April 20, 2015
Interviewed by: David Snow
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Long-term Effects of Net Neutrality

Finding technology-services companies that are not directly touching consumers is core to how Augusta Columbia Capital invests its fund, says chairman and managing partner Chip Schorr. The firm tends to stay away from sectors where the product-innovation cycle is extremely fast.

Finding technology-services companies that are not directly touching consumers is core to how Augusta Columbia Capital invests its fund, says chairman and managing partner Chip Schorr. The firm tends to stay away from sectors where the product-innovation cycle is extremely fast.

Long-term Effects of Net Neutrality
With Chip Schorr of Augusta Columbia Capital

Chip Schorr, Augusta Columbia Capital: The implications of net neutrality will be felt for a very long time. In fact, today we’re operating under a system of net neutrality. And the view of almost everyone in that ecosystem was there was going to be an enormous amount of value to be derived from being able to make positive decisions about who’s paying me the most for my traffic or to route their traffic, etc. So what’s happened is a lot of companies have had their entire business plans, their long-range forecasts, thrown out by the netneutrality decisions.

Meanwhile, it has enabled a whole range of competitors and new innovators in many industries. For instance, if you were Netflix (you’re a major, major player) and you could actually pay to have your content routed. Net neutrality might have benefitted you against an upstart player, so what net neutrality has done is it has up-ended a lot of industries. It will create opportunities…where people have made investment thinking, “Aha! We’re going to do away with net neutrality. I’m going to be able to charge; I’m going to invest in this area.” That investment doesn’t make sense anymore. We’re going to see divestitures. We’re going to see consolidations that should have taken place if there was no net neutrality. Companies have inflated prices. We’re going to see those come down and they’re going to come down and become attractive prices, because when people throw the baby out with the bathwater, it tends to create opportunities.

Additionally, some of the companies that were thought of as “This will be become an alsoran if the world goes away from net neutrality”—those companies now become interesting investment options because the playing field is leveled. I think it’s a very interesting gamechanger that has implications well beyond the fiber and cable providers into the content providers and all kinds of enabling technologies. To us, it has thrown the landscape up in the air and we’re trying to see which pieces people thought were going to do different things that are now no longer going to do that. Where there are discontinuities. And that creates opportunity.

Is content still king?

Schorr: A content company, if you will, for the most part, is only as innovative as his next round of content. To a certain extent, you’re on a treadmill in that. Take Level 3, for instance. Level 3 does not care what is going over its rails. All it wants to do is move the trains. And the more trains that are moving, the better off it is for it. So, for us, enabling technologies, infrastructure technologies back to the services standpoint, companies that are service-enablers to content providers to payment companies, you name it. Those rails are always more interesting than what’s going over them, from our standpoint, because you can be agnostic to the shifts that are taking place in the environment.

Enabling technologies, enterprise technologies that are enabling, that are infrastructure players, etc. to a certain extent are always more attractive to us because there’s not flavor to them, if you will.

Cash Flow vs. EBITDA

Schorr: As cash flowbased investors, we always have the true north of what we are paying as a multiple of free cash flow. Not EBITA. You can’t eat EBITA. You can’t use it for anything. It’s not even a concept. But free cash flow is. So, we use free cash flow as our true north. Where we see valuations right now getting out of whack is in the early-stage venture investments, where you’re seeing private rounds that vastly exceed the amount of capital a company could ever raise in an IPO or a secondary offering being provided in private rounds. Companies staying private forever, acquiring market caps that in many cases exceed the potential revenue pool for that industry.

There’s a euphoria there that we haven’t seen, basically, since the 2000 time period. The interesting thing for us is—and this happened in 2000—we had a phenomenal year in 2001 and 2002 buying cash flowrelated assets. Because, actually in 2000 as well, there seems to be a discontinuity in the markets that when the venture side goes crazy and valuations become extreme and people start doing multi-hundredmilliondollar rounds at multi-billiondollar valuations, the cash flowing, high singledigit growth companies tend to be looked on a bit like, “Oh, they’re pedestrian. They’re only growing at 8% a year and they’re generating cash flow.”

This company over here is growing at 57% a year and it’s racking up enormous losses. And what you’re doing is not innovative enough because you’re not generating loss. We love that. As cash flowbased investors, fine. Hate these businesses over here that are already generating high free cashflow margins, and love these. This is the second time in my career that I’ve seen this. Maybe this time it will end differently, but the implication for us right now is we’re finding a lot of value to be had in businesses that are seen as pedestrian. And those pedestrian businesses tend to be very embedded in their sub-industries. They tend to be very important to their customers and they have really long runways. We like that.

Does disruption automatically mean obsolescence of older companies? 

Schorr: One implication in the technology world of disruption is that disruption is going to wipe away legacy players. Sometimes it does, sometimes it doesn’t. However, disruption is a part of business. The buggywhip industry was replaced by the automobile. McDonald’s is currently facing disruption and just changed CEOs. Why? Because the bespoke or madetoorder burger market is exploding. However, within that, opportunity is created. We’ve seen this time and again.

We had an investment—we bought a transaction processor many years ago called World Span, which was a GDS. We bought it from American Airlines, Delta Airlines and Northwest Airlines. This company processed airline tickets. People said, “This business is going to go away. It’s going to be replaced by the Expedias of the world.” Well, it was a misunderstanding of where they sat because, in fact, the Expedias of the world were the customers of World Span. And the movement to online travel agencies actually gave a whole new growth vector to a business that had been around at that point for 50-ish years.

When we bought that company, people were like, “I can’t believe you’re buying that company.” Well, one thing we did (because it had been owned by a triumvirate of Fortune 500 companies) is we took out $100 million of cost in less than a year. So, we almost doubled EBITA. And we took new product development that was averaging almost three years and we were getting new products out in six months. But, additionally, the growth of the business went up substantially because the disruption that was taking place at the end customer—the travelagent market—was a net benefit to an electronic network because more transactions were moving electronically.

Disruption—you have to be very wary. You have to constantly be looking in any business, fundamentally, to see what is going to change for you. Just as the old-line department stores had to worry about the specialty retailers. In our markets, disruption can be both a threat and an opportunity. But often, people just think of it as a threat.

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