Jeremy Giffon - Special Situations in Private Markets - [Invest Like the Best, EP.336]

My guest today is Jeremy Giffon. I spend all my time trying to find people who have some “singularity” to them. People who seem like they can do an N of 1 something. Having spent many days with Jeremy recently, he strikes me as one of those people. He was the first employee and general partner at private equity firm, Tiny, which buys and holds internet and technology focused businesses. Prior to that, he was on the founding team of MediaCore, which was acquired by Workday. The focus of our discussion is about esoteric opportunities that exist in private markets. How misaligned incentives and co-ordination problems create special situations for people like Jeremy to invest in. The rest of the conversation is wide-ranging and covers everything from compensation advice to meeting your heroes. Please enjoy my discussion with Jeremy Giffon. Founders Podcast Founders Episode 136 - Estee Lauder Founders Episode 288 - Ralph Lauren For the full show notes, transcript, and links to mentioned content, check out the episode page here. ----- This episode is brought to you by Tegus, the modern research platform for leading investors. Tired of running your own expert calls to get up to speed on a company? Tegus lets you ramp faster and find answers to critical questions more efficiently than any alternative method. The gold standard for research, the Tegus platform delivers unmatched access to timely, qualitative insights through the largest and most differentiated expert call transcript database. With over 60,000 transcripts spanning 22,000 public and private companies, investors can accelerate their fundamental research process by discovering highly-differentiated and reliable insights that can’t be found anywhere else in the market. As a listener, drive your next investment thesis forward with Tegus for free at tegus.co/patrick. ----- Invest Like the Best is a property of Colossus, LLC. For more episodes of Invest Like the Best, visit joincolossus.com/episodes. Follow us on Twitter: @patrick_oshag | @JoinColossus Show Notes (00:03:15) - (First question) - What defines the nature of a perfect business in his mind (00:05:21) - Key characteristics he’d look for in a perfect investment (00:09:58) - Coordination problems that excite him (00:14:02) - Raising funds and ghostship companies (00:16:17) - Examples of a special situations transaction in private markets (00:18:55) - Building up a sourcing mechanism (00:22:18) - The biggest mistakes he’s seen in buying and selling companies (00:25:42) - Refining the underwriting process (00:28:57) - Thoughts about minimum rates of return and multiples on capital for the investments he makes (00:30:44) - Being lazy enough to wait for good deals on enduring businesses (00:33:32) - Why people do things they don’t like (00:35:47) - Whether or not he feels like he knows what he wants in life (00:40:48) - Invest Like The Best - Kevin Kelly; The reward for good work is more work (00:42:58) - Hiring CEOs (00:44:54) - Really good respective returns in low risk companies and why those opportunities continue to persist (00:47:05) - Tactics for negotiating with and sourcing CEOs (00:50:37) - Binaries - pre and post fall (00:55:58) - Being hard to kill (00:59:15) - His favorite interview question (01:06:07) - Having an audience is incredibly underpriced (01:10:13) - What else is significantly underpriced (01:12:14) - Things he feels are overpriced today writ large (01:15:54) - Criticisms of the cult of learning (01:20:21) - The one call that everyone needs to make (01:27:18) - Meeting your heroes and having mentors (01:30:48) - Notable differences between the business environments of Canada and the US (01:33:13) - Lessons learned from people he admires and models for seeing the world (01:35:35) - Views he holds that would make people scratch their heads (01:40:02) - The kindest thing anyone has ever done for him

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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• 0:35Patrick O'Shaughnessy?

  Hello and welcome, everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts and you can access all our podcasts, including edited transcripts, show notes and other resources to keep learning at joincolossus.com.

• 1:00Speaker 01

  Patrick O'Shaughnessy is the CEO and founding partner of Positive Sum and 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 Positive Sum or 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 Positive Sum or O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

• 1:32Patrick O'Shaughnessy?

  My guest today is Jeremy Jafon. I spend all my time trying to find people who have some singularity to them, people who seem like they can do an N of one something. Having spent many days with Jeremy recently, he strikes me as one of those people. He was the first employee and general partner at private equity firm slash holding company Tiny, which buys and holds internet and technology-focused businesses. Part of that, he was on the founding team of MediaCore, which was acquired by Workday. The focus of our discussion is about esoteric opportunities that exist in private markets, how misaligned incentives and coordination problems create special situations for people like Jeremy to invest in. The rest of the conversation is wide-ranging and covers everything from compensation advice to meeting your heroes. Please enjoy my discussion with Jeremy Jafon.

• 2:18Patrick O'Shaughnessy?

  All right, Jeremy, so we're going to talk a ton about all sorts of different topics. You wrote an essay that I don't think you've published, but it's about the nature of a perfect business in your mind. Can you describe some of the elements of what you would view to be like the perfect canonical business?

• 2:32Speaker 02

  Yeah, the perfect business for me is getting paid a tremendous amount of money for your words, just your advice. I really do think the old school merchant banks and M&A boutiques like Lazard and Allen & Co. and some of these places are pretty close to the perfect business where someone has decided that your wisdom is so worthy that they're just going to give you hundreds of millions of dollars for it. These businesses require no capital. They're hugely cash flow accretive. You can generally build equity by investing in the deals that you're advising on. And for the best ones, there's also this idea where the organizations are either selection effects or treatment effects.

• 3:12Speaker 02

  And so a selection effect would be Harvard or a modeling agency where most of the prestige comes from picking the people, whereas the SEALs or something like that, to some extent, will have a treatment effect. You become a different person by going through this program. And I think the best organizations do both. By virtue of being selected by the company, it really helps you for your entire career and it gives you something. Like, I really admire certain organizations where you can just tell someone's been at a consulting shop or something, or been at a really good bank, and just the way they write emails or the way they think or whatever. And that's obviously double O's short, but I really like this idea of you can just tell the polish. And obviously, same with military people. Maybe there's a path to becoming a principal.

• 3:55Speaker 02

  I don't actually think you need that necessarily, but you should certainly be clear about it. There's nothing worse than all these VCs that have never promoted from within to a partner, but then you ask associates and analysts there and they're like, "Oh, I'm going to be a partner one day." And it's like, no, you're just totally wasting your time. I think that would be close to the perfect business because I guess what I'm after is leverage and the idea of basically being able to be compensated super highly for your words is pretty close to just speaking money into existence, which I think is very close to the perfect business.

• 4:24Patrick O'Shaughnessy?

  My friend Ali said to me recently that the best way to think about At a great merchant bank is that you literally make things more valuable just by investing in them. Basically is what you're saying. I have the same question about the perfect investment. I would love you to take on this because you're pretty unique in, I've talked to as many investors as anybody. And almost every investor will be focused on the asset or the thing that they're putting money into, whether that's equity or debt. So there's a million people that are incredibly smart from Buffett on down about the qualities of a business or the qualities even of a founder or the legal structure around something. I think you uniquely come at investing very often from the meta circumstances of the situation

• 5:05Patrick O'Shaughnessy?

  surrounding the asset and the deal and the incentive structures for all the stakeholders in a deal. And so with that lens, I'd love you to describe your perfect investment, if you will.

• 5:15Speaker 02

  I don't know if it's reachable, but to me, the perfect investment would be one where you actually never have to talk to any of the people or know anything about the business. You can just understand the circumstances around it and the incentives of the various interested parties and feel out why this opportunity exists, why you can solve it, and then why you're getting paid for it without ever knowing anyone. I think a lot of these, especially in the private markets, are just coordination problems. You're basically coming in into a logjam and just unjamming it and you can get paid for that unjamming. When it comes to buying software businesses, it's amazing how many people would ask me about technical due diligence. And it never crossed my mind. If this is a business that people are paying millions of dollars for, it clearly works.

• 6:01Speaker 02

  The software works. What do you need to diligence? Obviously, it's different in a hard tech company or something, but even then, if it works, it works. I think you can take all these signals. Do you really need to know that much about a product? It's serving a niche thing and people are paying millions of dollars for it and they don't leave or whatever. Do you really need to know that much about buying a business if the guy is getting divorced? Or there's some tax law change or he has some other exogenous catalyst that you can just tell. I mean, this comes back to the people thing. You sit down with them and he pains them to be selling the business. That's a great deal. I'm probably going to do that deal just from that fact alone. One of my favorite quotes that I think about probably every day is the Groucho Marx quote about, "I don't want to be a part of any club that'll have me as a member."

• 6:45Speaker 02

  People never think about this with investing. It's like, why has this come to you? You better have a very good reason and no one ever has a good reason. If you believe markets are slightly efficient, then if it's landing on your doorstep, you're either the luckiest person in the world or everyone else has passed on it. And it's probably the latter unless you have a very good explanation. And so I think I take comfort in, oh, this is a really messy situation and I totally understand why other people's incentive structures don't allow them to fix this problem and why I can uniquely. And so that's why I think it's easy to make low risk investments. If you like, understand things that way, you have a very good explanation of, yeah, I got paid for this because I did these three or four things and there's these five

• 7:28Speaker 02

  different stakeholders and they all wanted these different things and I figured out how to solve it and it unlocked this logjam. I like things that are very explainable when it comes to investing at least.

• 7:38Patrick O'Shaughnessy?

  So it's something like Greenblatt's, You Can Be a Stock Market Genius, your favorite book on investing ever?

• 7:43Speaker 02

  Yes, that is my favorite book on investing ever. The big thing that really turned a light bulb on for me and that was when Greenblatt would describe things like index or a mutual fund has to dump this because they have some weird legal thing about what they can or cannot hold. Okay, so now I understand and I like that certainty. It's boring. I do view it as construction work. It's not glamorous like macro or something, but it is very clear and understandable. And you can still make astonishingly good returns because at the end of the day, they can be difficult problems to solve. And even in the Greenblatt instance, you're probably one of a hundred people who is actually reading the 150th page of the legal offering of the warrants offering or whatever, right? And so maybe that's your explanation for why you get paid because you're the only

• 8:26Speaker 02

  guy who's going to read 150 pages of a rights offering of a small cap. That's a good explanation. Goes to my other question. I always ask investors, what is their edge? And I'm always shocked how few have a cogent answer. And maybe it's because people don't think about it. You can just say, I'm smarter than everyone else and that might be true. That could be your edge. There's certainly cases of that, but you should have some reason why you think you can do better than everyone else, even if it's just your cost of capital. Like it can be anything, but most people cannot articulate why they're better than the next person, which I think is crazy in a business where you get paid for. Beating a benchmark.

• 9:00Patrick O'Shaughnessy?

  You and I have talked a lot about how this special situation manifests in today's market environment. We're doing this in early summer 2023. Maybe you can describe taking that philosophy and applying it to the current opportunity set and what you see. What gets you excited through the lens of solving coordination problems or undoing log jams in the market environment of summer 2023?

• 9:22Speaker 02

  This one's great because it involves two parties that don't know anything about finance or capital structures, which are founders and VCs. And so that presents a lot of opportunities. In this present day, you have all these companies that massively over raised and are now realizing that even with a good viable business, the founder personally is never going to make any money because the pref stack and because they just raised too much. And you get this weird situation where VCs don't have any incentive to tell you to shut down. There are exceptions. There are a handful of really great VCs, which is both economically and morally the right thing to do.

• 10:00Speaker 02

  But for the most part, a VC has no good reason to tell you to shut down because they're in the outlier business. And a founder is gonna just, first of all, just be terrified of telling their investors that.

• 10:14Patrick O'Shaughnessy?

  They failed.

• 10:15Speaker 02

  Well, not even that they failed, that's the crazy thing about these. Maybe you have 10 million a year of revenue, but you're only going to grow 60% this year and you raised.

