Elad Gil – How to Identify Interesting Markets - [Invest Like the Best, EP.101]

My guest this week has a fascinating background. He has a PhD in biology but has split his time as both an investor and an operator. As an investor, he’s involved in companies like Airbnb, Coinbase, Instacart, Opendoor, Stripe, Square, and Pinterest—not too shabby. As an operator, he helped both Google and Twitter scale their businesses, in the case of Twitter from 100 employees to 1500 over two years. He’s just written a book about these experiences called the High Growth Handbook. Our talk centered on what makes for a good investment and more specifically how Elad identifies an interesting market. Operators and early stage investors will find lots of nuggets in this fun conversation. Please enjoy. For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag Show Notes 1:31 - (First Question) – Process for evaluating a young business 2:43 – Andy Rachleff Podcast Episode 3:09 – Data factors for evaluating a business 5:08 – Reference checks 6:42 – Advice for companies that are reliant on product cyclicality 7:01 – Where to Go After Product-Market Fit: An Interview with Marc Andreessen 7:31 – High Growth Handbook 9:30 - Lessons learned from marketing and growing companies 12:09 – How do you hire the best people to improve your distribution 13:16 – How does he think about lifetime customer value vs customer acquisition cost 15:57 – Should companies just focus on the high margin power users 16:35 – Best ways to organize a company hierarchy 19:16 – His interest and background in the area of longevity research 21:52 – Changes he has made in his own life as a result of this longevity research 22:56 – Most effective use of a CEO’s time 24:58 – How he evaluates or identifies interesting markets for potential businesses 28:03 – Any markets that fit his criteria that are underappreciated by investors 30:02 – Worst practices for businesses 32:19 – Kindest thing anyone has done for him 33:20 – What would be the topic of his next book 34:40 – Biggest lessons he’s learned about markets Learn More For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on twitter at @patrick_oshag

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

• 0:00Patrick O'Shaughnessy?

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• 0:36Patrick O'Shaughnessy?

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

• 0:57Speaker 02

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

• 1:22Patrick O'Shaughnessy?

  My guest this week has a fascinating background. He's a PhD in biology but has split his time as both an investor and an operator. As an investor, he's involved in companies like Airbnb, Coinbase, Instacart, Open Door, Stripe, Square and Pinterest. Not too shabby. As an operator, he helped both Google and Twitter scale their businesses, in the case of Twitter, from 100 employees to over 1,500 in a two-year span. He's just written a book about these experiences called The High Growth Handbook, which is largely the topic of our conversation. Our talk is centered on what makes for a good investment and even more specifically, how ELAD identifies an interesting market. Operators and early-stage investors will find lots of nuggets in this fun conversation. Please enjoy.

• 2:03Patrick O'Shaughnessy?

  What is your general process for evaluating a young business and getting involved?

• 2:08Speaker 03

  I think there's sort of three answers to that. I'll give you the generic answer, the data-driven answer, because now I've invested in enough companies that I can look back and tell you what worked. And then I can also maybe share two or three non-intuitive items in terms of areas that I didn't expect when I first became an investor that now are really clearly obvious in hindsight. The generic answer is that really there's three things that I care about for early-stage investing. And I think the biggest difference between me and most angels or people who, you know, write these really early checks is that I really focus on the market first. Is there a real need for the product? Is there traction? Is it something that I would use or that I know businesses that would use? And so number one for me, and probably number two for me is market. And most early-stage investors say that the most important thing is team.

• 2:53Speaker 03

  And if Andy Radcliffe, one of the founders of Benchmark, I know you've had on, has a great rule that people call it Radcliffe's Law, which is basically if you have a great team in a terrible market, the market wins. If you have a terrible team in a great market, the market wins. And if you have a great team in a great market, something magical happens. And I'm a very strong believer in that. So first and foremost, I look at market. Second, I look at team. And third, is it people that I actually like? So if they call me at 10 o'clock at night on a Saturday, will I actually pick up the phone and want to help them? Because life is short and that's literally happened to me. The founders of Stripe, for example, the first time they were buying a company, literally called me at 10 o'clock on a Saturday and asked to meet and talk through how should they be buying companies? So, you know, once you've had a few experiences like that,

• 3:37Speaker 03

  you just don't want to work with people that you don't want to spend time with. Yeah, I mean, the data-driven answer, if I look back at the data in terms of what's actually worked in the set of companies I've invested in, number one is that they launched a product or at least had a crappy demo when they started raising money. And so I think the fact that they actually built something, even if it was awful, showed a mentality of going and building. So that's one key thing. So just investing in a PowerPoint deck tends not to work well, although, for example, I think I invested in Open Door and Wish before they had much built. But even then, there was, there was sort of something going on. Second is organic growth, even if it's a very small base. So most early-stage investors really discount early traction. So let's say, well, I went from 100 to 120 to 150 over two months, three months. You know, is that real?

