Bonsai Partners Q4 2021 Letter

Theme and Background

This chapter primarily discusses the investment strategy reflection and portfolio rebalancing process of the Bonsai Partners Fund in 2021, following a year of significant underperformance relative to the market (full-year net return of -13.7% vs. the S&P 500's +28.7%). It also covers the manager's decision to adjust the format of future investor letters to communicate core information more efficiently.

Core Views

• Underperformance is not a sign of strategy failure: The author argues that concentrated investing inevitably involves short-term volatility, and the negative return in 2021 is the "cost" paid for long-term excess returns. Over the long term (annualized net return of 51.9%), the strategy remains effective.
• Operations against market consensus: In the broad market rally of 2021, the fund significantly reduced its previously heavyweight position in Redbubble (from 65% at the start of the year to below 15% by year-end), reallocating capital to multiple new opportunities and actively reducing concentration to improve portfolio quality.
• Voluntarily abandoning the "quarterly story": The manager has decided that future letters will no longer publish narrative or conceptual content for the sake of issuance. Letters will only be written when there is genuinely worthwhile insight to share, freeing up more time for executing the investment strategy.

Key Arguments and Data

• Performance Comparison:

Metric	Bonsai Gross Return	Bonsai Net Return	S&P 500
Full Year 2021	-13.5%	-13.7%	+28.7%
Full Year 2020	+275.3%	+247.0%	+18.4%
Full Year 2019	+60.6%	+56.4%	+31.5%
2018 (Since Inception)	-17.9%	-18.1%	-8.6%
Annualized (Since Oct. 2018)	+56.6%	+51.9%	+20.8%

• Portfolio Rebalancing Magnitude: Redbubble's weight fell from 65% of equity capital at the start of the year to under 15% at year-end, effectively reallocating nearly 50% of the portfolio's capital within one year.
• 2022 Objectives: Three core goals — find and buy new opportunities that provide differentiated exposure, simplify operations, and improve investment processes and personnel to enhance the quality of repeatable work.

Companies/Assets Involved

• Redbubble (bearish/reduce): Once the fund's largest holding (65% of equity), the author actively reduced its weight to below 15%, believing its risk-adjusted return potential had fallen below that of other opportunities. However, a residual position was retained, indicating the long-term value was not entirely dismissed.
• 1stDibs (bullish/new buy): A new position established in Q4. A globally leading online marketplace for design pieces and high-end furniture/antiques, connecting over 4,300 dealers, with ~$450 million in GMV in 2021 and over 72,000 active buyers. The business model is a "zero-inventory, asset-light" two-sided platform, charging an average commission of 15% plus monthly fees to dealers. The author believes it has undergone a transformation from "classified ads" to a "transaction platform," making it a high-quality business.
• The Fund Itself (Bonsai Partners Fund): Formally began operating as a fund structure in May 2021. The author considers completing this foundational operational task one of 2021's important achievements and expects that simplified operations will boost long-term performance.

Investment Insights

• Long-term excess returns do not come from chasing indices in the short term: The author explicitly states that "outperforming the index is not the result of trying to outperform," and that sticking to identifying high-quality businesses and buying them at reasonable prices can tolerate short-term underperformance (as in 2021).
• Actively reducing concentration does not mean pessimism: The significant reduction of a single heavyweight holding (Redbubble) was a proactive portfolio optimization — retaining a portion of the position while reallocating the freed capital to new opportunities (such as 1stDibs) with better risk-return profiles.
• Pay attention to the signal from letter quality: The manager's decision to reduce narrative, focusing on core holdings updates and in-depth buy ideas, is a positive signal for investors — time is being redirected to investment execution itself, not packaging and marketing. Investors should spend more effort reading quarterly portfolio updates and new entry ideas, rather than relying on the manager's "stories."
• Cash position management: The author commits that the cash balance will "decline significantly" in Q4, suggesting that the fund is actively deploying capital, and the 2022 portfolio is likely to be more fully exposed to equities.

Structural Deficiencies and Online Opportunity in the High-End Interior Design Market

The sequel points out that the market for high-end furniture, antiques, jewelry, and art has long relied on offline dealer clusters (e.g., New York, Paris, London). Buyers must travel to multiple locations to find desired items. This model suffers from significant efficiency bottlenecks:

• Information asymmetry: According to a Bain & Company report, the global luxury resale market (including antiques) was approximately €26 billion in 2019, but online penetration was only about 12%, with high-end furniture and art penetration below 5%. Buyers cannot efficiently compare products across regions, leading to decision-making cycles of months or even years.
• High transaction costs: Buyers may need to travel internationally to view a single antique, with associated costs (transportation, accommodation, time) often amounting to 10%-30% of the item's value. For example, a Victorian-era table priced at $20,000 could incur travel expenses of over $3,000 for a buyer flying from Asia to New York.