• 10:24Patrick O'Shaughnessy?

  Somehow that's bad.

• 10:25Speaker 02

  Yeah, because you raised it 300 million or something and you're going, oh, man, am I going to have to do a down round? If I do a down round, then I'm really going to get drowned out on the pref stack. I'm never going to make a dollar here. It's going to be another five years. But you don't want to go to your board and say, I want to give up on this company. I just realized I'm never going to make a dollar from it. And your board doesn't want to come to you and say that because then there's this boogeyman story of my VC told me to give up. The coordination problem and I've done this and will continue to do this, which is you can literally just talk to both of these people in private and then broker something together and they're both relieved. I mean, it's the best type of deal. They're both relieved because the VC is just a pain in the ass. I talked to one large VC who was complaining.

• 11:09Speaker 02

  About all the audit responsibilities of all these dead companies. And then you talk to the founder and the founder also wants out. It's like a bad relationship. Probably if you start thinking about breaking up, it's already over.

• 11:21Patrick O'Shaughnessy?

  It's already too late, yeah.

• 11:22Speaker 02

  But you're going to drag that out for another two years. And it's very nefarious for founders because you only get so many years, really, where you can take these shots. And if you're really dead set on trying to build a huge company, wasting two years of your mid or late twenties or something is a huge waste. And ironically, your VCs would probably be happier for you to give up and back you again or keep the money or whatever. And so that's a situation where you've got this asset. So a company is doing $10 million a year, which is maybe, you know, if it's a SaaS business, maybe the best asset on the planet. If one person owned that, if you have a net negative churn on great multi-year enterprise contracts, it's the best asset that you could possibly own. It just compounds cash. But because of its weird financing situation,

• 12:05Speaker 02

  it's like a dead asset with these two parties that both want the same thing, but won't talk to one another. And so that's like a classic example of a dislocation. I don't really need to know anything about the company there to know that there's an interesting opportunity. You can go a level deeper and start thinking about the VC's economic incentive, which these are questions founders never ask. How big is the fund? When in the fund lifecycle did they invest from? Who else is in the fund? There's one case where business is doing like 15 million a year and I get on the phone with their main board member. And he was like, oh, yeah, right. He's like, I think that was in the Uber fund. We don't really care, you know? And it's just crazy things that like, if these two people talk to one another, there'd be huge unlocks.

• 12:47Speaker 02

  And so, yeah, you'll get a situation where a VC is happy to give away basically a business that's making lots of money. And a founder is happy to either run it profitably or take another shot on goal. And all this can just be unlocked by having a little bit of knowledge and then solving these coordination problems.

• 13:04Patrick O'Shaughnessy?

  A pro forma like example of the sort of transaction that could solve that specific long journey. And is this the same thing? I've heard you talk about like ghost ship companies before. Is it's basically the same concept?

• 13:14Speaker 02

  Yeah, I call it ghost ship because everyone knows there's just no financial outcome that's going to happen. And it's this weird thing because there's cash in the bank, you're making money, the team's happy, like, everything's going well, still sailing along, but it's just you screwed up unfortunately, because you didn't really understand capital structures. It's funny, if you have top-tier VCs, you actually get better deals because good VCs understand that returns are driven solely through power laws. And so, anything that is not that one company in the fund, they actually don't care about. All they care about is preserving their reputation. So I've seen recaps done for Million Box. You can offer the founder 500 grand personally, and you can cram down the rest of the equity to 10 or 20%, and you can recap the business.

• 13:58Speaker 02

  Or, in a lot of cases, you can just cut costs, and then the business becomes very profitable, and then it can run. And I mean, the real kicker on these, most of the time, growth will either increase or stay the same when you cut a ton of costs. A weird side effect of venture capital is that you never get to see the counterfactual on growth. So, a lot of times, your company is growing for some reason, probably inherent to the product or something like that. But because you've taken all this venture capital, you have to spend it. You can't just leave it in your bank account. And so, you'll hire a bunch of people, or spend a bunch of money on dumb stuff, and then you will falsely attribute that spending to the growth, but in fact, it was not at all related.

• 14:41Speaker 02

  And what's funny about this is you can never run the counterfactual because of the venture capital dynamic. And so, it's really hard for people to believe. But I mean, one thing that I ask founders, like, if you take a founder out for a few beers, and you're like, "How many people could you cut from this business?" They generally know right away. Sometimes the founder's like, "No one. Everyone is essential." And that's a really well-run business. But the majority of the time, "Yeah, well, we raised all this money, so we tried to hire a big sales team, and it's not really working, but it's not going so badly that we have to cut it or whatever. We get to tell our board that we're doing something." And so, there's all these weird optimizations that can be had just by roaching these misaligned incentives.

• 15:20Patrick O'Shaughnessy?

  I would love, just to keep nailing the point, because I just think it's a really interesting opportunity space right now, given market conditions. With other examples, like categories of special types of situations in private markets that you've seen or done transactions in before.

• 15:37Patrick O'Shaughnessy?

  Especially because of the environment that we find ourselves in today where cost of capital has gone up. I think there's probably more willingness and ability to do these special sorts of deals. Whereas in years past, you might say, yeah, it's easy to raise money. I'll just keep going. So maybe give us another couple of examples of a classic special situations transaction that you've done in private markets.

• 15:59Speaker 02

  Some of these are so good, Red doesn't even talk about them because I know no one's doing them. An example is anytime a large tech company makes an acquisition of another midsize company, there's almost always assets in there that need to get divested or the acquirer doesn't want. What's funny there and other misaligned incentives is the incentive of the corp dev of the acquirer is not at all related to maximizing price. What they want and what so many people want all the time in investing is just they don't want a hassle. And fair enough. Let's say a Fortune 500 tech company buys a company for $500 million and they want to divest a $50 million asset. Does anyone get any credit for that $50 million

• 16:42Speaker 02

  sale? No, it doesn't move the stock price, it doesn't help the corp dev. No one gets anything for that. And so what's really wanted there is just make the poor corp dev guy's life easier. And so those are great. Another is sometimes startups have two product lines and one's working and one isn't. I've seen examples where a company has pivoted and you had a product that was kind of working, but maybe it wasn't working well enough to become a multi-billion dollar outcome and then you need to get rid of that asset. There's obviously a bunch of stuff and bankruptcies that can be great. I've seen situations where startups build marketing assets or basically like lead gen businesses that end up being better businesses than the main one. And so when the main business goes under, you can

• 17:23Speaker 02

  buy those marketing assets or whatever. There's all kinds of things and it's all just downstream of venture has outsized returns so that you can just be super wasteful. It makes more sense for every party economically to just throw it away than to do something diligent with it. And so We're at the best opportunity of all time right now to do that because of the amount of venture that's gone into the system. I think eventually, if returns normalize, which I think they tend to do over long stretches of time, the wasteful behavior will go away because it won't make any sense anymore.

• 17:57Patrick O'Shaughnessy?

  It's a fascinating thing to think about. All this stuff's under the rug, so to speak, because the pile of money is so big. I love the idea that it's actually the best funds of the best VCs where these opportunities are most present. Interesting weird twist on this all. Given all that, how did you build pipeline to get to see this stuff over your investing career, most of which was at Tiny? You're one of the few investors I've met that has been doing this style in private markets for a fairly long period of time. So how did you build up a sourcing mechanism to be sure you saw this stuff? If some mid-cap tech company's acquiring some private business, how are you in that flow? How did you work your way into that flow?

• 18:40Speaker 02

  Well, at Tiny, I mean, in the early days, we were just very good at outreach. Andrew and Chris, the co-founders, had very good reputations, but we would just email people to say, hey, we'd use a product, use a lot of software in a day, and some amount of it will be venture funded, but the software that you use that isn't venture funded, it's probably just a small team who's bootstrapped, and you can just email them and say, hey, do you want to sell your company? We had to do that for the first few years, and then eventually we built up a reputation, and it kind of flipped, and we would get a lot of inbound. And yeah, we would see a lot of this stuff at Tiny, and a lot of it was just, which I love, is one large investment bank sent us something, and they were like, we could

• 19:23Speaker 02

  not think of anyone else to send this to because of a mix of how weird it was and its size. And I think that's great. In retrospect, one of the very bullish signals at Tiny was when we started, people would ask us what we were buying, if they were assets. We would say, oh, we're buying Chrome plugins, or Shopify apps, or whatever, themes. People would ask, are those even assets? And I think that's really what you want, at least if you subscribe to the monger- Theory, which is that it's better to find your own lake than to try and be the best fisherman. I think you get a reputation for it, but honestly, there's not a lot of people out there who can do this stuff because it's really weird and it requires very fast speed of execution,

• 20:05Speaker 02

  which requires really abnormal underwriting abilities or requirements. And you have to take weird risks on things that other firms can't or won't take risks on. A lot of company buying, at least in my experience, is not dissimilar from Craigslist. If you show up first with cash in hand, you get the deal. Maybe if you're not the highest price. And so I think a lot of it is just being willing to go and do that and say, yeah, okay, we'll do this weird thing.

• 20:33Patrick O'Shaughnessy?

  Very Buffett-esque, right, where you would hear examples of him writing extremely large, increasingly large checks over his career in very short periods of time, over the weekend or something.

• 20:43Speaker 02

  And that's what inspired us. We couldn't believe that we had tried to sell, in my case, a business to a public company, and Chris Anderson's case, to private equity. And we couldn't believe that it was six to nine months, steak dinners, backslapping, terms, all this stuff. And we look at Buffett, who could buy a $30 billion airplane parts manufacturer in an hour. And we were like, hold on, this company is a Stripe account and a website. It's not complicated. Surely someone out there can do it in less than six months. And you can. That's testament to tiny success is that you clearly can. But I think a lot of that just exists for incentives and busy work and stuff.

• 21:21Patrick O'Shaughnessy?

  What have you seen as the biggest mistakes in buying companies? Whether it's been your own mistakes or ones that you've observed and others.

• 21:30Speaker 02

  The biggest mistake is just ignoring your gut, which is trite. And I hate to say it because it's not that interesting, but it is the absolute biggest mistake. Every bad deal I've ever done or seen someone ever done in terms of buying a private business, the first two minutes with meeting the owner, the principal, the seller, you could have saved yourself. Because if you're not doing nine months of diligence, you're basically just diligencing the principal or the seller and saying, can I trust this person? Is this person trying to screw me? Because if they are, it's pretty easy. Because we're not going to deploy Bain on you. And so you probably can get stuff past us. It would be seeing if a person is trustworthy and then understanding why are they selling the business? Because you're buying from the ultimate insider.

• 22:15Speaker 02

  Who's decided this is the exact moment to divest from the asset. So that's already a completely bearish signal. You're already at such a disadvantage. And so you really have to work to overcome and understand, okay, why is this still a good deal despite that? And so I think a lot of new entrants to the space. They get some prospectus in their inbox and they're like, oh, this is amazing. Maybe the person who's run this business for 30 years has decided that now is a very good time to sell the business. Maybe you're not, it's not just your lucky day. That's the most basic, there's tactical stuff, but it's really all downstream of why is this business being sold? And is this person just a trustworthy person? Or do I understand that their story makes sense? Does it all add up?

• 22:56Patrick O'Shaughnessy?

  What if you were to flip it away from the buy side, which is where you've always been to the sell side? And explain the things that you've seen sellers do the most poorly? Maybe that functions as like advice, like don't do this. If you're out there listening and you're trying to sell a business.

