David Sacks - How to Operate a SaaS Startup - [Invest Like the Best, EP. 234]

My guest today is David Sacks, General Partner at Craft Ventures and founding COO of PayPal. During our conversation, we explore what differentiates Enterprise SaaS from DTC subscriptions, what makes for a magical product launch event, and what key growth metrics David uses to measure success. David has written extensively on his idea of operating cadence, and we explore how that applies to the various functions within an organization. As time goes on, I am more and more impressed at the talent that existed within the original PayPal mafia, and I couldn’t help but ask David to highlight the superpowers for a few of his early partners. This was an incredibly informative conversation with fun threads throughout. Please enjoy my conversation with David Sacks. For the full show notes, transcript, and links to the best content to learn more, check out the episode page here. ------ This episode is brought to you by Canalyst. Canalyst is the leading destination for public company data and analysis. If you've been scrambling to keep up with the deluge of IPOs and SPACs these days, Canalyst has models on Robinhood, Marqeta, Grab, and everything in between. Learn more and try Canalyst for yourself at canalyst.com/patrick. ------ This episode is brought to you by Eight Sleep. Eight Sleep's new Pod Pro Cover is the easiest and fastest way to sleep at your perfect temperature. Simply add the Pod Pro Cover to your current mattress and start sleeping as cool as 55°F or as hot as 110°F. To embrace the future of sleep and get $150 off your new mattress go to eightsleep.com/patrick or use code "Patrick". ------ Invest Like the Best is a property of Colossus, Inc. For more episodes of Invest Like the Best, visit joincolossus.com/episodes. Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here. Follow us on Twitter: @patrick_oshag | @JoinColossus Show Notes [00:03:30] - [First question] - Defining what it means when a company can explode [00:05:39] - What it would look like if a company didn’t have what it takes to explode [00:06:17] - Key factors that make for a strong product hook [00:08:51] - Whether or not there has been a divergence at the early stage of B2B investing compared to B2C [00:11:36] - Reasons why products that make people collaborate are always stronger [00:14:14] - Nuances between team subscriptions and team product use [00:15:37] - Describing the burn multiple metric and how it can be applied to companies [00:18:18] - The gross margin problem and issues for businesses in this area writ large [00:22:34] - Common practices amongst sales programs that have and haven’t worked [00:24:22] - What about new founders makes him most excited [00:25:58] - Explaining cadence and why he groups product and marketing as one bucket and sales and finance as another [00:30:44] - The anatomy of a great product launch [00:32:17] - Ways in which external dependencies can be landmines for growing companies [00:34:06] - Whether or not he’s willingness to invest in a business with regulatory variables [00:36:59] - What he’s seen in company culture that breaks a company as they scale [00:39:55] - Things a founder actually does in order to reign in and tame their culture [00:42:08] - Unique traits of founders who are both investors and operators [00:44:12] - Peter Thiel’s superpower [00:44:57] - Max Levchin’s superpower [00:45:38] - Elon Musk’s superpower [00:46:07] - Roelof Botha’s superpower [00:47:15] - Reid Hoffman’s superpower [00:47:43] - Keith Rabois’ superpower [00:48:41] - What zones of change in the world have his attention writ large [00:51:43] - Why teams want to be pushed and how we can apply that to business [00:55:25] - 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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• 0:43Patrick O'Shaughnessy?

  the founder and CEO last year to pick his brain about SaaS businesses. Founded by a former buy-side analyst who encountered friction in sourcing, building and updating models, Canalist is now used by over 300 institutions, including the largest money managers in North America and by a number of guests on the show. With detailed company-specific models on virtually every investable public equity, Canalist clients are able to react more quickly. If you've been scrambling to keep up with the deluge of IPOs and SPACs these days, Canalist has models on Robinhood, Marketeta, Grab and everything in between. Their pre-IPO models are built as soon as the S1 hits and include all segments, KPIs and non-GAAP figures. If you're a professional investor and haven't talked to Canalist recently, you should give them a shout.

• 1:27Patrick O'Shaughnessy?

  Learn more and try Canalist for yourself at canalyst.com/patrick. That's C-A-N-A-L-Y-S-T.com/patrick. If you're curious to hear more about Canalist, stay tuned at the end of the episode when I talk to Canalist customer Ryan Cope from American Century Investments to discuss Canalist in more detail. This episode of Invest Like the Best is sponsored by Eight Sleep. Eight Sleep's new Pod Pro cover is the easiest and fastest way to sleep at your perfect temperature. It pairs dynamic cooling and heating with biometric tracking to offer the most advanced solution on the market. Simply add the Pod Pro cover to your current mattress and start sleeping as cool as 55 degrees or as hot as 110 degrees.

• 2:08Patrick O'Shaughnessy?

  It also splits your bed in half so your partner can choose a totally different temperature. I was so impressed after using Eight Sleep that I became an investor. To embrace the future of sleep and get $150 off your new mattress, go to eightsleep.com/patrick or use the code PATRICK.

• 2:28Patrick 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.

• 2:54Speaker 01

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

• 3:19Patrick O'Shaughnessy?

  My guest today is David Sacks, General Partner at Kraft Ventures and founding COO of PayPal. During our conversation, we explore what differentiates enterprise SaaS from DTC subscriptions, what makes for a magical product launch event, and what key growth metrics David uses to measure success. David has written extensively on his idea of operating cadence, and we explore how that applies to various functions within an organization. As time goes on, I am more and more impressed at the talent that existed within the original PayPal mafia, and I couldn't help but ask David to highlight the superpowers for a few of his early partners. This was an incredibly informative conversation with fun threads throughout. Please enjoy my conversation with David Sacks.

• 4:02Patrick O'Shaughnessy?

  So David, I figured we'd start with a very fun, short list of investment criteria that you've shared publicly before and dive into the detail behind some of these. My favorite of these is can it explode? I just like this idea of looking at a company and going through this exercise of deciding whether or not it can explode. I'd love you to explain for us what that means to you, what it looks like when the answer to that question is yes.

• 4:23Speaker 02

  So it's a little different depending on whether it's consumer or enterprise. And I've had some experience with both PayPal was a consumer play that was very explosive. And then I did Yammer, which was enterprise and by enterprise standards was fairly explosive. But that means two orders of magnitude less. For consumer, you almost have to be explosive because you basically have to go viral as a consumer product. Because the typical consumer, at least for any kind of social product, they don't pay or they don't pay very much. Consumer products tend to have high churn. As a result, you can't spend a lot to acquire that customer. So the only way to build like a very large customer base is to somehow go viral.

• 5:07Speaker 02

  I mean, that by and large has been true with consumer products is that the big consumer companies didn't really spend any real amount of money on customer acquisition. They figured out a way to do it just like organically. Enterprise is a little different or B two B SaaS because for a functional SaaS company, you'll have more expansion than churn. The customers, those sort of revenue, the customers willing to pay, sometimes they're willing to pay a lot. And so that those revenue cohorts be around forever. And as a result of that, you can actually spend money on acquisition and that's what makes the sales team pencil. And so in the enterprise context, the explosiveness is more around lead gen. Do you have a way to sustainably create leads?

