Pod Insights Invest Like the Best with Patrick O'Shaughnessy Bill Gurley – All Things Business and Investing - [Invest Like the Best, EP.137] About this episode My guest this week is Bill Gurley, a general partner at Benchmark Capital and one my favorite investment thinkers. As you’ll hear, despite enormous success through his career, Bill is clearly still in love with business and investing. Where many might discuss past glories, I’ve been incredibly impressed with how both Bill and his partners emphasize the current portfolio and market landscape. I’m thankful to have had the chance to speak with him in this format. I hope you enjoy our conversation.
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
1:13 - (First Question) – The idea of increasing returns
1:21 – Competiting Technologies, Increasing Returns, and Lock-in By Historical Events
2:07 – Complex Systems Theory – Santa Fe Institute
4:35 – Markers that could be a sign of network effect in a company
6:27 – The opportunities for companies to capture network effect
8:46 – Are there certain teams/leaders that are more conducive to leading a network effect company
11:55 – Liquidity quality
13:35 – How important is the revenue model at the beginning
15:59 – Fascination with Nextdoor
17:56 – Paradox of Choice
18:39 – Finding opportunities
20:17 – Potential marketplaces and assets that could be commoditized
20:20 – All Markets Are Not Created Equal: 10 Factors To Consider When Evaluating Digital Marketplaces
21:39 – Usage yield on the world’s assets
23:50 – Has technology changed the world of value investing
26:28 – Hyper niche marketplaces
27:52 – Challenges of labor marketplaces
30:12 – User generated content businesses
32:44 – People who are capable of building UGC businesses
33:16 – His interest in Discord
34:31 – Factors of a healthy marketplace
37:57 – Fools’ gold in marketplace businesses
39:04 – How influx of cash is impacting the marketplace business landscape
40:43 – All Revenue is Not Created Equal: The Keys to the 10X Revenue Club
43:20 – How does the influx of money into the space impact him
46:44 – Spending money to attack top brands
50:32 – Regulatory capture
53:36 – His thoughts on the IPO market
57:49 – How did he realize this was his passion
1:00:42 – Qualifying his passion
1:01:52 – Favorite thing about working with entrepreneurs
102:48 – Honing your craft
1:04:33 – Making yourself a good mentor
1:05:56 – Kindest thing anyone has done for him
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
Transcript 12,573 words · 5 speakers
Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
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0:36 Patrick 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.
0:57 Speaker 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.
1:22 Patrick O'Shaughnessy? My guest this week is Bill Gurley, a general partner at Benchmark Capital and one of my favorite investment thinkers. As you'll hear, despite enormous success through his career, Bill is clearly still in love with business and investing. Where many might discuss past glories, I've been incredibly impressed with how much Bill and his partners emphasize the current portfolio and market landscape. I'm thankful to have had the chance to speak with him in this format. I hope you enjoy our conversation.
1:46 Patrick O'Shaughnessy? So Bill, as I just said, I'm totally ashamed that until this morning, I had never heard the name Brian Arthur and never read his 1996 piece on increasing returns in business. And so I thought, since it's fresh on my mind, and I know it was influential for you, that we'd start there with this idea of increasing returns, which really at the time flew in the face of much of economics, which was based on diminishing returns. Maybe you could talk about how you stumbled across this and the influence that it's had on your thinking.
2:10 Speaker 04 Yeah, so between 93 and 96, I was working on Wall Street at Credit Suisse, first Boston in the research department. And literally the first or second day, fell into a friendship with Mike Mobison, who you've had on many times and who you know well. And Mike and I, even though he was the food analyst and I was the tech analyst, we started sharing ideas and books and whatnot. And I actually don't remember which one of us, he might remember, had a book called Complexity by Mitchell Waldrop, which was about the rise of the Santa Fe Institute. And in that book, Brian Arthur is one of the heroes, early professor at the Santa Fe Institute and someone that had a lot of different radical ideas.
2:54 Speaker 04 And so we had read that book and I think visited Santa Fe and had met Brian. But this notion of increasing returns, that some company that got to a big level would find it even easier to get to the next level. And I'll tell you, two open table data points that equate back to having read that paper, even though what played out was 20 years later, 15 years later, is a really fascinating concept. And I was covering Microsoft at the time on Wall Street. And you could see this at play. You could see the more of their OS that existed, the more people wrote apps for their platform, the more apps people wrote for their platform, the value of the platform was higher. And it just kept paying off.
3:38 Speaker 04 And so you ask yourself which other businesses are susceptible to this. And I would say it's just been a mainstay mental model that I've kept in the back of my mind at every single investment decision we've ever made.
3:51 Patrick O'Shaughnessy? So basically always as a checklist item or something, the potential presence of increasing returns to scale.
3:57 Speaker 04 Or network effects is another word that's used. And there's two real challenges with the term and the concept. One, everybody's heard it and repeats it. So it's kind of...
4:08 Patrick O'Shaughnessy? It means nothing.
4:09 Speaker 04 Right, it's been polluted, right? And so people aren't really paying attention. And it's in every startup investor deck. And so you have to have judgment in terms of analyzing whether it's present or not. You can't simply say, oh yeah, it's not a black or white switch. The second thing I would say is I do think, especially having looked at so many different businesses over the years now, there are different levels of it. And it's almost like someone should come up with some type of scoring system. There are companies... That are wildly prone to network effects. And even Metcalfe's law, there are financial constructs which try and measure it. And whatever the actual Metcalfe's law equation is, that's a pretty strong form of it. Not many people have that.
4:52 Speaker 04 And they almost always decay at some level. Like, what's the value of an incremental member joining LinkedIn? It's probably less than what the value of the 10,000th person that joined LinkedIn. And so there are many, many, many nuances.
5:08 Patrick O'Shaughnessy? When you're sussing that out at the very early stage, you're investing. I mean, you mentioned that there are certain companies more prone to these things. Are there markers? Are these things identifiable? The potential strength of them, like the spectrum, is that identifiable ahead of time? Or is it really just a case, is it really idiosyncratic?
5:23 Speaker 04 I mean, obviously, a lot of the companies that become platform companies are exposed to network effects. I think there are things you can build into a product, especially when you're thinking very early stage about a concept that could make them stronger or weaker, depending on what you're doing. A lot of the social networks are prone to this. As far afield as it may sound, like Eugene Wees' piece he wrote on status as a service. Creating more status surface with tons of different types of validation and scoring and winning can tip up your network effect. And so I'm looking at it broadly across a whole bunch of different things. This notion I mentioned about when does it top out and how?
6:06 Speaker 04 I'll give you a formula that I've never published, but that I think about a lot, which is just imagine an X Y graph. And on the Y axis is the value to the customer. If it's a two sided network, you could build one for the value to the supplier, one for the value to the consumer. On the X axis is your penetration into the market. So if I'm building a two sided marketplace, it'd be penetration into supply. Now, the question is, is the line you would draw between those two things, the function up and to the right? If it is, you have a network effect. Does the 10,000th customer have a very different, more positive value equation than the 1,000th customer?
6:51 Speaker 04 And you can just think about that against any business and ask yourself why that might be the case. And lots of businesses are way more prone to it than others.