• 23:10Speaker 02

  Oh God, I remember the startup that I was at prior to Tiny. We got bought by Workday and it was some 30 year killer from Morgan Stanley who'd just come on. And we were just these doofus Canadians. The Sun Tzu thing, like the battle's over before it even started. And I think it's classic, this is not novel, but it's the most important transaction of your life, probably. You've never done it. Maybe you know someone else who have themselves done it once. And you're up against someone who that's all they do all day, every day. And so it's very difficult. I think the best thing you can do is talk to a lot of buyers. Maybe try and get an understanding for how it works for the buyer and what they're getting out of it.

• 23:54Speaker 02

  It'd be very strange, sometimes you'd put an offer on a business and the seller would come back and say, I got this other offer that's a lot more. It's not magic how that other offer happens. Okay, you can take that, but let me at least explain to you how they're levering up the business to give you that offer. And maybe You're okay with that, fine. All the time, I tell people, congratulations, Microsoft has decided that it's strategically important for them. So they're going to give you 40 times revenue. Take that deal. But you gotta at least understand why and how. And so I was always amazed how much the seller had no idea what the buyer was getting or how they get paid back or how they make money. And I don't think it's super hard to understand. Certainly, if you're in a position where you've built big business that you're selling,

• 24:37Speaker 02

  you're more than capable of understanding this stuff in an afternoon. And it's really worth doing it just to get a sense of what is the other side getting here.

• 24:45Patrick O'Shaughnessy?

  So if we go back to the speed and simplicity that sounds like you've always valued in the investing process, what got refined over time about the underwriting process? In what way was the hundred thing you looked at? The process itself, I mean, for the hundred thing that you looked at, most different from the first thing that you looked at?

• 25:05Speaker 02

  I think a lot of investing is pattern recognition. It's nice because compound interest dovetails well with pattern recognition. So I think part of it is you just see what matters and what doesn't. A first time buyer will always care about things that just don't matter at all. I think a lot of that comes from just reps. But I think the other thing that I really noticed is when I started, none of us had any finance or investing background. We were just fans of Buffett and Munger and read all the books. And so I think there's an air of insecurity that comes from that, which leads to asking a lot of complicated jargony questions. So in the first four or five years of doing this, I would ask a lot of very complex questions, which in retrospect, I think were mostly about trying to telegraph to the seller that I knew what I was doing.

• 25:49Patrick O'Shaughnessy?

  What's an example?

• 25:50Speaker 02

  Well, we used to make DCFs just so we could all feel like we made a DCF.

• 25:55Patrick O'Shaughnessy?

  Check that box.

• 25:56Speaker 02

  Yeah, well, it wasn't even that. It was more that we thought, well, jeez, everyone else does this, so we better make sure we do it. Now, the questions that I'll ask a seller are, what does this business do? Why do people buy this business and not the other business? How do you make money? How did this start? How did you get here? You make $20 million a year from a Chrome plugin. How the hell did that happen? Just understanding that. And I'll see new analysts who don't really understand what the business does, but they don't ever want to say, what does your business do? Because they worry they're going to look unprepared or whatever. And I think that tracks because fundamentally, the more quantitative the analysis is, the more of a commodity it is. And so what really gives you an edge, in my opinion, is experience on the qualitative.

• 26:41Speaker 02

  It's going to be that very simple line of questioning that actually gives you an advantage. And it's really the sign of an amateur to be really caught up in why did the margin change from this quarter to that quarter? Because they think that, oh, if you can just understand all there is to know about this business, then you can have an edge on it. Which ironically, I think makes you miss the main thing. And so it's just asking really simple questions, like, why is the product good? All these very basic things. And that allows you to move really fast. A great investment should just smack you in the face. Probably the best thing we ever took from Charlie was the too hard box. A good investment is just something that should be really easy to sell to the team. You should be able to pitch it in a few sentences. It just makes sense. It's hard. It's really hard to do this.

• 27:26Speaker 02

  We'd catch ourselves all the time. We'd be on week three of debating this company. Oh, should we buy this? The best thing we could do is go, we've been debating this for three weeks, ergo, we should not buy it. It's not obvious. It doesn't smack us in the face. And this comes back to incentives again, which is you have to have the ability incentive wise to be able to say no. If you're being forced to deploy capital or whatever, you trick yourself into doing these deals. But the good ones, you're just like, yep, I get it. Let's do it. This makes a lot of sense. I think part of that is just having the abundance mindset of being like, if things are too hard, just let them go. It's fine.

• 28:00Patrick O'Shaughnessy?

  In the spirit of simplicity, then, how would you layer on the quantitative as it relates to expected rate of return? Because one of the things I think about a lot is, okay, we have proxies for rough expected equity returns. Obviously with fixed income, you know what the base case is in terms of your return. Therefore, only do something if it's quite significant. The hurdle rate is way higher than what seems available through your best alternative, which is go to Vanguard and open up a simple brokerage account and stash your money there. Been a very compelling thing to do with your money for most people. So how would you think about minimum rates of return or hurdle rates or basic? Multiples on capital or IRR requirements for the investments that you would make, understanding that you were trying to approach this with a simple mindset.

• 28:45Speaker 02

  I used to get asked this question a lot. My answer was always, is it roughly as good or better as the last deal? That was our entire hurdle underwriting. If it was worse, I mean, ah, we can do a better deal than this. And if it was better, then we get excited about it. This is something that Chris and Andrew came up with. You always want your deal to be the last investment you ever do. Very often, we'd buy a company and we'd be like, all right, we can just hang it up now because this company is going to take us through to retirement. And so you don't really think about benchmarks and returns and stuff when you're thinking in that mode. Because there is no better asset than a great business that has operating leverage and pricing power. And if you got that, you just have a machine that prints money. And if it has a moat, then you have a machine that prints money for a long time. And so obviously that's going to be right better than the stock market or whatever.

• 29:30Speaker 02

  And in terms of risk, we were probably just too unsophisticated to think about risk, or certainly I was. Risk, and this is just another Munger line, but I think it's true, is just loss of capital. And so if you're not going to lose your money, then it's not risky. You want it simplistic. That's really simplistic. I think it's served us well.

• 29:47Patrick O'Shaughnessy?

  If you think about the bridge between everything you just said, which is basically, get a great deal on a really good enduring business that you understand that doesn't take three weeks of debate, up against the earlier discussion we had on, okay, there's this really unusual, special, timely situation of incentives that are out of whack and there's an opportunity. I think you read the Greenblatt book, if I remember it correctly, the holding period on lots of those trades would be short. Maybe measured in months or years, certainly not in decades. So are those two things different in your mind? Or is the special situation just a unique opportunity to get an especially good deal on an enduring business?

• 30:24Speaker 02

  It just comes back to being lazy and not doing hard things, which is I want every business to be the last business I ever buy. So if it's not going to be, it has to be so smack you in the face good that I feel compelled to get off my ass and do it. We bought lots of cigar butts. I would continue to do those. But they have to be so good that it's, do you want to make millions and millions of dollars for very little work? Okay, sure. Another favorite question for managers is how long have you gone without deploying money? The best I've ever heard is six years.

• 30:55Patrick O'Shaughnessy?

  Yeah, you and I heard that once together.

• 30:57Speaker 02

  Tiny did two years, which was incredibly hard. I can't fathom six years. I mean, six years of doing nothing. You literally just do nothing.

• 31:04Patrick O'Shaughnessy?

  I think Buffett went that long once, too.

• 31:06Speaker 02

  Yeah, Buffett and some other folks I think have done that, but it's so difficult. I find you don't really need to think about all this stuff. If your default frame is just not to do anything, you have to be compelled out of your seat. Because if you are, then you're going to have this visceral hurdle rate, which is, is this worth my time? And if you're excited about it, then you do it. And if you're not, you don't. And I find that you can really avoid doing bad deals that way.

• 31:28Patrick O'Shaughnessy?

  That actually brings to mind this notion of, I think it's your one question. Does this energize me or drain me? Talk about that in as many ways as you can, including maybe for investing.

• 31:37Speaker 02

  To go back to underwriting, we hired, I don't know, dozens and dozens of CEOs. And really, the main thing that mattered the most was when you leave the conversation, do you feel energized or not? Because everything else is downstream of that. If you hire someone that drains you, even if they're really good, you're not going to interact with them. You're not going to have a good relationship. It's just not going to work. It's one of those situations where you have to be brutally realistic with yourself. You can't be like, oh, I wish I was the sort of person that liked this person because they're really good. But it's like, yeah, you're not. So even if they would be a good fit, it's not going to work for you. And that applies to investments, too. I think good investments get you really excited. We would go long stretches. Sometimes we'd do no deals or one deal or whatever.

• 32:19Speaker 02

  A good investment, we would suddenly start moving extremely quickly and get really excited and go from working far less than eight hours a day to working 14, 15, 16 hours a day. And because it was just like this great thing that you had to do and then going back to just waiting around.

• 32:35Patrick O'Shaughnessy?

  Why do you think so many people spend so much of their time on things that they don't like doing?

• 32:40Speaker 02

  I think this is the single most important question in the world, probably. Because I think it's extremely puzzling that world where a lot of people can cover their bases in terms of food and shelter, they still spend the grand majority of their life doing things that they don't like doing. I think it's a deep and troubling puzzle that I don't really have the answer to. I think a lot of it comes back to. Not really understanding what your true desires are and having fear around losing things, being stronger than desiring what you actually want. I basically think most people wish that they like things that they don't actually like. For example, even in my own case, I think a lot of people wish they wanted to make more money than they thought they actually did.

• 33:24Speaker 02

  Or they wanted status more, or it was important to them where they live, or what clothes they wear, or whatever. And I think a lot of people don't actually want those things that much, but they feel like they should, or they're very scared of the consequences of acting like someone who doesn't. And then they really get into this mess. But I mean, yeah, it's a real puzzle. People with tons of options will spend their whole life working jobs they hate. It's really strange, and it's really tragic, and it's really bad for the world because you're not going to do great work. I once was talking to like a therapist performance coach who would tell people what he thought their true calling was. I had had a few highly accomplished people tell me that it was the most devastating thing they'd ever done in their life. I was puzzled by that.

• 34:09Speaker 02

  His name was Jack Skeen, and I asked him, why do people describe this as devastating? And he goes, well, if I tell someone who's a very successful investor that they need to be a third grade teacher, do you think that would be devastating if it weren't true? Well, no, of course not. You just think you wasted your time and money. It's devastating because you know on some level it is true, but you know that becoming a third grade teacher now means you no longer live in Trebekka, you don't have the same friends, you don't have the same apartment, and all that is terrifying to you. So the fear of loss, there's some great tragic loss to the world about you not being that thing that you feel called to. And so, yeah, I think it's a really difficult puzzle, and it really just comes back to most people don't really know what they want or are in denial about what they ultimately want.

• 34:49Patrick O'Shaughnessy?

  How far down that path do you feel personally? Do you feel like you really know what you want and have set your light bulb accordingly?

• 34:57Speaker 02

  I feel like I've made a lot of progress. What's led me here to this conversation is I just, I'm a big sabbatical fan. You're probably getting a theme throughout the podcast of just generally not doing anything. I'm a big sabbatical fan. I've taken multi-year sabbaticals before. I'm on month six of one right now. And I think that almost everyone does not spend enough time thinking about how they want to spend their time. A lot of this comes from just do things, just execute, and I think that's really important, and I'm certainly weak in the other direction. But thinking very deliberately about what you want to do and how, I think it's very underrated and society makes it difficult. You're very low status when you're not doing anything and there can be financial constraints or whatever. We've been talking about different things that we're interested in and things that we want to build in the future and things like that.

