Charlie Songhurst – Lessons from Investing in 483 Companies - [Invest Like the Best, EP.181]

My guest this week is Charlie Songhurst, the former head of strategy at Microsoft and a prolific investor, having personally invested in nearly 500 companies throughout his career. I met Charlie at an event hosted in New York and you can tell within one minute of meeting him that his mind is sparkling with ideas and curiosity. Its no wonder he’s been among the most commonly requested guests when I asked several top investors and CEOs who I should have on the show. We discuss the lessons he’s learned about business, investing, and people from such a large sample size of companies. I won’t reveal any more here, I highly recommend you just listen to Charlie and learn. Let’s dive in. For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club and new email newsletter called “Inside the Episode” at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag Show Notes (1:25) – (First question) – Stack ranking the vices of power, money and fame (2:41) – Memorable response to the stack ranking question (3:13) – Best scenario to explore this stack ranking concept (3:55) – Other ways to rank founders (4:44) – Quick look at this career (5:16) – Time at Microsoft (6:03) – Features he looks for in startups (10:55) – Managing the declining curve of productivity (14:55) – Why founders are often unique people (14:57) – Jeff Gramm Podcast Episode (15:04) – Aliens, Jedi & Cults (19;43) – How early entrepreneurs need to make recruitment a serious part of their work (23:06) – How successful founders win the best candidates (25:27) – The East Coast vs. West Coast investment strategies (30:40) – When it’s time to bring in quantitative factors into early stage investing (34:36) – The markers that pop up in companies that hit (37:22) – Boring but successful investments (39:28) – Investor aesthetics (41:29) – Characteristics of investors that he believes are important to success (42:57) – Impacts of Covid and some of the permanent changes that have happened as a result (47:49) – Investing opportunities in the local community (49:13) – His take on cryptocurrencies (53:47) – Most mis valued asset in the world (55:16) – Investing opportunities in Europe (57:34) – Make up of his 483 investments (57:58) – Matt Clifford Podcast Episode (59:17) – Curation as a skill (1:01:54) – Timing and startup success (1:05:11) – Kindest thing anyone has done for him Learn More For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club and new email newsletter called “Inside the Episode” at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

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• 1:28Patrick O'Shaughnessy?

  That's P-A-X-O-S dot com forward slash Patrick.

• 1:35Patrick O'Shaughnessy?

  Hello and welcome everyone. I'm Patrick O'Chanisey and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

• 1:56Speaker 01

  Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

• 2:21Patrick O'Shaughnessy?

  My guest this week is Charlie Songhurst, the former head of strategy at Microsoft and a prolific investor, having personally invested in nearly 500 companies through his career. I met Charlie at an event hosted in New York, and you can tell within one minute of meeting him that his mind is sparkling with ideas and curiosity. It's no wonder he's been among the most commonly requested guests when I asked several top investors and CEOs who I should have on the show. We discuss the lessons he's learned about business, investing, and people from such a large sample size of companies. I won't reveal anymore here. I highly recommend you just listen to Charlie and learn. Let's dive in.

• 2:56Patrick O'Shaughnessy?

  Charlie, I like starting these things in a unique way, and one idea that you've had is to have people stack rank their vices of power, money, and fame. I'd love you to begin by explaining why you're interested in this idea and what you've learned from the answers over the years.

• 3:11Speaker 02

  So it's a two-part question. One is the virtues, which is working with people you like, working on amazing problems, and having impact. And then the three vices, power, money, and fame. And you can't avoid them. They have to be stacked ranked separately. And it's really trying to get at the differences between, there's no good answer, but there are definite good, fit answers. So someone who's interested in power tends to be better at execution. Someone who's more interested in money tends to think more about some capital efficiency. I tend to avoid people interested in fame. But if you are doing something in showbiz, it would presumably be the number one criteria. If you think about the difference between sort of impact, intellectual interest, working with people, you really get the impression of where people are going to be happy and where they're not going to be happy.

• 3:56Speaker 02

  You also start to understand why certain organizations do so well. So SpaceX, if you think about it, stacks high on all three. It's intellectually interesting, you're working with amazing people, and you have huge utilitarian impact in the world. Whereas if you're working in fintech, you're less likely to sort of have that utilitarian positive impact.

• 4:12Patrick O'Shaughnessy?

  Any especially memorable or interesting series of answers that you've gotten on the two stack ranks that come to mind?

• 4:19Speaker 02

  A lot of people have negative utility from fame. A lot of people start with power and then when you push them, it's actually money, but they don't want to say it. And that's more true outside of the US culture than it is in the US. It's particularly true with Europeans. And so a lot of it is trying to get people to actually say what they truly believe as opposed to say what they think they should say.

• 4:44Patrick O'Shaughnessy?

  I'm curious in what context, whether it be interviewing prospective founders, interviewing potential hires or others, you find it most interesting and useful?

• 4:53Speaker 02

  All of the above. The founder one is fascinating because you actually end up going down different lines and helping them depending on whether they answer the power and the money. Founders that answer with power tend to need help more on managing their startup capital efficiently. They tend to be the ones that spend more. They tend to be the ones that over expand. They're often too aggressive. Conversely, the ones that answer money tend to be very capital efficient, but often slightly too cautious, slightly under aggressive, sometimes not willing enough to stamp their authority on the company and make it the culture that it needs to be to be successful.

• 5:26Patrick O'Shaughnessy?

  When it comes to hiring or evaluating founders, apart from this two-part stack ranking, are there other favorite questions or devices that you return to again and again?

• 5:36Speaker 02

  I think what you're really looking for is founder market fit. I think there's a sort of mistaken concept that there's a platonic ideal of an entrepreneur. And I think maybe there's two very basic things. There's energy and there's sort of cognitive ability. But after that, you're really looking for fit. So if you take the sort of prototypical consumer founder, they tend to have more empathy for how people behave. Whereas if you take the classic enterprise founder, they tend to be more rational because in some ways you can just go and ask your customers, what features do you want? And go build them. And so you go down those different lines and I think there's a lot of fallacy in that sort of platonic ideal. What you're actually looking for is someone who's a good fit for a business.

• 6:15Patrick O'Shaughnessy?

  I'd love to take a step back now and introduce you to the audience a little bit. One device that I've been using with people on the podcast is to ask you to give the thumbnail two-minute sketch of your life and career up until this point.

• 6:28Speaker 02

  Studied politics first with economics at Oxford, ended up very briefly at McKinsey, then at Microsoft, and then sort of bumbled my way into becoming an investor and do a lot of angel investing. So I think I've done about 500 angel investments. I think the actual number is 483 and about 300 in the portfolio at the moment.

• 6:47Patrick O'Shaughnessy?

  I believe you ran strategy at Microsoft. What exactly did that entail? And what is most memorable about that time?

• 6:55Speaker 02

  There's so many memories working with amazing people. The hostile acquisition of Yahoo as an attempt was just unbelievably intellectually fascinating. Trying to buy a company in a hostile acquisition for, I think it's $47 billion. And just the drama and the soap opera and realizing how much path dependency matters in big deals, how much a casual comment misinterpreted by one side or the other actually changes the outcome. It's remarkable how little system theory there is in the sense of if you ran experiments again and again, I think you would get a lot of different results in M and A activity. Whereas in things like product usage, good products and bad products will probably be the same in each experiment.

• 7:34Patrick O'Shaughnessy?

  483 investments is a crazy amount. I want to come back to your time at Microsoft probably later on and talk in more depth about strategy. But given the sheer volume of investments that you made, I think a great place to begin our conversation is your idea or your thinking around why startups succeed and fail. I'd love to begin by you outlining sort of what, if anything, is shared in common across those 483. So are there certain features that you're always looking for and sort of how your process works? And then we'll get into the success and failure of startups.