7:00 Patrick O'Shaughnessy? How do you think the pipeline has evolved in terms of companies trying to capture this? And whether or not it's quote unquote like picked over, meaning a lot of the major potential network effects, something like social have sort of been landed and mined, or at least it'll be much harder to do that again into the future. Do you think that that's true? Or do you think that we've got a-
7:18 Speaker 04 I mean, I do. I'll give you another category. So in marketplaces, I could give you 10 reasons why OpenTable is just way more prone to network effects. You're not monogamous. You like to go to new restaurants. Your frequency's high. There's all this stuff that doesn't exist in other verticals, and so you don't get the same dynamic. But I'm 100% certain that there's some high network effect business out there lurking with the internet. The internet is just such a rails system for this type of thing because something can be instantly known. People can sign up overnight. And so there's a concept people have talked about fondly that no one's quite landed called the interest graph, which Pinterest and Twitter
8:01 Speaker 04 and Quora and a bunch of others are kind of tilting at. But if someone nailed that tomorrow-
8:06 Patrick O'Shaughnessy? Can you say more about what you mean by that?
8:07 Speaker 04 Yeah, it's this generic concept that there'd be a website or mobile app you would go to where everyone that had that same shared interest would be immediately there. I love mountain biking, and this is my level, and I live here, and you're automatically grouped with those people.
8:23 Patrick O'Shaughnessy? It's generalizable. It's not-
8:24 Speaker 04 Yeah. And if you could come up with a concept like that, it would monetize like crazy. The UGC opportunities would be incredible. I mentioned three companies, probably five others that feel that they're the rightful heir to that. But there's a concept where I wouldn't be shocked if a company popped up tomorrow. If you look at our portfolio, even look at what we're doing with Discord or Nextdoor. All of the UGC plays, I remember when Rich Barton of Zillow fame had the idea for Glassdoor. And today, every single person knows of Glassdoor. Investors look at Glassdoor. But this was just a notion. And the notion was if we can get people to review their place of work, will that be successful? It's
9:07 Speaker 04 a classic network effect type opportunity because it either tips or it doesn't. It's almost like a binary case. You either get enough traction where it becomes relevant. And once it becomes relevant, it becomes more relevant.
9:18 Patrick O'Shaughnessy? Is there anything in the founding teams that you think is interesting as it pertains to network effects? Are there teams that are, or people of certain backgrounds that are particularly well-suited to thinking about this kind of business?
9:31 Speaker 04 I think so. I would say whether it's a good marketplace play or a network effect business, or a UGC play, user-generated content, all of these require that the individual be hypersensitive to the system and the playbook. And the thing I said about is the value of customer N plus 1,000 higher than N. And like, you have to understand where the end game is and are you building the system where things tip into one another and it starts to take off? I'll give you a great example in this case. I have found the majority of, one of my rules for getting a marketplace off the ground, or you could say for a UGC play is do tons of unscalable things.
10:14 Speaker 04 And if you took 90% of the entrepreneurs that have been to business school and understand scaling, it drives them nuts. Like, they don't understand. They'll say, "Oh, we can't do this. How will we ever do that at scale?" And I'm like, "We're not going to do it at scale. This is a flywheel. We're trying to get to flywheel spinning." So, the cost of our activity today is irrelevant to the marginal cost of the activity down the road, because we're going to stop doing what we're doing. I'll give you an example in the Glassdoor case. I think the very first company that was reviewed was Cisco, and the founders went to the Starbucks near Cisco with a pad of paper and interviewed people for reviews.
10:53 Patrick O'Shaughnessy? There you go.
10:55 Speaker 04 Zero, zero chance that's going to be the long-term business effort against that, but you got to seed the market. Another great example is Yelp. Jeremy would go to nightclubs with T-shirts to get the Yelpers excited about what they were doing. And there's no way he's going to go to every business on the Yelp platform. You're trying to get the thing to come alive, where there's passionate participants that care about the quality of the reviews. You want that seed state to be so strong that your natural, as a network Tips and tips and tips. It was built off of something from strength. It was really interesting from a historical perspective. At the time that Yelp launched, there were two other venture-backed plays that had more money.
11:40 Speaker 04 Judy's book and Insider Pages.
11:43 Patrick O'Shaughnessy? Never heard of either.
11:45 Speaker 04 And both of them took, I think it's called like ABI, Small Business Listing or something. They bought that and they just started the website live where you could review any business. And so they have way more breadth than Yelp, but they have no depth. There's no quality to what's going on. Jeremy focused on nightclubs in San Francisco, got the fire burning really, really bright, and then had it bleed with quality. Do you understand what I'm saying?
12:13 Patrick O'Shaughnessy? Of course, yeah.
12:13 Speaker 04 And so that's one of those playbooks is precisely built around network effects, doing something very unscalable early on and getting it going bright, and then growing from strength. And then you have something that's way more alive, if that makes sense.
12:28 Patrick O'Shaughnessy? Yeah, so it's like a locality, not necessarily physical locality, although that would make sense too, like in the case of Nextdoor, but or locality around an interest or like something with a lot of density.
12:37 Speaker 04 And I've come up with this phrase I use internally that I made up. So I, one day I'll have to write a definition of it, but I call it liquidity quality. And I tell entrepreneurs, I care way more about that than I do how broad you are. We can use venture dollars and growth playbooks to go broad if the fire's burning bright. And so how do you get this liquidity quality high? And Jeremy being at those nightclubs in San Francisco and people being super passionate and their review frequency being high, that caused the quality of the experience, even though it was in a very small area. And so I very frequently run into entrepreneurs who think they need to expand to 10 cities really quickly to raise their A or their B or whatever.
13:20 Speaker 04 And I'm like, no, if you have like incredible unit economics and growth metrics in a single city, where it's obvious that your playbook's working and things are spinning and things are getting better and you're basically having network effects, that's way more interesting.
13:36 Patrick O'Shaughnessy? Are there interesting markers of whether it's like liquidity quality or like the health of the network itself in a contained area that you find especially interesting?
13:44 Speaker 04 I mean, I think that's exactly what you have to look for. The reason I can't say measure A, B, and C is you have to know the system that you're looking at and then define what that is. But I think every company that's trying to build a marketplace, UGC and network effect, should have some definition of what quality looks like or liquidity threshold that matters and track it like crazy.
14:07 Patrick O'Shaughnessy? How about the importance of the revenue model early on in some of these things where notoriously, some of the biggest companies in the world now didn't necessarily have a revenue model in place as they were scaling this network effect? How has that evolved?
14:19 Speaker 04 I think it's highly dependent on the situation. Uber had a business model from day one and we've been involved in a number of companies from Instagram to Snapchat to Twitter, Nextdoor, Discord, that it had none. And so I've seen both flavors. I think the UGC stuff tends to lean more towards get big fast. The marginal cost on a UGC play is pretty low. And we've been in a capital environment where there's enough people that have seen that work now that you can get incremental funding and you can keep the game on the field. If you're in an advertising oriented world, you should not try and monetize until you're north of 10 million users.
14:59 Speaker 04 Your ability to get a decent CPM is not high enough to warrant losing the screen real estate and whatever other viral growth mechanism you could have put in there.
15:13 Patrick O'Shaughnessy? You've written and talked a lot about, maybe from your original days on Wall Street, the importance of understanding mispricings. You might get something right, but if it's priced incorrectly, it's worthless to you as an investor. Do you think that that has applied to businesses like this, maybe at the later stages? Obviously, maybe early stage, the pricing is more similar. But have you seen that mispricing of network effects change at all?