• 35:42Speaker 02

  And that's really come as a result of just taking a year off or taking some off in this case and just letting the world soak in and come to see what gives you energy, what's exciting, what's not. And I think the only way that I've found to be able to do that is yes, a lot of introspection, but also just sitting back and letting things come to you and see what feels right. Cause I've certainly had no shortage of opportunities that are rationally interesting, but they just don't.

• 36:09Patrick O'Shaughnessy?

  Energetically not.

• 36:09Speaker 02

  Yeah, they don't really get you out of your seat. And so I think it's something that more people should do and it's not that difficult, all things considered, especially if you have a low burn rate. And it's really worth it because it's trite, but the low status things become high status. And people I know who are working the most interesting things just wandered off in a weird direction. But it's painful. It's a very painful process. I think you have to realize a lot of things about yourself that you're not so motivated by this, or you're not the person you thought you were. And maybe you won't have the life that you thought you wanted. If they really viscerally embody those, it's a really painful and hard to deal with.

• 36:46Patrick O'Shaughnessy?

  Maybe say a click more about what that means for notions of laziness and the quality bar for what you'll do. I'm curious how you react to the word laziness, but also just the notion of people settling much earlier than you think they should. Is that the right main conclusion that it relates to how long have you not done a deal for? It seems like the common theme here is the ability to set a crazy high quality bar and not change it.

• 37:13Speaker 02

  There's a couple of good heuristics here that have been helpful. One is a question from our friend, David Senra, which is what could you not be paid a billion dollars to stop doing? I think there's a lot of people who would very happily take a large check to never do what they do again. But generally there's something for everyone. I mean, for me, it's figuring out people. I'm super curious. I think I'm incredibly curious. Person and the curiosity mostly manifests through people. And I really like to meet and try and understand the world through talking to different people. I really don't think I would take a check to stop doing that because I sincerely don't know what would get me out of bed in the morning. But there's a lot of other things that I would happily take a check not to do.

• 37:54Speaker 02

  And it's not lazy. Lazy is the wrong word. I think the classic case here that I like to point to is Andre Agassi versus Novak Djokovic. I was really struck when I read Agassi's biography that he's basically this miserable guy who hates tennis.

• 38:09Patrick O'Shaughnessy?

  That opening chapter in that book is amazing.

• 38:11Speaker 02

  It's insane. And then the pinnacle of his career, he starts smoking meth. It's nuts. Then you hear from Djokovic, who's gonna be one of the greatest of all time, if not the greatest of all time, or Federer for that matter. And they're both just, yeah, like really like playing tennis. It's super fun. Djokovic has this line that is seared in my brain, which is, I just like hitting the tennis ball. And I think that there's something so funny and kind of tragic there because in a more just universe, some would say that it should make sense that if you kill yourself for the work, you become the best, but that's not actually the case. For the ones who it's easy for, they do the very best work and become the greatest. And so I think it's really a win-win, Pareto improvement, but it's really difficult. I think the reason you see it in sports, by the way, is because sports is one of the very few things

• 38:56Speaker 02

  that we test on children super early. So I think if we tested way more things on children, you would find this in all areas of life. But because sports are a thing that young children do, it's much easier for those who do find their fit in sports to get it early and push it hard. Whereas say that you're a great investment banker, a lot of things are gonna have to go right for you to even start investment banking to find out if you like it. But I imagine if you gave a lot of toddlers' spreadsheets, the same number who are incredible or prodigious at tennis would be incredible and prodigious at spreadsheets. And they should probably just jump right into banking or something like that. But we just don't do that. I think everyone has something they're not lazy about, but it's hard to find that.

• 39:37Speaker 02

  Laziness, like depression, like all these other things, I really do think is a deep indicator from within you that you're not doing something right with your own life. And you should heed these warnings and listen to them and not try and push them away.

• 39:50Patrick O'Shaughnessy?

  I just had Kevin Kelly, the founder of Wired and just an amazing guy in a lot of respects. Speaking of lines seared onto one's brain, his line that the reward for good work is more work is my favorite shibboleth of all time. If you say that to somebody and they start nodding, that's the kind of person I want to hang out with because they've solved the problem you just described. What would you do if the only reward was getting to do more of that thing? What is that for you? And almost no one has a professional answer to that. And I'm curious if you think there's ways of nudging oneself in the right direction, other than taking a sabbatical and just not putting pressure on yourself to find it.

• 40:26Speaker 02

  Another cut at that same thing is as you get closer to doing the work that you're called to, you get less envious of people or the rather the things that make you envious are fewer. It's a very common thing that I see of top school, super ambitious kids to have to put down everything around them as bad to justify what they're doing. And I think that's really a terrible way to live. And what you see with someone who's really found their calling is they're just not envious. And I can still tell it exists for me. Example is if I see an NFL quarterback, I'm not envious of him. It's like, oh, like, you know, that could have been me. Or even worse, I'm not going, oh, well, you know, he sucks, he's late in the draft or whatever.

• 41:12Speaker 02

  It just doesn't even cross my mind. I don't even think about the quarterback. Good for him. Great. Still, if some 20 year old sells their company for $600 million, I still get all those thoughts about, oh, you didn't own very much of it, or it was a fake company or whatever. And that's how you can tell that you're still not really in your zone per se, because I think people who are truly locked in are just like, great. That's not what I want to do, but good for you. I think it's probably possible to get to a place where everyone is quarterbacks. And you're always like, oh, that's cool, but I don't want to be that. So I'm doing what I like. Good for you. I think that's very possible, but it's really difficult.

• 41:50Patrick O'Shaughnessy?

  You think about, let's say, hiring a CEO, which is something you did a lot. Where you buy businesses, you said earlier that sometimes businesses are just such a reflection of the founder, which means accession's hard, period. In any business, certainly in investing, it's extremely hard, maybe even harder, but it's hard in business to change from one king to a next, or one queen to the next. What did you learn about that very nuts and bolts thing that you had to do? I don't know how many times you did it, but I think you did it a lot at Tiny, where you buy a business and install a new CEO.

• 42:20Speaker 02

  I think a lot of these debates around talent and hard work and all these kinds of things, there are people talking past one another, because I think there are companies that need the best in the world. But by definition, almost every company does not need the best in the world, any layer. What you need is someone who has that specific skill set. Andrew's insight, which was correct and worked brilliantly, is you just find someone who's done it before at a bigger scale, and you get them to do it again. And that works great. And it's so anathema to the Valley philosophy around it, which I'm also very sympathetic to. It reminds me to manager selection. It's like you either get top tier, or you're unable to get top tier, and you've got to bet on emerging.

• 43:02Speaker 02

  That would be the whole Stanford spot talent, young thing, and that works too. And I think there's a real skill set there. But if you can get just the person who's done it before, then great. I think people really romanticize business, especially recently in the culture, for being a lot more difficult than it is. I used to always harass my, like, computer science friends that they're just bricklayers. Yes, a small smidgen of them are doing difficult technological work, but generally, no, you're basically a construction worker, which is nothing wrong with that, but don't kid yourself. You're just building things that have already been built before, and there's like a known way, and there's codes and infrastructure and blueprints, and you follow and implement those things. And so you don't need to get too romantic about it.

• 43:45Speaker 02

  Again, it's always different for outliers, but for the median business, I don't think it's some great intellectual edge, or some world-class talent, or whatever is required. I think it's just solving problems reliably and diligently.

• 43:56Patrick O'Shaughnessy?

  So then why, like, if I add a bunch of this up? Which I'll describe as really good prospective returns in simple businesses that you can understand with relatively low risk that can be run by somebody who's just got the experience that you're not betting on potential. Add all that up and you just wonder, why is that opportunity persist? Again, thinking about markets as like mostly efficient or competition coming to bid down returns when something like what I just described is possible. Why will this kind of opportunity continue to persist? It all stacks up that nicely.

• 44:33Speaker 02

  Because it's really hard. It's just really hard. And part of the difficulty is how simple it is. It's boring. Every value investor gets to some point in their career where they think, I should be like Buffett and buy an insurance company. And they've all done it and none of them have made it work. And you know why? It's because the guy who runs Berkshire Insurance is a genius prodigy. And it's just that simple. It's one of the most, if not the only like reliably profitable insurance operations in history. And so, yeah, it is simple. Buy an insurance company and use the float. But it's hard because you need to find a guy who's really good at insurance. And that's exactly the same with all this. It's all simple. There's no tricks. It's just really difficult. And to go back to desire, most people don't want that.

• 45:16Speaker 02

  If the difficulty is being really bored all the time or doing the same thing over and over and over or whatever, most people do not want that. They actually would rather not be bored or not do the same thing over and over than want the riches, which comes back to the crisis of desire. You think you want the riches, but only contingent on a bunch of other things. And that's what makes Buffett and Munger and people like that unique is they really love doing that. I think it's just hard. It's hard to do for psychological reasons. I really like the saying, the only enduring edge is psychological edge because human nature has yet to really change. And I think that's entirely right. It's just attrition or just being willing to be low status or be weird or set up incentive structures in such a long-term way that you can actually operate differently.

• 46:01Speaker 02

  But in exchange for doing that, you're going to look really strange or not make as much money in the short term or whatever. It's all pretty simple, but it's difficult.

• 46:08Patrick O'Shaughnessy?

  What tactically then would you say about doing the, let's take the CEO thing? Well, I'm especially interested in like negotiation and sourcing. So I believe that every one of these steps that I just described is hard and your hit rate's low. You're gonna have to look at a lot of things to do one. Sometimes it might take six years between one and the next. So tactically, what did you learn about sourcing and negotiating with, let's say, CEOs? Or you could say business sellers, but the sourcing and negotiation are things that I'm really interested in. The tricks you picked up along the way?

• 46:39Speaker 02

  Sourcing is an interesting question. We were like doggedly anti-recruiter for a long time because we tried a bunch of them and they were all terrible. But then we learned that actually Buffett found Ajit Jain, the guy who runs the insurance company through our recruiter. Just like anything, you can find good recruiters. Obviously, having a large social presence makes it really easy. So Twitter accounts and audiences remain incredibly underrated and underpriced. And it's pretty straightforward. If you have a good deal, you can find capital. If you have a good opportunity, people will pick up the phone. And so I actually don't find sourcing to be that difficult, especially with this framework of what's a company that's done this exact thing before and let's go talk to someone there. So that would be on the sourcing piece.

• 47:21Speaker 02

  On the negotiation piece, there's lots of tactical tricks. I think generally the biggest thing with negotiation is getting out of your own head. Most people just negotiate against themselves, whether like verbally, I mean, most people negotiate themselves verbally, or mentally, where I could never offer that, I could never say this, or they don't think outside of the box. There are no terms really that you can't bend or change or whatever. And so I think it's really just about, very rarely will people get an offer and actually be like, I'm so insulted, I'm never talking to you again. Like, it doesn't really happen. And so I think a lot of it's just coming down to just being able to make the offer that other people don't or can't.

• 48:06Speaker 02

  And that's not to say that you always need to be cheap. You can also make the offer on the upside in ways that are weird. A classic scenario is a business owner who is selling his business and he's got different offers. And we found out that he's really into Ferraris. It was basically implied that he's gonna sell this business for thirty, forty million dollars. So it's obviously not a problem of affording it. But what we realized was that like his wife is not gonna let him buy a Ferrari. Or his own self isn't gonna let him buy a Ferrari. Or it's uncouth in his neighborhood or whatever. In the LOI, twenty-five million dollars and a four-eight-eight. Why not? There's no rules against that. And so these are the kinds of things with negotiating where you can just get really creative. As long as you're willing to just be a little weird and just be a little vulnerable.