• 8:05Speaker 02

  In some ways, they're two tied together. So I think the dominant sort of failure mode for startups is the same at each different stage. So sort of pre-seed to seed, you basically have a failure to achieve labor productivity, which is only just a polite way of saying the team doesn't come together, doesn't gel and produce good output. Usually a team that just produces good work will generate enough sort of kinetic energy to get continuing funding. Once you're sort of going from seed to series A, it's another single cause, which is failure to get product market fit. You're basically on a For demand curve and you either find one or you don't find one. And this is where you've got the highest element of pure chance in a startup. It's always feels akin to sort of gold prospecting in the California Gold Rush.

• 8:49Speaker 02

  Which is you can be good or you can be bad, you can do the right thing, you can do the wrong thing. But there's some irreducible amount of chance. The wisest prospector with the best maps and the most intelligent strategy sometimes just won't find it. And someone will just fall asleep, put the pan in a stream and gold will come out. And there really is a little nexus of serendipity at this stage. Then when you move to Series A, it's really all about labour productivity, but in a different form. It's can the manager scale? And one of the fallacies is most early stage startup founders think they're managers and they're actually not. What they have is a team that's actually managing them. Because when you're managing, say, ten or less people and you're spending time with them every day.

• 9:33Speaker 02

  What's actually happening is they're managing you by inference. Because they know you well enough and they talk to you enough to work out what your desires are. So as long as you're articulate and energetic and sort of engaged, you actually don't have to manage. The team manages you up. But when you scale to thirty people, to ninety people or above. You no longer have those personal connections and you have to move to formal management techniques. And that's like a sort of firmly paradox great filter. It wipes out an amazing amount of startups. And the way that's divinced is a collapse in the labour productivity per person. There's a term in microeconomics called managerial diseconomies of scale. And I think in some ways the angle of the decline of productivity per person

• 10:16Speaker 02

  is the difference between the stripes, the great startups and the failures. And maybe if you're a great startup, as you go from ten people to a hundred people, output per person drops fifteen percent. And if you're a bad startup, it actually drops over ninety percent. With the result that often hundred people startups produce less than they did when they had ten people. Because the managerial collapse has been so extreme. And one interesting thing is if you look at the companies get by big. Maybe there's a sort of interesting explanation where more of the shared attributes was an instinct for the sort of structures and processes and management. That was shared between Gates, Zuckerberg, Bezos, the Collytons, all these sort of super talented people, because my guess is they didn't receive formal instruction on it. Their VCs and advisors weren't that helpful on it.

• 10:59Speaker 02

  It may be either by chance or by skill, they just intuitively thought it. Then when you get beyond that sort of series B and beyond, I think it's institution building. And one of the interesting problems is the sort of people that become entrepreneurs are often full of energy and sort of flexibility, almost a sort of combination of street smart and book smart. But there's a point where they've hit product market fit, where actually what they're doing is repeating a process at scale. And to repeat a process at scale, you need to build an institution. And often that sort of is almost anathematic to their personality. If you're going to take in revenue from forty two countries, you really need a well-developed finance department. Once you get to a certain size, you will always be in court cases because of being sued by

• 11:41Speaker 02

  ex-employees, you'll have patent infringement suits, you'll be debt collecting customers that didn't pay. Like this shift to sort of building an institution with institutional norms, institutional values, institutional culture, and all the boring stuff of building a strong finance department, strong legal department, strong HR department, that again is a big filter. And so those are sort of filters by stages. What's interesting is some of those you can do when you sort of meet someone in pre-seed. One interesting thing is I sort of close my eyes and think, can I imagine this person in a public company conference call, remembering the, as I said, in the Microsoft, some of the Microsoft earning schools? And I'm thinking, can I imagine them sitting as a sort of CEO next to their CFO, talking with all the sort of Wall Street equity analysts on the buy side on the phone and just be incredible enough and deep enough and mature enough to pull that off?

• 12:26Patrick O'Shaughnessy?

  It's a fascinating set of framing. The one that jumps out is maybe most interesting to me is this idea of the declining curve of people's productivity. And in your experience, whether or not that is something that is typically innate to the founder, meaning they just handle that naturally and with aplomb, or if instead it's something perhaps that could be coached, and if it's really just a set of best practices that are fairly universal that founders just don't get.

• 12:51Speaker 02

  I think the irony is it is absolutely something that can and should be coached, but often isn't. So often the people that get it intuitively are the people that survive. But there's no need for that. It can just be coached in. And I think a lot of it is you get this very strong transition. When you're a very small startup, most of the people you're employing just come in and do their job and go home. And the drawback of that is you tend to end up having to do tight management, a lot of micro-management. And the beauty of it is you tend to get a very low level of politics within the organisation. Then you get this transition to where you're hiring people that are sort of execs, would be the sort of headhunters description, VPs, senior people. And the beauty of these more senior people is you can give them much more complex tasks.

• 13:35Speaker 02

  Build me a product division doing this. Go open European markets for me. And the drawback is it, anyone capable of those complex conceptual abstractions necessary to do that, tends also to be capable of politics. And because the world is not composed of saints, as an organisation scales, the level of internecine politics increases exponentially. Someone once said to me, the difference between a great company is one where the execs spend only 25% of their time on politics. And a bad one is where they spend 50% of their time on politics. And that delta is the entire Gaussian bell curve from the best Fortune 500 company to the worst. And I think one of the things that really matters as a founder is acting as a dampener on politics.

• 14:16Speaker 02

  So reducing internecine warfare, reducing the tendency for marketing to try and take control of the sales funnel. Reducing tendency for the head of sales to want to take over sort of inbound marketing. Trying to stop the CFO controlling spending so tightly that you don't get positive return on capital investments by sales. Trying to stop sales getting so much control over spending that your margins go out of control. All those boundary conditions between sort of VP leaders and functional heads, defining those well and managing through that transition is just so important. And there's nowhere where someone learns that through the process of entrepreneurship. One of the things that's, I think, very interesting about people's careers in general, is the early stages and the personalities that go into them, often of negative.

• 15:01Speaker 02

  The latest stages. So if you look at a sort of McKinsey or Goldman Sachs analyst, often what they need is attention to detail, strong work ethic, high diligence, high conscientiousness and sort of by factors, all those sort of things. If you look at middle management at those companies, they need good project management, good ability to abstract and structure problems, good ability to pull a team together and create team morale and the sort of being close to detail and the technical knowledge matters less. And then if you look at the sort of partner level in those firms, often all that matters is relationship building and sales and charm and the ability to empathize with the client and connect with them. And so it's very hard to find people that are stars in all three parts of those careers. And I think it's the same with

• 15:44Speaker 02

  entrepreneurship. The street smart entrepreneur that sort of pre-seed who can raise money with a good narrative and get energy and recruit people and sort of create a sort of sense of momentum and a speed of core is often very negatively correlated with the sort of personality that wants to put in quarterly HR reviews and QBR reporting and really make sure that the finance team is taking at a later stage. And then conversely, often the entrepreneurs that do very well later find the early stage capital raising hell and earth because in some ways they're so tightly gripped to reality and they're slightly pessimistic, which makes them very good at sort of avoiding chaos, often makes them very bad at pitching.

• 16:26Patrick O'Shaughnessy?

