Invest Like the Best with Patrick O'Shaughnessy
· Gokul Rajaram
I know over the last year there's been a lot of AI-enabled ERP businesses but there is no compelling reason to take NetSuite and say "I'm going to rip it out" because it is career limiting to suddenly take NetSuite out when you're a company running on NetSuite. So I think those companies are much more insulated, and I think obviously – you could argue that NetSuite has more time to build AI agents on top of it because they have the data. They can train the AI agent on top of it and bundle it. So essentially, I think the software public markets are not distinguishing between these two types of companies. Companies where the half-life data is low, and where you can actually have, you can literally take half of the value of this company and put it onto an AI company that sits next to it. Well, something like an ERP system, or even Salesforce for sales data and records, those are real customer records. It's going to be hard. So what are AI-native companies doing? The first thing you've got to do if you ever have to compete against them is you've got to spend a year or two first building a system that literally takes, migrates your Salesforce instance to your own company's platform. One of my companies is an AI-native company. They literally hired engineers in an Eastern European country for two years to build this migration thing, transition tool. So, you have to build a migration tool, because who's going to migrate it? You can just present your spanking new system, but this data is still there. Even for Square, for a small business, I remember, they had a point of sale. They wouldn't move to us even though it was cheaper because they had gift cards, customer data, loyalty data, payments data, all of that, even credit cards. So we had to build scripts and that took us months or years to build it for a simple POS. For something like Salesforce, you can't just say, "I'm a much better CRM." If you look at CRM, what does the CRM contain? It contains your customer record. Your customer support system contains what your customers are complaining about. And Jira or Atlassian contains what your product development team is building. Now, all of these things should be linked, because there is no linkage. You should be addressing the biggest complaints of your customers, which are in Zendesk.
· Gokul Rajaram, Patrick O'Shaughnessy
And those Zendesk customers, you should know where they came from, who bought them, who sold them. So all these three systems should be linked together, but they're all three different companies. So there are companies that are trying to unify these things, and it's a great value prop. But guess what? None of your customers is ever going to move unless you build a simple, seamless way to take the Salesforce data and move it to your instance, the data from Jira and move it to your instance, the Zendesk data move it to your instance. So literally, it's a two-year effort to build migration. Otherwise, you've got to get Accenture. [00:00:00] S0: How do you think about stickiness in this era, just as a general concept, when the friction for creators to build something that new is so low, you can do whatever you want really fast? How is anyone going to use anything for a long period of time? [00:00:00] S1: In the age of AI, stickiness, I think, comes from a few sources. One, you need to have network effects. So, DoorDash is sticky, not just because it has this beautiful app, but it's because, it's a network of restaurants, and dashers, and consumers. So you can't just attack one, you've got to go – [00:00:00] S0: You can't vibe code your way to those two.
· Gokul Rajaram
[00:00:00] S1: Exactly. And so network effects. The second example of stickiness is when you have financial or money moving through you. I think that's another way to be sticky. Many of the systems of records, for example, Toast, have payments going through them. And I think that really is interesting because you can't just start building the point of sale. You also have to have money flowing through it. And I think if you look at the banks, banks are a good example. Once you have something like Mercury, as a business bank, your money flowing through it is hard to then switch because you have regulations and other stuff embedded. So I like things that are a combination of financial services and software because of that. The third stickiness is from hardware. You can actually have hardware. Toast is a good example where Toast gives you hardware for free. But if you try to return the hardware, you have to pay them. But either case, the hardware is there. And somebody can't just build software. They also have to take hardware and put it into the thing and rip out the Toast hardware. The fourth one is access to a unique asset. I was thinking about a good example. And I came up with the example of Sierra, which I think the unique asset is Bret Taylor. I mean, they have full control of Bret, who's one of the best salespeople, chairman of OpenAI. He can make a call to any company, any country, and they'll take his call. Well, you can't really outsell Bret. There's alpha in that. You need one of these four or five things, which are basically indicators of durability. The half-life of software today is so short that unless you have one of these things that make it durable – Hamilton Helmer has this thing called 7 Powers. So you've got to have a few of those seven powers that basically are embedded in the business model from day one.
· Patrick O'Shaughnessy
[00:00:00] S0: You've been so lucky to work for some of the most well-known CEOs and founders of this modern era. I'd love the chance to ask you a little bit about each of them and what you learned from them. And then more generally, just things you've learned about what great leaders do to run companies. But maybe going all the way back to Google, and starting with Larry and Sergey, what did you learn from watching them operate and lead?
· Gokul Rajaram
[00:00:00] S1: One of the most interesting things about all the leaders that I've worked with that have built generational companies, is that they have a superpower that is very aligned with what the company needs to succeed. And the company was really shaped in their image – the company, the culture, the early hires, the products. I joined Google in 2003. The first product I got exposed to, actually, which I didn't know about, was a product called Caribou. Caribou was an internal code name for a product that was launched on April 1st, 2004. Publicly, it was called Gmail. I didn't believe that this product existed, because in the internal alpha, it said, this gives you one gigabyte of storage. Back then, remember, Yahoo Mail was the dominant product, and it gave 10 megabytes of storage. So this thing had 100x more storage. And this really epitomizes Larry and Sergey's philosophy, which was basically build the best technology on the planet. They were deeply technical, and every product was held to technology and scale. And I'll never forget, AdSense was the fastest growing product in Google history. And we went in to reviews, and Larry would be disappointed in us. And we asked why. He's like, "What percentage of all ads on the internet are you? Less than 1%." He didn't care about the revenue. He cared that Google is involved in serving every single ad on the planet versus making a business of whatever, a billion or two billion or 10 billion. So the focus on scale and the focus on technological superiority – and that investment, Google Street View, TPUs, Waymo, all of these, I think, show the 10 plus years of investment to an uncertain future. But knowing that if you invest in technology, good things are going to happen, and good things happened, but it took a decade. And that's investing in technology capabilities.
· Patrick O'Shaughnessy, Gokul Rajaram
[00:00:00] S0: Before you leave Google, you had this interesting idea about communication and Eric Schmidt, obviously another key Google person. Can you tell the story about him presenting the company strategy using nothing but images? This is an interesting example of communication. [00:00:00] S1: Eric would give a product leader… we would become seconded to Eric for the weekly strategy, or the annual strategy planning session. So I did it, I think, in 2007, where my job was to go to Eric and say, "Eric, how do you want to present the strategy of the company?" He's like, "Well, it's very simple. I want you to go and interview each of the different leaders of the different teams. There's only one constraint I have." I'm like, "What is that?" "You can't use any words to describe what they're doing." I'm like, "What do you mean? You have to use words." "Nope, you've got to use only images." I'm like, "Why is that?" He's like, "People don't remember words. They remember how things made them feel. And you can put words in the speaker notes I'll use, but I want you to come up with the most compelling image that exists for what they're describing." And so, it was a crazy thing because I never thought of doing a presentation that way. So I went to each of the businesses, AdWords, Search, YouTube, AdSense, and then had to come up with a compelling image that was easily accessible to the whole company, yet represented what they did.