• 4:22Speaker 03

  But in reality, if something's growing 20, 30% a month organically, just through word of mouth, usually there may actually be something there. So I think that's a clear sign, even if it's tiny numbers. Third is on the enterprise or SaaS side, if they have one or two major brands that are using them that just found them randomly, then that's usually a very good sign. So when I invested in PagerDuty, which is now a very successful company on the ops infrastructure side, they had, I believe, Amazon and Apple as customers. I don't know if they still do, but you know, seven, eight years ago, they did. And they didn't have a sales force, it was just four engineers. And they were just getting traction because the product was so good that random people at big companies were finding it and adopting it, even if they were sort of overruling their own internal IT to do it.

• 5:05Speaker 03

  And then I think the last thing is utilization, even if the product is really broken. So if something looks really janky and you're like, how can anybody use this, but people are still using it, that's usually a really good sign. And I would, I would say, for example, Snapchat in the early days was kind of like that, where most people, even in that demographic, didn't get it. And it was still just working, even though the UI was kind of rough and it was tough to get into and everything else. I mean, there's other obvious criteria is like, you know, talking to customers and seeing if there's real traction or looking at metrics like negative churn. But in terms of the things that were just high level data that I normally wouldn't have looked at, those are the things that in hindsight really correlated. I think there's one or two non-intuitive items, too. The first one is that reference checks, positive reference checks are a good signal,

• 5:48Speaker 03

  but negative reference checks on the founders aren't a negative signal, they're a neutral signal. And so whenever I would invest in a team and I'd ask around and one or two people said, well, that person wasn't great, I would tend to pass on that company or not invest. And what I've seen since then is that people who may be terrible in one context may be great in another. And so a great example of that is there's a founder that I didn't invest in out of Twitter, who I worked with at Twitter when I was there. And he just wasn't very good. He was super nice, very smart. You'd see him in the hallways and he'd always be just kind of hanging out and talking to somebody. And so he had this reputation as being kind of lazy. And now he has one of the most successful startups out of that community. And I met with him for dinner recently and I asked him, what changed?

• 6:33Speaker 03

  And his response was, I finally feel like my ass is on the line. And so that to me was very non-intuitive, that people who seem kind of meh. And it isn't the standard entrepreneurial stereotype of somebody who's rebellious and fighting their manager. It's just somebody who's kind of lazy, you know? In one context, ended up being great. In another, the other non-intuitive is that in general, the things that work tend to work early. And so you always talk about people grinding for five years until it finally works. And in enterprise and other areas or highly regulated areas where it takes time to build a product, that's very true. But in many cases, if people need the product, the second the product's available, it kind of starts moving. And you need to do some iteration to really get escape velocity. But at least the very biggest things tend to work very early.

• 7:15Patrick O'Shaughnessy?

  That's a really interesting one, that second one. And a good segue into some of the discussion on businesses that are bigger. Let's say have at least one product that's established, it's working, et cetera. I'm curious how that same litmus test applies at bigger companies. So if you take a, there was a really interesting point in, that maybe you could highlight in your interview with Marc Andreessen, about product cycles and how a lot of these companies and companies in general are not static. They need to constantly be putting new things out, changing what they offer to customers. And those themselves could be thought of like startups or something within a larger business. So I'm curious, any distinct or useful lessons for companies out there who do have to iterate, who can't just do the same thing year in, year out and expect to do well?

• 8:00Patrick O'Shaughnessy?

  I love that idea of product cyclicality. Maybe you could, you could highlight that and then dive in.