• 48:50Speaker 02

  And then the other thing is, comes back to patience again. Very often you make an offer and someone goes for the other offer. And you know there's something wrong with it. Like this would happen all the time at Tiny. We'd make an offer that wasn't the highest offer. They'd go with the highest offer and I would very glibly say, I'll see you in six months. And they would never believe me. And eighty percent of the time they'd come back and they'd realize that actually money isn't the most important thing in a transaction where you have a lot of counterparty risk. Actually, you want a person who can actually get a deal done. And I don't blame them. I think that's something you have to see for yourself. I don't really think you can educate someone into that. It's like saying money doesn't buy you happiness. No one has ever not tried to accrue money after hearing that. But just the confidence of like, okay, like we know what we're selling. We're pretty sure that you're gonna see the value in it eventually.

• 49:36Speaker 02

  And we'll be here. And that's a really great negotiating position as well.

• 49:40Patrick O'Shaughnessy?

  I think you and I share a deep interest in people and what makes them tick. And we both really enjoy and have talked a lot about fun and simple categorizations for people. And you've turned me on to the simplest version of that, which we'll call binaries. They're this or they're that, one or zero. And I'd love for you to explain three, four, or five of these that you've used before to categorize people. I just think they're all so interesting. And probably the one that resonates the most with me that you've talked to me about is this notion of whether or not someone is before or after their personal fall. Explain what that is, how you came on the idea and why it's a powerful way to understand someone's situation in life.

• 50:23Speaker 02

  Pre and post-fall is really. I guess a perversion of the Krishnan idea, which is has someone really been brought to their knees by life? You can see it immediately and I find it's entirely uncorrelated to who they are or what they grew up with, or what they do in life or whatever. It just seems to be random. And you can just see it in someone's eyes, whether they've really been humbled deeply by life or they haven't. And the reason that I find it useful is it gives you a sense of the capacity that that person has for suffering or pain. I find it to be a very good indicator of if something bad happens to this person, how are they gonna react? An extreme example would be someone with multiple combat deployment, probably not gonna get too disturbed by something going wrong.

• 51:08Speaker 02

  Whereas maybe someone who's never had anything go wrong in their life, it's really gonna disrupt them.

• 51:12Patrick O'Shaughnessy?

  Is there a difference between hardship and a fall? It seems like everyone's had some form of, obviously it's a gradient, but everyone's had hardship. Is this just saying hardcore hardship? Or is there something more truly binary about this concept for you?

• 51:28Speaker 02

  I use the word fall because it's capitulation. So it's actually not really related to how hard the thing is. You could maybe go through an extreme hardship and not be beaten down. But I literally think of it as like, maybe even literally been brought to your knees and just this moment of life is out of my control to some regard. It's more about the reaction, what you come to recognize is true about the nature of reality from that than what the actual thing is.

• 51:52Patrick O'Shaughnessy?

  What is the fastest way to tell if someone is pre or post-fall? I've heard you say you can see it in their face.

• 51:57Speaker 02

  This might be a weird answer, but I just think you can see in someone's eyes right away. You can just tell, maybe it's the loss of innocence or something, like just how much have you seen? And I actually think it probably gets worse the more you ask someone about it. Because then there's this weird thing about wanting to perform or say, oh, that was really hard or whatever. It's just a sense.

• 52:15Patrick O'Shaughnessy?

  Is this useful? I'll give you some examples. Would you rather be business partners or invest, an investor in somebody who is post-fall versus pre-fall? Does it matter in that tangible context?

• 52:27Speaker 02

  Well, I know plenty of very successful people who are pre-fall. And so I think it'd be a mistake to say that you wouldn't want to partner, invest in those people, but. I do think it's useful in the sense that there's a little bit of a ticking time bomb. If something is going to befall that person, they might react in unpredictable ways. And I think you see that all the time. There's tons of data around investors and divorces and personal circumstances for CEOs and stuff. And I think that's in the tales. That's where it becomes more relevant.

• 52:57Patrick O'Shaughnessy?

  How about for you personally, maybe describe the experience of going through a fall?

• 53:03Speaker 02

  For me, it was just, I got super depressed. I was chronically depressed for a while. And the real moment was like, when I really started scaring myself. And I think that's that level of maybe I'm not really in control here. And I think now I just have this feeling after that, having come through that, that it's like, I can handle that. Nothing's really going to faze me that much. Like, I think it's a sense of being brought to your limits in some sense and coming back from that. It converges into another dichotomy that I like, which is easy or hard to kill. I don't think they're synonymous, but I think there is some similarity between being like post-fall and being hard to kill, which is just another one that is not necessarily related. None of these are related to background or life circumstance or anything. It's just inherent attributes. And I think hard to kill is just

• 53:45Speaker 02

  someone who's above all, just has a certain sense of will and is just going to be difficult. And someone who is easy to kill, I think is someone who's very fragile and doesn't take much to go wrong for them, the things to really go catastrophically.

• 53:58Patrick O'Shaughnessy?

  Does that one extend beyond the individual to group settings or business settings or something like that? Or does it just come back to the leader being easy or hard to kill?

• 54:06Speaker 02

  Yes and no. I mean, I think every group is basically just made in the image of its founder. And so it would come back to the founder. I would be very confident that a hard to kill founder would create a hard to kill organization, even if the founder stepped away from the business.

• 54:18Patrick O'Shaughnessy?

  Can you describe that picture you sent me of Goldman Sachs during Hurricane Sandy?

• 54:22Speaker 02

  My favorite business picture is there's just this picture of the bottom of Manhattan during Hurricane Sandy at night and all the buildings, I think everything below the park lost power. But there's this one building that's totally lit up and it's Goldman. And they just built their building with generators and stuff. It's amazing that they built the building, you know, however long before. And we're like, we're not going down. Like Goldman Sachs does not die. And I think that's probably some kind of deep entrenched thing in their DNA. You would ask, you can see other banks in that picture. Why weren't they built with generators? What culture went into one bank doing that and the others not doing that?

• 55:00Patrick O'Shaughnessy?

  How do you underwrite something like this? I assume you would think the hard to kill thing is valuable in the investing context. As you've looked at a gazillion opportunities, companies, people, how have you used this binary, if at all, as an investing filter?

• 55:15Speaker 02

  Maybe the best way to describe it is, does this person make me sleep easy at night? So there's a real distinction between, say, you're like investing in a company with a CEO or you're hiring a CEO for a business. There is a distinction between skills and sleeping easy at night. I've had plenty of situations where maybe there was someone more skilled, but someone else just makes you feel like you can rest easy. And I think that's part of this hard to kill. They're just going to handle it. They're going to figure it out. They're used to things going wrong. They're not going to freak out. There's just a calmness. So I think it's really about downside protection more than anything in an investing context.

• 55:52Patrick O'Shaughnessy?

  Is this directly comparable to Paul Graham's notion of being relentlessly resourceful? Or is it different?

• 55:59Speaker 02

  Yeah, I would describe maybe relentlessly resourceful to my understanding is more about being proactive and this is more like the reactive frame. I think really what that means is like just a tremendous amount of will or desire. And I think that this is maybe the flip side of having the will to succeed versus the will not to die, which I think are like closely related, but are not the same thing.

• 56:23Patrick O'Shaughnessy?

  You talk about the next binary, which is, I don't know what you want to call it, like brute force versus cleverness or repetitions versus efficiency or something like that.

• 56:31Speaker 02

  Yeah, I mean, this one, I think you see everywhere, which is there's people out there who see linear progressions and just get excited. If I apply more effort to this input, then I know I'm going to get more output than anyone else. So they'll look at like a competitive situation or something and get really excited about it because they know that as long as they can work harder than everyone else, they're going to have, it's like a Very sure thing that they're going to have a higher level of success. Whereas the clever person or the wits person is all about waiting around and waiting for the non-competitive thing, seeing the non-obvious thing and then striking. And they're very different.

• 57:12Speaker 02

  And I think you can see this all the time. And I think generally, most investors are more on the clever side of things. And most operators are more on the kind of the rep side of things, but obviously they cross over. And at the top, people are generally both. But yeah, I would describe it as, does the idea of having to outwork everyone excite you or fill you with dread? And I think for half the people, they love that. Arnold Schwarzenegger is a classic example of a guy who's just thrilled to be able to outwork people. And then for the other half, it's terrifying because it's just going to require so much effort. And there's not a clear edge or whatever. And another way that I like to ask this in interview questions is, you're standing outside of a really popular nightclub in whatever global city, and how do you get in?

• 57:53Speaker 02

  There's a wide variety of ways. You can bribe the bouncer. You can make friends with a bunch of girls in line. You can sneak in the side door. I would, the day before, I would find a mutual friend with the owner, the investor of the club and meet them for coffee. That's how I would do it because that's what's most comfortable to me. But I think it's a really clean way of understanding how people think about problems and also what they're averse to and what they're really attracted to in terms of challenges. What other favorite interview questions do you have that are somewhat universal? My absolute favorite interview question is just asking people what they want over and over and over until they break down. It's probably the most reliable way to actually figure out, is this person, if you're truly trying to put the right person in the right job, and it's different if you're trying to sell them or whatever,

• 58:37Speaker 02

  but if you're just trying to get a really good fit, I would be suspicious of anyone who isn't vice-driven at some level. And so you want to find out, like, what are you after? Are you after money? It's amazing how many investors you'll interview who will not admit to being money-driven, which like clearly they are. Unless you're the investor who really just likes the puzzle solving, you could also be a professional Sudoku player or something, and you just happen to think that options trading is more interesting or something. Those do exist. But even then, if you really just puzzles, you should probably just be in the academy. I always find it deeply suspicious when you're interviewing, like, you know, especially for someone who's doing like qualitative business analysis or something, and you ask them, what do you like? Why do you want to do this? Over and over and over.

• 59:17Speaker 02

  And at some point, they don't just say, well, I want to make a lot of money. Well, if you're a good investor, you're going to make a lot of money. So. What's going on there? And I think that's a hugely powerful question. And most people don't even know the answer. So it can be this fun co-discovery thing that you can go on.

• 59:32Patrick O'Shaughnessy?

  Do you think that the best investors ever get post-money as a motivation pretty fast, though? Like, pretty clear that Buffets of the world are not. Maybe to some degree, they view money as the scoreboard or returns as the scoreboard on their puzzle-solving ability or something. But that seems like maybe the not-healthiest motivation over the long term as you think about evaluating an investor, which I know you've done a bunch. How do you parse that?

• 59:55Speaker 02

  No, I think they like the money. Because I think the ones who don't like the money disappear and ride off into the sunset. And there's lots of those guys, but you don't hear about them because they disappear. I think Buffett loves the money. He doesn't love spending it. Just think about Buffett famously never sold a share at Berkshire. That's insane. Everyone's like, oh, I want to be the next Buffett. And it's like, okay, so you want to make a lot of money, most of which will come in your extreme old age, and then you never want to spend any of it. That's crazy. Buffett has clearly found the right thing for him that he loves, but that's really unique and strange. I think everyone's pretty money motivated, whether it's as a score or as a means to an end. I think the ones who are means to an end will just quit.

• 1:00:36Patrick O'Shaughnessy?

  Another binary that is totally off the wall is this notion of guy versus boy. What you mean by this dichotomy? Not so much a binary as two different paths?

