has a chapter about how the company nearly went bust because they predicted huge growth one year (let's say 30%), and staffed + ordered accordingly, but then the sales only grew 5% the following year.
Just look at Vital or social media, a lot of brands must have armies of content creators to fuel all these banners/videos and press releases. Case in point Commencal, I love them, the weekly must watch videos, the dozen WC and EDR winning riders, but they had to almost double the prices of their bikes to achieve that, and right now pretty much every bike on their site is in stock, including old generation models and arguably pretty bad value...
Just a hunch?
I dunno, if anything I think they're probably one of the safer/well-off (private investors backing it?) small, really niche companies. I don't know how they do it though seeing as their presence on the world cup scene and such must be relatively expensive.
I hope not!
Came here to ask about this. I believe it was a $250k grant from the state of Colorado, which IIRC went into manufacturing equipment.
I’m not too familiar with their business model or history, but I wonder if they had trouble getting the raw materials to take advantage of the COVID boom, then tried to play catch up.
I worked in the bike industry for over two decades, and can certainly confirm that there’s lots of folks who make irrational decisions.
I don't see Forbidden going anywhere in the short term. They seem to be doing okay from my insider eye on them. I do know some larger companies are in a world of hurt and there will be a lot more consolidation in the market. I see a few clothing brands being eaten up by larger component or bike brands, and maybe a shoe line or two becoming part of a larger group also. We've seen QBP consolidate its house brands and I expect that to continue as well.
2024 is going to be rough. Q4 of 23 has already been scary and it is a sign of what is to come. However, those. who make it out of 2024 alive fair well in 25 and use it as a building year to gain back market share (i.e. growth capital).
I speak from a marketing perspective and my own marketing budget for 2024 is a significant double-digit percent less than my 2023 budget was forcing me to go really lean and focus on different areas of revenue. '24 is going to be dark for some companies and even athletes.
Thanks, this thread was incredibly interesting !
Without getting really in the weeds on "what is a company", for the purposes of this discussion a bike company is any purveyor of components, accessories, soft goods, frames or complete bicycles for sale to the specialty bicycle market. (IE, not Huffy).
As to the decision of how vertically integrated you really are (IE, how much do you do "in house"), its any management team's choice where they want to draw that line. No matter what company you are talking about, there is always going to be some farming out of something to make what they make happen.
When we are talking about the smaller-to-medium sized companies in a performance-oriented market (IE, bike frames), I do feel there is a little bit of a "what is it you do, exactly" sentiment if you are a company without a team actually building your bike in a shop somewhere (IE, Reeb). But if that's the case, then every single microchip company is also a "fake company" in that nobody is fabbing their own chips anymore, either. In the same vein, no internet company has their own servers anymore.
There is a quote I often reference in my dayjob from ole' Jeff Bezos. "Focus on what makes your beer taste better". This is to say, anything that you are doing that doesn't directly translate to a better "beer drinking experience" for the end user is a net negative for you and your company.
As a CEO of a bootstrapped small to medium sized company, you should be laser focused on what your value proposition really is for your customers and how you will build a moat and capture this value in the short, medium and long term. However you want to do this while keeping a firm handle on the lever of breakeven/profitability against whatever runway you have is your job as CEO.
Now, when we start talking about larger companies a lot of what I wrote above gets a lot fuzzier in that the CEO is not going to be the one running most of the day to day one-off growth initiatives. For example, the GasGas example referenced here. For a company of KTM's scale/size, there is an entirely different set of decisions undertaken when KTM Austria is examining where to allocate capital. Those who took corporate finance 101 can skip this. In any event, here are the basics:
1) KTM has a baseline cost of capital. (or, if you want to be nerdy, "weighted average cost of capital...WACC")
2) KTM has a number of projects they in theory could aim at with capital they have access to.
3) Any project that, when discounting back projected cash flows at the company's cost of capital returns a positive present value should be considered.
4) The company will also ascribe some level of risk to all of these projects. They'll pick those with the highest PV/IRR/least risk.
In this case it seems the company saw fertile ground in the e-bike market and wanted to make a "branding" and "distribution" play where they do minimal engineering/manufacturing and farm out as much as possible, only making sure that their suspension engineers at WP could sign off on the work/give input, it was colored/stickered appropriately and sits on powersports showroom floors. Who are they aiming at here? Probably not us...probably a die hard GasGas fanboi who has a red dirt bike and wants a red mountain bike. Totally different play, totally different proverbial "beer" (this is branding beer, not performance beer).
TL;DR, there are lots of different styles of companies out there, from intensive manufacturing to 100% brand equity/marketing being rolled up in some kind of feel/emotion. Its super fascinating to me, especially when you consider how visceral of a reaction these entities give us as humans, be it from what they make or the logos/names themselves.
Thanks for coming to my TED talk.
Slight thread derail, but if anyone wants to read the most impactful paper I've ever read on company moats & value creation, Michael Mauboussin's work from 10 years ago still tops my list. http://csinvesting.org/wp-content/uploads/2013/07/Measuring_the_Moat_Ju…
WARNING: IT IS SUPER FINANCE NERD MATERIAL.
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