15:35 Speaker 04 I think that happens from time to time, but I think it happens in all types of businesses. So I wouldn't tie it to the network. People might get overly giddy around a model where they think that's present. I mean, certainly, I would say that when you see companies trading at astronomical revenue multiples, like north of 20, I think there's some inference that Wall Street believes there is a network effect present because you could take what Brian wrote in 96 and it would say, if you have these things, things are going to keep getting better for you. And that would be a reason, even if you built the DCF model, to say, oh, I'd be willing to accept that type of outlandish multiple.
16:18 Speaker 04 There's a strong argument right now that Zoom's in that very place. People are putting hardware into their offices.
16:24 Patrick O'Shaughnessy? It's pretty amazing.
16:25 Speaker 04 And there appears to be a cross-company network effect, which for enterprise software, may be unprecedented.
16:31 Patrick O'Shaughnessy? I'm fascinated since we first talked about Nextdoor, the company. I had not a whole lot of experience with it. I've since gained quite a bit of experience with it, using it. And it's this incredibly interesting example of this that's hyper, hyper local, literally my zip code. Maybe mention a little bit about what is so interesting about that business relative to other network effects? And maybe that answer is that simple, that it's just the density of the people involved.
16:52 Speaker 04 A couple of things. When the idea first came up, I think it was very easy to argue intellectually that if you could build a social network tied to address, that there would be value there precisely because of how many decisions are made at or near your address that are relevant to your life. It's a much more utilitarian social network versus a social, social network. There's a little bit of some of those things around different topics, but it's really about, how do I optimize my life? How do I find a babysitter? How do I find my dog that's lost? How do I, who can I hire to fix my roof?
17:32 Speaker 04 And we believe that there is a group of things that you could organize people around locale that what I would just call like a business option that's really, really broad. Probably more than I'd even want to say right now, but there are so many places we can go as we continue to build this. There's a really strong recommendation product inside the system today. That's liquid in almost every market. It's different from Yelp and then it doesn't try and grade positive and negative. It just lets you state which of the local businesses you vouch for. And then it's got this really cool construct where your face now lives on that person's page,
18:13 Speaker 04 which is a really strong commitment. And I actually think in the first 10 years of the internet, we thought and Bezos led the way is like Earth's biggest selection. We thought you had to catalog everything because you could. And I think we've reached the point of saturation. There's that famous book, Paradox of Choice. You don't need to know that there's 40 plumbers near you. You'd like one of the top three that can get there in the next hour. Right? And so I think the tools and technologies of the internet are going to be used to help people make choice. Stitch Fix is doing a lot of that, obviously, and reduce the set of options. And so this is a version of that, but there's a whole bunch of things that once you've become rooted that way.
18:53 Speaker 04 And very broadly, I think about it this way, which is we have the opportunity to be your digital mailbox. And so all the stuff that you historically used to do with your life and house that revolved around your real address that brought mail there, there might be an opportunity for us.
19:12 Patrick O'Shaughnessy? I'm curious what direction it goes in terms of you thinking that there might be an opportunity in a category, let's say local zip code. And then finding companies that are doing that versus coming across ideas like that because you saw the companies.
19:25 Speaker 04 Yeah, there's some of both. In this case, we had worked with a team of EIRs, Sarah Leary and Neer Tola, who we'd worked with before. They had started a company called Fanbase that was a network effect UGC play that didn't work. And we had scaled back to seven people and we're going through ideas each week. And one of the engineers said, my neighbor wants us to build a platform for their HOA. And we were like, wait a minute. What if we did this and this and this and it tipped here and here and here? And so we, before we built the first line of code, we thought through, could we design it in such a way that network effects would be at play? I'll give you a great example, since we're talking about network effects.
20:08 Speaker 04 There was a decision early on to let some of the neighborhood posts go, create an option for the user where it could go not just in your neighborhood, but a little bit further out. Now, we could have made the decision to make that conical. In other words, it would go from your neighborhood to your zip code to your city. But there's not bleed in that case. So what we did instead was imagine any neighborhood on a map. We gave you the opportunity to do the neighborhoods that were contiguous and around it. Now you have the ability to bleed into any neighborhood across any boundary. Bleed being a UGC concept or idea. So liquidity goes from one place to the next.
20:50 Patrick O'Shaughnessy? I was fascinated, and I think it was this year that you wrote another post on marketplaces and sort of the descent of type of marketplaces, starting with things like Uber and Airbnb. Maybe no coincidence, those are the two most valuable assets that people tend to own that are also.
21:05 Speaker 04 I actually started with the original, which was eBay.
21:07 Patrick O'Shaughnessy? eBay, right, exchange of goods, right, right, right.
21:09 Speaker 04 Exchange of goods, I think it's created more market cap than any.
21:13 Patrick O'Shaughnessy? And it's the oldest, bazaars and.
21:16 Speaker 04 And it appears to be, uh, sharing economy would be second with Airbnb and Uber. And then the third one in it was labor marketplaces, which I don't think or is proven at this point.
21:25 Patrick O'Shaughnessy? Yeah, yeah, we'll definitely spend a bit more time on labor marketplaces. I'm curious if you've ever done on a whiteboard or something, listing people's top assets that might be underutilized or some exercise like that, where there's like a total potential map, aspects of human identity or something like that.
21:40 Speaker 04 I've done it intellectually, I haven't written it down, but I'm sure people have. And it drops off quickly from your home and your vehicle. And then it goes fast in terms of something that someone would want to share. I actually think to tie together some of these conversations, I think Nextdoor has a pretty interesting opportunity in sharing economy around.
22:00 Patrick O'Shaughnessy? Smaller things.
22:00 Speaker 04 Yeah, 50 foot extension ladder, a chainsaw, something that you buy once and don't use very much. And I think some of the hardware stores might not be excited about that, but I do think that's an opportunity.
22:11 Patrick O'Shaughnessy? I'm just so interested in like the productivity or the yield, the usage yield on the world's assets as a result of this marketplace model. How much more do you think there is to go in that? Do you think that those kinds of businesses, the sharing economy model, if you will, for earlier stage startups is still as interesting?
22:28 Speaker 04 I mean, I'm always surprised by what entrepreneurs can uncover that until they do, when it happens, you're like, oh, my God, I should have thought of that, but you don't. And so I do feel like with all the money and all the VCs and all the investing, all the entrepreneurs, it has been a pretty exhaustive search. And one of the things I talked about in that piece is one of the things that an Uber does or an Airbnb is it connects someone who has marginal time immediately through algorithms with someone that wants their help. And it's interesting because I went back and I was looking at some of the leading economists that had kind of uncovered these theories.
23:12 Speaker 04 And they obviously, because it was 300 years ago, they didn't have the opportunity to say, well, there's probably a hell of a lot of information asymmetry in trade because there's not perfect information. And until the internet came around, there's no way to have perfect information. But now we have perfect information or can have near perfect information about someone with a skill set being available and someone with that need being able to get to them. And while we may have done that with cars or homes, I have to believe that when it comes to medical expertise, or I guess even if I have some peculiar problem with my car, if there's a way to link you quickly with someone who's the perfect person for that problem,
23:57 Speaker 04 there's got to be more economic unlock, even connecting tutors and coaches and those kinds of things. No one's really nailed that yet.
24:06 Patrick O'Shaughnessy? The kind of search cost idea is like a really interesting way of thinking about this. Just get me the thing I need faster. I'm forgetting in the piece, who were the original economists? Was it like Adam Smith or?
24:14 Speaker 04 Adam Smith and Ricardo, I think, were the two that I mentioned.
