Joys of Compounding
00:31:05 · Luca Ferrari
[00:31:05] S3: I don't think we deserve anything. We just try to work our ass off to be that. It's not about deserving. It's just either you are or you're not. But you asked why M and A first of all, because we could also launch competing products from scratch. There are a couple of issues with that. First of all, we like to own businesses with some moats, with some staying power precisely because these businesses already exist in certain segments. If you launch something from scratch, they are very unlikely to greatly erode their market share. If it were so easy to do so, we probably wouldn't be that interested in participating in that market anyway. So that kind of rules out the follower strategy in existing segments. Other launch from scratch potential pathway, which would be radical innovation coming up with something completely new where the segment almost doesn't exist or you'd be disrupting it completely, which is how startups do gain market share when they succeed. The problem there is, if you look at the statistics of this, are absolutely dismal. Out of 1,000 startups, how many get to a level of revenue, just to pick the most obvious KPI, that would move the needle for us at this point? Assuming we close the acquisition of Miro, we're at about $4,000,000,000 run rate revenue. So we need to believe that this new thing we launch is going to get to at least 500,000,000. And by the way, if it gets there, so there's probably a one in a thousand probability that it does. If the broader markets statistics apply to us too, even if we were a little bit better, it would still be very small. And then generally these companies get to say, billion dollars in revenue in ten years, maybe today with AI and a better distribution and more efficient markets a bit faster. If it's in ten years, we're not interested. We would need earlier. Otherwise in ten years, probably want to have it at 5,000,000,000. It's just too statistically unappealing. I think there is a lot of hidden loss making investment in the world of startups in terms of the massive amount of time invested by very talented people, founders and early employees in projects that fail. And they do that for basically no money for a dream. Probably the expected value of that is awful. Naturally, there's selection bias.
00:33:10 · Luca Ferrari, Paul Buser
We see relatively few companies that succeed in a big way, but what the overall investment that's gone into making those companies possible? I don't think it's appealing for an established business to go after that systematically. It would be different if you were Apple and you have an established customer base for a very particular type of product. You can build the ecosystem products around it. It's maybe much more predictable and you have a distribution channel. I can see that, but we own a diversified set of properties and launching a yet another completely from one. I don't think it would be particularly appealing in terms of attractive returns. Instead, we buy product market fit companies that have already succeeded. And because we believe we can operate them better, we can offer a high price, what's perceived to be a high price and still deliver good returns for our shareholders. [00:34:00] S1: Why do you think the market obsesses over organic growth? I think about some of the acquisitions you've made, and maybe they're growing a little bit, maybe shrinking a little bit depending on how you measure it, and then plenty are growing very quickly organically. What is it that you think the market is missing about the potential inside Bending Spoons in this platform, building something real and steady versus some organic growth rate?
00:34:00 · Paul Buser, Luca Ferrari
[00:34:00] S1: Why do you think the market obsesses over organic growth? I think about some of the acquisitions you've made, and maybe they're growing a little bit, maybe shrinking a little bit depending on how you measure it, and then plenty are growing very quickly organically. What is it that you think the market is missing about the potential inside Bending Spoons in this platform, building something real and steady versus some organic growth rate? [00:34:27] S3: By the way, you're absolutely right. A majority of investors are focused on organic growth, even with Bending Spoons, which I initially found it odd, given that the entire value proposition here is that we want to be the ultimate, ideally the perfect M and A and operating machine. Organic growth should be... Yeah, [00:34:45] S1: shouldn't be the same
00:34:45 · Luca Ferrari
[00:34:45] S3: as inorganic. It's just certainly a factor you want to understand, but it's a very secondary at best. I think there are two reasons for it. Part of it is just not all investors are uber brilliant and there's a lot of pattern following. Overwhelmingly companies in the market grow organically. Serial acquirers are fewer and far between because in aggregate I think it's a smaller opportunity. It's still a gigantic if you add them all up in it's probably trillions of dollars, but it's a rarer type of opportunity. So most investors have not done a lot of those investments. Some have done none. In any case, they're being trained to think about how do I catch the next Google? And that's more, you know, a product that scales organically. There's just that more shallow approach. Several investors are extremely shrewd and perfectly understand the math and why organic growth in our case is, I wouldn't say completely irrelevant, almost within reason. Some don't care at all and enthusiastically buy our stock even though organic growth has been lackluster, let's say, for the most part. Despite understanding it perfectly, we value our stock less because they are afraid there is kind of this vicious cycle where they think, well, I think many people out there in the market don't get it. They like organic. And so maybe Bending Spoons will not be valued as much as I think it should. And I need to embed that in my own valuation, and therefore I should value it less. So there's also this phenomenon of very astute investors who are second guessing what everybody else may be thinking, which is fascinating. And it's rational. If you're ultimately not holding forever, it is not irrational to think that way. I understand it.
00:36:23 · Paul Buser
[00:36:23] S1: Welcome to the world of public markets. This exists though in venture land. I remember just a couple weeks ago, a good close friend of ours who's been a influence on us is a gentleman named Ho Nam. He helps to run Altos Ventures, and he had put something out on X. They run an extremely successful venture firm, but he's obsessed with Berkshire Hathaway. So he has this strange melding and almost like a Yoda like set of thoughts once in a while on X. And he just brought up the old story of the voting machine versus the weighing machine that Graham and Buffett popularized. And you see that a lot in venture land because everyone's worried about who is going to be the next buyer. So who's gonna vote on it? I think your advantage, short of maybe a few of your public shareholders not realizing if they just hold on, they're gonna be just fine, is that you don't have to be the voting machine. By definition, you taking the company, expecting that essentially every company is gonna stay within the Bending Spoons forever. All you're doing is weighing what the actual cash flows can be based on your model. Does that resonate with you? Important is it that you look at it through the lens of your model and how it could find a permanent home within you?
00:37:29 · Luca Ferrari
[00:37:29] S3: It's all we do pretty much when we choose whether we will acquire a company and what price to offer for it. There is a set of more qualitative checks we go through, but then once those are cleared and we're happy to move forward, it's all about the math of IRR, NPV per Spoons or these KPIs of compounding and ways of accounting for opportunity cost. We barely, if ever talk about will the market like it? If we have two opportunities where IRR based on our own projections of free cash flow is compatible, almost the same, Not sure if we think the market will like and we can't do both one more than the other, will lean because we're not masochistic. I think it would be dangerous to try to please the markets for a bunch of reasons. One is the markets change their minds in time. You probably looked into Teledyne by Harry Singleton and there was a decade or two where what at the time were called conglomerates and that's maybe a word we hear less today, but were very popular. And so the guy who was one of my favorite entrepreneurs and investors of all time, maybe the favorite, I think is absolutely exceptional. Also great engineer by the way, and chess player was aggregating assets under the same umbrella. And then at some point the markets decided that businesses that had a narrow, sharp value propositions were more appealing and started to optimize and spin off different businesses. And it kept compounding very efficiently just with exactly the opposite approach. You can't count on the markets to think the same way. Now there, I think it's no harm done. You bought them, you sell them. It's a little bit different if you bought a business you don't like simply because other people like it, then you're stuck with the business. So I wouldn't want to do that. Secondly, even if you were to assume that your meaning our approach to selecting targets led to a portfolio mix, the markets like less. It's not even necessarily thing, but let's assume you're certain that that's going to happen and that will all as being equal afford you a lower multiple. Ultimately, what you care about is valuation, which is the multiple times, say your EBITDA or some other factor in the equation. If by allocating capital more efficiently, the other factor, say the EBITDA gets to grow much faster. And these are exponential.