• 5:49Speaker 02

  And if you can use consumer tactics like virality to create sort of a rapidly growing top of funnel, that's a superpower for SaaS companies. So I tried to invest in those kinds of companies. That was the thesis that we developed with Yammer was to apply consumer growth tactics to an enterprise product. And I still try to invest in those types of companies today.

• 6:11Patrick O'Shaughnessy?

  Are there things that you see often either in consumer or enterprise that are clear no's? Because it's clear they can't explode, kind of the negative version of the question?

• 6:20Speaker 02

  Yeah, I mean, so we have sort of minimum growth thresholds that we want to see to invest in a SaaS company. Below a million dollars of ARR, we really want to see about 15 to 20% month-over-month growth. Between, say, one and five million of ARR, we want to see a company that's at least tripling year-over-year. And then maybe above five million of ARR, you could relax it a little bit, but certainly not below doubling every year. So yeah, we kind of have those like minimum growth hurdles.

• 6:49Patrick O'Shaughnessy?

  So obviously, in any product, you've talked about this notion of a product hook, like some very simple elemental thing, which I think will then drive that potential explosion or virality. What have you learned about what makes for a good product hook?

• 7:01Speaker 02

  Again, this is something I learned at PayPal. It's very important for consumer products that you understand exactly what is the single transaction or user interface, that atomic unit of the product. So with PayPal, it was putting in someone's email address and a dollar amount, and then you could attach a credit card to it and just send money. That was sort of the product hook. It has to be something that consumers are willing to engage in over and over again. So with Uber, it was putting a pin on a map to summon, you know, a town car to pick you up and then take you to your destination. Google probably has the ultimate product hook, which is just a search field. You put in your search query, hit enter, maybe I feel lucky, whatever, it's two choices. And that's an amazing product hook. And so with consumer products, you have to figure out what is the repeat transaction going to

• 7:46Speaker 02

  be? And how do you translate that into a very simple intuitive interface? Because consumers generally won't stick around for a very complex transaction. People make the mistake of trying to get users to engage in a complicated behavior before they've gotten them to engage in a simple one. You can graduate users up to complexity over time, but only if you get them hooked on some aspect of the product. Twitter had this beautiful product hook, which is just, what are you doing? And you post your tweet. The product actually hasn't gotten that much more complicated, but now they can layer on new things on top of it. We took that same product hook and adapted it for Yammer. Which was, you know, what are you working on?

• 8:28Speaker 02

  And that was just that initial way to get people to engage with the product, start creating content, and then we could build from there. Now, one difference between SaaS and consumer is that SaaS customers have a much greater willingness and need to kind of engage with a more comprehensive product. They're willing to put up with more complexity, and in fact, they often demand it. And I call this the race to completeness. I still think it's very useful to have a product hook in mind, like the simple transaction or what's the central user interface. Very often, it's a dashboard, you know, in the context of a SaaS company. Once you kind of have that singular product hook, you're in a race to complete the product

• 9:10Speaker 02

  offering, to beat competitors, to create something that's where the value proposition is comprehensive enough that people are actually willing to pay for it. Again, a little bit of a difference between consumer and enterprise.

• 9:22Patrick O'Shaughnessy?

  Seems like always in consumer, there's this kind of element of magic and design that matters ultimately. And that in SaaS, B2B SaaS, the playbook for how things work, how you run a sales team, how you do anything has really matured. Does it feel to you like there's been a divergence? Or B2B SaaS almost feels more like private equity now, even at the early stage, than consumer investing does?

• 9:45Speaker 02

  Well, it's interesting. I mean, the thesis that I've been investing in, and really that I was a founder with Diamaran, was really convergence between consumer and enterprise. Nobody really remembers this, but the cloud started happening, I guess Salesforce got started in 1999. It was, I think, the same year that PayPal did. And of course, they were trying to get people to move their software to the cloud. That was just getting started in the early 2000s. Even by 2008, when I founded Yammer, there was still incredible distrust of the cloud. The most common objection we got to our product was, it looks great, can you burn on a disk? We want to run it on our own servers on premise. We said, no, sorry, we're a multi-selling cloud product.

• 10:25Speaker 02

  So you really had two very different worlds between consumer and enterprise in the early to mid 2000s. And the thesis of Yammer was that actually we could bridge that gap. In other words, once you've moved software to the cloud, that's sort of the first step. Why couldn't you use all the consumer growth tactics that have been figured out for cloud products on the consumer side of the house? Why couldn't you make enterprise software go viral inside companies? Why couldn't you just go straight to end users, kind of go over the heads of IT and go directly, appeal to sort of this consumerization of the enterprise is what it got named? And so it used to be that enterprise products, those companies looked very, very different than consumer companies.

• 11:06Speaker 02

  You know, they were top down, they were usually led by a sales leader, they had to go through the CIO. It was a very different culture, you know, it was like much more of like an Oracle type of culture, like a Facebook culture. In any event, well, I think we've seen over the last dozen years or so is a convergence where now that all software is being delivered through the cloud, you're seeing a convergence of playbooks from consumer and enterprise. Now, that being said, I guess one thing I would say about SaaS that is a little different than consumer is just how benchmarked it is. I think this is kind of getting to your point. Everyone's looking at the same metrics. It's like, what's your MRR, your ARR? What's the month-over-month growth rate? What's your churn? What's your expansion? What's your PAC?

• 11:48Speaker 02

  And so it's incredibly benchmarked and then we know how to compare those metrics to industry averages and tell who's tracking a buck. So consumer is much more of a binary thing of like you either have an explosive breakout or you don't. You kind of know it when you see it, like, oh, that's working. But SaaS is more tracked.

• 12:07Patrick O'Shaughnessy?

  If you think about the notion of, that you've written about recently, of individuals versus teams and how that figures into successful products, not just at getting customers, but at keeping them. I found this fascinating that in the data, I think what you saw, even sometimes within the same company, that the team version or the version of the product that caused two people to interact or collaborate was just a drastically better business. Can you talk about all the reasons why that's true and kind of how you came to that conclusion?

• 12:35Speaker 02

  I came to this conclusion because I've looked at the economics of both B2C and B2B subscription businesses. So we're talking about software products that try to get somebody to subscribe. And in one case, it's an individual and another, it's typically a team or a company. And what you see with individual products are just very high churn rates. I mean, usually 5% plus per month churn. So what that means is by the end of the year, you're lucky if you still have half your customer base. It's very hard to get them to upgrade. You don't really see expansion in those accounts because it's single player mode. Whereas with the B2B subscriptions, they keep adding coworkers and you can sell more seats.

• 13:14Speaker 02

  So what you see on the B2B, the team product is that not only do you have much less churn, typically call it 2%, 1% to 2% logo churn a month. You actually have net expansion because you're getting more seats sold into the companies that stay with you than the seats that you lose from the logos that churn. So what that means is the subscriber base just keeps compounding.

• 13:37Patrick O'Shaughnessy?

  Do you have a favorite example recently of this dynamic playing out inside of a company? In terms of just like the expansion and the team dynamics?