24:17 Patrick O'Shaughnessy? Yeah, so it's kind of productivity and specialization.
24:20 Speaker 04 Specialization and trade.
24:22 Patrick O'Shaughnessy? So I'm always interested in the four dangerous words in investing being it's different this time. And trying to square that with the rise of computers and the internet specifically. And whether or not that does indeed represent something that has created sort of a seismic shift in markets and in investing more specifically. So if you look at, for example, the recent plight of value investors in public markets. A style that in all of our testing, where we can go back a long time, the early 1900s or something like this. But there was nothing like this back then. It was a more traditional, kind of the old school that Brian Arthur describes. Manufacturing type business, nothing knowledge economy like what we see today. Do you think that that's true, that the kind of it's different this time?
25:06 Patrick O'Shaughnessy? Might be applied to more increasing returns business kind of post-internet and that's a permanent shift?
25:12 Speaker 04 Probably yes. I would state it a different way, which is the propensity with the internet being there for network effect. Businesses is higher than it's ever been because you can get a whole bunch of people on the same platform quickly. Ideas can spread super fast. We're creating more connectivity every day with every one of these services, which allows ideas to flow even faster. I'm amazed at the, everybody won't have this experience, but the quality of very high value conversations I have with people. Some of which I didn't know over Twitter DM. And so, holy crap, like those pathways didn't exist five years ago.
25:56 Speaker 04 And now all of a sudden, stuff's happening across them. And that's just one vector because a lot of people have started asking questions about vertical LinkedIn's. And that's really interesting to me. I look forward. 10 years and think, won't everyone that's in this occupation or whatever be connected in some way? And how do those things happen? And how do they come about? We're not an investor, but I've spent a little bit of time with the founder of RigUp. And it's just a really interesting notion that, oh yeah, anyone that works in oilfield services, people may not know what this is, but it's a labor marketplace for people that work in
26:35 Speaker 04 oilfield services. And if you're in that business, your reputation on this, what looks like an increasing returns platform is all that matters. Like the only thing that matters. Nothing else matters. Your reputation off of it doesn't matter. And so that's a pretty niche esoteric example of network effects popping up in a place probably no one expected.
26:59 Patrick O'Shaughnessy? Might that be the weak underbelly of the large network effect businesses that in the future, there will just be ever more specific subspecialties and that that's
27:10 Speaker 04 Maybe, but what we're finding, I have this theory that investors get into a lot more trouble with TAM than you look at Viva, which is trading at some ungodly valuation, or you look at what Marcus built at Guidewire, which is a vertical SaaS software for the insurance industry. These things are turning into $10 billion companies and they're showing signs of network effects. Both of those examples do RigUp does and SaaS and marketplace, they're all kind of running into each other.
27:40 Patrick O'Shaughnessy? It seems like it would be hard for, let's take the LinkedIn example, for them to generalize and be able to own all the sub.
27:46 Speaker 04 I think it is hard. I think Yelp has struggled with that a little bit over the years as people get in deeper into the verticals. And there are things you can understand and know taxonomically that allow you to build one-click type experiences if you go deep that are going to be hard to do if you don't. And so, yeah, but maybe, maybe that's okay. Maybe what we're going to find is that technology gets so pervasive and becomes so important that, oh, we should have done that bet for that vertical SaaS company and veterinarian business because all of a sudden it's got a $20 billion market cap.
28:24 Patrick O'Shaughnessy? You mentioned earlier that labor marketplaces maybe are the least proven of the major categories. So what makes those so hard? Is it, RigUp's a great example of one that's working, but when they don't work, what tends to be the problem?
28:34 Speaker 04 Rather than say don't work, let's say didn't show signs of a network effect, was Mechanical Turk that Amazon built, which was a labor marketplace for perfunctory work that could be pushed over the internet. So people used it for image identification and things like that. And my theory as to why they didn't work, if you go back to, over the podcast medium, but you go back to the graph I described with the X Y graph between value and penetration. It turns out that if you get just 5% of the supply, the value you provide in customer is no different than if you get 95% of the supply. And that allows for fragmentation and you don't end up with a network effect or a winner take all.
29:18 Speaker 04 I think some of these, they haven't proven an ability by having this labor marketplace to be able to tip things fully up and to the right. We were the original investor, the company that became Upwork, which went public last year. And so there are some success stories. I think it's market caps between one and two billion, which relative to some of these other things that have happened is not as big. And when we made that investment, I would have thought, wow, if we build the Earth's largest marketplace of programmers, what's that going to be worth? You would expect, oh, that's a hundred billion dollar opportunity. And that hasn't played out just yet. And so I don't know.
29:58 Speaker 04 I mean, the RigUp case is kind of interesting in that every single work transaction is temporary.
30:06 Patrick O'Shaughnessy? Oh, interesting. They have to re-up back onto the platform. There's no leakage.
30:10 Speaker 04 You have a new well you want to drill. You bring in these experts, they drill the well and they set it up and they leave. Maintenance is a small fraction of the cost of doing it. You want to turn an old well into a new fracking well. You got to bring in all these experts for a short period of time. But that constant, put it together, tear it apart, put it together, tear it apart, is way more interesting for a labor marketplace. Otherwise, if you're just dealing with the temporary end of any business, it's kind of the edge when you need marginal capacity or not, and it's not the center. Of what you're doing.
30:44 Patrick O'Shaughnessy? Let's talk about user generated content businesses. So you mentioned earlier already that this is sort of a scale it first, then monetize it later story for the most part. What are the unique features of these businesses early on and why are they so interesting to you?
30:57 Speaker 04 Yeah. And look, I would do intentional plug for Benchmark. We have had massive success with UGC's from Yelp to Quora to Twitter to Instagram to Nextdoor to Discord, and we love them. So if any entrepreneur out there has a UGC idea, and I mentioned Glassdoor, come to us. We think we understand them and we really like them. Obviously, one of the early keys is to get people contributing. And there's often a cold start problem. If people are going to come for the content and then they're going to be encouraged to contribute content, there almost has to be some content there anyway.
31:33 Patrick O'Shaughnessy? Yeah, it's like putting money in the tip jar to start something.
31:36 Speaker 04 So, and that goes back to what I said about doing unscalable things. And a lot of these companies have these go to market playbooks. I mentioned Jeremy with the nightclub. They built a repeatable process where they would go to other cities and do the same thing. Tinder ironically did this with parties, not really a UGC, but kind of a UGC company in each city that they would launch in because you want to get the quality up to a certain high level. And Nextdoor, we did the craziest thing in the world. We said until you get to 10 members, you can't open your neighborhood. So intentionally restrictive because we didn't want ghost town experiences and we knew quality of the experience was a function of how many neighbors were in your system. So
32:19 Speaker 04 rather than, we thought the anticipation of getting in was a better user experience than getting in and finding it poor. And so we'd encourage you to go find the others so you could unlock your neighborhood. It's almost like a game heuristic. And so every one of these, you'll find there's somebody that understands that nuance and about how this is going to tip and have some type of growth playbook is what people would call it. But I find the number of entrepreneurs that are capable of successfully launching a UGC play is a very small fraction.
32:53 Speaker 04 Maybe less than 1% of all entrepreneurs and they just tend to have a nuanced feel for what it takes to make something come alive and the feature sets that matter and how much they care about quality. I keep going back to that word, but it's what makes the kind of fire burn and then makes it possible to grow into ever bigger circles.