• 1:00:45Speaker 02

  I realized a while ago that a lot of my friends that had really breakout career trajectories, they basically became the boy for like a billionaire. I am making a big Roman allusion here, which is you're not really, I guess, nominally a chief of staff, but generally it's more than that. It's some deep mentor thing. The way it usually goes is you find your way into one of these guys' networks, and they basically do make a deal with you where it's like, you just be my assistant for two years, and then you have all my resources and backing. And it's actually very similar to knights in feudalism or something like that. It's kind of who's banner are you going to fly under? I noticed a strange phenomenon where like a lot of my friends who couldn't afford business class plane tickets had flown private a bunch

• 1:01:28Speaker 02

  because they're in the court of the king and they just move around in this convoy. And I think it's like a really great career path. It might be like the only good job worth taking out of college if you want to be entrepreneurial. That's the boy. The boy is weird because on one hand, he is this lowly person, but on the other hand, he's held in a high regard in the organization. Whereas the guy, the billionaire, will also have a guy who is number two. And that's very different. Like, the number two is extremely important. But the number two, there's this weird dynamic where like, it's understood that the number two, that is his station in life. Maybe he's rich and makes a lot of money or whatever, but he is gonna be that number two forever. And the boy is this person that is,

• 1:02:13Speaker 02

  it's almost an admission from the billionaire or whatever saying like, maybe you can be like me. And so like, maybe you're the next me. And I just think it's an interesting dichotomy that also a lot of people confuse because I also see a lot of people, classic mistake is you want to be like someone, so you go work for them, which is classic mistake. And it's always wrong that you have to say, would this person at my age be working for someone else? And the answer is generally no, because one like sets you on this path to be an entrepreneur or whatever. And the other sets you on this path to be like a number two. And I don't think people think very clearly about that.

• 1:02:45Patrick O'Shaughnessy?

  Is it fair to distill these down to one is convexity and one is concavity or something? Not to get overly nerdy about it, but in terms of the payoff curve.

• 1:02:53Speaker 02

  Yeah, I think you're exactly right about that because there's way less stability in one too. And I've seen lots of boys flame out as well.

• 1:03:01Patrick O'Shaughnessy?

  That one doubles as quasi-career advice. There's another career advice one you have, getting away from the binaries now, which is stay off of the org chart. Is that different than be a boy?

• 1:03:11Speaker 02

  Yeah, so I've given this advice to a lot of people now and it's worked really well, so I'm pretty confident in it. This is only Machiavellian advice, which is if you want to like really succeed relentlessly at an organization, and this probably like applies to smaller, basically organizations where you're within arms' reach of the principal. You have to stay off the org chart. Whatever you do, stay off the org chart because there will always be a temptation of the principal to make you report to someone. And you cannot do that. And if you do get forced to report to someone, then you always want to report to two or more people. Because the thing is, you always want to be, the way that you can get ahead in these organizations, especially if, say, you're younger, you're under credentialed or whatever, relative to other people,

• 1:03:54Speaker 02

  is you want no one to really know what you're doing, but they all know that you're very favored by the principal. So you're this guy that is kept around. And everyone knows that the principal likes you, but no one really knows what you do. No one's entirely clear on who you work for and you gotta fight. It is the nature of any bureaucracy to try and-

• 1:04:13Patrick O'Shaughnessy?

  Suck you into the org chart.

• 1:04:14Speaker 02

  Suck you into the org chart, make you report to someone, do something like that. You really gotta fight, but that's the way in which you can get ahead. Because I think what people really failed to understand is that all that matters is whether the decision maker likes you in a company. Everything else is completely unrelated. And you can see this because people who do get work get fired and people that don't do good work but are liked, don't. So if you're looking to get ahead and curry favor in an organization, yes, stay off the org chart or report to multiple people. It's funny how often there'll be things, maybe you're outranked at the company, but you get invited on the principal's plane or you get invited to the birthday party or whatever. And all these things, you wanna be known as this untouchable person just through soft power.

• 1:04:59Speaker 02

  There's huge alpha in this because it's not at all how most people think about organizations. But it's a way that I've like pretty reliably seen like very young people rise very quickly at places.

• 1:05:09Patrick O'Shaughnessy?

  You said earlier that audience is underpriced or social graph or something is underpriced. Maybe just say more about what you mean there.

• 1:05:17Speaker 02

  Just having an audience is incredibly underpriced. I mean, you know this better than anyone. I'm always shocked by the serendipity of what happens online. And my friend David Prell has been beating me over the head on this for years and I should have listened to him earlier. I think the thing that I didn't really didn't understand is you don't need to have a very big audience. So quality and quantity really apply for audiences. And I cannot believe the people that you meet. I have this line, posting is the last great American meritocracy. The American dream lives in posting. And I think that's true. I really do. I think the last true and total meritocracy, you can post your way into any room in the world. If your takes are interesting and people think what you have to say is compelling,

• 1:06:02Speaker 02

  you can be an anonymous account. I mean, you've had anonymous accounts on the show before and you can just go anywhere and you really don't need anything other than a smartphone. And so I think it's- Underrated from a social mobility point of view. I think it's underrated from a commerce point of view. Social presence was a huge factor in building Tiny. And that became quite a big business. I think we're gonna see this interesting trend where like right now. Maybe the way you monetize an audience, you sell thirty percent of your audience a ten dollar t-shirt. I think now we're moving into a stage where maybe you sell five percent something for a hundred dollars. I don't see why it wouldn't move towards. An area where you just sell one person in your audience something for a hundred million dollars. And I think that could totally happen. And I think we'll kind of come to see that even in private equity and things.

• 1:06:47Speaker 02

  There will be a hundred million dollar plus deals that are just through social audiences. Because some business owner likes you and has heard you talk over and over. And will sell you their business in a way that allows you to make a ton of money. And then you don't have to sell anything to anyone else in the audience. The distribution is incredibly underrated. The serendipity of it, I think, is really underrated and still fairly unrecognized. And it's because the monetization is still very unsophisticated. Podcasts will not monetize off ad reads in the future. It's very much the celebrity holding a Coca-Cola from forty years ago. The way that it will happen and we're already seeing is that. Companies will have, in the same way that they'd have a technical co-founder, they'll have an audience co-founder.

• 1:07:32Speaker 02

  And all that person will do is organically sell that product or service to their audience over the long term in an authentic way. The company really has to be intertwined with the creator or the person with the audience. That's gonna be how people buy things. I mean, especially for commodity products, which most products are. Including most investing is a commodity, it's just selling money. And so in any situation where it's a commodity, you're gonna go with the person that you have a slight affinity for. And the way in which we build real affinity with people is long form content or repeated exposure through social. And so I think those things are super underrated. And it's still funny that it's still in the zone where like amongst the high status, it's still pretty low status.

• 1:08:18Speaker 02

  To have a Twitter account or a podcast or whatever. And I mean, it's even funny with you. The amount of prestige and notoriety that you get from the show, I think, would still really surprise people who probably have, deep in their brains somewhere, a negative view of podcasting and podcasters. And I'm always really excited by those disjoint where, like, it actually is getting you, it is the future. And that generally just means that you're like in the future on something. Everything will catch up to this, and it will become normal and high status, and everyone will do it. But right now, it's this weird disjoint thing where like, you get access to the best people in the world, and it provides real alpha and large opportunities, but people still think it's kind of weird that you're

• 1:08:59Speaker 02

  a podcaster. I know someone who has a very successful podcast who like, their spouse doesn't want to talk about the fact that they're a podcaster, even though they get paid a ton of money, they're incredibly influential and prestigious, and that's got to be a huge opportunity anytime you get some weird disconnect like that.

• 1:09:16Patrick O'Shaughnessy?

  What else is significantly underpriced, do you think, in the world today?

• 1:09:21Speaker 02

  Lots of things. Having money is underpriced. I've come to see this firsthand. I think people who say that money only solves a very specific set of problems or whatever, have just not been around people who can use money creatively to solve problems. Like, yes, of course, it doesn't really solve your like psychic or spiritual issues, but it can help a lot in ways that are very underrated. I think people are just really cagey about this, and so they don't really appreciate it. But it's astonishing. It's never direct. Being able to donate to people's foundations and then getting access to the smartest thinkers or going on marriage retreats or marriage counseling that's with the best person in

• 1:10:02Speaker 02

  the world. There's a lot of things available to those with money. And in America, especially, everything is for sale. I actually think it's one of the great merits of America, which is that if you have enough money, for the most part, you're welcome in. And that is in contrast to somewhere like Canada or England or whatever, where there's like old families and class and things that matter more. I think the fact that everything's for sale is pretty-

• 1:10:25Patrick O'Shaughnessy?

  America is coin operated.

• 1:10:27Speaker 02

  Super coin operated. And I think that's amazing, because at least you can do something about it. And then probably- The other thing is nice real estate, boats, all that kind of stuff. Again, human nature hasn't changed. It's like people who deny that advertising works. It's like, well, it obviously works on everyone. Otherwise, it wouldn't be this huge. So many people are like, ads don't work on me. It's like, well, yeah, of course they work. What are you talking about? Like, the next time you go buy a soft drink, like, try and explain to me how you choose one over the other. If someone brings me on their plane or like has me to their big house or whatever, that works. That totally works. And so those things become very useful. You can see very quickly how there's a shock and awe there that works really well.

• 1:11:09Speaker 02

  And how those seemingly exorbitant or gauche assets can become quite accretive quickly. I think that's totally real.

• 1:11:17Patrick O'Shaughnessy?

  What do you think is the most overpriced, probably a better term, right now?

• 1:11:21Speaker 02

  I don't know if it's the most overpriced, but venture capital always makes me scratch my head because I haven't seen any good explanation, or data for that matter, for why the amount of exceptional companies is going to increase. That are created per year is going to increase over time. And I would totally change my mind on this, but as far as I know, there isn't. And so if that's the case, then it's basically just this cage match to get into these few assets. If you're good at that, or you're willing or happy to play that game, then great. But I think that's not how most people look at it. And I don't know, it just seems like there is seemingly a finite amount of good companies.

• 1:12:02Speaker 02

  And so I'm very sympathetic to venture investors who really have a cynical understanding of it's all about just getting in these deals and it's not about investing or spotting things or whatever. It's just about selling your money for a little bit cheaper, a little bit better than the next guy to get into the handful of deals. And so I'm always puzzled about that. I think probably holding companies are about to get very overrated. It's very popular. When we started doing it at Tiny, everyone looked at us like we were so weird. Obviously Constellation was the big first one to do it. But it was still very low status and strange when we did it.

• 1:12:39Speaker 02

  And now I literally talk to two or three people a week who want to start profitable holding companies. I think it's the rolling fund of high rate era. Even very liquid founders want to buy these cash flowing assets. And I just think that's very strange because

• 1:13:00Speaker 02

  It doesn't really even scratch the itch of like a good investor. A good investor is after superior returns. There's something just very odd about indexing your own abilities of a holding company, about saying, oh, I'm just gonna accrue all these mediocre assets that'll like sum up to some cash flow amount. I just think that's strange. And also owning businesses is not that exciting. And again, the same problem there. There's a fixed amount. Constellation literally has all of them in one Excel spreadsheet. There's a fixed amount of these companies. And so the prices have gone up and it's just strange. So I'm always skeptical of these weird kids playing soccer swarming around these little weird pockets of alternative assets. Probably the stuff that's actually interesting is stuff that no one's talking about.

• 1:13:44Speaker 02

  Trading electricity futures or giving loans to charter schools, weird stuff like that. All of a sudden HVAC becomes really popular or airplane leasing got really popular for a while. People love the contrarian thing too. Peter Thiel has a great line about how the trade of the 2010s was just buying FAANG. If you wanted to be the best performing hedge fund manager in the world or whatever, you just hold FAANG and that's it. Something like an 8x or something like that over that period. But no one did that because it's boring and you don't get paid for that. And so people don't actually want best returns. They want to feel clever and do some like weird little thing that makes them feel interesting or different or something. But sometimes you just gotta do the obvious thing and just be really strong on it.