• 13:45Speaker 02

  The one that I wrote the Substack post about was OpenPhone, where they started off with more of an individual experience and then they added the team experience. And a lot of products start this way. It's a lot easier for founders to conceive of and build like a single player mode very often before a multiplayer mode. Sometimes you'll see it go the other way, but usually a single player first and you do multiplayer. And they have a good individual product. It's still a business product. It basically is putting a business phone in an app on your phone. So you don't have to get a second phone at work. Compared to industry benchmarks, the individual product retains very well, but it's still a net churning product. Again, if you have, say, 50% revenue churn over the course of a year,

• 14:29Speaker 02

  you're effectively rebuilding your company from scratch every two years. It's very hard to build a very valuable company that way. Whereas once they launched the team product, you could see it not only was it growing faster, instead of churning 50% a year, it's expanding 100% a year. So that's a fundamentally better business.

• 14:46Patrick O'Shaughnessy?

  Is there any nuance between what I'll call a team, which is like you can buy multiple licenses or buy it as a team, and companies where fundamentally the product is about team members interacting? Is it the latter that really drives the best outcomes in this kind of new paradigm that you've described?

• 15:02Speaker 02

  You have to have a reason for team members to want to use a product. So you need something that drives the seed expansion. And so those use cases typically involve some kind of collaboration within the product. That's the multiplayer mode. But the important thing is just that you have seed expansion. That means the accounts can keep growing because nobody, I mean, no SaaS company can avoid churn. You will always have some amount of logo churn. What that means is that your revenue base will be deteriorating year over year unless you can get more expansion out of the accounts to stay with you. And that ability to get expansion is what makes B2B SaaS businesses so magical compared to B2C SaaS businesses.

• 15:44Speaker 02

  And so what I always encourage companies to do when they have more of an individual subscription product is figure out how do you get the team product as quickly as possible? And sometimes it's easier said than done because it's not exactly clear from a product standpoint what the multiplayer experience is supposed to be. But from a business standpoint, there's no question that the economics product are simply better than an individual product.

• 16:08Patrick O'Shaughnessy?

  As you go down the list of your investing criteria, one thing you get to quickly is frictions to scaling. You've also written about this concept of blitz failing. Everyone talks about blitz scaling, but you talk about blitz failing more specifically. There's so much that we can cover in this area. And I think really where a lot of your writing shines is just like how the system of a business actually operates and works. I'd love to introduce some of your key concepts and then kind of mash them together. The first is burn multiple. I just think I introduce it first because it's sort of this high level metric underneath which there are several other things that we can talk about. What is burn multiple? How do you define it? How do you apply it to companies?

• 16:41Speaker 02

  The burn multiple is a metric I came up with. Just to define it, it's simply your net burn over your net new ARR in a given period of time. And that period could be a quarter, it could be a year. But let's say like in Q1, the company burned Five million dollars, it added two and a half million dollars of net new ARR. That would be a burn multiple of two. If you were to say burn one million dollars in a given period and add one million of net new ARR, then you have a burn multiple of one. So what you're doing is you're looking at your burn as a unit of net new ARR. You're basically asking, how much burn does it take to generate one new unit of ARR?

• 17:26Speaker 02

  Whatever that unit is. So the reason why we came up with it, I mean, it's a measure of capital efficiency. And there's a couple of other metrics that are similar. Bestomer has one called the efficiency score, which is basically just, this is the flip side. It's net new ARR over net burn. There's one called the hype ratio, which is your total capital raised divided by ARR. The reason why I like burn multiple is it just puts burn in the numerator. So you know that the higher your burn relative to growth, the higher your burn multiple is going to be. And higher burn multiples are bad. Where you want to be is I'd say under two. So you're burning $2 for every incremental dollar of new ARR. I think if you can do that or be under, you're in good shape.

• 18:10Speaker 02

  And the reason why we, we came with this metric is we want to make sure people aren't cheating on growth. So like growth is still the most important thing. Like I mentioned, VCs won't invest in your company unless you hit certain thresholds. But the way a lot of entrepreneurs who are struggling can interpret that is, oh, I need to grow at all costs. You need some check on that. If they know that in order to raise a series A, for example, they need to generate one million of ARR. Well, there's a big difference between generating that one million of ARR by spending one million, five million, 10 million or 20 million, right? And so it's there to make sure, so you know how impressive the growth really is.

• 18:49Patrick O'Shaughnessy?

  I'm sure that obviously there's a lot of nuance here. There's no one size fits all. And as a company matures, that ratio should probably go down. Early product development, it's probably going to be higher, et cetera. But what I do like about it is it's sort of like a can't hide metric. You can't hide from this metric at all if you're a founder because it's very high level, non-controversial numbers. You then go into some of the things that might cause a bad burn multiple. And let's just assume it's an established company. So there's a product that people are using and like, and there's a sales force or something. The first is gross margin. So you've written a lot about gross margin. I'm curious kind of like what the arc of your interest in this topic has been over time. But talk us through the gross margin problem and just kind of what you see in gross margin as issues more generally speaking for companies that are struggling.

• 19:31Speaker 02

  In general, SaaS businesses should be just about perfect gross margin businesses because they are pure software businesses. The insight that Bill Gates had that made him the richest person in the world is that he could create mass market software if he actually cut the price and sold more copies. It would be very scalable because the first copy of the software is where all the investment happens, right? That's all the cost. Each incremental copy of the software is free. So he was the first one to sort of have this insight around the perfect gross margins of software. And that means you really want to have a mass market product. In any event, the software then moved to the cloud. And if anything, it made it even better because now the provisioning of new copies is new instances just happens through the internet.

• 20:16Speaker 02

  You don't even have to worry about shipping software. So these should be just about perfect gross margin businesses, 80, 90%. The main cost is usually just in hosting on AWS or something like that. And so when you see much lower gross margins, you have to ask why. And I think frequently it's because, there's a couple of things. One is it could be a physical world product or there's a physical world component to the product. And as soon as you're operating in the physical world, you're going to have real COGS, real costs of goods sold. It's going to force you to operate, to have some sort of supply chain and to have real operations. And that is just a whole other level of challenge for most entrepreneurs. I'm not necessarily against investing in companies that have a fiscal world

• 20:58Speaker 02

  component, but it definitely raises the difficulty bar. And the entrepreneur has to have the ability to manage complex fiscal world operations. It's just much tougher than just being a software entrepreneur. The other way you can see a gross margin problem is through mechanical Turk. And what that basically is, you hire people to perform work that the product is supposed to be doing. So like the customer just sees the product. They don't know that there's all these humans in the background doing the work. They may think it's all just software, but in practice, you've got a bunch of people in the back office pushing paper around. Now, why would you do this?

• 21:38Speaker 02

  Because let's say that there are connections to legacy providers, like insurance companies, something like that, and they don't have APIs. The customer thinks that they're filling out forms on your website and that gets transmitted. Let's say you're like an insurance broker or something, and they think that's being transmitted directly to the insurance companies, but you know they're not because the insurance companies don't yet have APIs. That's like one example, okay? Now, the argument for mechanical Turk, like why startups should do it, is I think what the founder would tell you is, well, look, we're just getting started. We haven't had a chance to write all the software yet. We will be able to automate this over time. And so it's very important that we provide a complete product experience. And if we have to sort of mechanical Turk it, that's fine.