33:17 Patrick O'Shaughnessy? Do those people tend to come from the domain itself? Is that almost like a prerequisite? Like to understand that quality, does it require deep experience in the place they're trying to launch the business?
33:26 Speaker 04 I mean, this is purely speculative on my part. Like, I don't even know of a way to unpack it, but I would say no. I think it's just something they understand innately. And I think most of the business tenants you're taught that have to do with getting scale cause you to completely be able to not get it. All of your instincts are telling you the wrong things.
33:48 Patrick O'Shaughnessy? Can you talk a little bit about Discord? This is a company that I hadn't heard of. Now I see that name all the time, all over the place. So what is Discord for people that are not familiar? And again, what was so interesting about it to you?
33:59 Speaker 04 So prior to the explosion of multiplayer social gaming, and by multiplayer social gaming, I'm not talking about Zynga, I'm talking about Fortnite, League of Legends. Kids started playing head to head over the internet and they wanted to be able to talk to who they were competing against. And most of them use Skype. There were a few other alternatives, but most of them use Skype. And this was also a full pivot, by the way. One of our companies that was a game company that then decided that game wasn't going to work and went in a different direction. But in the pivot, they decided that one, they thought they could get the voice quality a lot higher. And two, once you have people
34:39 Speaker 04 hanging out and communicating around a social construct, in this case gaming, and you know what they're passionate about, you could make it even better. So rather than it being just a tool that has to do with communication, it could start to understand your interest and put stuff in front of you. And so it started as basically a Skype for gamers. And today it's over 100 million users daily worldwide.
35:03 Patrick O'Shaughnessy? Crazy. I don't want to take for granted some of the important features of a healthy marketplace. You've mentioned a few of them. So high fragmentation of supply was one I think that you mentioned. What was the word yours? Monogamy or something like that?
35:14 Speaker 04 Oh yeah. So certain businesses are prone to monogamy. So babysitters are prone to monogamy. Haircutters, if you find a good one, prone to monogamy. Doctors, dentists. If things are succeeding, you're not changing and those businesses are tougher for marketplaces. Restaurants, you're prone to promiscuity. You go to your favorites, but you want to try new ones constantly. And so that's a very different dynamic for a marketplace.
35:41 Patrick O'Shaughnessy? There's two other ones that I wanted to ask you about. The first was the notion of this thing providing some sort of new, better experience versus a status quo experience. What's the idea there?
35:51 Speaker 04 The most obvious example, not to overuse the open table example, but prior to open table, if you had a group of eight and you wanted to go out on Friday night, you were going to be dialing on the phone for a long time. Because finding that person that had that table that was big enough. Now all of a sudden with open table, you can say, I want to eat Asian Friday night, eight people. And it would do an immediate, less than one second search live, connecting to the books in the restaurant. And come back and tell you exactly where you can pick from. That's a night and day differential for that type of search.
36:28 Patrick O'Shaughnessy? Yep. So it's the use of technology alongside the domain, new technology.
36:32 Speaker 04 But once again, different marketplaces may or may not have that need. I haven't seen anything since open table where the overlay network provided that amount of value to the user. Like all of a sudden, boom. I mean, I guess it happens in the travel stuff too, but that's less frequent.
36:49 Patrick O'Shaughnessy? So then the last one I had was an interesting one, which is the friction of supplier signup. I thought that was like an especially esoteric sounding feature of a marketplace.
36:58 Speaker 04 Yeah, although I would say I've come to be almost skeptical of marketplace entrepreneurs whose achievement they brag the most about is supplier acquisition, because I find it to be. Almost irrelevant because if you go to any business and say, can I put you on my network if I send you more business? You're like, why not?
37:18 Patrick O'Shaughnessy? Sure.
37:18 Speaker 04 Right? And so assuming it's easy to identify supply and demand, sometimes it gets kind of confusing, but demand is the game. Now, if there is high friction supplier signup, that makes it worse. But I've come over the years to lessen my concern on this issue because I've found most suppliers are easy to sign up. Now, I'll give you one caveat. Most of the big marketplaces I have been fortunate enough to be an investor in are all built on highly fragmented supply bases and are typically built on small and medium businesses and are typically built on small and medium businesses that haven't been in business that long.
37:53 Patrick O'Shaughnessy? Right. Because if there's dominant supply, then it's going to be hard to do.
37:56 Speaker 04 Yeah. And I mean, there was the classic example back in travel of no one's ever made money in online airline marketplace because they just won't allow it. And I remember when Grubhub was first getting off the ground, there were several competitors who said, hey, we're going to go service McDonald's or Quiznos or Subway. And they all went bankrupt because you start dancing with the big machine and you don't have any leverage and like you don't ever get anywhere. It's interesting to see those guys come on to these food delivery platforms now, but we're 15 years later.
38:29 Patrick O'Shaughnessy? So my last question on marketplaces is like a fool's gold question. Things that may look like a marketplace or a network effect, but through experience you've learned are not.
38:38 Speaker 04 Yeah. I mean, companies where there's super heavy marketing spend, especially on the consumer side, if you haven't tipped to organic, then you don't have a network effect and you don't have a marketplace.
38:51 Patrick O'Shaughnessy? It's just like Andy Radcliffe's old original notion. Dogs eating the dog food.
38:55 Speaker 04 Yeah. But in this case, I would say it's even simpler. In any vertical in any industry, you can become an outsourced marketing services provider. So I can attach myself to a bunch of supply. I can go buy media on their behalf because they're not that good at it. And I can then lead gen, sell them that demand at a higher price than I paid for it because I've filtered this person to being a good transaction for you. Those types of businesses have existed since the birth of the internet and before, but lead gen businesses trade at one or two times revenue. They're not marketplaces. They're not network effects. And I see that kind of failure all the time.
39:37 Patrick O'Shaughnessy? So I'm also curious what the broad, deep availability of capital is starting to do to some of these businesses in terms of the flow of cash.
39:45 Speaker 04 Yeah, the flow of cash and the competition and how that money's being used. And one thing that I've started to see just in the past, I'd say, two or three years, which I think will be a super interesting experiment from a kind of financial understanding standpoint, which is because the money's available to do things like fund receivables or fund payables or write loans, entrepreneurs are using the capital in those ways. It causes me some concern because I go back to everything I've learned from Mike Mobison and all the great investors of all time, Buffett and Munger and all those things. And early, you're taught a very central construct, which is, and Mike talks about
40:30 Speaker 04 this all the time, which is for any company, you could calculate their cash flow relative to their earnings. And there are companies where their cash flows are way better than their earnings and there's companies that are way behind where their earnings are a lot higher than their cash flows. And if you could lay those companies end to end based on that metric, I think you would see it highly correlated with market multiple, whether you're looking at PE or price to sales or enterprise value to EBITDA. I've always felt Silicon Valley has a very crude understanding of valuation. Most entrepreneurs think they all deserve 10x revenue and also with zero regard for what the revenue is, they're making 1% on a house sale and then they want you to pay. It's ridiculous.
41:13 Speaker 04 And in fact, I wrote a blog post a few years ago called All Revenue is Not Created Equal. And I took all the public tech stocks and laid them end to end on price to sales. And it was far from a line. I mean, it went from 0.1, which I think was overstocked to Tencent at the time, which traded 22x revenue. And so it's all over the map. I'm fairly confident that in the very long run, companies that are really good allocators of capital, they're able to have very high return on invested capital. Are going to trade at much higher multiples. And even if you're in a capital intensive industry, you can understand this construct. I'm 100% convinced that Jeff Bezos has understood this since the beginning of Amazon.
