Joys of Compounding
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.
00:44:27 · Luca Ferrari
[00:44:27] S3: It's certainly a concern. The good news is that we haven't been able to see any of that happening yet, which is reassuring, but I fully expect that there will be some saturation and some deterioration on your returns, maybe because you need to deploy more and therefore you can be less discerning. And so yes, we can talk about expanding the addressable market, but unless you do that, there's certainly some level of downward pressure on returns because you need to buy a bigger percentage of whatever is available. We have been, I think, offsetting that well by improving our talent density, culture, our technologies, but it's not written in the stars that will continue to suffice. And in fact, I would expect returns to compress a little bit at some point going forward. It's only reasonable. Now the good news is that we have to the best of my knowledge and hearing from investors who have studied us the best relative to our scale over time. Have delivered returns that are better than maybe any serial acquiring history. I don't know. That's what I've heard by from two separate investors. I haven't studied enough that I can say I'm sure that right. But at least the fact that two extremely professional competent investors told us at these different scale points have always been the most efficient, fastest compound compiler in history, at least all the companies they knew. Even being in that conversation, I think that's a testament that we've done something right. There is a pretty wide margin between where we are or have been up to now. And let's say where returns would start being. Do we want to do this? Or do we start paying dividends? It's good to know your model. It doesn't hinge on razor sharp and razor thin margins. And so that's good. Naturally, will continue to work hard to make sure that such compression doesn't occur or occurs as slowly and as limited a fashion as possible. And the tools are strengthening the team, the platform more broadly, the data, the technologies and the people. By the way, the AI especially is now very powerful tailwind in making sure that we can 10x revenue while not 10x ing headcount. Very confident we can do that. I suspect we can 10x revenue by increasing headcount 3x at most, something like that. So that helps. So there's a lot of investment and effort going into that.