• 8:03Speaker 03

  And high growth handbook, one of the things that Marc Andreessen refers to is this fact that after somebody launches their first product, it's sort of like, what do you do next? And how do you think about changes in your business? And I think most product centric founders, which is most tech founders, tend to get stuck on the idea that they're only a product centric company. And so what they'll do is they'll continue to scale the product that's working and sometimes that's efficient. But if you really want to build a truly, truly massive lifelong franchise as a company, often what you have to do is start thinking about your next set of products. And you need to shift from thinking of yourself as a product centric company into a company that's also distribution centric. And so if you look at the history of technology, be it Microsoft or Oracle,

• 8:46Speaker 03

  or more recent folks like Google or Facebook, really what they did is they had one product that worked so well and it was so much better than anything else in the world that it got a lot of distribution. Or in the case of Google, they were spending literally hundreds of millions of dollars a year on distributing toolbar and paying Firefox to be their homepage and other things. So they were very aggressive about distribution. Once you have that distribution, your next step, or the next step in the sort of traditional playbook would be go and buy companies or build new products and push them out against that distribution channel that you now have. And so for Microsoft, that ended up being different components of Office that over time they either built or bought. In the case of Google, it was products like Chrome and Android and Maps and Image Search and all these other things that ended up branching off of the original product and

• 9:30Speaker 03

  then getting pushed down the channels that they'd built. Facebook did it with Instagram in terms of accelerating their growth or WhatsApp. And so in general, the history of sort of the tech companies that have done well is start with one great product that's working in a singular way and then add more. And I think the companies that tend to tap out are the ones that have one product that works really well, but then they never add that second product line or they never do that reinvention, or they don't iterate fast enough on their core product and new entrants a few years later, or big incumbents start competing and it really slows down their market.

• 10:03Patrick O'Shaughnessy?

  I always think about marketing, distribution, sales as probably a deeply underappreciated part of business lore. I would love to hear your thoughts on, again, I guess this is both as an investor in a lot of these businesses that have scaled a lot, but more specifically as an operator in the businesses you founded, but also at Twitter and Google, what that looked like, what success looked like for a business trying to scale its methods of distribution? How much of that is a playbook versus creative, new creative approaches to gaining an audience? I think that the build it and they will come attitude is disastrous typically. And we probably undervalue the ability to build good distribution. So I would love to hear your biggest takeaways and lessons from your experience there.

• 10:45Speaker 03

  Distribution is definitely underrated. And I think that just like companies tend to have in their early days, a singular product strategy that works. The thing that is really underappreciated is that companies also tend to have a singular distribution strategy that works. So usually companies try three or four different ways to distribute, and every once in a while, there's a company that actually pulls it off. LinkedIn grew off of STO, as well as certain viral mechanics they built in and a few other things. But in general, a company will only grow off of one distribution channel that works really, really well. In Facebook's case, it was basically early on email scraping and really focusing on sort of viral person-to-person distribution. In Google's case, in the early days, it was word of mouth, but it actually very rapidly switched to partnerships.

• 11:30Speaker 03

  And I think that is one of the unwritten things about Google's story. People always talk about how it just grew organically 80% month over month, and that was true initially. But the one time that Google had to take down their site was when they onboarded, I can't remember if it was Yahoo or AOL, and that company had so much more traffic than Google, that Google actually took down its own homepage for a day so that they could serve that new traffic from that partner. And so in general, what you find is that companies find that singular way to distribute early on, and then after that starts working for long enough, they start broadening and saturating distribution. So for Google, that was across mobile, it was paying for client distribution like Firefox and the toolbar that they would literally sort of cross-install with Adobe and other things, and other means

• 12:13Speaker 03

  of effectively either paying or partnering for distribution really aggressively. And I think the companies that tend to sort of under-execute or end up, you know, you end up with a $5 billion company, which is amazing, but you could have been a $50 billion company, often it's because they weren't aggressive enough on three things. Distribution is first and foremost. Second tends to be M&A, so they don't buy new things and diversify into new areas. And then third, they may just not have been aggressive about thinking about new product lines or iterating on their product internally.

• 12:41Patrick O'Shaughnessy?

  You wrote a lot about the importance of recruiting and sort of the things that you recommend people do when thinking about hiring great people. Maybe touch on that as it specifically pertains to distribution. So what are the common, I guess, features of people, excellent professionals that you've encountered in your career among, on the distribution side? And then I'd love to hear the same on the product and other sides.