41:55 Speaker 04 And Mike and I talked to him about it back then around the time that they went public. But these entrepreneurs don't. And I think they're going to be surprised when they get to the end, whatever the end state is. And they're trying to take this out to Wall Street. And the fact that the companies are so capital intensive, they're going to be disappointed at what it's worth. And maybe the investors will as well.
42:18 Patrick O'Shaughnessy? And you think this is mostly a result of just how easy it is at the low cost of capital?
42:23 Speaker 04 I'll paint the picture the other way. You could say, I've got the availability to this capital. And so why don't I use it? You can certainly tip a marketplace by if everyone in the industry is used to paying 30 days and you let them pay net 90, they'll probably come trade with you. Or if you are willing to run a labor marketplace where you're fronting enterprise companies and they're paying you net 60 and you're paying that labor day of, you're going to attract a lot of labor. And I think a lot of those games are going on right now. I'm talking about past 12 months. This is like a really new thing. But I overheard a VC on a panel say that now that capital's become so cheap,
43:08 Speaker 04 we as venture capitalists get to go after all these new industries. And it really made me chuckle. I think I laughed out loud sitting right next to him. And I was like, you know, I don't think that's how this works. If you are saying that you've got a low cost of capital and you're going to fund a business because of it, the exact flip way of saying that is I'm excited about funding low return businesses and I'm going to go do it. And I don't think that will end well.
43:35 Patrick O'Shaughnessy? Yep. It reminds me of the Buffett tide goes out, see who's swimming naked.
43:38 Speaker 04 Yeah, yeah, yeah. He has this other thing, his is more eloquent, but he says, if a bad business and a good manager hang out together, it's the reputation of the business that will endure. I think that will apply here as well.
43:51 Patrick O'Shaughnessy? Yeah. The other question that it raises is the presence of unusual and new players with very deep pockets in the private, we'll call it early-stage private market and their clear willingness to spend enormous amounts of money or invest, I should say, enormous amounts of money in businesses which, who knows, in the absence of that, huge chunks of capital may not be viable going concerns. How do you think about that as an investor, meaning you're playing on that field and it's impacting things? So how do you think about it?
44:19 Speaker 04 I think it is the single most challenging and difficult business strategy question that we've run into in the past, maybe in my career. And it's not one that has a precedent. It's not one where you can go, oh, go look at this Harvard case study. And I've even said you could have Jack Welch and Warren Buffett in your boardroom and it wouldn't matter because they haven't seen it either. Let's say you're in business X, leave any company's name out of this, and your competitor in business X raises half a billion, billion dollars and decides that they're going to lose
44:58 Speaker 04 $150 million a quarter. Now, if you go back prior to 2010, Amazon was, they lost a billion one year and they were the only one that came anywhere close. And then there's like no other examples of this. And now this is happening all over the place. And you can sit back and say, oh, well, I'll be fiscally prudent. I won't do that. You're dead. Let's say you're going to build next generation laundromats, but this other person is too. And they're just going to offer 50% off dry cleaning or whatever. Like you're dead. No customer is going to come to you. And so you can be fiscally prudent, but you're off the field.
45:36 Patrick O'Shaughnessy? But you're gone.
45:36 Speaker 04 Yeah, you're gone. And so now you're faced with these business decisions of what do I do in this escalation scenario? The best business case that I've come up with that's interesting to think about relative to this, it's called the dollar game or something like, I think Michael does this with his class, Dollar Auction Game.
45:55 Patrick O'Shaughnessy? Oh, yeah, yeah.
45:56 Speaker 04 You've heard of this?
45:56 Patrick O'Shaughnessy? I've heard that. I've heard of it, yes.
45:57 Speaker 04 Yeah. So you get in front of a class of students and you say, All right, we're going to play a game. Everyone's going to bid on this $20 bill, I think. And they start bidding. And I think he lets like three or four people bid. And then the teacher says, oh yeah, there's this other dimension to the game. Whoever comes in second has to pay, also has to pay, but doesn't get the money. And the game goes straight through $20 and gets way up above 20 almost every time someone plays it. And so
46:24 Patrick O'Shaughnessy? This is literally that.
46:25 Speaker 04 Yeah, I mean, that's the best construct I can think of, this game of escalation. And so the obvious answer, after you think about it a while, is to merge. Whether or not the regulatory environment will allow that or not. And then outside of that market signaling, who knows? That causes things to calm down. There's a interesting, the nearest equivalent I can think of is green mail. Where if someone's in third or fourth place, but they have a very deep pocketed investor, they can make the decision to just keep plowing money in to see if you'll blink and acquire their company, which is a radical, radical investing game,
47:06 Speaker 04 which prior to 2010, no one would have ever even thought about participating in. But now we've boiled the frog and this is happening all over.
47:17 Patrick O'Shaughnessy? Speaking of fascinating people on Twitter DMs, I was chatting with an anonymous account who I've gotten to know well, who goes by modest proposal on Twitter. And we were talking about this very idea earlier today where it's kind of the old Buffett question of like, how much money would it take to attack Coke's brand? And it's almost like we're seeing maybe some of that play out today where SoftBank picks a company. And that's literally what's happening.
47:38 Speaker 04 I totally agree. So when this showed up in, it showed up, I think at scale first in ride sharing. A lot of people, because we're an investor in Uber, would come and talk to me about it. I would say, I don't think it's just ride sharing. I think that people decided they really wanted to be in this business. And so then we got the capital and then the dynamic played out. We had experienced a very similar dynamic in the enterprise open source space around Hadoop. So we had backed a company out of Yahoo called Hortonworks. This other company called Cloudera had raised $900 million from Intel and the game ensued. And we had to go raise the money as well. And that has nothing to do with consumer internet ride sharing.
48:21 Speaker 04 It was a completely different place, but the money escalated up. And I don't know if you know the story recently, they finally did agree to merge, but then they've missed a quarter. And, and it's like the war hurt to both of them is what it looks like from outside. And so I think it can happen anywhere. I think a lot of people think their business was immune. You said Coke, I think Coke might be a really tough one, but we're watching attempts at insurance right now. Obviously, Open Door and Zillow are locked into this home buying thing that Rich is excited about taking on. I think banking, the one thing right now that I would be paying attention to if I were a public investor, which I'm not, is the interest rates that Wealthfront and SoFi are
49:04 Speaker 04 offering out there and the product offering. I came home the other day and my wife, I have an 18 year old. My wife had just set up his checking account at a different bank. And I looked at this SoFi announcement and I printed out the thing. I said, you know what? I have to teach my son about this because I have to teach him financial responsibility. And it is nutty. I mean, the difference between what, whether it's Citibank, Wells Fargo, you just name any of them are offering compared to what SoFi just put out there. And you have the Robin Hood who would be in that market already if they hadn't have got stopped, but I bet you they'd come back. And so these people are going to try radical things.
49:48 Speaker 04 And I'm not looking at the income statement, so I don't know if they're losing money or not, but relative to what anyone's tried before. And for the first time in history, I believe, private companies are the ones with more money and are attacking the long held incumbents.
50:09 Speaker 04 Which is a radical thing to think about.
50:11 Patrick O'Shaughnessy? You mentioned those companies. I happen to know those ones a little bit better just because it's closer to my world. The brand that is being built and bought by some of these businesses with a younger, with the millennial generation and younger, that takes time to switch over. There's a big generational gap, but when it does, that is a powerful tailwind.