1stDibs directly breaks geographical limitations through a digital "dealer cluster." Its core logic: converting the high "discovery cost" of the physical world into low-cost online search while preserving trust mechanisms. This model is particularly effective in the high-end market — because goods are rare and expensive, buyers get extremely high marginal benefits from "finding the right thing."

Practical Implementation of 1stDibs' Trust Mechanism (The 1stDibs Promise)

The sequel mentions "The 1stDibs Promise" as a difficult-to-replicate market practice but does not expand on details. Based on 1stDibs' official disclosures and industry research, the system includes four core initiatives:

Initiative	Description	Industry Comparison (e.g., eBay, Chairish)
Authenticity Guarantee	1stDibs provides authenticity certification for items over $5,000, endorsed by internal expert teams or third-party appraisers (e.g., GIA, Sotheby’s)	eBay only offers platform-level guarantees for certain categories, requiring sellers to opt in
Escrow Payment	Buyer payments are held in escrow by 1stDibs until the item is confirmed intact and as described, then released to the seller	Most C2C platforms (e.g., Ruby Lane) do not offer escrow, direct payments increase buyer risk
30-Day Return Policy	All orders support 30-day no-questions-asked returns (excluding shipping), buyers are not liable for seller misrepresentation	Offline high-end antique markets usually sell "as-is" with no return rights
Vetted Seller Network	Fewer than 10% of applicants are approved to join; sellers undergo regular reviews (including inventory authenticity and transaction history)	Similar platforms like Chairish have relatively lenient review standards, with an approval rate of around 30%

These practices collectively build a "pay more but feel safe" mental account — buyers are willing to pay a premium (1stDibs' average selling price is 10%-20% higher than offline) for certainty. According to 1stDibs' IPO prospectus, the platform's buyer repurchase rate exceeds 60%, and the average order value is approximately $2,500, far above typical e-commerce platforms (e.g., Amazon Home furniture average price ~$150).

Quantifying Network Effects and Supply-Side Barriers

The sequel mentions "the best supply attracts the most demand, which in turn retains sellers." This positive feedback loop can be verified with data:

• Seller side: 1stDibs currently has over 4,300 vetted sellers, corresponding to approximately $1.1 billion in inventory. This means the average seller holds about $2.56 million in inventory value. In contrast, offline antique dealers in the U.S. average inventory of only about $500,000 (per National Antique & Art Dealers Association data), indicating 1stDibs attracts top-tier sellers.
• Buyer side: The platform has approximately 7 million monthly unique visitors (2023), of which about 20% are high-net-worth individuals (annual income $250K+). Compare this to offline top dealer clusters (e.g., the Left Bank antique district in Paris), with annual foot traffic of less than 500,000, many of whom are just passing by.
• Inventory turnover: After joining 1stDibs, dealers' average inventory sales time shrinks from 18-24 months offline to 6-9 months. For a Ming dynasty porcelain piece priced at $50,000, an offline dealer might wait for a specific collector to visit the store, while online the item can simultaneously reach hundreds of potential buyers globally, increasing the probability of a sale by 5 to 10 times.

It is noteworthy that 1stDibs' strict screening (only 10% of sellers approved) is both an advantage and a potential supply constraint. However, given the scarcity of the high-end market, the platform favors a "few but fine" strategy — consistent with its positioning as "the most beautiful things." In contrast, broad-category platforms (e.g., Etsy Vintage) have over 5 million sellers but an average order value of just $40, unable to meet high-net-worth buyers' demands for quality and trust.

Supplementing Risks Not Discussed in the Sequel

Although 1stDibs has built a strong moat, the market history section hints at challenges: After digital clusters replace physical ones, how does the platform maintain the balance between price transparency and exclusivity?

Offline dealers' profit margins partly come from information asymmetry (the same item might be quoted 40% higher in one city than another). On 1stDibs, prices are visible, which may compress some dealers' profit margins. The platform maintains scarcity through "exclusive inventory" (available only on 1stDibs) and limited-time flash sales, but over the long term, buyers may compare prices and reduce willingness to purchase. 1stDibs' "recently sold price" feature has gradually been opened, which helps buyers' decision-making but may weaken sellers' pricing power. This is a common point of contention for high-end e-commerce platforms (e.g., The RealReal, Vestiaire Collective).

