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.
00:42:52 · Luca Ferrari
[00:42:52] S3: I completely agree. Earlier I mentioned why we like M and A so much, and I kept it simpler by focusing on, I think, the ROI of launching from scratch, especially our scale is not that appealing. And it looks deceptively appealing if you just look at the few winners because you're forgetting to really account for the massive human capital that's being deployed at a loss by people for free on their own time, hoping to be those winners. The other big reason is that I think an inorganic strategy scales more than 99% of organic strategies. Google is Google, but even extremely successful, let's say single product or single segment companies, I think if you scale to 1,000,000,000 or 2 in revenue, if you knew today you're starting a startup, you get to 1 or 2,000,000,000 in that city would say, wow, that's better than almost anybody. Whereas I think what we do, we're already at 4,000,000,000 and look, I don't know how much we can scale it, but it's obvious that it's more than five, you know? There's a long way to go.
00:43:47 · Paul Buser
[00:43:47] S1: How do you avoid the law of large numbers? Like everything, you seem to have thought deeply about them and and usually have a flip on the typical orientation towards these things. But if you 10 x the number of people from here, if you go from 4,000,000,000 of revenue to 40,000,000,000, generally, things creep in. Maybe you do start to eat away the TAM even though we just talked about it being enormous. Why stop at software? Are there things outside of software? I know you've done a little bit of hardware now, but I'm I'm in very far afield from there. What is it rationally in your playbook if you look out twenty years that's possible to not fall prey to the kind of organizational rot that usually comes as size grows? Yeah.