50:28 Speaker 04 I think these banks made a huge mistake, which is they've set on their hands with ACH for 30 years and they did it for all the wrong reasons. They did it to protect themselves, like three days to settle a transaction. There are other countries that just mandated UK faster payments, China has it, India. Like, it's so ridiculous, but for another podcast, we have so much regulatory capture in this world and these banks, instead of making it easy to one click move your money around the internet, have made it hard. And from my point of view, no one deserves to be disrupted more.
51:04 Patrick O'Shaughnessy? Would you mind, just for those that don't know the term, defining what regulatory capture means?
51:08 Speaker 04 Ah, well, you should look it up because I think it's interesting to read the Wikipedia page on it, but it's this idea that the companies that are supposedly being regulated end up with so much face time and so much interaction with the actual regulators and the government constituents, that they end up having more of a voice in the regulation than the people they're supposed to protect or any new up and comer. Another way I like to say it is regulations, the friend of the incumbent. And the businesses that have historically been the hardest for Silicon Valley companies to break into are the ones that are most regulated because they have the most protection. We backed a company years ago called Tropos
51:51 Speaker 04 that let you build citywide wifi and we were able to convince a ton, a ton of mayors across Texas that they wanted to just bathe their town in wifi. And we got hit, I think AT&T had a lobbyist in every county in Texas. Like just boom, boom, boom, boom, to try and shut that down.
52:13 Patrick O'Shaughnessy? Amazing.
52:14 Speaker 04 And I think it's ridiculous. Well, we're off on a tangent, but like roads matter, rivers matter, rail matters, the internet matters. So a city would be in any of those other three businesses. If the public markets aren't providing them, or even if they decide that they want to compete with other cities by giving away free internet access, that should be doable in my mind. So tying together where we started with where we just were shortly after, and I don't remember how many years, but let's just say five to 10 years after I read that first Brian Arthur book, I asked Mike Mobison the question.
52:51 Speaker 04 I said, imagine a game dynamic where there are two investors and both know that it's a network effect opportunity. How far do you?
53:02 Patrick O'Shaughnessy? How far do you price?
53:03 Speaker 04 Yeah. What's your game dynamic? What's your strategy?
53:06 Patrick O'Shaughnessy? Great question.
53:07 Speaker 04 Yeah, but it may actually inform what's happening. It may inform what's happening. People believe it's winner take all. So, and you look at the investments in ride sharing and food delivery and whatnot. It looks like that type.
53:20 Patrick O'Shaughnessy? Scooter companies.
53:21 Speaker 04 Of escalation.
53:23 Patrick O'Shaughnessy? The Brian Arthur point about adaptation versus optimization. And then this kind of more adaptive world of, of knowledge based businesses being like a casino. And if you know the right vicinity, like you're going to bet big. And it's, it's pretty amazing to watch it play out. And I wonder like what the ultimate reckoning is going to be. And then what happens after that? So if there's a huge amount of money deployed in private markets that ultimately earns paltry returns, let's say, what happens then? Who knows? Any thoughts there?
53:55 Speaker 04 I don't think the market cares. In other words, there'll be someone else that will invest in the next thing. And a lot of the people investing today have no memory of.
54:04 Patrick O'Shaughnessy? Of anything bad.
54:05 Speaker 04 Anything bad.
54:07 Patrick O'Shaughnessy? Last investing question, which is just around the IPO market. I've seen you write about this a little bit recently. Maybe you have a different definition of a busted IPO. So maybe talk about what's been going on there.
54:16 Speaker 04 I went on Twitter. I had listened to the, a lot of this is on CNBC, but you also see it in the written press, talk about Lyft or Uber as a broken IPO because the price is 5% below where it priced, yet celebrate companies like Zoom and CrowdStrike and where the stock's up, or Chewy recently, where the stock's up 80% on the first day. And this is something that I think it's odd to me that more people don't understand how ridiculous this is because had, and I ran the math in the Zoom and CrowdStrike example, had those companies priced the IPO at the price of first trade, they would have 600
55:00 Speaker 04 million more dollars each in the bank with no incremental dilution. And I can make the argument that's malfeasance, but everyone's writing this stories about how wonderful it was. And I just think that's really, really bizarre. What people don't understand is that even in 2019, with a traditional IPO, someone basically just got a list of accounts and how much they're willing to give and how much. And they're making decisions based on personal relationships or business relationships. To me, if you went out and found 100 of
55:41 Speaker 04 the smartest, let's just say, academics in finance and say, I want to price this good that's never traded before. How should I go about it? And to get optimal execution for everyone involved, they would say, do a Dutch auction.
55:57 Patrick O'Shaughnessy? Yep.
55:58 Speaker 04 And you could hire a programmer in Python, probably a first year out of a top 100 comp sci program, and they could do it in a weekend.
56:08 Patrick O'Shaughnessy? It's not hard.
56:08 Speaker 04 It's not hard technically, and it's not hard intellectually. But going back to regulatory capture, we've had this process that's played out. Over the years and everyone's in on the game and no one is kind of highlighting that it just shouldn't be this way. Something really interesting, last week when I tweeted that a bunch of the press got upset because I said, you guys are part of the problem. You don't understand these things relative to fiduciary duty and how the people that are making the decisions should care. And I said to one of them, I said, is Spotify at or below their first trade price? And before you answer that question, do you know? And none of them knew. And I went
56:51 Speaker 04 back and did a web search for Spotify broken offerings, Spotify, whatever, couldn't find a single thing. So Spotify is a little bit below its first trade price, the same as Uber and Lyft. But no one says anything because no banker picked a price out of a hat and allocated capital based on that. And then everybody queued off of that. Why? Because an algorithm properly determined how to match the buyers and sellers, which by the way, every single stock that opens every single day, that exact process happens. This is not hard. And we had the brief interaction with Dutch Auction IPOs, NetSuite, Google, and one other that happened. No one died there. They
57:35 Speaker 04 all worked fine. I tell you this, they didn't radically underprice the IPO. And so I'm super excited about the Slack direct listing this week. And I'm hopeful that everyone comes to realize that this is a way smarter way to go about doing things. I'm surprised, actually, the more I think about it, that there hasn't been a derivative lawsuit brought against a board for pricing their equity at half of the real value.
58:01 Patrick O'Shaughnessy? And if one of those works, that's a tipping point.
58:03 Speaker 04 And look, someone was come back and say, well, how would they know? Actually, there is an answer to that question. You get everyone to put their demand equations into a blind auction and the algorithm figures it out. There's no how would they know? It just happens, it's instantaneous.
58:20 Patrick O'Shaughnessy? Well, I'd love to close with one of my favorite videos that I've seen in a while, which was a speech you gave at the University of Texas, I think to MBA students. It was really a series of stories about some fascinating people. Danny Meyer being my personal favorite because I kind of grew up going to his restaurants in New York City. I've read his book, just seems like a phenomenal guy. But then taking these stories and sort of extracting a formula, if you will, for an interesting and fulfilling career. And rather than just recount them all, I thought I would turn the questions back on you and hear your answers to these same categories, since you profiled other people. So just very quickly, at a high level, they were find your passion, hone your craft, develop mentors in your field, embrace peers in your field, and sort of pay it back, I guess would be what I would call the last category. So we'll start with finding your passion.
59:02 Patrick O'Shaughnessy? What was the seed, if you will, where you knew that this is what you wanted to do?