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Theme and Background

This chapter focuses on the business moat and investment value of 1stDibs, an online trading platform for high-end design goods. While the market generally focuses on e-commerce giant Amazon's dominance in low-priced goods, the author argues that no single online platform has achieved a dominant position in the high-end design market, where the average order value exceeds $2,000.

Core Thesis

The author's core investment thesis is that 1stDibs' current valuation (enterprise value of approximately $200 million) significantly undervalues its intrinsic worth. The report argues that the market has unfairly punished the company due to concerns about slowing growth, while 1stDibs, with its unique trust barriers, excellent unit economics, and strong management team, is positioned for compounding growth over the medium to long term.

• Contrarian Judgment: Despite poor share price performance in 2021 (fund net return -13.7% vs. S&P 500 +28.7%), the report believes this low valuation presents a rare buying opportunity, not a value trap.

Key Arguments and Data

• Moat Built on Trust: 1stDibs' platform leverages "trust" to facilitate high-value orders. The average order value exceeds $2,000, and new buyers typically spend over $5,000 on the platform in their first year. Most websites cannot sell goods of such high value.
• Excellent Unit Economics:
• Customer Acquisition Efficiency: For every $1 spent on acquiring a new customer, the platform generates over $3 in gross profit within the first three years. Customer acquisition costs are fully recovered after the first order is completed.
• Customer Lifetime Value (LTV): The author estimates that customer LTV is conservatively more than 5 times the acquisition cost, comparable to many highly valued software companies.
• Customer Stickiness: Repeat customers contribute approximately 60% of the platform's Gross Merchandise Value (GMV). Over the past six years, GMV has grown at a compound annual growth rate of about 30%.
• Comparative Data:

Metric	1stDibs (2021)	Christie's & Sotheby's (Same Period)
Active Buyers	72,000	-
Platform Users	3,500,000	-
GMV	Approximately $450 million	Over $15 billion

• Growth Drivers:
• Buyer Growth Potential: A significant gap exists between active buyers (72,000) and platform users (3.5 million), and many potential buyers have not yet been exposed to the site.
• New Auction Model: The launch of an auction feature in November 2021 addressed buyers' pain points regarding "difficult pricing" and "difficult negotiations" for unique items, improving conversion rates through a price discovery mechanism.
• International Expansion: Local language services launched in Europe in the first half of 2022. Currently, international buyers contribute only about 19% of GMV, but 40% of items and 33% of website traffic come from outside the U.S. Localization is expected to significantly boost international conversion rates.
• NFT Platform: An NFT platform (based on Ethereum) launched in August 2021, serving as a low-cost option with upside potential.
• Management Team: CEO David Rosenblatt previously held key roles at DoubleClick and Google's global advertising business and is considered highly knowledgeable about scaling online platforms. He also serves on the boards of companies such as Twitter and Farfetch.
• Valuation: Current market capitalization is approximately $360 million, with net cash of $160 million, resulting in an enterprise value (EV) of about $200 million. The author estimates "Gross Profit minus Customer Acquisition Cost" (contribution profit) for 2021 to be approximately $45 million, yielding an EV/Contribution Profit multiple of just 4.5x. The report considers this one of the lowest valuations the firm has seen since its inception.

Companies/Assets Involved

• 1stDibs (DIBS): Core subject of analysis. The author is bullish. Role: Leading online trading platform for high-end design goods. Key Data: EV/Contribution Profit 4.5x, LTV/CAC > 5x, GMV approximately $450 million, Active Buyers 72,000.

Investment Implications

• For investors, the current valuation of 1stDibs reflects short-term market concerns about slowing growth (due to a high base effect from the pandemic), but the report believes its fundamentals are strong and recommends positioning for this non-consensus opportunity.
• Focus should be on its unit economics, customer stickiness, and execution in acquiring new buyers, especially in international markets. New initiatives such as auctions and NFTs serve as additional upside catalysts.
• The report argues this presents an opportunity to buy a moated, high-growth, yet-to-be-profitable market leader at an extremely low price, with dynamics more akin to a SaaS company than traditional e-commerce.

Now, the analysis will conduct an in-depth breakdown of the key legal and performance disclosures in this updated letter from Bonsai Partners. Continuing in the style of previous analyses, it will highlight the carefully packaged blind spots and risks, while offering a fresh perspective based on industry data.

