We sold half of our position in CafePress.  The reason for this is we are concerned management may not be able to successfully grow the business and because of that reduced visibility, it should be a smaller percentage of the fund.  In the most recent quarter CafePress reported its revenues decreased 30 percent compared to the prior year.  We expected revenues to decline when management stopped using unprofitable promotions and discounts to spur demand but the decrease was greater than we anticipated.

If you recall, the co-founders of CafePress returned in 2014 to turn around the business, planning to first stabilize the business, second optimize it, and third grow the business.  So far the co-founders have been able to stabilize and simplify the business by cutting over 200 product types, leaving CafePress with its 400 best-performing products.  This has resulted in improved gross margins of 40 percent, simplified operations, and improved free cash flows (free cash flow burn rate in the most recent third quarter was $0.8 million compared to $4.9 million in the previous year).  The co-founders are now focused on the second stage of the turnaround which is the optimization phase which can be best described as the phase where the infrastructure is built to grow the business.  For example, CafePress is making investments in engineering and human resources.  Although we appreciate the fact that the co-founders are reinvesting in order to grow, we are less enthusiastic about the fact that they are hiring new leaders from outside the business, which we believe increases risk.

We also believe its primary competitor Zazzle has a better website and better products and have been unimpressed so far with the changes made to the CafePress website and product offerings.  All these factors mean that we find ourselves in the position of not being able to forecast what this business will look like in the next five years which means it should represent a smaller percentage of the fund.

Although reduced, CafePress still represents 5 percent of our fund as of the end of the year.  One of the main reasons we have not reduced our position further is that most of our purchases were made in February of 2015 and we are waiting until February 2016 in order to classify our taxable gains as long-term.  In the interim we believe our downside is protected from the $2.60 per share in cash on the balance sheet as of the end of the third quarter (stock price at end of year is $3.84 per share).

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This post has been excerpted from a letter to partners of Compound Money Fund, LP.

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