Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy, Scott Nolan
[00:00:00] S0: Could you think of a single investment that your gut was not flashing yes almost immediately that you worked your way to get there and did it? [00:00:00] S1: Airbnb was one of these, we did a lot of work on it. At the time – so Founders Fund did a small angel check early on, and then did a much bigger check in the next round. And so at the angel check, it was still the very informal air mattresses. I think there had been something where some guests completely destroyed a home and there was a whole bunch of controversy around that. And then the company took a hard stance on that and said, we will reimburse the host and we are professionalizing this. And I think that was maybe the moment that you could tell it was going to go mainstream. And then Founders Fund made a huge investment. But if you just look back at the past, you might say, oh, this seems like a niche thing. But if you did the work, you could see a bunch of different trends. You could see the demographics were shifting to a slightly older crowd, not just backpackers out of college, like some people had perceived. The market share in different markets was increasing a lot. We did the work. We looked at every single market, sliced market share, marketing spend, and you could see – all these markets that they were in, they were just taking share and becoming the dominant thing. So you analyzed the data, and it was like – they're winning. It's over. They're going to win.
· Patrick O'Shaughnessy, Scott Nolan
[00:00:00] S0: There's two other components of the no competition idea. One is the valuation and price that you have to pay, and the second is capital intensity. You've invested in lots of stuff that requires lots of money to get the thing up and running and to revenue and to profitability. I'm curious how you learned about those two dimensions of earning high returns – did low competition bring lower entry prices on average? And is that something you cared about much once you found someone that was doing one of these things? And then also how you think about the amount of capital that you would have to put into the company to make it work? [00:00:00] S1: The low competition thing typically would be associated with lower valuations. But I think that trying to find value deals in venture is – [00:00:00] S0: A dumb idea.
· Patrick O'Shaughnessy, Scott Nolan
[00:00:00] S0: A dumb idea. [00:00:00] S1: It's not the right plan. Maybe if you have a very small fund and you can pick up some interesting IP, or this company maybe will never be that huge, but this is a really good deal. And you look at multiples and stuff, and it starts to look a little bit more like PE or something. I think that can probably be okay. But for true venture, I think it's dangerous. Because either it says something about the company's ability to raise capital – that they're unable to at market prices. And unless this is the last round that they need to raise, or they really are going to be a capital efficient business, that's probably a risky thing. Maybe the team is incredible at debt financing, but terrible at venture financing, and so they're going to switch to debt and that's going to be amazing. You could imagine a situation like that, but typically if you're meeting a company and it's a crazy value deal, it's probably just not going to end up being that good is what I've observed empirically [00:00:00] S0: Do you think if we did an analysis of the actual dollars deployed by Founders Fund, that more of the dollars would have been deployed once the company was already popular?
· Patrick O'Shaughnessy, Scott Nolan
[00:00:00] S0: Do you think if we did an analysis of the actual dollars deployed by Founders Fund, that more of the dollars would have been deployed once the company was already popular? [00:00:00] S1: Yeah, that may be the case. Yeah, if you look at actual dollars deployed, it's probably more the whole concentrate into the winners strategy. I think the way that that can still be a good strategy, even if the company's popular is – A, it's popular, but not as popular as it will be. Or B, this idea that up rounds, it's almost like anchoring in the past versus looking to the future. Peter has said this a bunch of times and has guided the Founders Fund team to think this way. It was more talked about in the early 2010s, but if you've got a company that was growing steadily, but then there's a big up round – it's probably the case that that up round is not even enough up. That if it's like a 2x up round, maybe it should be a 4x up. [00:00:00] S0: Yeah. What's going on there? There's that famous quote of his, which is the steeper the up round, the greater the undervaluation. What is actually happening that makes that true?
· Patrick O'Shaughnessy, Scott Nolan
[00:00:00] S0: Yeah. What's going on there? There's that famous quote of his, which is the steeper the up round, the greater the undervaluation. What is actually happening that makes that true? [00:00:00] S1: Yeah. People are just anchoring to the past, or they're like oh, last round was this. I guess it should be reasonable compared to last round price. And then in reality, like, okay, all that matters is next round price. How do we make sure the next round's an up round? What are the catalysts going to be for further increases? You don't get paid as an investor based on how close you were to last round's prices. It's ultimately against exit price. But the only thing you have to go off of that's actual data or empirical is the past. And so people are much more anchored on that. [00:00:00] S0: What have you learned about how much to be in love with the problem itself? This is a good excuse to talk about General Matter too. Are you inherently fascinated by and in love with uranium enrichment or is there some other big thing going on behind the scenes? And I'm curious if you think about all these founders you backed, my guess is most of them were deeply passionate about the domain because they had this thing where they could go down the rabbit hole or whatever. How much does passion matter in selection of founders?
· Scott Nolan
[00:00:00] S1: From the investor seat, I don't think you want to be in love with an idea. I think that's a risky thing, because then you're going to try and find a way to express that by investing and you're going to maybe make some compromises on the team because you know this idea is just so good, its time has come. But then if the team isn't there, 90% of the time it doesn't work. Then there's a whole thing of course in jockeying, can you swap out the team? But the whole Founders Fund thesis was always no, you need the founder to run the company, to have this vision and to see it through. From the investor side, I think being in love with an idea is really dangerous and it can cause you to make all sorts of compromises that come back to haunt you and it can cause you to put good money after bad, despite the writing on the wall. But I think on the company side, you have to be in love with the idea. It's not that rational to start a company. There's a lot easier, more comfortable ways to make money if that's the goal. So it's got to be about what the company is doing specifically. I think smart people who want to make money, there's so many good jobs in the finance world for that, or people who just want to build, there's lots of places you can build. But if you want to actually start a company, it better be something that you're really passionate about, or you think that the problem is really important. So for me no, enriching uranium never was something I was specifically excited about. I was always into nuclear energy. I always thought that this was a no brainer. Probably the two things from sci-fi from like the 60s, was always the two industries we were supposed to have – not just from sci-fi, but like what our country thought was, we're going to be going to space and we're going to be doing things in space, and we're obviously going to have nuclear energy. We went from burning wood to chemical bonds and now atomic energy was clearly so much more energy dense and powerful and should be lower cost. Those were always things I was excited about. Never had a specific interest in uranium enrichment, but then through the course of investing in Founders Fund, went from 2010 just looking at all sorts of different hardware companies.