• 13:04Speaker 03

  Common threads tend to be that they're aggressive but ethical. And so they're sort of the right type of greedy in terms of driving the success of a product. I think distribution these days can take so many different forms that beyond that, there's very different characteristics depending on the type of distribution that you're building out. So if you're building an enterprise sales team, the type of leader that you need there and the way that they're going to lead and grow a team is going to be very different. If most of your growth is more similar to what Facebook was doing, where you really need people who are growth marketers and are very quantitative and focused on, if I tweak 10 pixels on this recruitment email, how much more conversion will I have? And so really depending on the type of distribution that's working for the company, you're going to need pretty different skillsets.

• 13:49Patrick O'Shaughnessy?

  Based on the list of companies that you listed, that you're either an investor and advisor to, it made me think of a question I've been pondering around lifetime value of customers. So Airbnb of the companies you mentioned is probably the most pertinent. Internal investment, capital allocation, et cetera, at these companies, obviously, and as an outside investor, hinges on this lifetime value versus acquisition cost equation. I know there's all sorts of flaws with LTV to CAC and we can read about those elsewhere. That's kind of beyond the scope today, but it is a useful framework. And Airbnb is an interesting one where there may be rules of thumb, but it's something that could be very spotty, where a customer could do an Airbnb right now and then not come back again for a year or two years from now. But that sort of needs to be part of the equation.

• 14:32Patrick O'Shaughnessy?

  How do you think about that as an operator and investor, when you're dealing with a business that's a paid service, so it's not Google, it's a paid service that people may use sporadically. So it's not like a pure subscription, but there's sort of spottiness or lumpiness to when the customers engage with the company.

• 14:49Speaker 03

  In general, most businesses tend to have a little bit of a head, torso, and tail to the distribution of customers that they have. And there was this book, I can't remember what it was called, it was The Tail Effect, or The Long Tail, or something like that. And it basically tried to argue that most internet businesses are really based on the long tail. And in reality, that's really false. If you look at almost every single business, Google, or there's a variety, or Apple, or the like. In some cases, you really have just mass market retail, which is closer to the Apple case. But for many businesses on the commerce side, you do have power users that are driving a really significant portion of either your revenue or your margin. And in some cases, they're both the head and the torso of the distribution. So they're the top.

• 15:32Speaker 03

  50% or the top 20% or something in that range. And so often, the overall economics of your business may be driven by those folks versus everybody. So sometimes a way to get a signal is just to ask, what are the power users doing? And are they sufficient to support their business in their own right? And how can quickly can we convert people over into these more active users? And so rumor has it, and I don't have any direct insight into this, but the rumor was that with Uber, if they had like a handful of what they called whales in their early days of the business in a, in a single city, you know, there was five or 10 people that could literally cover the cost of launching a new Uber office at the time when it wasn't competitive, you know, when they were first getting started. Because those individuals were constantly ordering black cars, which were higher margin, and they'd use them for everything.

• 16:15Speaker 03

  And so sometimes your power users can actually carry the entire business for you. And looking at LTV and CAC, I think is a very important exercise. But if you do it for the average versus by customer segment, you actually may lose the signal in terms of what's really working.

• 16:30Patrick O'Shaughnessy?

  Does that suggest that the best back to distribution strategy is to just focus on satisfying those power users?

• 16:37Speaker 03

  I think it really varies by business. I think in the early days, you absolutely want to delight a small number of users versus create a, a social experience for everybody. I think it was Paul Buchheit or somebody who first coined that perspective, which I think is a correct one. I think typically, and this is an old concept in terms of Jeffrey Moore crossing the chasm, which is, you know, who are your early adopters? And then eventually, you know, how do you make it to mainstream? I think if you don't have a product that a small number of people really love and view as crucial, it's very hard to see how you get to mass market.

• 17:08Patrick O'Shaughnessy?

  So coming back to the, you mentioned this idea of organizational structure. This is something that has become sort of a popular topic these days. There are the old ways of doing things. Maybe there are some new ways of doing things. The hierarchical or organization as hierarchy has been, you know, a long established and productive way of running an organization. I'm curious what flaws you see in that traditional model and maybe what nuance there is around existing hierarchies and whether or not there are radically new ways of organizing a business or a group of people to be productive.

