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Fyre alert – value lessons from a doomed music festival

A number of investment lessons can be taken from Netflix’s new documentary about a tech entrepreneur’s ambitious attempts to stage a luxury music festival on a tropical island

14/02/2019

The Value Perspective team

If you have access to Netflix but have yet to watch the documentary Fyre: The Greatest Party that Never Happened, you really should.

Not only did we find it often eye-opening and occasionally jaw-dropping, here on The Value Perspective, we also felt a number of investment lessons could be taken from this story of a tech entrepreneur trying to stage a luxury music festival on a tropical island.

To say this attempt ended in disaster only counts as a plot spoiler if you consider the revelation the Titanic sank after hitting an iceberg to be one too.

A state-of-the-art marketing campaign, lots of investor cash and huge quantities of blind optimism counted for little when the festival’s organisers came face-to-face with the harsh realities of what achieving their plans would actually entail.

As a result, thousands of ticket-holders were left stranded on a small island in the Bahamas in facilities more reminiscent of the aftermath of a natural disaster than the A-lister party paradise they had been envisaging as they touched down hours earlier.

For their part, the organisers were left with an array of multi-million-dollar lawsuits while the event’s chief architect, Billy McFarland, is now serving six years in jail for fraud.

Lesson 1

The first investment lesson that leaps out from the documentary is, of course, that old favourite – if it looks too good to be true, it probably is.

So, if somebody tells you that all the supermodels in the world are waiting to frolic with you on the beach of some sun-drenched tropical island, you might want to take some time to consider just how realistic a scenario that is before you fork out $1,000 or so a day on tickets.

By the same token, if some broker tells you they have found a company that can grow its profits 20% a year over five years while doubling its margins, come what may, then – again – you should pause for thought before committing your cash.

Be wary, then, of any company where the sun is always out – faced with any negativity, McFarland would tell staff Fyre was a “solutions-oriented” not a “problems-focused” business …

That sort of mentality – where a positive attitude arguably has more to do with delusion than inspiration – leads to a second lesson for investors:

Lesson 2

Be very wary of any management team channelling the famous Field of Dreams line of ‘If you build it, he will come’.

One of the most striking things about the Fyre documentary is that the festival’s organisers genuinely seemed to believe the project would become a self-fulfilling prophecy.

In other words, if only they could generate enough hype and encourage enough people to become excited about the festival, then the headline acts would come, the sponsors and investors would write large cheques and, even though they were up to their neck in debt at the time, the festival could still be a success and, having got away with it, they could set about planning the following year’s event …

To us, here on The Value Perspective, that is very reminiscent of a certain type of new and disruptive business looking to float on the market that concedes 'yes, all right, as a company we may not generate anything in the way of profits today … but we just need to whip up enough hype and encourage enough people to become excited about our product and we will be a success…'

What the management teams of such businesses have seen work – not every time, by any means, but often enough to offer hope – is companies succeeding in getting away high-profile floatations that lead to their shares being highly rated and thus able to be used as currency to buy other businesses and attract new talent.

The temptation then becomes to promise the world in the hope that eventually you will be able to deliver it.

As many such businesses – and their investors – have learned to their cost, however, the stockmarket is like a weighing machine and empty promises are worth far less than hard assets and cashflow.

Focus on the balance sheet, not on management promises

That is why, here on The Value Perspective, we spend so much time focusing on a business’s balance sheet rather that on what its management has to say.

If we do this properly and consistently over time, then our investors could themselves start dreaming of sun-drenched tropical islands – and ones that actually offer more than dreams when they get there.

Author

The Value Perspective team

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