• 22:23Speaker 02

  So that would be the argument for it. And then the argument against it would be, well, the problem is that once you develop a dependency on humans doing the work, it's actually very hard to change that. First of all, you're creating an internal constituency inside the company who doesn't want their jobs typically to get automated away. And it can create a culture of throwing bodies at the problem. I don't think there's like a right answer to this. It's just something that I think founders have to be very aware of. And I think as an investor, if you see a gross margin problem, you have to ask, why does the company have so many bodies? Because software companies are supposed to be about doing more with less, be able to scale things more elegantly. It's just a red flag to look out for.

• 23:05Patrick O'Shaughnessy?

  Another thing that can cause bad burn multiples is really inefficient sales teams. And one thing I see a lot is companies that have lots of growth, but it's just very expensive to finance the cost of sales. And salespeople that get very myopically focused on revenue without thinking about the underlying economics of the business. What have you seen here? What have you learned here? Like, what's common amongst sales programs that have gone off the rails? Or what's common amongst the absolute best ones that you've seen?

• 23:31Speaker 02

  What I would say is incentives work for better or for worse. And so the good part of the incentives is that if you put salespeople on a plan and you have a product that has some product market fit, very scalable. You scale up your sales team and you'll be able to scale up revenue. And that works quite well. I'd say the downside of it can be if you don't have a properly managed sales team, you have to be careful about like what they're actually selling. A salesperson's job is just to close ARR. You have to essentially have quality control on your sales reps. You have to make sure they're not promising things that your product doesn't deliver because you'll have a downstream churn problem. But by that point, the salesperson may not be involved. It'll be in CSM.

• 24:11Speaker 02

  And so what I've seen is that inexperienced sales manager thinks that their job is just to hit the number. Whereas an experienced sales manager understands that their job is to enforce good selling behavior without missing the number. They really want to make sure that sales reps are selling correctly. They're selling the right product. Even the deals that don't go anywhere, the prospects that say no, they're not like burning those prospects in a way that creates a bad reputation in the market. So there's a lot of subtleties that incentives don't quite capture. And you have to be aware of those things and compensate for them. Or you could have a sales team that goes off the rails.

• 24:54Patrick O'Shaughnessy?

  Obviously, before all that happens early on, especially if you're investing like at seed or something, you're really buying into a team. What about teams or founders get you most excited? Like, in what sorts of meetings do you find yourself like giddy or just excited to keep spending time with the founder?

• 25:10Speaker 02

  Well, for me, it always starts with a product demo. We have the saying that show us a product, not a PowerPoint. The same PowerPoint can describe many different products. I don't really know what the founder is talking about concretely until I see the product and what they're trying to do. So we always try to begin with a product tour. And then if I get excited about the product, then I'll get excited to learn more about the business. But it's like, I think Naval said this, that your product is your resume when you go see a VC. No one cares where you went to school or whatever. Just show us what you've built.

• 25:41Patrick O'Shaughnessy?

  Any original product demo that was most magical when you saw it, or just one that stands out as magical?

• 25:47Speaker 02

  Gosh, I mean, I would say that generally speaking, products that we've invested in have been pretty great, or we wouldn't have done it. I mean, so some of the SaaS companies that we invested in pretty early on, you know, we led the series A of ClickUp, phenomenal product, really deep, comprehensive project management collaboration suite. We led the series B for SourceGraph, which is universal code search. Those companies are both unicorns now. And then more recently, we led the series A of Scratchpad, which is a great product for sales reps and other people in revenue creating functions. OpenPhone was another bottom of SaaS product that we invested in. So, and there's other ones too, but that's sort of a common denominator for me.

• 26:29Patrick O'Shaughnessy?

  One of the names you've given to this kind of operating structure for companies is the cadence. In the cadence specifically, I was trying to think about the right entry point for describing what this is, because it kind of reminded me of Frank Slootman's Amp It Up idea, like, yeah, it's great. You have a good product. You need to run a business with extreme efficiency. And cycles and organization matter a lot. This visual in the post on this topic where you couple product and marketing and sales and finance as two separate buckets. That's kind of an interesting weird delineation. I'm just curious why those two groupings?

• 27:01Speaker 02

  So the cadence is an operating system for companies, specifically SaaS companies. And it becomes necessary once you get above, say, 50 employees, 50 or 100 employees, on your way to, say, 500 employees. It works pretty well. And the reason is, the very beginning of a startup, when you have a couple dozen people, everyone's in one room, either physically or virtually. And the founders are really running around telling everyone what to do and what to build. And there's not generally a lack of coordination or collaboration because the founders can just coordinate everything directly. By the time you get to about 50 employees, you're starting to see functional silos develop. You've got a product team, a sales team, engineering team, marketing team. And the people in those silos are generally just dealing with their team.

• 27:45Speaker 02

  They're really have a great sense of what's happening outside the company. And so it becomes necessary for the CEO to provide a lot more strategic alignment and to make sure everyone in the company is on the same page about what they're supposed to be doing, what they're supposed to be building. And so the cadences, my operating system, it's kind of the techniques that I developed first as CEO of PayPal and then as CEO of Yammer. And what I kind of realized is that there's actually two main cadences or rhythms that's happening in the company. One is around product development. Product and engineering, I find work best on a quarterly release calendar or a seasonal release calendar. Salesforce has been doing this for many years. I mean, the very beginning of the company, you just ship weekly.

• 28:29Speaker 02

  But as you get bigger, it becomes actually quite disruptive to your customers. If everything's changing on a weekly basis, you still do code releases. It's good code hygiene not to let things build up. But from a marketing standpoint, it's easier to package up these big releases into something that's communicated quarterly. And so then what you'll do is you'll build like a marketing event around this big quarterly release because most news in a company is sort of product created. So this creates the alignment between product and marketing is because product generates the news for marketing. So you're going to be organizing that whole side of the company, product, engineering, marketing around the big seasonal release.

• 29:15Speaker 02

  And I like to do launch events. You know, if you look at what like Benioff has done in Salesforce or Elon at Tesla, they get tremendous benefit out of focusing the world's attention on these lightning strike marketing events, these big launch events for their products. And then they sort of build around that. So that's one big axis of the company. Company. The other is the sales and finance system. So what I mean by that is, sales is also on a quarterly schedule. But what I find works best for sales teams is to put them on a quarterly plans. And that's just my process of elimination. Monthly plans are too disruptive. In other words, if their plan is changing every month, it doesn't create enough predictability for sales reps. And if your sales plans are annual, that doesn't give you enough opportunities to make adjustments, sort of mid course adjustments.