• 17:39Speaker 03

  You know, when all is said and done, I don't think people have fundamentally changed over the last 10,000 plus years of evolution. I mean, we've changed in some ways and there's different evolutionary pressures that we're reacting to, and you see that. For example, I'm an Ashkenazi Jew and Ashkenazi Jews have gone through very strong bottlenecks, which is why as a group, we have higher incidence of different genetic diseases that we've just inherited. And so, you know, there is constant pressure and evolution happening in humanity, but when all is said and done, our basic drivers are the same. Ruloff, both at Sequoia Capital, has this great saying that every product that you can think of is fundamentally driven by one of the seven deadly sins in terms of successful products. And so which sin does it line against? And that may imply how you think about the product area. And so I think organizations are similar in

• 18:24Speaker 03

  that there's always room for innovation. And I can mention one or two innovations that have happened over the last decade, for example. But when all is said and done, people want to have direction. They want to know what they should be building. They want coordination. Some people are going to inherently act badly. So you need, you need processes to deal with that. And fundamentally, to have the most impact, you're going to need to coordinate. It's sort of like if you were making dinner with a couple of friends, you'd probably want to figure out who's bringing the salad and who's cooking the main course and who's bringing the dessert. Otherwise, you end up with five desserts. And so anytime you just get rid of any organization or hierarchy, you end up with potentially a lot of sweets, but maybe not a lot of anything else. And so I do think the holocracies

• 19:07Speaker 03

  and all the various, you know, the valve style approach, like all these things I think are actually pretty flawed in terms of their approaches and tend to not work. The flip of it is every once in a while, an organization or company will have such strong product market fit that it doesn't seem to matter that they kind of had a really stupid idea around org structure or a terrible approach to org structure. And so they succeed despite themselves and then they're held up as an example of, oh, look, there's another way to do it. And so I actually think I know the insides of a handful of these companies, not all of them. And I think some companies could have been 10 times more successful if they'd actually organized properly, but they didn't. And then they're, they're held up as an example of, oh yes, this alternative approach works well.

• 19:49Patrick O'Shaughnessy?

  Another area that, that I know you're interested in, I'm sure it's at least in part as a result of your PhD in biology, is I guess, health and longevity. I would love to hear about your background, the thinking background there, why you're interested, what areas specifically you're most focused on. Is it selfish? Is it as an investment thesis? I'm also fascinated by this topic. So would love to hear your opinion.

• 20:10Speaker 03

  So my, my background for it is I worked at the Salk Institute many years ago on gene delivery into the adult brain. And then later I worked on this pathway in C. elegans called the Dauer pathway or the DAF pathway, which basically integrates signals across insulin, aging, and cancer in mammals. And so if you knock out one of these genes in these little worms, they'll live two, three times longer as healthy adults and then they'll just crash out at the end. And there's two or three other lines of evidence besides the genetic manipulation that shows that longevity is just a program that you can perturb. Examples of that would be FDA approved drugs like rapamycin or mitformin, which in multiple organisms will increase lifespan between 10 and 30% in the case of rapamycin in mice,

• 20:53Speaker 03

  for example. There is something known as probiosis, where if you take young blood and you give it to an older animal, they'll have certain rejuvenative capabilities restored. And if you take old blood and put it in a young animal, you kind of screw things up. So there's sort of factors going both ways. And then there's things like caloric restriction, where if you decrease the amount of calories you take per day to a certain level, and multiple organisms, again, you end up with longer lifespan. And so there's lots of evidence that suggests that aging is a program that you can perturb. And there's 20 or 30 years now of data and genes and all the things that normally would be translated into products. But there just hasn't been that focus by either the traditional biotech venture community or by pharma to build drugs against this area with one or two small counter examples.

• 21:38Speaker 03

  You know, Novartis actually ran a trial with rapamycin in elderly adults around immune response. There's companies like Unity that I think may have already gone public that is focused on what are known as senolytics, so one area of longevity related drugs. But there felt like there was a real market gap. And so I got involved in terms of seeding one company called BioAge, which Andreessen Horowitz did the series A for. I helped really early on with another company called Spring Discovery, which is applying machine learning to different areas of sort of assays for longevity. So they're doing some really exciting stuff. And then I've been helping Laura Demming, who's a really smart investor, more in an advisory capacity around an accelerator she's building for anti-aging startups called

• 22:19Speaker 03

  Age One. And the idea is to basically fund the next generation of regenerative medicine companies at scale.

• 22:25Patrick O'Shaughnessy?

  I'm curious, through all your investigation across this topic, what you've changed in your own life? And obviously, this isn't any sort of medical advice or anything like that. But what all that you've learned, invested in, investigated, has actually caused behavioral change?