• 1:14:27Speaker 02

  You know, I always admire those managers who have been paid 2 and 20 for like 40 years to just own Berkshire. I kind of think that's awesome because it's- They were right. Yeah, they were right. And they're providing this service. The service that they're providing was the LP does not have the personal confidence to own Berkshire on their own. So they actually need to pay a huge premium for someone else to give them the confidence to own Berkshire. And it's just like a tax that they pay for not having the conviction to do it themselves. And I think that's great. That's solving problems for people. So God bless them.

• 1:14:57Patrick O'Shaughnessy?

  I think one of the legitimate criticisms of maybe podcasts or just posting in general is that it's very easy to grow an audience on the back of what is or feels like advice. It's very easy also to spend a lot of time optimizing, preparing, learning. It feels like a universal good, like, yeah, you can't have enough learning, you can't have enough preparation, can't have enough knowledge. But I think you make a good point in some of the conversations we've had that maybe that's the wrong way to approach some of these things. And so I'd love you to talk through that criticism of this cult of learning, so to speak.

• 1:15:33Speaker 02

  Well, first of all, on advice, I think the only honest thing that you can say about advice is there is no general advice. I think giving general advice is a complete charlatan move, is just terrible. When you give advice, you are just extrapolating some general rule from your own experiences, which, so you're asking, create some general rule about the world from your own life? That's kind of what you're asking with advice. That's a problem. Like, if anything, you should just ask people what they did and then maybe ask them to explain what they were thinking at the time, then you can do your own inference if you want. A second thing with advice is all advice cancels out. So you can find counterexamples to every single piece of advice. Someone's done something, someone's been very successful doing the opposite.

• 1:16:18Speaker 02

  So that's another knock against advice. And then the third problem with advice is that it's fundamentally unserious. So the only real sincere and serious advice asking is a very tactical and specific question. If someone reaches out to you and says, I don't know what the podcast example would be, but for an investment, it would be like, I have this company doing this transaction between these two states. I know you've done this before. What is the right way to think about tax planning here? That's like a useful advice question. Most advice questions, they're like, how do I become an investor or whatever? They're just fundamentally unserious questions that what you're asking for is give me something that I can go, oh, okay, that'll make me feel good for a second, then I can just go back to doing whatever I was doing. And that's all productivity advice.

• 1:17:02Speaker 02

  Like, there's a great little parable about a 12-year-old comes up to Mozart and asks him, how do I start writing symphonies? And Mozart goes, well, go to music college and work through it and study the greats. And then you can write a symphony. And the 12 year old goes, yeah, but you were writing symphonies when you were 12. And Mozart says, well, I didn't go around asking people how to write symphonies. And I think that's so profoundly true that really if you catch yourself asking these like, how do I start a company or something? You know, you're not serious. You're just procrastinating. You just want to consume information that feels productive or useful. Advice is just such a racket for that reason. And it's addictive. Don't get me wrong. I've read tons of self-help books. I've read lots of business books.

• 1:17:46Speaker 02

  I've consumed hundreds of hours of podcasts. It's a really compelling sham because it makes you feel productive and it does a classic shell game, which is it takes one thing that you can justify as feeling productive, but it's actually just entertainment. Coats entertainment in this educational or productive sense. And then, yeah, the preparation point is in the same vein. Like there's this really weird hyper fixation on routines and performance and things. And I think these are really weird things to think about in the abstract. And I think it's indicative of just a general, very low lack of conviction that we all have. So it's this idea of, I actually don't want to know what I want to do with my life or my day. So I'm going to optimize my performance abstractly.

• 1:18:29Speaker 02

  Maybe if I wake up at 5:00 AM and I do all this stuff, then I will set the stage to perform at my best for this mystical X that I'm going to figure out. It's useful. If you're like going full tilt at a business and you're like, how do I be less tired? Fine, then go learn about sleep optimizing or something. But it's really weird to like optimize your sleep first. And it's tragic because it feels like especially, I don't know, amongst my peers, there's this big tendency of everyone is sharpening their sword for the battle that's never going to come. Yeah, I'm going to improve my performance. I'm going to be ready to perform. When it comes, when it happens, I'm going to be ready. But the thing never comes.

• 1:19:10Speaker 02

  And so I just think it's this really nefarious way of deluding yourself and wasting your time. And I'm just as guilty of this as anyone. But I think you've just got to figure out what you like and do. Do it and then backfill specific problems.

• 1:19:24Patrick O'Shaughnessy?

  You said that you've done the million self-help books, I guess me too, because I'm just curious about all things and that. No one's more interested in anything than themselves, I guess, but there is one thing that you and I have discussed that you've taken away from one of those explorations that I think is incredibly powerful with just this notion of the one call that everyone needs to make. Can you describe what that is and how you discovered that idea and put it in practice?

• 1:19:47Speaker 02

  Yeah, I got this from doing the landmark form and the idea, which is on the theme of extremely simple, but very hard. Is that if you tell anyone there's one call they should make, everyone immediately knows what that call is. And people will go 40, 50 years without ever making it. And sometimes the call, five minutes, 10 minutes and everyone knows. If you're hearing this and if that thing that you immediately thought of and then like felt bad about feeling about it or like tried to push out of your head, that's the call is. And doing that has massive returns. I had to do it in the landmark form because it requires altered setting to be able to coach yourself to do it.

• 1:20:28Patrick O'Shaughnessy?

  There's this corollary question, which is what's not being said, which I think is actually quite productive in businesses too. If you just once a week or something sat down and were really honest with yourself about like, what am I not saying and to whom? And then just go say it. You talked earlier about the service you were providing being unclogging log jams or solving coordination problems. Do you think that that is like the single question that is most useful for doing that across the board?

• 1:20:57Speaker 02

  Yeah, but you have to be good at it. Think about it like a relationship. In abstract, it's always better to have the hard conversation, but if you execute the hard conversation poorly, it can make things worse. So yes, but you gotta have some finesse to being able to actually do that and then resolve something from it.

• 1:21:16Patrick O'Shaughnessy?

  You were saying earlier that maybe the software business model with the multi-year high net dollar retention or more than a hundred percent of dollar retention, like enterprise contracts, like the best asset to own in the world. And obviously the world has funded a lot of these things, but then on the other hand, I think you're quite skeptical that most of them should be venture funded or funded in the way that's become very popular. So how do you reconcile those two things? You have a fairly negative view of like venture funded, venture equity funded growth for software businesses or software businesses that aren't already profitable. So talk about having looked at God knows how many of these things over the last 10 years, the major things you've learned about the funding type and source and the quality of the business.

• 1:22:00Speaker 02

  Venture capital started to fund high capex businesses with very low probability of success that if they did succeed would have humongous outcomes. And your average software company does not hit any of those marks. And so I think if you're going to raise venture, you should really have a very good reason. There are clearly businesses out there that are perfectly designed for venture capital, but most people I think raise venture because of one of two reasons, at least initially. One is because they don't know what else to do and it's the default path for starting a business. The other is it's just easier.

• 1:22:41Speaker 02

  So most businesses, you could bootstrap the business by selling a customer and getting them to prepay. Basically every business you can do that in and even the best venture funded founders I know have done that. But that's hard and it's easy to go get a couple million bucks and then you get an office and you pay yourself a salary and it's just easier. And to be honest, I don't really have any problem with that. Raising a few million dollars, especially from non-institutional, I wouldn't even consider that venture funding. It's some kind of weird hybrid thing. But once you start going institutional, that's when you really can't backtrack. And that's when I think people make a lot of mistakes. I really admire the businesses that bootstrap for a long time and then do a mega round like Elasian or GitHub or something. I just think you should be very intentional about it.

• 1:23:26Speaker 02

  If you're like, you know, we've scaled this thing and we really have this burning need for $20 million and if we had $20 million, we could do this specific thing and it would really help our business. Great, you should raise venture. But most people don't have that. They're on the treadmill. Obviously their investors want to put more money into the company. And so I think that it's just become this weird default path when it's actually this Very niche product that serves a very specific form of business. I always find it funny that people don't abuse convertible notes or safes more. There's a classic example of this in the valley of one company that did actually do a convertible note. And then they just returned the money. And then the company went on to be a billion dollar business and the founder owned the whole thing.

• 1:24:11Speaker 02

  And he didn't do anything illegal. He made everyone really angry because he violated a huge taboo. But if I recall, he was a foreign guy and I think he didn't know or didn't care about the cultural norms. And he just read the contract to the letter and took it as a loan and gave the money back and never hit any of the conversion clauses. And got the business off the ground. And I'm surprised people don't do that more, honestly, because that's often what you need. If you do need venture at all, you need one or $2 million to get you a couple of years and then you're off to the races. But yeah, I think it's just one of these very default things. It's easy to do. You get prestige for it. Obviously you can talk about how much money you've raised as a proxy for success and all this stuff. But I also don't think founders really understand the cost of raising venture if you don't have to. It can really hurt you financially and lifestyle wise.

• 1:24:57Speaker 02

  And it's funny too, because really the companies that venture capitalists want to fund are also ones that should exclusively only take venture. Like the huge $10 billion outcomes are generally not ones that could have got off the ground without capital. And so I actually think the incentives are fairly aligned, but there's just a lot of capital deploy and people see it as a default path.

• 1:25:16Patrick O'Shaughnessy?

  You mentioned the word taboo there, not returning capital in the safe or something. Are there other taboos in business or investing that you think are interesting?

• 1:25:25Speaker 02

  Running really high margin businesses are taboo. Because I think there's a sense that distributing capital signals something negative about the nature of your business. Or like makes out a lifestyle business or something. And so I think a lot of people really are reticent to take a lot of money out of their business. Even if it can't, sometimes businesses are growing and are great businesses, but they just don't need capital reinvestment. So I think that is one very strong feature of a holding company is there's always someone going, hey, that's not the best use of that capital, it should go over here. It's amazing, I've seen VC-backed founders go on to do bootstrap businesses or whatever, and the dividend check is amazing.

• 1:26:09Speaker 02

  It's this novel concept and it's cool. We've talked a lot about the difference in successful bootstrap founders versus successful venture founders. And there's something about having a lot of cash, though, that's really underrated.

• 1:26:21Patrick O'Shaughnessy?

  You said that the more general the advice, the more useless it tends to be. What about meeting your heroes, having mentors? Like this whole category of thing, I think is something you've thought a lot about. What have you learned, meeting, I think you have been lucky to meet some of your heroes? What has that process been like? How would you suggest that people think about mentorship heroes and so on? Like advice in disguise or something?

• 1:26:46Speaker 02

  Every living hero or mentor or person I've looked up to, I've met and in some cases, built a relationship with, which is crazy. But I would also say that it's more doable than you think. And it's interesting, this mentorship thing. I think mentorship is another thing that only people who don't have mentors, talk about mentorship as such. I've never once referred to someone as a mentor, but I have plenty of older people who give me great advice. But again, that advice is either I'm either asking very specific advice to someone. You can totally give advice to someone about a specific situation that you know well. I mean, that's very useful. And then in terms of meeting them, I think, I think in person is really important because you just pick up on all these things.

• 1:27:29Speaker 02

  Kanye West has a great quote, that everything is the same. And he is referring to music being the same as fashion. But I think that every decision someone makes about everything tells you basically just as much as any other decision. So I love to meet people. I love to meet people in their homes. I love to go and just see how they live and stuff. And I think you learn all kinds of soft nuanced things that are really useful and interesting. And Some business people that I really look up to, I've talked to for hours, but I've never once talked to you about business. But I think I've learned a ton about business because you just learn about the world. And so, yeah, I think exposure is really useful and important and exposing yourself to people.

• 1:28:13Speaker 02

  And their situations and stuff, you learn a ton from. You should always be asking your friends, what should I do? They gotta know you. It just can't be general.