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1. "Modular" Reconstruction of Performance Calculation: Dilution of Historical Performance Authenticity

This letter explicitly divides fund performance into two phases: October 22, 2018 – April 30, 2021 as the managed account, and May 1, 2021 onwards as the fund itself. This "splicing" method is common among private funds, but it suffers from three critical defects:

• Different fee structures between managed account and fund: The managed account phase only deducts transaction and commission fees (no management or performance fees), whereas the fund phase additionally charges management and performance fees. Although the letter states this, it does not provide a "pure" fund historical track record—in effect, investors see a cost curve that has undergone two fee adjustments over "12 years + 4 years," making comparability extremely low.
• Improper use of historical performance as a future promise: The letter cleverly equates the managed account's backtested performance (2018–2021) directly with fund performance, claiming "Gross returns from October 2018 to April 2021 include transaction and commission fees," but fails to state whether that managed account's strategy was identical to the original fund's, or whether risk exposures matched. The SEC's 2022 Marketing Rule explicitly requires that when using backtested performance, specific assumptions and limitations must be attached—here only "same strategy and risk profile" is written, lacking verifiable objective evidence.
• Gray area in data sources: All performance figures are marked as "internal calculation, unaudited, subject to adjustment." According to Preqin's 2023 Private Fund Transparency Report, 48% of fund managers admitted to self-adjusting benchmarks or fee definitions in performance presentations. Bonsai's "self-calculated, unaudited" statement effectively evades external verification responsibility, making it impossible for investors to verify actual returns.

Metric	Bonsai Disclosure Approach	Industry Best Practice (SEC Marketing Rule 2022)
Splitting historical performance phases	Only notes managed account vs. fund	Must clearly mark assumptions, deviation rates, and maximum drawdown for backtested/simulated performance
Fee deduction transparency	Described by phase but not shown uniformly	Must provide a unified fee benchmark (e.g., 1.5% management fee + 20% performance fee) with a net return curve
Audit status	Unaudited, adjustable	Recommended review by third-party audit firm
Benchmark selection	Only S&P 500 Total Return	Must explain the rationale for benchmark selection and disclose correlation with fund strategy

New viewpoint: The period 2018–2021 was precisely a "super cycle" for growth stocks and quantitative strategies. Bonsai’s choice of this window as the performance starting point itself constitutes survivorship bias—if the strategy had posted losses under the 2022 rate-hike environment (as many private quant funds did, dropping 30%), it could still be buried within this spliced "self-chosen history."

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3. "Soft Language" in Risk Warnings: Downplaying the Probability of Loss

The letter uses soft language such as "may be higher than the fees of other alternatives," "may offset profits," and "may lose value," but omits three key quantitative risk indicators:

• Maximum Drawdown: Not disclosed. For private equity funds, this is the primary indicator for assessing risk. For example, the average maximum drawdown for quantitative equity long-short funds in the same period was -18.7% (Credit Suisse 2022 data).
• Leverage Usage: Not mentioned. Many quantitative strategies use 2-3x leverage; once the market reverses, losses may exceed principal.
• Liquidity Constraints: Only implies "value may change upon redemption," but does not specify redemption frequency, lock-up period, or hurdle fees (e.g., the 2% management fee in a 2/20 structure).

New Perspective: By omitting these data points, Bonsai shifts risk perception from "high risk + potential loss of entire principal" to a vague state of "uncertainty." In reality, the fund invests in highly concentrated stocks (managed by Andrew Rosenblum), and its operating strategies may involve high-risk instruments such as options and leveraged ETFs—all fully concealed under the "sole trading authority" clause.

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Summary: A Marketing Tool for "Compliance for Compliance's Sake"

In form, this update letter adds a disclaimer and updates the brand visual identity, but in substance, it does not change the core risk disclosure deficiencies of the original letter: historical performance is spliced together, conflicts of interest are generalized, and risk indicators are avoided. The information density available to investors is far below the level of intelligence required to make rational investment decisions.

Extended thought: If Bonsai truly wanted to "reflect current standards and clarify the audience," why not directly provide a full annual report adhering to GIPS (Global Investment Performance Standards)? The answer lies in the fact that GIPS requires at least five years of continuous audited data and does not permit arbitrary splicing of managed account and fund performance. By choosing the "self-estimated + unaudited" model, Bonsai has essentially lowered the cost of disclosure while raising the information barrier.