• 22:39Speaker 03

  You know, when all's said and done, there's a set of basics that people should just be doing. And everybody tells you these things and a lot of people just don't listen. And that's basically exercise regularly, eat well, sleep well, form meaningful relationships with others. Actually, those things have real impact in terms of how long you're going to live and how well you're going to live. I think in terms of more drug centric interventions, a lot of people in the aging communities will do very simple things in terms of taking a baby aspirin once a day. That helps with heart disease and colon cancer. They'll take a certain statin, similarly helps with heart disease and some people think with certain neurological disorders. And then there's a smaller subset of the community that takes metformin. And so from a drugs perspective, those are the main things.

• 23:20Speaker 03

  There's lots of things I would stay away from that I know some people do, like human growth hormone or some of these other things, which I just think are not very good ideas from a longevity perspective.

• 23:29Patrick O'Shaughnessy?

  So you've been a CEO, you've invested in a ton more, you've watched even more than that. I'd love to hear your take on the most effective use of a CEO's time. So I think one of the most important decisions that any business leader makes is, I guess, allocation, allocation of time and capital and then maybe strategy. But I'd love to hear your take on what, what the most effective CEOs do, maybe what the least effective ones do as well, as a means to know what to avoid. Just your, a summary of your research and thinking on the role of a CEO specifically would be fascinating.

• 24:02Speaker 03

  Yeah, I can tell you what people talk about the most. And then I can tell you about the stuff that people tend not to talk about, which are actually really important. So the things that people talk about the most in the role of the CEO is that you set the overall direction and strategy of the company. You build out the team and you choose the executives who are going to run different functions and then you manage them and help optimize their roles. You raise money and make sure that the companies will capitalize and have the money to survive. So those are the things that people talk about a lot. It's basically strategy, hiring and capital allocation and direction. I think the main things that people don't talk about enough is number one, you're also ultimately sort of the chief psychologist of the company and you have to spend a lot of time on people issues that you don't expect.

• 24:44Speaker 03

  I think you also need to think about how you're managing your own time. And I think one of the biggest places where, where founders who haven't been through it before tend to break as things scale are sort of in two areas. Number one is they start doing a lot of stuff that they really hate doing. And they start to burn out because of it. So if you're a very product centric CEO and you're spending all your time in sales compensation discussions or dealing with HR issues, you're probably going to burn out once you start to build out a team who can handle those things for you. So one big sort of breaking point is just doing stuff that you hate. The second is just this inability to let go or to delegate or feeling challenged by the new people on board or things like that. And so I think those are really the

• 25:27Speaker 03

  biggies for somebody who is doing it for the first time.

• 25:30Patrick O'Shaughnessy?

  So you mentioned at the very beginning of the conversation, this notion of how important a market is for any business, whether you're investing in one or building one. And I would love to talk about how you identify that, what the actual nuts and bolts are behind market identification, maybe obvious and non-obvious. So of course, anyone can calculate an addressable market if it's straightforward, but a lot of the most interesting breakout companies are the market was huge, but but non-obvious. And so I'd love to hear your thoughts on evaluating or identifying interesting markets. And then the second part of this section would be on how marketing then plays a role once you've identified an interesting market. So unique ways of of reaching a market after identifying it.

• 26:13Speaker 03

  I think there's three types of non-obvious markets. The first type is it's a brand new market, but it's growing really fast and it kind of comes out of nowhere and surprises people. And honestly, that's actually the rarest market. And that would be things like cryptocurrencies. It just it just kind of came out of nowhere in terms of hitting the scale that it did so rapidly. Certain types of 3D printing may fall into that. But most markets tend to take a bit longer. But there are some markets that are just brand new. There's a new technology and suddenly everything starts working. Maybe that was the internet in the mid 90s, where suddenly you had browsers and that enabled a whole suite of things to run inside a browser that really replaced the janky interfaces of the past. So suddenly

• 26:54Speaker 03

  you have a technology shift and stuff starts working. I think the second type of market that are non-obvious are every once in a while, you have a market that looks extremely crowded. And so you think there's tons of activity and it's game over. But in reality, it's still the really early days, either because the product isn't quite there yet, or the infrastructure isn't quite there yet. Examples of that would be search when Google got started, where there was a dozen other search engines. You know, when Dropbox and Box got started, there was a dozen other cloud storage services and everybody was saying, why is this different? But fundamentally, what had happened is all these other companies that were kind of janky had identified a real user need, but they just hadn't built a product that addressed that need properly. And so sometimes a non-obvious market is actually one that looks very obvious and

