Barriers to Entry – Market Valuation and The Barrier to Entry Test

Coffee shops are a dime a dozen. One on every corner. They’re the 21st century pubs.

Want to become an Instagram influencer? All you need is an iPhone, a pout, cosmetic enhancement and a tonne of body ink.

But what about setting up another Sydney Harbour Bridge climb? You can’t.

The more difficult the barrier to entry, the more valuable your business.

That doesn’t mean there aren’t valuable coffee shops or Instagrammers making a small fortune. But these are the exception rather than the rule.

Whereas a business with a captive market is highly sought after and valued accordingly.

Understanding the ‘barrier to entry’ rule is critical to evaluating the value of a business.

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This is an extract from the 20 November 2014 edition of Gowdie Family Wealth (emphasis is mine)

Ever heard of GoPro? It is a waterproof camera you strap onto a helmet, surfboard, wrist or whatever to take video of you in action.

I know of this device because one of my daughter’s bought one for her action man partner.

GoPro is a nifty little gadget that’s taken the action world by storm. This ‘flavour of the month’ mood has followed through to the company’s share price.

GoPro is ‘a wink’ off being valued at $10 billion. This ‘crest of the wave’ valuation is based on — wait for it — a multiple of 200 (yes, 200) times trailing earnings.

When investors discover GoPro can easily be replicated by strapping any Asian waterproof camera to your body, it’ll be game over. With such a low barrier to entry, it’s just plain dumb to attribute this level of valuation to GoPro.

Perhaps investors should take a picture of the current share price before it takes them on a not so thrilling downhill ride.

My prediction is GoPro is going to experience plenty of downside action in the not too distant future.

At the time of making that observation, GoPro shares were trading around US$70.

The price today?

US$3.70…a downhill ride of 95%. Ouch!

GoPro Inc - 10-10-19

Source: Google

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More recently, the overhyped and over-overvalued WeWork IPO had the seed investors (those who kept funding the ‘new age’ space sharing business model) frothing at the mouth.

The prospect of the gullible public helping them cash out of this loss-making dud was soon to become a reality.

In the 30 August 2019 edition of The Rum Rebellion we wrote…

And if the hype around the upcoming WeWork IPO is anything to go by, there seems to be no shortage of fools looking to be separated from their hard earned.

WeWork is a company that rents space long term and sub-lets it short term.

Full Stop. End of story.

So how much do you reckon WeWork is worth?

Me…I put it at $0.

But you can’t really do an IPO for $0.

In ‘growth’ story land, there’s an odd relationship between losses and (dare I say) value.

The greater the losses, the greater the value.

Apparently, big losses means the company is building the foundations for growth.

Personally, I think they are just digging a big hole into which investor funds will be buried.

Anyway, back to the ‘growth’ story.

WeWork’s IPO valuation is…US$47 billion.

Is it worth it?

My $0 valuation was based on the barrier to entry test.

There are lots of businesses operating in the co-working space. The biggest is a company called Regus.

Here’s an extract from The Rum Rebellion on 30 August 2019…

Regus is the leading global workspace provider. We have built an unparalleled network of office, co-working and meeting spaces for companies to use in every city in the world. It’s an infrastructure to support every business opportunity.

Regus is part of IWG (International Workplace Group). An almost identical business model to WeWork…almost.

Here’s a comparison between the two businesses…

The Rum Rebellion - 10-10-19

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When I said ‘almost’, well IWG is almost 8-times the size of WeWork.

There’s almost US$2 billion difference in profits between the two businesses.

And, yet, WeWork is valued almost 13-times more than IWG.

You just gotta love the brilliance of the bullshi**ers behind these growth stories.

Fortunately for the mug punters who believe this bullsh*t, the WeWork IPO has been pulled.

With each passing week, the market seems to be edging closer to my $0 valuation.

This is the headline from the 4 October 2019 edition of Fox Business:

WeWork's bankers, investors scramble to salvage collpasing company - Fox Business headline 4 October 2019 - 10-10-19

Source: Fox Business

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WeWork is burning cash at a rapid rate.

Unless the business can source additional funding from persons with more money than sense, WeWork is going to be slamming the doors shut on those 425 locations.

And even if by some miracle WeWork is thrown a financial lifeline, that won’t be the end of it.

This thing will need to be kept on financial life support for a very long time.

Better their money, than mine.

The seed investors who bought into Adam Neumann’s (the co-founder of WeWork) vision forget the golden rule of ‘barrier to entry’.

A bigger con

Which brings me to one of the biggest con of recent times…no, it’s not the central bankers ability to play God.

It’s the crypto-currency mania.

According to Wikipedia (emphasis is mine)…

The number of cryptocurrencies available over the internet as of 19 August 2018 is over 1600 and growing. A new cryptocurrency can be created at any time.’

How true that last sentence is.

The following is a screenshot from CoinMarketCap. The last on the list is ALLCOIN, crypto currency number 2392.

CoinMarketCap - 10-10-19

Source: CoinMarketCap

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Since 19 August 2018, the number of crypto offerings has increased by 50%.

What’s the barrier to entry?

Not much.

A computer, some programming skills and a marketing story. You’re in business.

The big three — bitcoin, Ethereum and XRP — have the lion’s share of the crypto market.

However, even these ‘stalwarts’ of the crypto world have taken investors on a wild ride.

From the manic days of late 2017/early 2018, there’s been a bit of air let out of the crypto tyres.

The following charts are Australian dollar prices.

Bitcoin price - 10-10-19

Source: Coin Desk

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Ethereum price - 10-10-19

Source: Coin Desk

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XRP price - 10-10-19

Source: Coin Desk

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It’s obvious from the above charts, that bitcoin still engenders the most confidence of the crypto cult.

But what’s to stop a smarter, better, more savvy programmer/s from creating a better bitcoin?

There is no barrier to entry.

The value in these offering exists purely in the eye of the beholder.

When asked recently what it would take for me to invest in cryptos, my reply was ‘a lobotomy’.

And I know people say governments won’t shut them down or impose tighter controls on the crypto sphere.


But that’s a narrative based on the world we think we know.

Should the world get turned upside down, we don’t know how governments may or may not react.

As a reminder of what can happen when the proverbial does hit the fan…

Executive Order 6102 is a United States presidential executive order signed on April 5, 1933, by President Franklin D. Roosevelt “forbidding the hoarding of gold coin, gold bullion, and gold certificates within the continental United States”. The order was made under the authority of the ‘Trading with the Enemy Act of 1917’, as amended by the’ Emergency Banking Act’ the previous month.’


Legislation can be amended and/or created to suit the agenda of the day.

Believing otherwise is naïve.

When it comes to barriers to entry, think about this.

There is only one supplier of the US dollar. There is only one supplier of the Australian dollar. And the currency list goes on.

Do you really think the owners of these cash printing businesses are going to give up their rights to some upstart computer programmers?

And for those who distrust government, then there is only one store of wealth that’s lasted over the centuries…gold.

And this is a commodity that does have a finite supply…unlike cryptos.

When the dusts settles on this period of indulgence and dalliance with alternatives, my guess is bitcoin will be closer to US$100 than it will be to US$1000.

As for the rest of the crypto offerings, investors will be able to put them in the ‘I can’t believe I was so stupid to believe this rubbish’ file.

If they use an alphabetical system for their filing, ‘crypto’ will come after ‘climate change’.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

PS: Greg Canavan recently caught up with US gold expert Jim Rickards to talk about the truth behind the recent rise of the gold price in Australia. Click here to watch.

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

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