  I'd love to hear your thought on this interesting concept that actually our mutual friend Graham and I have batted around quite a lot, which is this notion, the term we use based on a blog post by a guy named Rick Burton, is the idea of an alien founder. An alien here is used as the best possible compliment to a founder, where it's somebody that just has sort of what seems to be like an unfair and privileged access to some sort of underlying substrate, the thing that is going to build the business. And they just kind of know what to do. They have an incredible first principles mindset typically. And say Bill Gates would be a great example of this. I think Bezos would be a great example of this, to use obvious ones. What do you think of that idea that in some ways the absolute best founders are in some sense alien and distinctly unique people?

• 17:07Speaker 02

  I will maybe for the Socratic sake of it sort of take the opposite argument and say, I think one of the mistakes it's going into is just sort of seeing sort of evocent genius. Because you're seeing people at the height of their powers, you're not seeing them on the way up. There's that famous clip of Bezos, I think in 99, with Amazon sprayed in spray paint on the back of the office. It would be really interesting if you talk to him, whether he is similar to the Bezos of today. Because in the intervening 20 years, remember you've got this incredible training programme for the mind. They're working every hour in the startup, they're talking with the smartest people, they're constantly getting new information.

• 17:49Speaker 02

  They're hiring, they're firing, so their pattern recognition of executives gets so much better. They've got a million failed initiatives, so they have all these learnings of what not to do. They've got all the things that have worked and they've seen what scaled, they've seen the commonality. And so how much of that is sort of looking at an athlete at the peak of their performance? And not seeing the 10,000 hours of practice that got them there? And I could almost argue you could invert it and say, what are actually the causes of mortality? And how do we just avoid suffering that mortality this year? And if you survive long enough, maybe greatness eventually becomes you. So one of the things I think that sort of is perhaps underestimated is if you want to live forever,

• 18:32Speaker 02

  maybe don't start thinking about study centenarians, instead work out how to not die of a DUI. Like drink driving or any of the, or smoking 20 cigarettes a day. And to some extent, the same in entrepreneurship is, it would be amazing. And of course, the problem with sort of the observation of the world is people spend a lot of time studying greatness. They don't study failure, they study Muhammad Ali, they don't study all the heavyweight boxers that flaked out after losing their first match. But maybe if you study all of those, you can find a commonality in their mistake. Maybe they all, I don't know, offered their chin to the opponent or something. And in startups, I think there are common mistakes. There's an original sin about capital raising. I see so many startups, three to five years in, still haunted by a bad capital raise at the beginning. Some investor they don't want, some value

• 19:17Speaker 02

  That was hopefully dilutive and puts VCs off now. Often, one of the things that I see correlate very well with success is how quickly they exit their first employee that doesn't fit. And I think what that's actually showing is are they willing enough to be disagreeable to make the company what they want? And so the willingness to cross that chasm, and often you're dealing with young founders, that's a major inflection point. And if you don't do it, that often leads to a toxic culture and bad results. Then there's sort of more subtle manhood is like sort of turning things into an academic project, particularly with founders with very strong academic backgrounds, often in deep tech and PhDs. They're sort of like generals fighting the last where they think prestige as the currency because it is an academia.

• 20:00Speaker 02

  And so they just think if we do amazing work and we tell the world about that amazing work, good things will happen. Because as a holistic, that did work, but it means they don't engage with revenue, they don't get quite product market fit. It's too much a sort of ivory tower intellectual exercise. Or conversely, do they just sort of think we get momentum, we get revenue, we get traction, it'll work. And they haven't really thought about the deep microeconomics and unit economics of a scaling company. And so I almost inverted and say, don't study greatness, study failure and work out how not to be that. If you're sort of thinking of history, trying to be as good a lemon influence as Augustus would be really, really difficult. Not being as incompetent as Caligula seems really easy.

• 20:43Speaker 02

  And so as a practical advice, not making the catastrophic mistakes and just surviving long enough feels like a good strategy. There was some general somewhere that said, it's not that good soldiers become veterans. It's that lucky soldiers become veterans, but veterans are good soldiers. Meaning just the luck of surviving the first few hours put you up an experience curve. And I see entrepreneurs transform in those first thirty six months of leadership and management. And half of it is just stay alive till you get good.

• 21:15Patrick O'Shaughnessy?

  We've talked a little bit about recruiting as someone that all of a sudden seems like half my time is spent just recruiting people in all different directions. Curious how early you encourage entrepreneurs to make that a major part of what they do? And whether or not that effectively lasts the rest of their career if they're successful.

• 21:33Speaker 02

  So I think recruiting is way underestimated precisely because in an early company, people replicate themselves. So because people tend to hire, not so much in their own image, but with their own set of biases, all the initial people you hire will influence all their other hires. And so you can either get this sort of upwards iterating culture of excellence, or you can get this downwards iterating culture of excellence. So those first few hires are utterly critical. And I think people way underestimate just the sort of the maths of the return, which is, it seems excessive to say spend a hundred hours hiring a person. But if you're only hiring 10 people, that person is 10% of the output of your company for the next seven

• 22:14Speaker 02

  years if they stay. But then if they hire as well, they may actually contribute to 10% of the productivity of the company for the first decade, both by their own labors in the early years, but also in terms of the way they themselves recruit. So I think people just sort of underestimate the power of the math here and don't focus on bias that entrepreneurs often have of going for speed and the desire to move fast. And partly, this has sort of come out of startup culture because of the synergies of network effect businesses where speed often really does matter. But 99% of startups don't have strong network effects. 80% don't have them at all, maybe 19% only have weak network effects. And in those, quality matters far more. And so

• 22:57Speaker 02

  going slower, spending an enormous amount of time picking exceptional people that are deeply synergistic, exceptional in and of themselves, and then have deep and meaningful synergies with the other team members, creates this thing, which is a sort of algebraic functional labor output. And I almost think that's how you have to think in the first year. How do I find amazing stand on people that are also synergistic? And so my net labor output of the firm is super high. And the biggest mistake I see is when they're panicked to hire someone because they need sort of a job done. And so they just go for the earliest person. And then, it's like Monolke here, the pernicious mistake is the change in hiring rate based on the amount of capital available to the startup. So what you notice if you go up

• 23:42Speaker 02

  After it is hiring is not consistent of a quarter by quarter basis. It bulges after each capital raise, pre-seed, seed, A, B. And then it's attenuated almost to nothing in the six months before the next capital raise. So the sort of entrepreneur is like the proverbial sailor coming into port who spends all their money and then doesn't have any months afterwards, but it's in hiring. And if you think about that, that's absolutely insane. Because what's the chance that you can find, say you're hiring ten people? What's the chance you can find eight in the first ninety days? That it's right to find eight in the first ninety days and then only right to find two in the next five hundred and forty days? Your chance of coming across the exceptional people is so much lower than if you space that out evenly.

• 24:25Speaker 02

  And because you'll know the existing people and see them working together. If you hire two in that first quarter, each next one you hire, you will understand their synergies with the existing team so much more.

• 24:37Patrick O'Shaughnessy?

  What have you seen successful founders do to make sure that when recruiting, they're able to win the best candidates out there? So it's one thing to be patient and spend the time to identify them. You also have to hold out an attractive proposition to those very talented people who presumably have other opportunities as well. So what have you learned about the best recruiters in terms of how they market the opportunity and market the firm?

• 25:00Speaker 02

  I'll give a sort of very cynical answer and then a more aspirational answer. The cynical one is just be in a labor market, sort of low competition. You really don't want to be sitting there in San Francisco trying to close your candidate when John Colson's trying to close the candidate as the alternative because John's gonna win.

• 25:17Patrick O'Shaughnessy?

  Knowing John, I agree.