• 29:59Speaker 02

  So what I find is that the best sales plans to put your team on a quarterly. And then those quarters should map to your company's fiscal quarters so that at the end of each fiscal quarter, sales has a number and then you roll from there into a board meeting and you discuss whether you hit your numbers or not. And so you've kind of got sales and finance and board meetings all lined up on your fiscal quarters. And then you've got product, marketing, engineering lined up on hitting seasonal releases. And what I like to do is to stagger those things by half a quarter. So everyone's hair on not on fire at the same time. And imagine if the sales team is trying to hit their numbers right as you're doing the big launch event.

• 30:41Speaker 02

  It's too disruptive. And so what I like to do is schedule the big launch event in the middle of every quarter. And that's when product and marketing are hitting a deadline, they're sort of peaking. And then the sales team's going to be hitting their deadline at the end of the fiscal quarter. This is the cadence. If you just organize the company this way, everyone knows what they should be doing at any given point in time. And you could start to kind of march in lockstep as an army and create some predictability and routine in your company. As opposed to everyone just like running around all the time, doing things in an ad hoc way.

• 31:15Patrick O'Shaughnessy?

  Can you talk me through the anatomy of a great launch event? So like Elon and Jobs come to mind, theatrical releases, but there's a lot more than just that and a lot of different types. What is the anatomy of a great launch?

• 31:26Speaker 02

  What I would tell startups is they can start small. So you could start with like a one day event or even a two hour event. It used to be you had rent a hotel ballroom at the Palace Hotel in San Francisco or something like that. You would have maybe a keynote by the CEO and you would talk through the big product release. And maybe you have demos. You might do a customer panel where you have the customers talk through use cases. And there's nothing better than customer testimony. Because then prospects and other potential customers will hear your customers selling your product instead of you. And that will always have more credibility. You'll try to do a customer panel. You may have partnership announcements. You may have other news and you try to package it all up into one event.

• 32:10Speaker 02

  Instead of getting it out in dribs and drabs with a bunch of different press releases over the course of a quarter. So that's what I mean by a lightning strike is that you save up a bunch of announcements that by themselves wouldn't be that impressive. But when you combine them, it actually looks very impressive. And then you'll find it might be part of that. You might announce that you just raised whatever your $50 million Series B. You just launched new Android app. You have XYZ partner integrations. You have 50 new enterprise customers. You've hit some sort of ARR milestone, whatever it is you want to release. And you package it all up into one big lightning strike that can pierce the clutter.

• 32:48Patrick O'Shaughnessy?

  Other things that kill companies in blitzscaling that we haven't talked about, a couple more that are interesting. The first is external dependencies. What do you mean by this as like a landmine for companies that are growing fast?

• 33:00Speaker 02

  An external dependency would be if you have built your app on someone else's platform. The platform can always shut you down. And sometimes it'll be such an obvious extension of the platform that they introduce their own competitor. That's not a great place to be is when the underlying platform that you're on and you're dependent on to get distribution decides to compete with you. We experienced that a little bit with PayPal. PayPal went viral on eBay first. That was the first market that we really exploded in. And then eBay introduced its own payment solution and it was worrisome existential set of circumstances. We ultimately ended up selling the company to eBay because of that. And then eventually eBay spun out PayPal, now it's a $300 billion company.

• 33:43Speaker 02

  The reason why it spun out is because eBay became a small fraction of PayPal's total payments. But at the time, when we had first created the company, it was like 70%. So we were very worried about that external dependency. And so what you'll typically see is this dynamic where startups will race onto a new platform to get distribution. I mean, that's why you do it in the first place is because, oh, hey, if we launch our app on Facebook, we can go viral and get millions of users like Zynga did. But then, oh, wait, Facebook changed its rules. They've shut down our virality or they're planning on competing with us. So you then you race off the platform. So which Zynga did as well. So you'll typically see this dynamic of racing onto platforms to get bootstrapped and then racing off them

• 34:27Speaker 02

  to basically create a more secure position. But if you can't thread that needle and the platform cuts you off before you've been able to diversify onto other platforms, obviously it's a very, very risky place to be.

• 34:38Patrick O'Shaughnessy?

  What about regulation? Are you willing to invest in companies that have existing or potential future regulatory variables, let's say, to their success or failure?

• 34:47Speaker 02

  The way I see regulatory is that there's sort of like black and white regulatory rules. And then there's regulatory rules that are gray. So a black and white rule would be like a place where the law is simply clear that you have to do something. And my view on that is that founders need to abide by those rules. It's very stupid not to. And frankly, if you break those rules, say the way that Napster did way back in the day, like you will eventually be shut down. Founders think they can get away with it, but the reality is that it's just that no one's noticed yet. Like when you're very small, no one really pays a lot of attention to what you're doing. But once you start getting to scale, people will notice and then noncompliance will definitely catch up with you. Now, then we have other sets of rules that are gray.

• 35:30Speaker 02

  This might be the even more common case because the rules, the laws were frequently written years or decades ago and they never contemplated. The new technology that the founders come up with, I mean, we're in the business of disruption. So PayPal, like no one really at that time had thought that PayPal, they never wrote money transmitter laws for PayPal. Right. And so now we eventually learned that we had to get those licenses we did. But there's a lot of examples where the law is sort of gray. And actually, another really good example would be like Uber and taxicabs. Did Uber need to go get taxicab medallions? I think the answer was no, because they weren't stopping to pick people up on the street. They were being summoned like a town car.

• 36:14Speaker 02

  And so then they just got the TPS licenses. But then what happens when it's completely P to P? And you're not dealing with like a town car driver, like the rules around that were completely gray. Because the law never foresaw a scenario where people could summon another driver on their phone. That's a new technology. So in cases where the law is gray, what I would tell founders is go for it. If you're creating consumer value, like eventually, if you get enough consumers happy with your service, generally speaking, the law will eventually accommodate that because it wants to make consumers happy. Right. But what you need to do is at the same time, go out and evangelize for your point of view.

• 36:56Speaker 02

  You need to go out there and explain why what you're doing has tremendous consumer value, why it's good for society. And sometimes I think founders make the mistake of just trying to hide as long as possible. And I think Uber saw and what Airbnb saw, Airbnb is another great case. They're not a hotel. What regulations apply to them? I think what they realized is we need to go out there and evangelize that what we're doing is very positive for the world. And we have to get out there with that message and we have to start lobbying and get public evangelism. So that we end up with the right regulatory outcome.

• 37:30Patrick O'Shaughnessy?

  Another aspect of growth that I'm really interested in is leadership and culture. You know, it sounds so good that you would grow four times or three times or 10 times in a given year. It sounds amazing, but I think anyone that's lived through it knows it's actually incredibly difficult on one's psychology, on a million different things that are breaking, et cetera. What have you seen most commonly that breaks companies in the category of leadership and culture as they're growing really fast?

• 37:55Speaker 02

  Well, it's interesting. I ultimately think that company culture is a macrocosm of the founder's psychology. Anything happening in the founder's head, the struggles that are playing out, the person's attitudes will ultimately be writ large across the company. It generally happens through a process of role modeling behavior. If the founder is warlike, the company will develop a very aggressive culture. If the founder frankly cuts corners, the company culture could be negligent. If the founder is stuffy and corporatist, you don't typically see that in startups. You see that in later stage companies. The company culture will frankly be corporatist and stultifying.

