Invest Like the Best with Patrick O'Shaughnessy
00:45:44 · Martin Casado
[00:45:44] S1: I... I've got 5% in every competitive... Like I really believe private markets are super efficient. I do and I think that the consensus is actually smart because I'm a capitalist and I believe in markets. And so if I could have 5% of every competitive deal where you've got legit investors in it, I'd be happy. But you simply cannot do that. You can't do that for competitive reasons. You can't do that for capacity reasons. So as an investor, you have to come up with how do I not run the the competitive bus hub, even more importantly, how do I not run out of our ability to keep track and help these companies? Because I do take the boards. I do get very involved, very involved. That's just impractical. So the way that we think about it, which you've heard before, but I'll restate it, is for every legitimate sector, and by that legitimate sector, we define it as there's good founders in it because we don't second guess founders. If they're risking their futures and the opportunity cost and their family's wealth, then it's a good sector. We do the work to try and decide for every good sector which is the top company. And that means you look at the team, you look at the tech, and you look at the monetization potential, you look at the market growth potential, you look at all of that stuff, and then we choose the best one and then we assume that the market is efficient. That's kind of the approach. It's kind of an index but we're actually segmenting it by market. Sometimes we get it right and sometimes we get it wrong but that way you're indexing the interesting markets.
00:47:00 · Patrick O'Shaughnessy
[00:47:00] S0: Yeah, there's this thing in indexing called stratified sampling. It's my old quantitative base. You can buy a small subset of the index and have your tracking error to the index be very low because actually literally what you're describing is effectively stratified sampling. Get exposure to the best, biggest, whatever per category and that will perform similar
00:47:19 · Martin Casado
[00:47:19] S1: to the... Yeah. Okay. I think venture capital early on... And I wasn't there. I just read the books. I think it believed that tech created value. I mean, often there was no business to evaluate. And I just don't see so much hand wringing about bubbles or this or that or the other thing. The market price is the market price. To me there's always this huge dissonance when I'm talking with other investors, they're always decrying the bubbles which nobody could ever predict. By definition, everybody's calling it a bubble is probably not a bubble. Like, it's almost a bubble like when everybody's investing because they think there's still upsides. And then they don't somehow think private markets are efficient. Remember I got VC canceled because I'm like, non consistent investing is dangerous. I once on Twitter was like, hey, listen, I think it's dangerous to invest against consensus because basically there's follow on capital risk. And from saying that, many prominent VCs came out and they were like, oh, like all of these deals that we've done were nonconsensus. And I think there's something very tied to the ego and the identity of investors that they have to believe that they can truffle hunt and find the nonconsensus thing. They're smarter than everybody else. But I think the reality is is certainly if you look at our portfolio, the ones that return money were actually very, competitive in general. I just think these markets are actually quite efficient.
00:48:30 · Patrick O'Shaughnessy, Martin Casado
[00:48:30] S0: I love the idea of market efficiency and private markets being one area that you disagreed with lots of well known [00:48:35] S1: Yeah. And apparently, a whole lot. [00:48:37] S0: Apparently all of them. Are there any other areas like that where you feel especially alone? [00:48:41] S1: Yes. That's another one that drives me nuts. This is my last one [00:48:44] S0: I promise.
00:48:44 · Martin Casado
[00:48:44] S1: Okay. Another thing that drives me nuts is this belief that if you put money in private markets, it doesn't somehow grow the TAM of private markets. I love Roelof. I think he's fantastic. He's an incredibly intelligent guy. He's a great board member. But he gave this talk, do you remember at TechCrunch Disrupt... Many investors believe this. So this isn't a call for Roelof because I was actually a huge fan of his but he was like, venture capital is not an asset class. There's only 20 startups that matter and that's it. If there's too much money going in, you've overfunded private markets. And to me, this is ludicrous. Capital creates opportunities and markets and value. And even though there is so much more money that has gone into private markets in the last twenty years, the value in the private markets has kept pace. Right? You've gotten massive private companies, tons of opportunities, very large exits. And so this zero sum thinking about private markets is so bizarre. Like, we're venture investors. We create value. Like, tech creates value. We put more money in it, it'll grow. And you will be surprised, and maybe you won't be surprised, but I've been very surprised how common this mindset is. And very often I'll talk to a pretty senior GP who's been investing for twenty years. They'll be like, oh, there's too much money. I'm like, what are you talking about? There's been more money in there. We need more ecosystem, more value, more investment. So I do believe money in private markets creates TAM. It creates the investable TAM. I think it creates value. I think there's more opportunity to deploy money now in private markets than ever has before. Even very simple examples of that are like companies not going public. Like if there's more private money available, why would you even go public? Again, we need to all step away from zero sum thinking. I think we all need to believe that technology creates value. Now, especially with AI, we need to believe that capital enables technology to create value. And if that's the case, more money in private markets, we should deploy the money and we should create the value.
00:50:37 · Patrick O'Shaughnessy
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