00:21:11 · Katie Prescott, Luca Ferrari
[00:21:11] S10: So you're changing the team, changing the tech, kind of wholesale looking at the business model. Exactly. And your teams around the world then work on all of your businesses. [00:21:21] S11: Yeah. At any point in time, there is a team who wake up in the morning, and all they think about is Evernote. But next month, we could take half of those people and move them to Airtable Yakuza or and or... And we could deploy new people to Evernote. So there's great fluidity and everybody's allegiance is ultimately at at the Bending Spoons level. This is very important for us. We believe it breeds massive efficiency and ability to go again, go after big opportunities. If someone comes up with an exciting idea for, for air table or for AOL, we could put a 100 great people. We don't have to hire coach, have them understand the culture because the entire technological foundation for each of our businesses is the same. It's the same operating system so they don't have to relearn the tools. They go there and they work pretty much in the same way as they were on whatever previous business they were working on. [00:22:12] S10: And I think you've described that as the perfect operating machine.
00:22:12 · Katie Prescott, Luca Ferrari
[00:22:12] S10: And I think you've described that as the perfect operating machine. [00:22:15] S11: That's the aspiration. We're far from perfect. But, yes, we're we're trying to build... Basically, could say the most important product we work on is none of the customer facing products, but these under the hood engine or machine that helps us operate all these these businesses, these products really well. Our creativity and efforts go first and foremost in... Into that underlying layer that's a little bit hidden, but so important. And and then after we feel we've done the best we could there, then, you know, any leftovers go to the... To everything else. And the and the reason is if that machine is amazing, then we're almost guaranteed to make sure that that each of the businesses is as good as it can be. If the machine is lack lackluster, then we lose our edge, our ability to to buy things and and make sure they're more successful with us than than with everybody else. And then the entire thing doesn't work any longer. Know? [00:23:04] S10: Do you ever get under the hood of one of these businesses you buy and go, oh, no. This was a big mistake or there are some nasty surprises there? Or you think this can't be part of the perfect operating machine? [00:23:15] S11: I mean, there are always surprises, some good, some bad. More bad than good because a lot of most sellers we find are honest. It's not black or white. People tend to lean toward painting it the rosier picture, you know, like [00:23:27] S10: Selling an house.
00:23:27 · Katie Prescott, Luca Ferrari
[00:23:27] S10: Selling an house. [00:23:28] S11: Exactly. Yeah. Big, big lies rarely. But things that are a little bit worse than that being presented to you. It happens somewhat often, but we've never found something that we're like, holy shit. Like this is a problem. It's mostly somewhat disappointing, but not too big. Now, when it comes to business being highly imperfect, that's mostly good news for us as long as we know when we set the price, because our very value proposition is that we as a company are generally able to to make businesses a lot better. So when there are imperfections or even serious flaws, if they're fixable, so if if if the problem is there are no customers, well, you know, we need customers, but... Or the product is not solving a real problem, we're not interested. But if the product solves a real problem, there are plenty of customers, users, retention is robust, but maybe the technology is dated, the product is buggy, customers need a set of features that's not there yet, maybe the team could be improved, Monetization is suboptimal. All of these things are good news for us because it means we are, we should be able to offer a great price to current owners while still having enough headroom that we can deliver high returns for ourselves. So we are actually quite attracted to businesses that fundamentally they're good, but there are elements of them that could be greatly improved. [00:24:46] S10: And when it comes to that returns point, when do you get to the point of selling some of these companies?
00:24:46 · Katie Prescott, Luca Ferrari
[00:24:46] S10: And when it comes to that returns point, when do you get to the point of selling some of these companies? [00:24:52] S11: We never sell any company. So we are a perennial owner. [00:24:54] S10: So it makes you very different to a traditional private equity.
00:24:57 · Luca Ferrari
[00:24:57] S11: Oh, yeah. Completely. I think the only... The people have compared us to private equity before. I think the superficially understand private equity is generally funds. They buy companies through a fund and then they need to wind down the fund. They sell the companies, they return money to limited partners. You know, they've done a good job. They've made money and everybody's happy. We buy off our balance sheet. Everything is integrated super deeply in the same operating system. We don't sell. We make money because these businesses produce free cash flows. We can then, you know, hopefully those amount to more than we paid for the business in time. And then we can redeploy those cash flows toward new acquisitions and also making that engine that platform better. And also unlike private equities, just to kind of underline this difference, generally, precisely because private equities need to sell these businesses down the line, they need to keep them separate. Yeah. Otherwise, you can't sell them. We do the exact opposite, which is, again, complete integration technologically, so we couldn't really sell them. Or I mean, I guess we could, but it will be incredibly difficult. And also the team is so centralized that we either sell the business without a team, which would greatly narrow the set of possible buyers for obvious reasons, or we would have to sell the team with it, but that would break that bond of trust. Team members come on board believing they're part of Bending Spoons as a whole, not necessarily Evernote, although they pour their hearts and minds into making Evernote as good as possible while they're working it. And so we couldn't do that. We couldn't sell a team off with the business, I think.
00:26:15 · Katie Prescott, Luca Ferrari
[00:26:15] S10: Along those lines then, another criticism that often gets leveled at private equity is they take on too much debt. I think Bending Spoons, I saw a number from S and P, you're going have almost $6,000,000,000 of debt by the end of this year. When does that become too much, you [00:26:32] S11: So I think it's not so much the absolute number of dollars. What matters is how much debt you have relative to your projected free cash flows. And we think we have kept very prudent levels of debt. Our guiding principle there is that we want to be in a position to pay back all of our debt before it matures. So we have kept a leverage ratio between two and three times run rate profitability. In fact, if I have to look at what we hear from investors by far investors have suggested that we should raise more debt, not less debt. And of course they don't want us to go bankrupt for obvious reasons. So we have tried to keep a prudent level of debt, but using no debt whatsoever would be suboptimal because with that you can, you can grow faster. So it's always a trade off between how much risk are you willing to take? Hopefully very little, but more than zero, no doubt, in exchange for a faster growth. But they they can never be zero. The moment you have $1 in debt, there's a little bit of risk if you don't pay it off.