• 38:35Speaker 02

  The famous org chart cartoons, different companies like Apple and Microsoft. You know, the Microsoft one was a bunch of different business divisions pointing guns at each other. And look, that's a direct result of the fact that Bill Gates was very competitive. That competitiveness trickled down into the culture and things were set up that way. The org chart diagram for Apple was, looks like a sun. Steve Jobs at the center and then everyone else is like around the radius connected to him. Right? So company cultures really reflect the founder's psychology. And where I think companies can go off the rails is if founders don't have a balanced psychology. I think this is one of the areas where it can be very useful for a strong founder to have co-founders

• 39:19Speaker 02

  is because one person is unlikely to have all of the personality traits that you'd want reflected in a company culture. And so sometimes you need the yin and yang of like a Steve Jobs and like a Wozniak. So it can be very helpful to have that balanced, this sort of hive psychology. But if the founder becomes unbalanced, the company culture can become unbalanced. And we have a name for this, we call them wild stallions. There are these founders who tremendous horsepower, but they're a little bit wild. And if they don't learn to get that under control, you know, they can go off the rails. I once heard Jerry Seinfeld talk about this concept with comedians. He said that he likened the talent that comics have to being like a horse.

• 40:04Speaker 02

  Some people are riding like a bronco. I mean, some people have enormous talent, but they can't get it under control. Great comics who die tragically young because of a drug overdose or something like that. And those were some of the most talented ones. And they were really riding a stallion, but they could not tame it. They cannot control their own psychology. If founders don't learn to do that, you will get a company culture problem.

• 40:26Patrick O'Shaughnessy?

  So let's just take the success case where you have like a stallion prone founder, let's call it, that is successful in sort of taming themselves and the culture. How does the rubber meet the road there typically? Like, what are they actually doing to make that possible?

• 40:41Speaker 02

  I think that the strong, hard-charging founder would seek to balance that by getting advice from experienced people and just double checking that, yes, they're driving extremely hard, but they're also just making sure that the strategy is correct. The one core obligation of the CEO founder is to make sure the strategy is correct because if you're executing against the wrong strategy, it doesn't really matter how hard you're working. I mean, if you're rowing in the wrong direction, rowing faster is not going to help you. I think a smart founder will just subject themselves to some sort of process of inspection. And this is where they should be building a good board of people who can do that inspection, right?

• 41:23Speaker 02

  And so it's a balance because you'll hear founders say, well, I just want to get the most pro-founder board they can. And yes, look, at this point, all VCs worth their salt are pro-founder, right? Everyone wants to support the founder. But the question is, does your board have enough relevant experience, having built startups, that they can actually give you advice on whether your strategy is correct? And it's useful for founders to subject themselves to that scrutiny and conversation. I used to compare, when I was running companies, what I would do, I would compare it to taking the Rubik's Cube out of my head. You know, whatever the big problem was that I was like noodling over, whatever was bothering me, I would take the Rubik's Cube out of my head, put it on the table, and I would

• 42:06Speaker 02

  let my board start turning the Rubik's Cube, or let my exec team turn the Rubik's Cube in front of me, and they're obviously having a debate about it. And then, when everyone's expressed their point of view, and we've kind of hashed things out, I can take that Rubik's Cube and put it back in my head and start working it again. But hopefully, they've made some progress, they've solved more sides of the cube. So I think that's what the hard-charging founder has to balance, because building billion-dollar, multi-billion-dollar companies is just really hard, and the odds that you're going to be able to figure it out all on your own is pretty unlikely.

• 42:39Patrick O'Shaughnessy?

  The idea of the investor operator is this modern creation. And you're a really interesting person to ask about this because you, just in your own career, have done both very successfully. But also the PayPal group, the original PayPal group, often called the mafia, just has this like crazy high percentage of people that have been both very successful operators and investors, which in the public equity markets, you almost never find like a great CIO or PM that was like a great entrepreneur. It's just, there's not a lot of crossover. Can you say a little bit about that? Like, what was in the water back then in that group? And how do you think about just this investor operator crossover trend?

• 43:16Speaker 02

  Yeah, well, I think there was a lot of pattern recognition that we learned at PayPal about what's successful. And then it was those patterns and that playbook that we developed at PayPal was then adapted by the PayPal mafia, who went on to both found their own companies using those playbooks or invest in companies that they recognized were doing well. The timing was also good. We sold PayPal to eBay back in 2002. I've kind of joked that it's less of a mafia and more of a diaspora. eBay had a very different company culture. PayPal was very freewheeling. It was kind of like the old west. And eBay was very corporate, working at a big bank or something, or consulting firm. And they promptly drove out the PayPal diaspora. We all got driven out.

• 44:00Speaker 02

  They kind of burned down our temple. And we had to go to create new homelands by creating our own companies. So the timing of that was good because that was sort of the nadir of the dot com crash. A lot of other people had just left. The joke back in the early 2000s was that B to B meant back to banking and B to C meant back to consulting. Everyone was leaving Silicon Valley. And so you had this group of individuals who were cut from the same cloth. They were very entrepreneurial to begin with, but they also just had a very positive experience building a, like a unicorn company with PayPal. And they learned all these playbooks for virality and team building and how to build software products. They kind of had the feel to themselves.

• 44:43Patrick O'Shaughnessy?

  Would you be game to do sort of highlight a superpower of some of your key early PayPal partners if I tick off some names?

• 44:49Speaker 02

  Sure, yeah.

• 44:50Patrick O'Shaughnessy?

  Cool. So we'll start with Peter Thiel.

• 44:52Speaker 02

  Peter's superpower was that he could identify the handful of strategic decisions every year that were going to matter 10x or 100x more than everything else. And everything else he would basically delegate because more in the delegator mode. I don't think he's ever fancied himself like a true operator, but he was very, very good at the overall strategy of the company and recognizing when one of those sort of power law moments occurred from a decision-making standpoint. And then, of course, he was very, very good at recruiting and hiring great people and putting them into those roles so that he could delegate to them.

• 45:28Patrick O'Shaughnessy?

  What about Max Levchin?

• 45:30Speaker 02

  Max was during the PayPal days was the great technologist and he was the CTO and built the whole engineering team. He was also very good. He had sort of like nerd charisma and was very good at hiring former classmates from U of I. And then the other superpower that he had was that he kind of figured out the fraud problem at PayPal. PayPal was being taken for many millions of dollars by fraudsters and he figured out how to build the systems that we would use to stop the fraud. And those technologies never really existed before. And I think post PayPal, he kind of graduated up to becoming CEO of his own companies and has the full range of skills.

• 46:10Patrick O'Shaughnessy?

  Elon might be an interesting one because there's probably many things you could say, but what stands out as his superpower?

• 46:14Speaker 02

  I think Elon, there's nobody more ambitious and sort of visionary. He's not just creating a rocket company. He's putting people on Mars. And so, I mean, it's like unbelievably visionary and charismatic. The difficulty level is like off the charts, but he also has the ability to execute. So you're combining maximum vision with maximum ability to execute. And that's why he's able to do things that nobody else can do.