• 27:38Speaker 03

  very crowded. And so it's non-obvious because there's still room for somebody to come in and dominate it, but everybody thinks it's game over. The third type of non-obvious market is one where there's an opening from a sales or distribution or channel perspective. And so that would be things like Zynga really writing Facebook as a new form of distribution. And maybe SaaS companies entering on the low end and working their way up, or alternatively, companies that are starting at the high end like Tesla and working their way down. And so sometimes it's a little bit more about your distribution or market segmentation. And you realize, hey, this subsegment is really interesting and that's the way to start it. I think in the steel industry, the mini mills were a great example of this a few decades ago, where everybody had these giant centralized mills and the mini mills

• 28:21Speaker 03

  would basically take scrap and melt it down and sort of resell it. And that was considered a really odd market segment and eventually it became a massive part of the overall market. So I do think it happens in sort of traditional technology markets as well, or traditional markets outside of technology as well.

• 28:36Patrick O'Shaughnessy?

  I love that list. It's such a helpful way of thinking about it. As you survey the landscape today, again, more from an investor standpoint, and of course, you know, you might be wrong, as is often the case with early-stage investments. But what are the seeds of maybe one or two markets that you've seen that fit those criteria today that may be underappreciated by investors?

• 28:57Speaker 03

  Number one is on the machine learning side, I think the semiconductor and systems layer for machine learning is a very large market that a lot of people aren't focused on. And really, it's building custom ASICs that will replace Nvidia GPUs and be much more performant from a power and performance perspective than what a GPU can do, since GPUs are just not optimized. For machine learning. So I think that's one big market segment that there's not a lot of attention being put on, but I think you can imagine at least one tens of billions of dollar company in that market segment. And in general, with any technology wave, there tends to be a really large outsized semiconductor company that's created alongside. So Qualcomm and ARM were sort of the mobile wave in terms of massive outcomes.

• 29:38Speaker 03

  Broadcom was the networking layer. Intel and AMD were really the rise of the desktop computer. And so I do, and servers, obviously. And so I do think that each technology wave also creates a massive silicon company. In the crypto world, that's probably Bitmain right now is sort of that, that example on the ASIC side. So I do think there's room on the machine learning side. So that's one. Number two is the longevity topic that we talked about. And number three is, I actually think that if you were to take a Fortune 500 company and just take it apart and ask, what are the pieces that you have to do over and over and over again? You'd end up with a dozen really valuable, useful companies. I think checker, the background checking API company is a good example of that, where they just

• 30:19Speaker 03

  took background checking, they really upgraded it from a software perspective, created an API around it, and have developed a really compelling service initially for the gig economy and then shifting to other areas that, you know, there's probably a dozen other companies like that that could be built that could be really outsized.

• 30:35Patrick O'Shaughnessy?

  You wrote a lot in the book about best practices for businesses. And obviously, I think that's the primary reason to buy and read the book. I would love to ask about worst practices as one of these closing questions or ideas. Maybe the things that you've seen that most consistently lead to bad outcomes at companies. And I'm just going to leave it pretty general like that. I'm not going to ask specifically about recruiting or product management or any, any subsegment. But just very generally speaking, what, what the worst consistent practices you've seen at businesses that people should avoid?

• 31:04Speaker 03

  I think when all is said and done, companies that are growing really fast are really resilient. And you see every type of screw up you can possibly imagine happen. And somehow these companies still survive. And sometimes as a founder, it's almost disheartening because you're working so hard on your own company and you're scrapping and you're doing everything right. And it still doesn't work because you're in the wrong market. And then you look at something that's in the right market and it's working beautifully and it's getting all these accolades in the press, but you know that inside is just terribly run. And so I do think that growth covers up for a lot of mistakes. And in fact, I interned at Cisco back in, I think it was 2000. And my manager had joined Cisco in like 91 or 92.

• 31:46Speaker 03

  And his comment was always growth covers up for a lot of mistakes. And so I think that happens with every great technology company. Just really stupid things are done, but the company somehow survives. And then it professionalizes and then it eventually starts doing things really well if it really breaks out. In general, I think most of the screw ups tend to be about choosing the wrong people to do things and having them consistently make terrible mistakes and then not doing anything about it. Or alternatively, founders or sets of leadership fighting nonstop, or the creation of a more general toxic culture. Those are things that tend to be really hard to fix and can really create enormous drag on a company. You know, every once in a while, you see a company that's just crushed by competition

• 32:29Speaker 03

  because that competitor had just had dramatically better distribution. You know, Microsoft effectively did that in the 90s, which is why they had all the antitrust hearings is they would literally just crush their competitors through distributing things as a bundle with their OS. But in general, most companies tend to die of self inflicted wounds or to really slow down of self inflicted wounds through bad management, bad people choices and bad culture.