• 25:18Speaker 02

  He's one of the great execs of his age, but you see this actually happen. Whereas if you're hiring that person in Kiev and their other option is working in outsourced IT for Deutsche Bank, it's a much, much easier win. So in some ways, what you want to find is where are the incredibly qualified people? In weekly competitive labor markets. And that is a much easier filter than actually being good at recruiting and a much more powerful one. You're much better being a heavyweight boxer who's not very good fighting lightweight boxers than you are getting good as a heavyweight boxer. And it's the same. You're better going and competing in a market where the other recruiters are lightweight because they're boring industrial firms with tenure-based promotions. So that's one. And then two, look, it's some combination of sort of painting a vision that people

• 26:02Speaker 02

  want to be part of, understanding what they themselves are motivated. So it goes back to those sort of early questions. Are they motivated by working with great people? Are they motivated by utilitarian impact? Are they more motivated by things like money and power? It goes back to just getting the impression that they want to spend time with you. Do they actually want to spend every day with you as a founder? Because these companies are small. It's not like you're recruited by a big company and the hiring BP you may be going to spend an hour a month with, you're going to spend a lot of time with this founder. So there has to be a natural desire to do this. And then third, I think there's just a sort of sense of being in a sort of gang that's going to succeed, a sense of we happy for you, to quote some Shakespeare, of just, I want to be with this because this is going to be something that changes the world and

• 26:46Speaker 02

  it's going to be an adventure and fun. And that cliche, the journey will be the reward, will be true and the economic outcome will be a reward. And when I look back, the impact will have a reward. And if you get that trip tech, you'll close them.

• 26:57Patrick O'Shaughnessy?

  I would love your take on the sort of interesting tension between what I'll call in the US, sort of East Coast versus West Coast investing, where I would say East Coast investing is very traditional Wall Street, more quantitative. West Coast, more startup-y and technology and more qualitative and almost cavalier about, in some cases, about the quantitative aspect of things. I'd love you to riff on the pros and cons of these two styles and where you see the appropriate mix of them.

• 27:22Speaker 02

  I think there's a sort of multi-part explanation for that. One part, I think, is the absence of existing status hierarchies on the West Coast meant there was less of an opportunity cost in sort of not joining Goldman. And you can almost do a counter history and say, maybe all this story about DARPA and the Valley and all of that is much less important than people think. Maybe you just have a new country formed of 70 to 100 million people without an existing status hierarchy. It would Obviously glom onto the new tech, to the new industry, the new tech, the industry is obviously going to be tech. And so it was obvious that a sort of new country, which is really what the West Coast has been since sort of World War Two.

• 28:04Speaker 02

  When you look at just the population numbers, the West Coast would obviously win. I think that's one part of it. I think the second part is differences in the nature of trust and zero sumness. Partly because financial markets are in the traditional sense, zero sum. One person's stock alpha is another person's negative alpha. East Coast investing has had this sort of sense of, I need to beat the other person, I need to get a deal. And that has led to sort of lower trust between participants. And the West Coast, and maybe it's sort of part of a California hippie culture tradition coming in, has this very high sense of trust. And if you look at sort of the convertible note, if you look at the sort of letting a founder make decisions below supervision. These things only emerge in a very high trust culture.

• 28:48Speaker 02

  And I'm not sure you can build trillion dollar market cap companies without that high trust culture. I think if you don't have it, you end up building something worth a billion dollars and then arguing over how to sell it or how to optimize it. And you don't get that sort of, je ne sais quoi, aspiration that you see in all the trillion market cap companies, all of which are on the West Coast. And then I think there's some interesting little sort of cultural foibles. Possibly with an actually dressed by the East and West Coast, but more by the nature of investing. Maybe what people do as analysts between the age of twenty one and twenty three. So if you spend your time between twenty one and twenty three building Excel models, you tend to think more about numbers.

• 29:31Speaker 02

  And so you tend to have a much better intuition for margin economics. And so where is the East Coast often at over the West in the way they look at businesses? It's they collect to identify businesses with shaky unit economics, but faster revenue growth and good product market fit. And they're like, look, you have product market fit, but only because you're giving away a hundred dollars for ninety. So of course you've got good product market fit. I'll give the sort of counterpoint where West Coast investors do very well. Is where you have a product we that doesn't get evinced in the numbers immediately, but is such a sort of tactile. And visceral experience when you use it, you have to make an imaginative leap to turn that into numbers. And there are two examples. One is the early iPhone, and I was doing some investigations for Microsoft at the time. And it was always easier to talk about competitors

• 30:15Speaker 02

  than to talk about yourself, because you're less likely to say something you shouldn't. So you always try and steer the conversation on to talking about Apple, Google or something. And one of the things you realised is, there was a bunch of investors that sort of thought Apple was overvalued when it was sort of a hundred, two hundred billion market cap, because they took the tam of Nokia and said, even if they take all Nokia's market share, this business can't be big, because phones only sell whatever it was back then. And they couldn't intuit the increase in price and power that you were going to get from turning the phone into a computer. And the West Coast VC community immediately intuited that. And then you see the same in this sort of almost comic battle of a Tesla as a stock. The Apple one we can say is a win on the West Coast. The Tesla story isn't fully written yet. But again, it's this difference between a culture that's, look, this product is so

• 31:00Speaker 02

  amazing, it will redefine economics or category, and investors saying, well, when you look at this in a spreadsheet, it just doesn't work. And I think one interesting thing in general in the search for alpha is, where do you get intuitions that are hard to make? Because there's no natural person to think of it. There's a public company called Xero, which is a small business accounting company. And it's headquartered in New Zealand, listed on the ASX. Its biggest market is accounting software in the UK. But the people that fundamentally understand accounting software would be people that had followed Intuit, which is a West Coast stock, NASDAQ listed, would be more the people maybe that look at Intuit, that look at H&R Book, that maybe even go into Tableau in business analytics, right? And so there you

• 31:42Speaker 02

  had a company that quietly went from fifty million market cap to ten billion market cap. And I'm not sure anyone intuited it, because New Zealand investors weren't used to tech. The Australian investors came out of a sort of mining culture, and the US investors tended not to look at ASX listed companies. And so one thing that's taught me is, trying to be smarter than other people is very hard and doesn't work very often. Trying to have an insight that you get because you sit in a different information foe, just seems exponentially easier.

• 32:10Patrick O'Shaughnessy?

  Everything you highlight suggests exactly what's happened in the last 10 years, which is that the primary sin for public market investors is being overly quantitative. That basically anything quantitative, whether pure quantitative strategies or people that rely heavily on spreadsheets, as you say, have tended to get trounced by people that have the more qualitative fundamental insight about what will become a very big market. I'm curious how you apply those concepts in your own style of investing at an earlier stage. So where does, obviously there's a lot of qualitative, but where does the quantitative come to play?

• 32:41Speaker 02

  We'll just go a little bit further on the thoughts around that, which is, I think one of the things that's very interesting is the way you model companies in Excel with a DCF, there's a sort of set of cultural norms, like trending down the growth rate to a terminal value over time, that obviously would correct industrial era companies, the sort of companies that a KKR would buy. If you were sort of modeling Nabisco and Barbary is at the gate, it's obviously the right conceptual approach. Maybe that's just not right for network effect businesses, because instead, literally how do you model in Excel the concept of in year six, something becomes a standard and therefore gets sustained or accelerating growth? There was this sort of joke in the 80s of you'd never get fired for buying IBM. Well, maybe in 2006, it suddenly became you never got fired for buying Salesforce.com.

• 33:26Speaker 02

  How do you model in that as a concept, suddenly kicking into revenue growth? Maybe what you should actually be doing is writing a sort of 3,000 word essay on revenue growth drivers as opposed to sort of trending it down over time as an automatic default. So there's sort of certain things where I think the industrial era protocols actually just mislead you. Conversely, I think the counterpoint to that, which is the sort of two-product-driven mistake, is when you look for network effects everywhere and you sort of assume they exist and actually you're just getting into a standard competitive market. Trying to turn that to startup investing, I think a very good blue of thumb is to think

• 34:07Speaker 02

  it's very hard to extract economic lengths to get revenue without solving someone's problem. So go right back to sort of Jeremy Bentham utilitarianism. Why are you making people happier? How much happier are you making them? And what percent of that can you extract as economic surplus? And what percent goes to them? So an interesting one is you pick on Google, there's lots of charts saying people would pay thousands and thousands of dollars for search. Yet Google's ad revenue ARPU per person is much lower. So potentially the utilitarian output of Google is 10x, maybe even 20x the economic value derived from that. Whereas I imagine if you looked at something like Oracle, you would actually find the utilitarian benefits, the economic lengths are a much higher percentage of the utilitarian benefits.

• 34:49Speaker 02

  Like there's more value capture as a percentage of the total sort of common wheel created, the total common utility. But I think even when you're talking to a company at seed, you can sort of start to have that conversation over how big a problem are you solving? How many people are you solving that for? Or how much money have those institutions got to spend in your product? If it's in the enterprise. And then if that's utility created, that's part one. How big is that? And then two is what are the competitive dynamics in this marketplace? So how much of that utility will you capture? And how much will just be given to your customers as consumer surplus? And one of the sort of interesting, wonderful tragedies of the economy over the last forty years is there are so many companies where 110% of the economic energy passed over to consumer surplus.

• 35:34Speaker 02

  So you've just had massive increases in living standards, sort of accidental Wikipedias. So there's very strange examples like LCD televisions. Everyone switched from cathode tube to LCD in the early 2000s. That's an increase in human utility, but no TV companies made money because the market is too competitive. Same with things like improvements in consumer modems, routers, switches. You don't see 200 billion market cap router companies like Intel, but we all benefit from far faster speeds than we did 20 years ago. And so what you're looking for as an investor is high utilitarian outcome and the ability to capture it.

• 36:07Patrick O'Shaughnessy?

  Are there markers of that latter piece? The ability to catch it that you see again and again that interest you?

• 36:14Speaker 02

  Most extreme is obviously network effects. Obviously, you have to get these in marketplaces. You get them in anything with the classics Metcalfe Law. You get some examples where, going to a company earlier today, you can bind data from other companies to generate insights. So each time you get a new customer, you improve the product for all the existing customers because you get a bigger data set to work on. Strangely, I think spotting them has less use than spotting the fallacies. If we go to data, there's an amazing sort of the last gasp of a company whose unit economics don't work is the values in the data. And 99% of the times, that isn't true. And the idea is that you've got a unique data set that's going to be incredibly valuable, maybe for advertisers, maybe for other customers, maybe for enterprises because of the insights to be generated.

• 36:56Speaker 02

  But it actually turns out most data sets will get you the same insight and people. There was once a company, I don't know if it's true by principles, but they said if you gave the last five browsing sites that someone had been to or their last five latitude longitude locations in real space or their last five Google search terms or their last five credit card purchases, you could basically get to the same level of accuracy on that person's predicted behaviour, which means there's a sort of false millage of an oasis, which is this can be valid in the data. And it turns out to be a millage because there's so many other ways to get to that answer. And so half the time, what you're looking for is sort of the exact opposite. It's where it appears there should be value capture, but there won't be.

• 37:37Patrick O'Shaughnessy?

  I asked once a group of people, what if any specific sector or category of companies they would invest in if they could only choose one for the rest of their career? And one person said communications because you'll always have some monopoly to pick from, which is sort of a classic expression of the network effect idea.

• 37:52Speaker 02

  I'll go for if you pick two axes. One called access is boredom and the other is complexity. You want highly boring and highly complex because everything in the universe is a supply and demand curve. And you just get insufficient supply of entrepreneurs in the highly boring but highly complex space. And therefore you get elevated returns. So if you go through the quadrants, you've sort of got the whole simple side, boring and simple and complex and simple. It's just too hard to get differentiation without enough complexity. That's when you get commoditisation. If you go for interesting and complex, you get brilliant entrepreneurs. This is a problem, say, with space tech as an area of innovation. Every single person involved with space is basically a brilliant genius who's passionate about their work and loves it. And so very, very strong competitive dynamic.

• 38:35Speaker 02

  On the other hand, if you hang out in audit software, accounting software, you're sitting in an area that's complex, but no one wants to boast they do it at a dinner party. And what you might call the sort of spiritual rewards of the industry are lower. And therefore you just get less by entrepreneurs. Therefore, the chance of every entrepreneur succeeding is significantly higher.

• 38:53Patrick O'Shaughnessy?

  Do you think that two by two matrix squares with, say, the trillion dollar club today of Amazon and Apple and some of the FAANG stocks? Do you think that they generally were at their start bored?

• 39:03Speaker 02

  No, I think it would more work in the sort of case of Salesforce, Workday, Tableau, Datadog, all those classic enterprise SaaS names. I think the truly exceptional ones are so idiosyncratic, there's no way to find them. Because if they were predictable, you would get so much competition, they wouldn't exist. Interestingly, when you look at, say, Google, how many failed search companies preceded them? Out of Vista, Excite, Lycos, Infoseek, Ask Jeeves. Imagine that someone sent you something about Google when it was a small company. You'd say, oh, it's just another search engine. In some ways, you almost need the opposite. You need a case for why it was so unobvious.

• 39:45Speaker 02

  If you look at early Facebook, there's all these comments on, but surely MySpace has already won this market. I think the exceptions are just so exceptional, you can't formulate rules for them. I think it's the next tier down where there's probably more repeatable behavior.

• 40:00Patrick O'Shaughnessy?

  Of the 483 angel investments that you've made, what percent would you say are clearly boring?

• 40:06Speaker 02

  To whom would be the sort of counter question? I think to sort of the average person, probably 350 of them. Obviously, they're not pulling to the founder and they're never pulling to me. I find things like accounting software deeply interesting because it's an intellectual puzzle. You're solving someone's problem. And I also think the utilitarian output to the world is way underestimated of these things. If you were to think what was the precursor technology to Manhattan, sewers.

• 40:36Speaker 02

  Very hard to have Manhattan without sewers, but they don't sound exciting, right? If you were to suddenly remove them, human living standards would drop exponentially. And so those base technologies that sort of double entry accounting in the sort of 14th century under the Medici's or whoever, those things really matter as sort of system wide improvements to the thing. And sometimes the joy of those can be missed.

• 40:59Patrick O'Shaughnessy?

  Before we started recording, you mentioned this interesting word, which you don't often hear in investing, which is aesthetics. I'd love you to talk a bit about investor aesthetics, why they matter and why they may create bias.

• 41:09Speaker 02

  I think this is a thing where if you think about the investment career, most people join a place where they fit. And so they join an organization that gets them. So you do have this sort of birds of a feather flock together. So you tend to find that you get a set of people that either like the gritty and the real and the physical and the tangible. Look at, say, the overlap between stock investors looking at things like mining companies and shipping companies. And then you get people that like the abstract and the ethereal and the sort of conceptual. Think of Atlassian Stripe companies of that ilk. Then I once saw this tweet, some joke about value investors that they love owning things with names like American Asbestos. And it made me chuckle because it seemed that there was some sort

• 41:52Speaker 02

  of truth to that. It felt grittier and truer and more real and more like just better to own something that's a steel mill plant in Pittsburgh than it is to own a tableau or some company doing this sort of weird software stuff. And so the interesting trend about that is, does that create biases and oversights? So maybe because VC sort of in the 2010, 2013, 2014, network effect consumer businesses were so good, maybe too much capital went into those in the subsequent years. I think of Lydian and Scooters and things like that, because there wasn't enough Darwinian survival of people that focused on unit economics. Those partners had diminished in their political power within the VC organization versus the

• 42:36Speaker 02

  partners that bet more on a network effect and a product. Then there's actually a chapter in Dawkins, a sort of selfish gene on hawks and doves and evolutionary stable populations of different behavioral strategies. And maybe that also replicates in investors. And of course, as an investing type succeeds, so it attracts more capital and more disciples. And therefore there's more people looking for it. And therefore the alpha is more diminished.

• 43:00Patrick O'Shaughnessy?

  We've talked a lot about the founders and characters of entrepreneurs, less so about characteristics of investors that you've worked with or seen operate. What are your observations there? Probably haven't processed 483 of them in the same way, but I'm sure you've been around them. What do you think makes for the right mix?

• 43:18Speaker 02

  Success is very idiosyncratic. While they're like entrepreneurs, it's sort of finding the fit for their style. So I know one investor at Siege, a fantastic investor and just has an absolute essence of getting to the knob of the character of an entrepreneur. Just the descriptions, the articulation, the strengths, the weaknesses. You would have thought should spend 300 hours doing a psychological profile. It's sort of like those TV shows where you have someone profile the serial killer in like 30 seconds. It's almost sort of a gift at that. Then there's another investor at the same stage who almost ignores the personality of the founder and is all about the structural economics of the business,

• 43:58Speaker 02

  the market power, that ability to capture value. And both those styles work beautifully. And then I've seen a third type, almost doesn't think about the underlying company. What they actually watch is other investors and sort of like a pack of lions. They don't try and kill the antelope. They just steal the antelope when it sits down and they just swoop in and win deals that they saw other good investors go for. So three wildly different strategies, all three I've seen work superbly. And so no cookie cutter solution.

• 44:28Patrick O'Shaughnessy?

  I'd love to hear your take on the effects that COVID now, three, four months into it, are having on the world at large, both from a company standpoint, sort of societal standpoint. And at what point sort of the behaviors that have changed, become very set and in some way permanently change how we live?

• 44:47Speaker 02

  I see two main effects. One is this sort of tech acceleration. You've got this shift in behaviors that would have happened only over the long term from demographics. I was a sociologist at Microsoft who once said, look, there's a thing called the rule of 1975, which is people born before that just never had computers at school. And so they'll never have the same intuitive behaviors as people born after that. It sort of reminded me of the Einstein, or maybe it's Einstein, comment of science advances one funeral at a time. And so in some ways, the natural movement of progress is as generations of people get older. Video gaming is a classic example of this. It was seen as something only for kids until those kids grew older and kept on doing it. I think COVID has changed that

• 45:29Speaker 02

  because what you've had is 70 and 80 year olds get on and use Zoom and use digital apps in a way that was much more akin to 25 year olds. That's a permanent one-off shift. And you really see it in the numbers for all e-commerce startups. Every e-commerce startup, the numbers have gone insane, to the point where you almost start wondering whether they've made a mistake because it can't be that good. You can't get that fast an acceleration. But no, it really is that fast an acceleration. And my guess is the emotional experience of retail will just be less appealing than it was. And so even in a world of reopening, my guess is you get this continued elevation of e-commerce. And then, once people have shifted from doing some activity, like going to a bar,

• 46:13Speaker 02

  to playing some video game competitively, probably a bigger percentage of that will stick and seems obvious because this has lasted long enough that you get habit formation. It's certainly longer than the 30 days that that's formally meant to take. Then there's a much more subtle impact, which is you've definitely had a globalization of investing. One of the things that I never made any sense to me was investors that defined themselves by geography. So they were in Berlin and they invested in companies in Berlin because the commonality in running a startup by geography seems almost de minimis, whereas the commonality of, say, fintech globally seems much more similar to each other, or quantum computing startups globally seems much more similar than a quantum computing company and a credit card company, both within a few streets of each other. So it always seemed more logical to me for startups to be defined by functional

• 46:58Speaker 02

  area than by geography. And that's starting to happen because if you're doing Zoom calls with someone, there's no difference whether they're a mile away from you or a thousand miles away. And then the same with the labor force. Startups are starting to do a moat in a way that was inconceivable before. And what it's starting to do is make them think very deeply about where they can find talented people. Maybe I'm too optimistic. I think that may just lead to a permanent shift in overall productivity upwards because you're putting together a team not defined by the accidents of geography, but defined by finding the best people you can anywhere in the world. And if everyone does that, you just have a bigger sort of liquidity in every type of output.

• 47:38Speaker 02

  And that leads to just a massively higher output function. What are these changes in sort of demographics and the way we live now? It does seem that there's likely to be some sort of city to suburban transition. And one of the things that I like to do is sort of, I think history is really useful for investing because I think one of the mistakes you can make is a sort of temporal arrogance of thinking the time one lives through is sort of overly unique. There's a book by Will de Laun called Caesar and Christ, and it's the sort of whole history of Rome from the founding to five hundred A D and sort of the full of Roman Christianity afterwards. So it's interesting to think, how would you invest through that? Do you buy or sell Roman real estate when Caesar's murdered?

• 48:18Speaker 02

  Because you get a civil war, you get chaos, but then you get Augustus and peace afterwards. Then when you get this whole spate of bad emperors, and it looks like everything's going to fall apart, maybe you would sell. And then you get the Spasi and Trajan, Hadrian, good emperors, and you get a great hundred years. It's like, it really makes you think about sort of volatility and about having to make informations without needing information available at that time. And what's so interesting is you do get this sort of pattern of going from a power and sort of fashion being to have your base in the city of Rome to being out in Capua or out in the smaller provinces or out on rural estates. And that cycle seems to go exist for like the five hundred years of history. And if you look at London, I think the peak population was in the nineteen thirties.

• 49:03Speaker 02

  I think it's still higher than the present population, or it may just have peaked. So maybe there's the beginning of one of these great forty year demographic changes where people move back to the suburbs or not. This is speculation. I certainly don't have as much conviction on it as I do on the startup stuff.

• 49:20Patrick O'Shaughnessy?

  What do you make on the other end of that barbell? So certainly agree that the far off collaboration is probably going to permanently change. I've seen it happen just personally in many examples where now you don't care where the person is zooming in from. It opens up an enormous pool of talent and you seem ridiculous for not having tried to tap that earlier. The other extreme would be like hyper local. What I've also noticed is the middle is gone. New York City for me, which is 50 minutes away is way less relevant, but my town is now way more relevant and the people in it. Do you think there's investing opportunity there? Or I would just be curious for any thoughts you have on kind of the local community versus the distant zoom.

• 49:57Speaker 02

  I'm sadly out of insight on it, but I think you're intuitively right in predicting the outcome. I think one of the things that's going to be very interesting is I do think there's a sort of U shape curve where for companies, you either have to be remote or you have to be centralized. The bit that's going to be absolutely nightmarish is if you have a hybrid mix. Because what that will lead to is everyone at headquarters will have a political advantage over everyone that works remotely. And so you'll end up promoting people who chose to move to headquarters rather than work remotely. So you'll end up promoting them more politically aware, which is probably the most toxic criteria you could have

• 50:41Speaker 02

  for long-term productivity of the firm.

• 50:44Patrick O'Shaughnessy?

  As a quick aside, Sarah told me to ask you about crypto and farmland. And I'm curious if those are meant to be topics that are grouped together in your mind or separate. And of course I'm interested in your thoughts on both.

• 50:55Speaker 02

  Crypto is super interesting because it's so unanalogous to anything that's come before it. So one of the interesting things with investing is people get a dopamine effect from things they've made money on before. And so they like to invest in similar things, or at least things that their friends made money on before. So they think there will be a dopamine hit for it. So if you look at Dex and startups from 2016, you would be amazed how often the Uber of or Airbnb of appear as sort of marketing poise to sort of almost say, you're going to get the dopamine effect investing in a business that is similar to these existing successes. So often you get something that just sort of has no epistemological pliers. There's just nothing like it before. And I think crypto has that.

• 51:39Speaker 02

  And then what's so interesting about crypto is it has such strong psychological war shafts tests. So the biggest variable I've seen amongst people I know of whether they believe something like a Bitcoin is viable is age. In a way that I don't see for any other element of tech. Younger people find digital money more intuitive, older people find it less so. There may also be something subtle there about the strength of the nation state. Then US investors find it less intuitive than non-US investors. Because they think of the US government, say banning crypto like FDR confiscated gold. And so they think of it as unlikely. Whereas if they're from a country like Belgium, it's less obvious that your government really has the capability to do something like ban crypto.

• 52:22Speaker 02

  So all these strange variables, like the size of the country you're in and the government capability. Effect your conception of its viability. And then it's also interesting within crypto itself that you have these two major platforms, Bitcoin and Ethereum. And they sort of attract different investor types. So Bitcoin's got the sort of association almost with Austrian monetary policy, with sort of gold, with preservation of value. With this sort of very trust minimized, sort of slightly dark, slightly almost Gothic view of humanity. And sort of Bitcoin as a sort of place of greater safety. Whereas Ethereum is much more sort of visionary about defy, changing stuff, much more software, much more network effects.

• 53:04Speaker 02

  Much less consciousness of trust and store value. And you start to see this sort of bickering between those two cultures. And it's fascinating how you've got to sort of shilling points of shilling points. Not only are they shilling points at the economic level, but they're also shilling points for investor personality types that go into them. What's interesting is if they continue to do that, they probably diverge far enough that there's no longer in fact any competition between them. Because they've diverged so much culturally and aspirations, they're no longer direct competitors. One of the things that's sort of interesting to me is how is wealth preserved over time? And if you look at one of the best stores of value, it was. Forestry and there's two very interesting attributes for forestry. One is it's so boring, no one ever bothers to seize it.

• 53:47Speaker 02

  So if you look at people that were in a country on the wrong side of a war and occupied by an invading power over the last 3000 years, things like houses and artworks were confiscated. Things that businesses were nationalized. No one ever thought about forestry. It just sort of slid under the radar. And then the second interesting attribute of it was that the cash flow characteristics are so terrible. You have to wait 50 years for trees to go. You've got very few investors and very few corporations doing it because imagine building an Excel model showing a payback in 51 years. That's really sort of only 2 to 3% of your principal. It's so appalling, you never go into it. And therefore it had these characteristics that really did work superbly well.

• 54:30Speaker 02

  It's sort of interesting to think, what are the digital equivalents of things that have some psychological repellence to them? And therefore actually will have great economic capture because there's something unappealing about them.

• 54:44Patrick O'Shaughnessy?

  What do you think some of the best examples of that last concept are? Digital equivalents of repellent asset?

• 54:50Speaker 02

  I think certainly up till 2017 crypto had that. It was such a strange topic. The association with things like Mt. Gox and fraud and things just made it slightly sketchy. And then the abstraction, the lack of physical reality of it, I think makes it unintuitive. People, you can't touch it, you can't feel it. It's sort of numbers in the sky. Things like that just don't have psychological appeal. And that absence of psychological appeal is a source of alpha.

• 55:18Patrick O'Shaughnessy?

  What do you think the most misvalued asset in the world is today?

• 55:23Speaker 02

  I would say it's probably entrepreneurs in markets that are non-obvious. And I don't mean because their end market is non-obvious. It's people addressing global problems, but in some secondary city in Romania. Because capital markets at that stage are just not efficient enough to find them. There's a famous company, UiPath, I think now worth about 10 billion that came out of Romania. And sort of is a paradigmatic example of that. I think if you were to say, where is there a core option? It's probably something in crypto. It may exist or it may not exist. I think one of the great questions is, is everything in that space now out of Vista Excit and like our space? Or is it at the Google and Amazon stage?

• 56:05Speaker 02

  That's a very, very hard question to answer in foresight, irritatingly obvious in hindsight. But it does seem there's a probability mass of something being very big there. Because there's something about finance where it's demarcated by nation state, even though it's a pure electron good. And so anything that's just pure numbers in the sky should actually be globally scalable. But it isn't because of the existing finance regulatory environment and the existing historical paths, sort of banks when they were physical institutions. That makes me think this globalization of finance has a potential for multiple trillion dollar market cap companies over the next decades.

• 56:47Patrick O'Shaughnessy?

  You mentioned Romania, which just makes me think of Europe more broadly speaking. I'd be curious your relative take on opportunity in Europe for business and investing when the last decade has been relatively underwhelming, certainly relative to the performance of US companies.

• 57:01Speaker 02

  It is amazing that if you look at the top 10, maybe even the top 20 by now, companies in the world by market cap, they're exclusively US and China. This is an absolutely fascinating stat and says so much about the last 30 years. There's a very sort of dark line of thought, which says, one of the best things about Europe is that you probably have a less geopolitical risk than any other place. There's something about the horrors of Salman Badan and Stalingrad that makes it sort of unimaginable for Germany and France to have a conflict. Whereas I think it is much more imaginable to have China, India, US, those sort of countries have conflict. So in some ways, one of the things you have in Europe is a sort of absence of systemic risk of wipeout.

• 57:45Speaker 02

  Because if you look at what really destroys investing returns, it's geopolitical conflict. If you look at the collapse of European wealth in World War I, World War II, it's just absolutely epic. And I think that may be an underpriced benefit of you. I think the other much more cheap and practical one is there are countries whose institutions weren't developed enough to build a Google. Arguably, that's every other country apart from the US. But I think it is certainly true of very small European countries because they just don't have the complexity of legal system. They don't obviously have a means for company going public. They don't have the institutional norms or the depth of financing or everything like that. But now I see so many companies come out of Europe that are

• 58:26Speaker 02

  Delaware corporations, LLCs, that have, say, West Coast investors, their legal documents by Wilson Cincini or some other US firm. And you have this amazing mix of sort of Soviet quality education, which is very high in math and logic, post Soviet GDP per head, which basically means your capital goes very far when hiring a labor force, but with US high trust institutions acting to sort of scale it as a corporation. And that unique coming together feels special.

• 59:00Patrick O'Shaughnessy?

  It's a fascinating take on everything. I mean, I had never considered really any of those angles. Again, appealing to the 483 companies that you've invested in, I'd love to know the geographic dispersion of those things, generally speaking.

• 59:13Speaker 02

  Almost an even mix between US, UK, continental Europe would account for 90% with the remaining 10 scattered to Asia, Africa, Latin America, with a particular hub in Singapore because of an incubator called Entrepreneurs First that I invest with a great deal.

• 59:29Patrick O'Shaughnessy?