• 46:39Patrick O'Shaughnessy?

  How about Ruloff?

• 46:40Speaker 02

  Ruloff, yeah, it's an interesting story that Peter hired Ruloff to be CFO. I think Ruloff was like 28 years old and had just graduated from Stanford Business School. We had had a CFO who had worked at a big bank and was sort of the gray-haired CFO that you'd want to IPO with. And something like three months before the IPO, Peter took that person to lunch and said, you're fired. You're not smart enough, basically was his complaint. He didn't know the numbers well enough in Peter's view. Peter's very good at math. Rudolph was like the smartest guy on that side of the house with the numbers and accounting background. Peter's like, you're CFO, you're going to take us public. Nobody else would have done that, right? And you wouldn't really see that done today. But obviously, look, Rudolph was valedictorian of his class, completely brilliant.

• 47:25Speaker 02

  And the reason why I think he was great in that role is partly because he knew the numbers so well. And he created, first time I ever saw a cohort model, a revenue cohort model is when Rudolph developed that for PayPal. I didn't know what that was until I saw that. But also, you know, he has diplomatic genes in his DNA, was very good at managing investors and the IPO roadshow and that whole thing.

• 47:47Patrick O'Shaughnessy?

  Last two, Reid Hoffman.

• 47:49Speaker 02

  Reid was in charge of all the biz dev relationships. And Reid's job was kind of to make sure that all the platforms that could switch us off didn't. He went to eBay and they wanted to kill us, but Reid would try and convince them. Reid has a very nice personality and would sort of convince them, keep them at bay. And same thing with Visa, Mastercard. He had managed those relationships to make sure that we didn't get switched off.

• 48:15Patrick O'Shaughnessy?

  Start of our conversation was your investing criteria, which I first saw when you quoted Keith Rabois' version of the same thing. So we'll close with Keith. What was Keith's superpower or is Keith's superpower?

• 48:24Speaker 02

  Yeah, Keith and Reid were sort of flip sides of the same coin. So, meaning that we had these huge platform dependencies at PayPal and we were like constantly worried about how do we not get switched off? How do we not get switched off by eBay? How do we not get switched off by Visa, Mastercard? And Reid frankly was the good cop. Keith was the bad cop. He spun up an effort to make sure that the antitrust authorities like the FTC, like the DOJ were aware of any potential anti-competitive actions that these big monopolies might take against us. And it was very important in terms of brushing them back from the plate because these big monopolies, if they get the chance to stomp on a little competitor who's innovating and potentially doing something disruptive in their space, they will.

• 49:06Speaker 02

  And Keith was a little bit of our pit bull to keep those big monopolies at bay.

• 49:12Patrick O'Shaughnessy?

  It's a testament to the insane collection of talent that, as we have to move on here and wind down the conversation, I didn't even mention the founders of YouTube. We're also at PayPal, just an incredible group. What about the world just writ large is most interesting to you right now? And this can be interesting in a good direction or in a bad direction, the things you might be worried about that are changing. What are the big zones of change or trends that have your attention?

• 49:33Speaker 02

  Well, I mean, if I look at things on like a 20 year timeframe, the thing that really jumps out at me is just how much bigger the whole tech economy has gotten. I gone to Stanford in the early 90s, graduated, left for fears, got a law degree I didn't really need, and then came back for PayPal in 1999. Tech was still pretty concentrated around the Stanford area, concentric circles around Stanford. There was stuff happening with CHIPS down in San Jose. The tech economy was still pretty small. And what you've seen over the last 20 years is just this giant expansion. So you had tech take over the whole Bay Area

• 50:12Speaker 02

  from San Francisco to the East Bay, and then it's now spilling out to every city. And partly because of COVID, you now have remote work, distributed work, and people are creating tech companies everywhere. And of course, you've seen the amount of venture capital that has just exploded as well. So the amount of capitalists available to fund all these new ideas has just grown tremendously. So, I mean, the big takeaway is just that the entrepreneurial economy, this sort of opportunity economy that we've created is just, keeps getting bigger and bigger. And it's the thing that I'm most bullish about. It's much easier, much easier to start a company today than it was 20 years ago. 20 years ago, it was actually hard to get an introduction to a venture capitalist. You know, you actually had to figure out this place.

• 50:55Patrick O'Shaughnessy?

  You had to unlist your phone number. They'd call you.

• 50:58Speaker 02

  You'd have to figure out like this San Jose Road thing was, and how do I get a meeting there? And now, there's so many VCs and micro VCs and angel investors, they're running around chasing every plausible idea and throwing money at it. There's also so many more tools to build companies, whether they're no code or low code development tools, or whether they're legal tools, like the SafeNote or something like that, have just streamlined the whole process of fundraising. So it's just so much easier to get started to be an entrepreneur now than it was 25 years ago. The main reason I went to law school 25 years ago is I didn't know how to become an entrepreneur. It wasn't clear what you're like, what do I do? Now, you'd never even ask that question.

• 51:43Speaker 02

  Go to Y C. There's just so many different ways you could explore it. So that's the big positive trend that I see. And then the negative one is just a lot of the things I see happening in society. Politics don't seem that great to me. My line on this is that we're in a race for the future between technological acceleration and socio-political deterioration. So we've got this like very positive force in terms of technology accelerating, creating tremendous opportunity. And then our politics and culture seem more dysfunctional and divided with more divisiveness, more sense of the country breaking down into warring political tribes. That part seems not so good to me. I don't know which force is going to win.

• 52:24Patrick O'Shaughnessy?

  Two closing questions for you. One is sort of in the form of advice. You had this nice write up where you identified cool lessons from The Last Dance, the documentary about Michael Jordan. One that really stood out to me in there because it kind of maps back on the cadence and other things that you've written. And I take your work to be very real. Like this is what's actually happening in the company. Let's focus on reality and not sit there and dream. It was item number five, which was the team wants to be pushed. Can you just give that as a form of advice, like what that means to you and why it's interesting?

• 52:52Speaker 02

  Well, first of all, I mean, Michael Jordan was the classic maniacal founder. Right? I mean, his desire to win was unparalleled. He had a founder mentality. Founders need to have that. Peter Drucker once said that all great things in business happen because of a man on a mission or a person on a mission. It takes a monomaniacal founder to create a great company. Jordan was sort of the founder of that team, but it also took co-founders. Jordan was playing on the Bulls team for about five years before they won their first ring. People don't remember that. So what changed? Well, they got Phil Jackson in as the head coach. They got Scottie Pippen in as sort of Jordan's number two. And then they also got role players like Dennis Rodman.

• 53:36Speaker 02

  And so they built a team around their star player. And then they got a coach who knew how to create a system, the triangle offense, that would utilize everyone's talents maximally. And specifically what they did is, I don't know if this is getting too detailed.

• 53:51Patrick O'Shaughnessy?

  No, bring it. I love it.