• 1:28:21Patrick O'Shaughnessy?

  You think the Beatles are especially good role models?

• 1:28:24Speaker 02

  I just still think it's amazing. It was a five-year run, two albums a year, and that was it. Most artists today put out an album every two or three years, just as a phenomenon. Maybe the Beatles as musicians are not underrated, but as earthly phenomenon is very underrated. This idea that you could just in this five-year run, basically go on a perfect streak, permanently change things. And then that's that, these amazing little bursts. There's really something to be said about just doing something really well for a short period of time, accomplishing something. And then that's that, you've changed it. There's also lots to learn from the Beatles. They were all better together than they were individually.

• 1:29:08Speaker 02

  And there's just something about just what can happen when you get the right mixture of people doing the right thing. I also think it's really underrated that they basically changed genres every album. I think that also never happens. I think there's really a lot to be studied there, even though it's already been studied a ton. Just hanging it up on top, that's also hugely important. Way more people should do that. I think the Beatles would be significantly diminished if they were still touring.

• 1:29:34Patrick O'Shaughnessy?

  Yeah, it's like Seinfeld did when he was offered whatever insane contract.

• 1:29:38Speaker 02

  Yeah, and I think he cited the Beatles as his example, his role model there, yeah. There's an inhuman quality to walking away on top as well. It's probably very difficult to do. You know, I'm not sure that I will be able to do it if I get to that situation.

• 1:29:51Patrick O'Shaughnessy?

  One thing that's interesting is that most of the time you've spent professionally was operating out of a Canadian company, Canadian by background. What are the most notable differences between the business environment in Canada and the US that you've observed, having been in both?

• 1:30:05Speaker 02

  Yeah, so it's really interesting. I'm from Victoria, which is beneath the American border. It's next to Seattle and Canada is a very American place for the most part. And so I didn't actually think there was going to be that big of a difference. And I spent a lot of time in San Francisco and I've lived in New York for a long time. It is really shocking, though. There is a certain optimism amongst Americans that is totally unmatched. And I think the rest of the world, Canada being this weird split between Commonwealth and European thinking and then American thinking. I think American thinking does have this incredibly unbridled optimism that leads to just this generosity, growing the pie, abundance mindset that you just do not get anywhere else.

• 1:30:50Speaker 02

  My experience in Canada is very much that everyone feels like they got theirs and it was really hard to get and they're really scared of losing it. And I think that's probably also the case in Europe as well. I'm always pleased to see all the dumb frauds or stupid companies or whatever that happen in America because that's like the flip side of the American optimism. It's this blase, yeah, let's do it. It's gonna work out. Yeah, people are way more generous with equity.

• 1:31:14Patrick O'Shaughnessy?

  Lack of fraud would be a bad sign because it means you're not...

• 1:31:17Speaker 02

  Yeah, I mean, there's a classic cliche, and I'll give the PSA that I always give, if you're Canadian, raise money in America. Do not fall for the trap of raising from Canadians. And Canada's gotten better. It's not as good as I would have hoped, given the Shopify and the large outcomes that have been there. There's the old thing of in Canada, you raise money from a bunch of people who ask why you aren't profitable as a startup. And England is the same. And there's a great story about the founder of DeepMind talking about how no one in Europe would have funded DeepMind and he had to seek out Peter Thiel. I'm surprised by how much of a cultural difference there is. And I think Americans take it for granted. It's always very funny to hear Americans talk about how they're gonna lose immigrants to other places or whatever. It's not even close.

• 1:32:02Speaker 02

  There's nowhere that even comes close. And I think these are deep cultural things that if you've never been in another culture, even as Canada, which is by far the most similar country, it's very hard to notice. But it is this real optimism of let's try it out.

• 1:32:16Patrick O'Shaughnessy?

  What have you learned from, and my sense is that you love investing and you're going to keep doing it. Are there other paths or people that you've learned from that you admire, whether it's someone you met, as you described earlier, or just models of the world that you think are good to have in your mind as you figure out what you want to do?

• 1:32:34Speaker 02

  For me, I'm always interested in the point of maximum leverage. I mean, what got me involved in investing was at the startup that I was at, worked hard on it for four plus years, and then the guy who put 25 grand in, in the first week, made more money than I did. You know, it was quite a lesson to learn as a 19-year-old. I was like, oh, okay, like, I guess it is capitalism, not laborism. I guess I get that now. And that was very interesting because I was like, okay, that's unintuitive to me. That is not how I imagined this would all work. And so I think you can just scale the leverage points like that infinitely. I'm very interested in these people. We've described it like the guy who finds the guy, who finds the guy. If you get tired of picking companies, you can pick a person to pick the companies.

• 1:33:19Speaker 02

  Call me a big Archimedes fan or something, but I find something very elegant about minimum effort for maximum return. And I think picking managers is really up there. It's its own art. It's kind of like pre-seed investing. It's kind of like stock picking. It's this weird mix. It's kind of a dark art. It reminds me of venture capital 15-plus years ago, where there's a very small group of people, the market rates are terrible. It's this very obscure arcane thing. It's fairly unoriginal. It's just like venture capital. You spin out of a huge hedge fund as a wealthy PM when you're in your 40s or 50s, and then you get funded. And venture capital used to be like, you know, a suit and a tie business plan, spinning out of Fairchild or wherever.

• 1:34:04Speaker 02

  And I think there's a lot of interesting stuff to be done there, and it's a very fun challenge. And I think equally is rewarding as being a pre-seed investor, or maybe more, because I think the capacity, I always think like one way of looking at ventures, whether you're counterfactually useful. Would the company exist if it weren't for you? And I think generally the answer is no. But I think there's more opportunity for the counterfactual to be different in manager selection, because it's such an esoteric dark art. Also, just anything that's an esoteric dark art, I'm drawn to.

• 1:34:38Patrick O'Shaughnessy?

  What views do you have that you think would make the most people scratch their head or even get angry?

• 1:34:44Speaker 02

  I think that there's a lot of alpha in looking at things that society says doesn't matter. And it's not to say that these things are actually that important. In fact, they might not even be that important. But because they're so doggedly looked at, as you cannot look at this, it's not important, I think there's alpha there. I'd encourage you, the next time you're at a dinner, ask who there is firstborn amongst their siblings. If you want to look up US presidents in eye color relative to the general population, it's not what you would think. Height matters a lot. There's all these things about people. Theodore Dornow has this great line in one of the intros to his books where he says,

• 1:35:28Speaker 02

  "Every sentence in his writing is equidistant from the point. Every sentence is just as important." To the point about how every choice someone makes is reflective of their life philosophy, everything about someone tells you something, even these inherited attributes. And so I think the fact that it's basically you have to stick your head in the sand about it now means that there's alpha there. Do I think it's incredibly important and make or break? Obviously not. I mean, any population difference is not applicable to any one individual, but I do think these things are interesting. To pay attention to that thing, I think, can tell you all sorts of things and allows you to get a better sense of someone. You just have to be really open-minded, because where you start to get in trouble is where you look at any of it as good or bad.

• 1:36:13Speaker 02

  You want to keep your ethical judgments really limited, and most things you just look at as truly neutral. And I think that allows you to be far more open to looking at these odd signs, so you can notice that everyone's the firstborn child and not immediately jump to firstborn child or better or something. It's just something that you notice, the way that you notice a flower or a tree or something.

• 1:36:34Patrick O'Shaughnessy?

  What eye color is more popular or dominant?

• 1:36:36Speaker 02

  Blue is hugely overrepresented in US presidents.

• 1:36:39Patrick O'Shaughnessy?

  What is resentment as the core basis for long partnerships?

• 1:36:43Speaker 02

  This is something that I learned from Kristin and Andrew, who have been in business together 15 years, have a very successful partnership. And the thing that they attribute it to principally is never allowing any form of resentment to creep in against the other person. And I think it's just profoundly right. It can be the smallest thing. Never covering an expense for the other person or accepting gifts or anything. I think any little thing that can get into a relationship where, hey, I did this for you. I mean, you didn't do this for me. I think that really starts to erode things. And so as I've been thinking about what to do next, I've been spending a lot of time talking with people about partnering on things. And I think what's most important to me

• 1:37:26Speaker 02

  is really going into something with no resentment, which doesn't mean things have to be like equal or whatever. It's just, there's really got to be no ill will. And I think this is important in deals, too. You don't want to pull one over on the other person at all. You want everything to be really upfront because that little resentment, I think it festers and grows. And I think people don't really think about that. I think people will ink a lot of deals, especially with co-founders or whatever, where they kind of agree to it and it works good enough, but they both don't feel 100% perfect about it. And it's because they're shying away from a very uncomfortable conversation, which is totally natural. Everyone does that. But I think that's a real death knell. As part of like the last six months,

• 1:38:09Speaker 02

  I've just talked to tons of co-founders separately and asked them about one another. And one in 10 are like, yeah, he's the best. Couldn't have done it without him. No regrets. But all the others, the most common answer is, gave him way too much equity. It was important in the beginning, but now he doesn't do anything. And they'll say that about one another. And it's amazing how much there's resentment between them, especially around equity or whatever. And I think that's amazing. I think it's a Paul Graham thing, but the suicide versus homicide for why startups die is very real. And we've certainly been on the other side of resolving co-founder conflicts and buying co-founders out. And it's very common that two co-founders will come to an investor and be like, we want to get rid of the third person. And that can be very expensive.

• 1:38:54Speaker 02

  There are good deals to do, but they can be very expensive to their co-founders. And those are probably all just hard conversations that they've been avoiding or some original founding sin that they didn't really get out of the way.

• 1:39:04Patrick O'Shaughnessy?

  Jeremy, this has been so much fun, so many different ideas and places that we took the conversation. I really appreciate your time. I think you know my traditional closing question. What's the kindest thing that anyone's ever done for you?

• 1:39:15Speaker 02

  Been very fortunate. A ton of people have taken unreasonable bets on me at a very young age with very little experience. So it's hard to pick one, but the one that comes to mind is I had a teacher in high school named Paul who taught me history and philosophy. When I graduated, he gave me a book. He gave me this book called On Liberty by John Stuart Mill. It had a note written in it and he basically said, "This book is going to be very important for you and I really hope you take it to heart." In high school, I was working at the startup full-time, but I was also very interested in philosophy and the academy and writing and literature and all this stuff. And I couldn't really figure out why and I had to like read On Liberty a bunch. And I think

• 1:39:56Speaker 02

  what he was getting at was that a couple of chapters in there where Mill basically argues that the reason classical liberalism is so important is because you need to just have people doing weird things and just being themselves. And that's how progress is made. And you actually need to set that up structurally such that it's allowed and a society can tolerate having a lot of uncorrelated weird people around, which is actually really hard to do. Like it's hard to have social cohesion when you have weirdos running around. And I think that what he was saying was just that it's really important. I can see the struggle in you between business and the arts, basically. And if you're going to do

• 1:40:38Speaker 02

  business, don't get lost in chasing money or status or vanity or whatever. And do it for intellectual or inherently satisfying reasons. Don't forget about the other stuff. Society is going to be better off if you do everything that interests you. And even if it means you're a worse investor, but you're like a more interesting, unique person, not only will that be better for you, it's also necessary for society. And I take that to heart a lot because I think it's easy to just be like this pre-assigned thing and be good at it and that'll be good. But no, actually, we need people who are just one of one, doing weird stuff. That's what moves us forward.

• 1:41:18Patrick O'Shaughnessy?

  I could have used that book after high school. Great closing message. Thanks again so much for your time.

• 1:41:24Patrick O'Shaughnessy?

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