  Yeah, I've had Matt on the show, which was a fantastic episode. I love his idea of the history of the technology of ambition.

• 59:34Speaker 02

  It's completely Matt's IP, which was, it's very interesting to think where talented people go as a framework. And so if you go back and go the other way and say, what can you learn from investing when you look at history? It's interesting to think is an underestimated cause of the decline of some institution, not all the stuff people think about when they wrote about it, but just that very talented people who were young chose to go a different direction. So there was a time when you're a young man and you can choose, do I go and do an administration of a Roman province? Or do I join the early Christian church? Possibly the talents. Started to flow towards the church and away from institutions and that actually caused a weakening. That is a generalized framework of where exceptional talent chooses to go is super interesting.

• 1:00:17Speaker 02

  So one thought that occurs in our world is perhaps the sort of investment banks and consulting firms and law firms of tomorrow will be much less good than their precursors twenty, thirty years ago because so many talented people are going into entrepreneurship and that talent has to pull out of somewhere. Now, I think, again, from a sort of societal viewpoint, I think putting very talented people in things that can scale their products to millions of people is higher utility than putting them in effectively a high-end artisan profession like consulting of the law where the output doesn't scale.

• 1:00:48Patrick O'Shaughnessy?

  It seems to me that a lot of what you're doing with your life and career is curation of people, ideas, companies, history. I mean, so many different examples in our conversation today. I'd love you to riff on that idea of curation and whether or not it's going to become an increasingly important skill in a world that is exploding with information and content and data.

• 1:01:08Speaker 02

  Very simply is if you think back to sort of thirty years ago, your basic problem is lack of information. So you sort of read about capital markets investors in the nineties and they're reading SEC filings, they're reading sell-side reports. They're trying to get time with management, but it's a fundamental lack of information problem. Now you look at the massive growth of available information and I think it becomes much more of a filtering problem. And in some ways, the best way to filter is to have second-stage filters before your filter, which is just to find amazing people and use them as filter points. So there's a sort of phrase which is if you hang out with people smarter, harder working and morally better than oneself,

• 1:01:50Speaker 02

  you always live in a funnel of positive serendipity because effectively you're dragged upwards to the mean benchmark, which is higher than oneself. So that's what I try to do.

• 1:02:00Patrick O'Shaughnessy?

  You just described my whole life. I'm playing with this idea now of it's better to be interested than interesting. And as someone that's never been particularly interesting, a great way to eventually become interesting is to be purely interested all the time.

• 1:02:13Speaker 02

  Yes, a hundred percent. And I think, Patrick, you could overlay amazing people in a unique configuration. You get an information flow that is both accretive to you, it pulls you up, but is also a unique lens in the world. And from unique lenses, you get unique opportunities.

• 1:02:29Patrick O'Shaughnessy?

  By that, do you just mean non-overlapping backgrounds and areas of interest in the people in your network?

• 1:02:35Speaker 02

  Yeah, and one of the ones that I think is always fascinating to me is just how geographically disparate networks, often you get these very tight communities, in some ways a valley, in some ways New York, say, the hedge fund community. And sometimes the most obvious insights are just from going between one to the other and just seeing the difference in worldviews and stark belief from each other. And so I think about that constantly. I mean, one of the ones that's most powerful is just thinking from a, say, imagine thinking about the same problem, not from a US perspective, but from, say, a Finnish perspective, an Albanian perspective. And suddenly, topics look very, very different. And there's a danger of defaulting to this, because the US is the world hegemon, to

• 1:03:19Speaker 02

  defaulting to that mindset. And that's not always the best, most predictive view.

• 1:03:25Patrick O'Shaughnessy?

  We've talked about a lot, and as we wind down, I'm curious what topic that we haven't talked about at all you are most interested in.

• 1:03:32Speaker 02

  Of course, after we finish this, I'll think of tons, but I'm failing to think of anything in the moment. I think there's one I would pick. It would be, I think one of the things that's fascinating in the history of tech is how much startups are temporal inevitabilities. So, there's a phrase someone once said to me, what's the difference between a hell attic and a prophet in tech? The hell attic gets burnt at the stake, the prophet becomes famous, about two years. And you sometimes wonder how much timing matters. Was a site like Pinterest always going to exist within a year that you could download a page of images on the internet in under 100 milliseconds? Was that the sort of temporal inevitability of a product like that?

• 1:04:18Speaker 02

  And is it the same for most products? Was GPS and mobile phone, did that make an Uber-like thing inevitable in around 2009, 2010? One of the great unknowns is the temporal one. And then I think the other sort of great unknown is how much of value is actually created for the top layers of the stack by the bottom layers that don't capture it? So are we all just the beneficiaries? Is angel investing pure the beneficiary of the emergence of AWS and Azure? Because I can tell a story whereby angel investing just didn't exist because it was negative ROIC, because you had to spend so much on some micro system servers and sort

• 1:05:00Speaker 02

  of physical equipment that you just had poor IRR across the whole industry. Then AWS and Azure come along and critically, as a startup, you don't know your own future demand curve because you don't know whether you're going to get product market fit. So you either had to buy too many servers, in which case waste of capital, or too few, in which case you couldn't beat demand. Whereas with AWS and Azure, they've effectively taken that risk out of the equation and you can almost know that your cost base only scales with your success. Is the entire industry just sitting on that? I kind of an intuitive feel, it probably is. Better luck and good. Maybe we get an AI boom in the next couple of years. Maybe that would be written about as that breakthrough in ML. Maybe it's actually Nvidia's Ampere chips and the emergence of sort of five and seven

• 1:05:44Speaker 02

  nanometer nodes just drive improvements in throughput that drives ML up. So it's nothing to do with the companies that are actually working on it. It's to do with sort of the pickaxes being turned from wood to iron, making their work far more efficient. And but Nvidia will probably capture some value of that, but probably won't capture the greatest of value. Same if you were to write a sort of history of early computing in the 90s and 2000s, it'd be interesting to write it from the importance of the evolution of Intel chips and modem speeds as the primary drivers as opposed to the narrative history of the growth of these great companies.

• 1:06:20Patrick O'Shaughnessy?

  Well, Charlie, I feel like I could do this with you almost weekly basis and be sort of endlessly entertained by your prolific interest in so many different things. I'll certainly remember this conversation as one that's a reminder that investing in business are complicated. And if you want to spend your career in those spaces, you better love it because there are so many variables and so many things happening and you have to develop your own niche and your own strategy. My closing question for everybody in each of these conversations is to ask for the kindest thing that anyone's ever done for you.

• 1:06:49Speaker 02

  Oh, my God, there are so many. There are so, so many examples. I think it's probably a recurrent one of often my enthusiasm has been greater than my competence. And it's the people that bet on the enthusiasm more than the competence. I'm internally grateful to them.

• 1:07:08Patrick O'Shaughnessy?

  I love that. Again, you're sometimes describing my life. So I know exactly what you mean. And it is a wonderful thing. And a major category of these answers is betting on somebody early, seeing something in them and taking that risk is always a great kindness. Well, Charlie, this has been a highlight of my early week, even though it's just Monday. I really appreciate your time and I've loved all your insight. Thank you.

• 1:07:30Speaker 02

  Thank you.

• 1:07:31Patrick O'Shaughnessy?

  If you enjoyed this episode, you can sign up for a new email newsletter sent out each week called Inside the Episode. Each week I condense that week's episode to my favorite big ideas, quotations, and more. I've been recommending books to members of this email list for years and will keep doing so in this weekly email. You can sign up at investorfieldguide.com/bookclub.