In this post I focus on the assets of a business, stuff that is owned by the business and is fundamental to the business model. Human capital is fundamental as well, but I will leave that for another day.
Note: the impetus of this post was a conversation with Elliott and Michael on China Tech Investor podcast (23): Is Luckin Coffee a real business? I believe Luckin Coffee is using scaling techniques that work for electron businesses but are not suited for atom businesses.
A post on Luckin Coffee where I will share my analysis on their traffic is in the works, you can follow this blog to receive posts by email. — And on to the post.
There is a difference between atom businesses (primarily focused on physical) and electron businesses (primarily focused on digital). Hat tip to Josh Wolfe for this concept.
Electron businesses are primarily media and software (in some cases intellectual property). They are supported by highly efficient infrastructure: fiber optic and copper data transfer, electricity generation and distribution, and electronic devices. Media and software is codified and stored on physical devices (sometimes in electrons), and can be infinitely flawlessly replicated. Storage costs for media and software are near zero: a hard drive on a laptop. Operating cost for software is low and can be “on demand”. Media operating cost is more about keeping it organized and available. Media and software have production cost and distribution cost. After media is produced it is in storage awaiting distribution. Maintenance costs for media are near zero. For software there are maintenance costs, they can range from high to low depending on complexity of the software and the rate of change in the underlying physical layer.
Atom businesses are primarily composed of physical things: assets or —stuff. All assets degrade over time to the point they are useless. Proper care and maintenance can extend an asset’s life, but it’s not free. Physical businesses also require “space” in the form of land or a physical location, which have to be found and acquired and come with carrying costs (such as leases, taxes). Physical locations (land, stores) are not easily spun-up or spun-down, unless a contractual-layer in the middle makes it so (such as a business renting month-to-month from WeWork).
Contractual-layer businesses redefine the contractual relationship on either the supply-side or the demand-side, usually the supply-side. For example, Uber redefined the supply-side for hired drivers (taxis, private car services) by allowing anyone with a phone and a car to become a driver, in effect circumventing the hiring/vetting process or stringent cab-driver license requirements. This lowered the barrier for drivers on the supply side. On the demand side, Uber used infrastructure available (electronic devices and GPS) to replace location-based hailing (standing on the sidewalk) and phone-call hailing with an app on a device with GPS.