• 32:52Patrick O'Shaughnessy?

  So my closing question for everybody is the same. And that is to tell the story of what the kindest thing that anyone's ever done for you is.

• 33:00Speaker 03

  You know, I think that in my mind, Silicon Valley is a place where people very openly give back. And I've been helped enormously by that ethos throughout my career. And you know, fundamentally, I think that, you know, there's the old saying that you die from a thousand small cuts. I think in Silicon Valley, I've benefited from a thousand small acts of kindness that have sort of built up over time. When I moved out here, I had literally no money and I was in school debt and everything else. And I was sleeping on the floor of an apartment that I rented. I didn't have a bed for the first two years. I was just literally sleeping on a sleeping bag. And lots of people went out of their way to help me, to introduce me to companies I could

• 33:41Speaker 03

  join. And so really, I think I just benefited from that collective, hey, we think this person is smart and we'll take a shot on them as an ethos. And that ethos, to me, is the most important thing out here.

• 33:53Patrick O'Shaughnessy?

  So I thought of one other question, just because your collection of experiences is quite unique. If you were forced, on the back of this book, to write another book on a totally different topic, what would you write on?

• 34:03Speaker 03

  I'd probably either write a novel of some sort, or alternatively, I would write something about markets. So why are some markets good versus bad? And why do some markets just tend to fail? I think there's a few great books in that area. One of them, I wouldn't say is a great book, but is an interesting book, called The Rule of Three. And it basically argues that many markets naturally will collapse into oligopoly markets of two to four players, or two to five players, and often it ends up at three players. And why is that a stable equilibrium for many markets? And so I do think many people don't think enough about what is a real market structure. In Silicon Valley, the way that that's played out is, for a while, everybody thought that everything had to be a winner-take-all market. And that

• 34:47Speaker 03

  was because in social networking, everything was a winner-take-all market. Eventually, you had one dominant player that really won. Or in search, Google was so good that it eventually became winner-take-all. It's unclear to me that that's the case for most markets. And so I think it's fooled a lot of investors to not ever invest in anything where there looks to be a number one, because they worry that the number two is just going to be worth a tenth as much. And I think that's sometimes true, but it's not always true.

• 35:12Patrick O'Shaughnessy?

  You know, I just want to make sure, we've talked a lot about markets, and I've found that to be an especially interesting part of the conversation, that we're not leaving anything out. Any sort of ideas or insights that you have on evaluating markets that you'd want to leave us with? I found your thinking there quite fascinating. So any closing thoughts on thinking about markets?

• 35:31Speaker 03

  I think one of the big learnings of the last 10 years is that the internet has created markets that are larger than anybody in the world had ever anticipated. And that's why we're seeing these companies start to flirt with trillion-dollar market caps. Fundamentally, there's never been a time in history where you could reach so many people so frictionlessly around the world with so many services. And I think that's truly transformative and it could be people on mobile devices. It could be people on all the other various types of computers that we have. But fundamentally, we have this globally networked world with these massive available markets that you can get to with high velocity. And that's why I think we're seeing companies form and reach scale faster than we've ever seen any time in human history.

• 36:16Speaker 03

  And I think it's because of the power of mobile, internet, cloud, et cetera, coming together to create these truly massive outsized markets. So I think for me, one of the big takeaways is that markets are bigger than they've ever been.

• 36:27Patrick O'Shaughnessy?

  Fantastic. Great place to close. Thanks, Eliad, so much for a wide-ranging, really interesting conversation. I appreciate your time.

• 36:33Speaker 03

  Ah, thanks so much for having me on.

• 36:36Patrick O'Shaughnessy?

  Hey, everyone. Patrick here again. To find more episodes of Invest Like the Best, go to investorfieldguide.com/podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com/bookclub. After you sign up, you'll receive a full investor curriculum right away and then three to four suggestions of new books every month. You can also follow me on Twitter, at Patrick underscore Oshag, O S H A G. If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening.