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.
00:39:34 · Luca Ferrari, Paul Buser
So in a few years, any marginal difference really compounds. Then even if the multiple is a little bit lower, you're much better off because the other factor is twice as big or three times as big. Also, would argue the multiple will certainly depend on the market's perception of quality of the portfolio, whatever the market's the finest quality at that point in time. But it will certainly also depend on your growth rate. And so if my growth rate is way faster because we're allocating capital better, I don't even know that the multiple is worse, net net. Maybe the perceived quality pushes it down a little bit, but then the faster growth pushes it up, and maybe the net impact is a bigger multiple. So we think it's much wiser to stick to Compounding Free Cash Flows as efficiently as we can. Maybe the markets will like us more, maybe less at different junctures, but in the long run, we're pretty confident this is how we go as far as possible, as quickly as possible. We've been joking about you internally that you're the accidental outsider, been in hiding for a long time. [00:40:33] S1: Teledyne was in Will Thorndyke's book, the outsider. [00:40:36] S3: It's great book.
00:40:36 · Luca Ferrari, Paul Buser
[00:40:36] S3: It's great book. [00:40:36] S1: Yeah. I had a chance during business school to spend a year with Will writing one of the chapters, not that one, Bill Stewart's chapter, and just learned a ton from Will and have built a lot of companies with him, and he's taught us so much. So this is the plug, Will. If you're listening, it's another fifteen or twenty years at least until he write the chapter on you. But everything you're saying, I know he's [00:40:56] S3: probably Most companies were listening, like, twenty, thirty years. [00:40:59] S1: Yeah. Twenty, thirty years and smiling at the feistiness and obsession with these metrics that are rational long term. [00:41:06] S3: By the way, in fact, I think if I could now sign a document guaranteeing that we can buy shrinking companies forever at 65% IRR, where do I sign? I would sign immediately. To be clear, bought mostly growing companies, although people sometimes misrepresent Bending Spoons as we only buy dying companies, but actually probably 80% of our companies were growing when we bought them and have continued growing afterward. But if I could sign now a document promising that we can deploy $56 7,000,000,000 a year for next twenty years in shrinking companies at 65% levered IRS, I would sign in a heartbeat. That would guarantee just an incredible run of compounding. Unbelievable. We have zero problems with even negative organic growth, let alone less than shiny organic growth. On that note, Will was on
00:41:52 · Paul Buser
[00:41:52] S1: our podcast last year. He came down to visit us, and there are so many learnings every time we talked to him. But one thing he said relates, I think, to this point in a lot of what we've just been talking about. And it's pretty simple. Like everything with Will, he's able to just distill things down very simply and discreetly. He would just say the total addressable market for inorganic growth far exceeds the one for organic growth. I know you alluded to before, maybe for the biggest organic growth companies, they can be massive. But I think he would say people continually underestimate that there's a slew of acquisition targets out there if you build the right processes and the right system to find them and and integrate them into whatever you're building, and they're still being built today. There's always a new refreshed group of them. I haven't heard someone so emphatically say, give me 65% levered IRRs and shrinking businesses. That's exactly what he's talking about. It's part of the same design. If everyone else is avoiding companies that look like organic growth is flatlined, it's probably an amazing place to fish, and you can make them even better. And there's an unending amount of these companies.