• 53:53Speaker 02

  Thing that's fascinating is you would think that having the greatest player of all time on your team with Jordan, you'd have a very simple offense, which is just Doug Collins, the coach before Phil Jackson. What he said is, give the ball to Michael and get out of the way. Like, that was the strategy, right? But as it turns out, they could not win a championship that way because that offense was too easy to guard against. All they would have to do is double or triple team Michael, and that was it. And then they would win the game. And so what Phil Jackson did with the triangle offense was create a system in which Jordan could either take the shot, or if he gets double teamed, dish off to the open man who could then make the shot. And so it turned Jordan from a great individual performer into sort of a team player. It allowed him to make everybody else great, too.

• 54:39Speaker 02

  And there's something, obviously analogous with startups that, obviously, if you have the star player, the franchise player like an Elon, that matters tremendously. But you still need a team around that person to be the force multiplier of that person.

• 54:55Patrick O'Shaughnessy?

  And that when this talent is there, like the PayPal talent or Jordan's, they do want to be pushed. They want the challenge.

• 55:01Speaker 02

  Right, exactly. And so what you saw in that documentary is, as maniacal as Jordan was, okay? And even though that might have created some hard feelings at the time, I didn't hear anybody who was interviewed for that documentary regret their time on the Bulls. They got to be part of something great. They got to be part of like the greatest franchise, the greatest team in NBA history. At the end of the day, everybody is happy to look back and be part of that success. And they do want to do something great. And so Jordan pushed them incredibly hard, but they responded. And now the reason why he was able to do that is he was leading from the front. I mean, he wasn't asking anybody to work harder than he was working. With Elon's companies as well, I mean, even today,

• 55:47Speaker 02

  Elon's one of the richest people in the world. He still works incredibly hard. That gives someone like Elon or Jordan the credibility to push the team that hard.

• 55:56Patrick O'Shaughnessy?

  I love it. It reminds me of some of the stories you hear about special forces teams that sort of come home and have an easier life and sort of long for the difficulty of working on a team. I ask the same closing question of everybody. What is the kindest thing that anyone's ever done for you?

• 56:11Speaker 02

  Kindest thing? You mean like in business or in life or?

• 56:15Patrick O'Shaughnessy?

  Up to you.

• 56:18Speaker 02

  When I was five years old, my parents immigrated to America. That was like very important for my future development. Look, I think they could have been happy and successful staying where they were, which was South Africa, but they expressly had the conversation about where their kids would want to live. Immigrating to America was obviously a gigantic unlock for me to have opportunity in my life.

• 56:40Patrick O'Shaughnessy?

  Have you been back to South Africa much?

• 56:41Speaker 02

  I have been back a number of times, but it's been about 20 years since the last time I was there.

• 56:45Patrick O'Shaughnessy?

  And what did it feel like going back there, knowing that your family was originally from there? They love that country.

• 56:50Speaker 02

  It was really interesting to see the change in the country. You know, I guess the last time I was there was about the year 2000. Mandela had become president and they completely transformed the country. apartheid was gone and things were very optimistic. And it was really interesting. I went to go see Robben Island, which is the island off the coast of Cape Town where all the political prisoners were held. And it was a really interesting experience. The tour guide asked the group some questions and I had just read Mandela's book, Long Walk to Freedom on the plane ride over. Plane ride was like 13 hours. It's a long book. It took about 13 hours to read the book. But anyway, he called on the group. He asked some questions and I knew the answers because I just read his book. And anyway, he was very impressed that I knew who some of his heroes

• 57:35Speaker 02

  were. After the tour, I was pumping my hand and really excited that, you know, I knew who his heroes were.

• 57:41Patrick O'Shaughnessy?

  What a cool memory. This has been such a good conversation. I highly encourage those listening to go read everything you've written, I think, as like an operating manual for fast growing businesses. It's about as good as it gets. And I really appreciate you walking through some of those highlights with us here today.

• 57:56Speaker 02

  Absolutely. Great to be with you.

• 57:59Patrick O'Shaughnessy?

  This episode was brought to you by Catalyst. In this four-part mini-series, I sit down with Catalyst client Ryan Cope from American Century Investments and talk about how Ryan found out about Catalyst, how he got involved in small cap investing, and his favorite aspects of using the Catalyst models for him and his team. In this week's episode, Ryan and I talk about how he approaches new companies in the small cap space and how he first heard of Cantilist. So when you're looking at, let's just imagine there's a new company you've never seen before. Walk us through the way in which you approach a new company.

• 58:32Speaker 03

  Yeah, so one of the other great aspects of the small cap universe is that it's so large. So there's always more stones to turn over, if you will. So one of the first steps that we would do is to pull up historical financials for a business and make sure that we understand, you know, this is a profitable business. This is a high-quality business. This is not something that's super cyclical. We're very focused on balance sheets and free cash flow. We want to see that they can turn those earnings into free cash flow, that they can then either redistribute to us in the form of dividends or reinvest in their business at high rates of return.

• 59:06Patrick O'Shaughnessy?

  When you think about the types of industries in small cap versus in large cap, in large cap, you have a lot of these like winner-take-most type dynamics. Small cap seems like there's just a ton of diversification. How do you think about sectors or how you build a portfolio? This will start to bridge into how you use Cantilist, but it just seems like you'd have to know a lot of different kinds of business models to do well in this space.

• 59:27Speaker 03

  That's exactly right. So a lot of the companies that we own in our portfolio might be a supplier to one of those winner-take-all, larger-cap companies where they're just making some niche, but very critical component that goes into those larger processes or larger equipment. Yeah, you're exactly right. There's a very wide range of types of businesses that you have to understand. And I think it's something that on our team, all five of us really love, that very broad business analysis, if you will.

• 59:56Patrick O'Shaughnessy?

  Do you think it's fair to describe, use the Bezos concept of undifferentiated heavy lifting when it comes to the process of building company models? And here I'm interested in how you first heard of Cantilist and sort of the job that the service does for you.

• 1:00:10Speaker 03

  Yeah, that's a great question. So to answer your second one first, we first heard of Canolus through actual testimonials from users on social media, Twitter, and then through targeted ads on great podcasts like yours, Patrick. I would say we were skeptical, though, at first on the reliability of the data. You know, we've used lots of data providers over time, and especially when you get down to the smaller companies, there's nobody that's fact checking, if you will. And so Canolus, one thing that we found very valuable is that human touch that Canolus adds, and we found their data to be significantly more reliable than some of the data dump providers that we've used in the past.

• 1:00:48Patrick O'Shaughnessy?

  Can you say a bit more about what that means, human touch? So what very specifically is the difference between, you know, you open a Canolus model, or you open a XYZ model from some other data provider? Like, what does that human touch create?

• 1:01:00Speaker 03

  There's a number of things. The first is just the reliability of the data. So they have people that double check every single input into their models. The second, and maybe more important, is really the drivers section. So they have someone that goes into the model and understands really what is driving the revenue for a given company and breaks that out in drivers work. If you're trying to do a one size fits all pull from a 10K, you simply cannot do that with the size of the universe in the small cap space.

• 1:01:31Patrick O'Shaughnessy?

  If you enjoyed this episode, check out joincolossus.com. There you'll find every episode of this podcast, complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.