59:06 Speaker 04 There were a couple of different things. My sister was a double E at Rice and became employee 63 at Compact. Compact being a brand that live in the lexicon much longer. And she got options and she's four years older than me. And I just started paying attention to that. I ended up going to work at Compact as well when I was very young. Got the gambling bug, loved to go to Vegas and count cards. I immediately was drawn to the stock market. I bought Borland on the IPO date over Prodigy. So this is like super early because I love their program. I love Turbo Pascal, I love Quattro too. I just love their product and I had read Peter Lynch.
59:48 Speaker 04 So I had this combination of, and I had a Vic 20 in the ninth grade and program. So I had a love affair with technology. I had seen my sister do well off of options. I had this gambling bug and I became very curious about venture as a result of that. I went to business school and Amongst many things asked around about venture, I was told primarily by people in Austin where I was in business school that get out of here, kid, go work for 20 years. So it wasn't something that was available to me. And so I went to Wall Street just
1:00:28 Speaker 04 as something that scratched many of those same itches. So, and I got super fortunate by helps from a ton of people. I ended up as a sell-side analyst and because even more people helped me, I was a successful one. And true story, 1996, Frank Quattrone called me and said, hey, I'm leaving Morgan Stanley with my whole team. I've heard a lot of good things about you. We want you to come be an analyst with me. And I, after figuring out who Frank was and how important he was, I met with him, but I said, I don't think I want to do this much longer. And I gave him a few reasons. And he said, well, what do you want to do? I said, I'd like to be a venture capitalist one day. And he said, tell you what, you come work for me, I'll move you to Silicon Valley and introduce you
1:01:12 Speaker 04 to every VC that I know, which is what happened.
1:01:15 Patrick O'Shaughnessy? Incredible. Would you identify your passion, your core passion as understanding the essence of businesses, value creation, investing return? Could you qualify?
1:01:23 Speaker 04 So some of the things that I mentioned that excited me were like gambling and technology, and then business strategy and disruption were something that I played into that. And then realizing that if you can predict how something's going to play out over the next five or 10 years, the amount of leverage on your investment dollar here is so much higher than anywhere else. And there's an element of venture that's different from public investing where we're just closer to the metal and we get the opportunity to work with the entrepreneur and have impact. And I just get tons of psychic reward out of that. Some entrepreneurs would never be able to get the reward that I do because
1:02:05 Speaker 04 they feel like they have to be the person on the ground. I've never had that. That's never bothered me, but I've heard that argument from certain people. So anyway, it was just something that I was very much drawn to every step I got closer to it. I realized this is what I wanted to do with my life.
1:02:23 Patrick O'Shaughnessy? What is your favorite thing about working with entrepreneurs? It seems like that's something that still is a key part of what you love.
1:02:29 Speaker 04 Yeah, I think it's being able to sit down with someone. And it's really important, I think, to kind of come to a common understanding of what the goal and objective is and where you're going. And then to be a part of, let's go make that happen. And then over the years, I think, when I'm talking to Chuck Templeton about open table and he's in three restaurants. And we know the business model doesn't work unless it tips from a network effect standpoint. And then one day you're in 20,000 and anywhere you go, you walk in and you see that thing there. And you knew when you started that that was the end goal. That's pretty good stuff.
1:03:07 Patrick O'Shaughnessy? Pretty cool.
1:03:07 Speaker 04 I told you the Glassdoor example, like just to be there with Richie, say, I got this idea. What if we did this and like, it doesn't exist, but now every CEO in America knows with their Glassdoor.
1:03:18 Patrick O'Shaughnessy? I love that. I love that. So the second one is hone your craft. And this may just be a natural outgrowth of your passion. If you're passionate, you can't help but stay at the edge of it. Any other nuance there that you found in your career?
1:03:28 Speaker 04 One thing I would say about this is like, in the day of the internet, you can know more about a subject matter than everyone else. And you just keep narrowing the scope of that subject until you're the one that knows the most. Because everyone else is going to run out of time. And so it's particularly easy today to know as much as you possibly can. I think it's critical to start with the historians of your industry or craft and to know all that happened prior to now. For me, that was investing, like having the bedrock of Munger and Grandma Dodd and Peter Lynch. And like all the books Michael gave me gives me a different frame of mind than most of the people that are out here.
1:04:11 Speaker 04 And so I just think you could do the same thing in any industry, but like really go study the pioneers. It would be different. Going forward, but you should have all of that bedrock information. Then the second thing is just be hyper curious. Once again, super fortunate to be working with someone like Mobison, not directly, but just kind of sitting near each other. And we're just sharing books and ideas left and right. I think certain people are able to grab ideas from further away places. I've heard of this notion of like far analogies, but if you have that skillset, you can read even further away and bring stuff back. But just read, I still today read obsessively and I've
1:04:55 Speaker 04 noticed other people that have had success say that in a variety of different industries. There's just a lot of information available.
1:05:04 Patrick O'Shaughnessy? To shorten the mentor question a little bit, I'm curious about you acting as a mentor, or what you think makes for a good mentor?
1:05:11 Speaker 04 I mean, I think the first thing is, is you just have to make yourself available. One of the tenants that I talked about is just, there's something really interesting about Silicon Valley that I can't say it would work 100% of the time, but 60% of the time, if you approach someone in a reasonable way and ask them to respond to an email, maybe do a five minute call, like don't overstay, you can pretty much get in front of people. There's some essence of how this place has worked and how people move in and out of different orgs that you can get. I wouldn't start by just going straight to the top, but you can develop mentors and get people to look after you. One of the things I talked about in there
1:05:51 Speaker 04 that can be kind of a viral or network effect is if you can get that mentor to care about your outcome, if you can get them to believe that if you're successful, it reflects well on them and they take pride in your success. That's a lot more interesting than if I just met somebody and I know them. That's a little trickier. I don't know how to quite solve that, but you show up with immense respect for them. You've read everything about them. You know all of their tenants. You're much more likely to get sucked up into that type of relationship.
1:06:27 Patrick O'Shaughnessy? Yeah. So your final criteria is a good excuse for me to ask my closing question of everybody. Your criteria is to pay it back. And the last question I ask everyone is for the kindest thing that anyone's ever done for you.
1:06:37 Speaker 04 I mean, I had so many, I probably mentioned three or four things. A guy named Al Jackson was head of research at Credit Suisse, and he gave a kid from Texas a chance to come be a sell-side analyst, and not like an assistant. I was covering Compaq, whatever, 24 months after I left Compaq as an engineer. He didn't have to do that. I was the only kid from anywhere near Texas in that starting class. All the stuff Mobison did, that move that Quattron did, and Winblad and John Hummer giving me my first chance as a venture capitalist, all those things are just super, super, super impactful to your career. I go back to the, I don't know if Bobby Knight said it first, but we're luck is where preparation meets
1:07:21 Speaker 04 opportunity. The more you can do to set up those types of outcomes, but nothing should take away from the impact that those gestures have had.
1:07:30 Patrick O'Shaughnessy? Yeah, I love that Bobby Knight quote you used. Everyone's got the will to win, but not the will to practice.
1:07:34 Speaker 04 Yep.
1:07:34 Patrick O'Shaughnessy? And great place to close. Well, this has been just awesome. Such a wide-ranging survey of marketplaces and a million other things. Thanks for all the time, Bill.
1:07:43 Patrick 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, @Patrick_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.
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