Invest Like the Best with Patrick O'Shaughnessy
00:44:10 · Patrick O'Shaughnessy, Sarah Guo
[00:44:10] S0: Everyone told me this. [00:44:11] S2: Yes. It was really bad. That's like a example of Bella, a partner on our team, started looking at a bunch of these companies and it's obvious that the demand is there. Now I think we have arrived at the conclusion that others are as well, which is, well, the market is different today. We are seeing consolidated at scale demand for accelerators or even supply chain independence because the big buyers of it want it too. We can't all be stuck on one line at TSMC. All of that is very, very valuable and that changes the risk equation for these companies. We start with pretty aligned beliefs about the direction of travel or the problems that are worth working on. And then a lot of the debates are like, is the market friendly to a venture backed company or not? Space is not a friendly market to a venture backed company, but is it possible? Is the distribution of outcomes worth betting on? That could be true in solar and batteries and nuclear, in turbine manufacturing, in robotics and biology. These are not your favorite software markets from ten years ago. Each of them is a new debate. Biology is an interesting one where by virtue of seeing the data empirically, I have now strongly moved to one side of the debate. [00:45:32] S0: What side is that?
00:45:32 · Patrick O'Shaughnessy, Sarah Guo
[00:45:32] S0: What side is that? [00:45:33] S2: You can create and capture enormous value with models in biology. And there could be different AI software in biology. We're the first check-in a company called Chai Discovery. And Chai is working with a number of top 10 pharma companies in really significant ways to accelerate some part of the r and d process. The conventional wisdom when we invest in this company... And I've been looking at computational biology companies of different sorts for five plus years at that point. The conventional wisdom was the only way you make money in biotech or serving pharma is by make a drug and then get biobucks deals and then decide how far along that risk path you wanna take. And what that means for the capital structure of the company is, okay, the great traditional biotech firms find these principal investigators, and they own 40% of the company, and they're kinda assembling these things, turning them into candidates. But most of it doesn't work. So it's just like a very different distribution of outcomes and structure and way to invest in businesses. Dumb software investors, you can't make money selling software to pharma or build platform businesses in pharma. The debate is, does it change with models? I'm a strong yes now. We still have a question to solve on regulatory. There's the speed of the physical world and safety is not something you can overcome easily, but I think we should see a massive acceleration in cures. [00:47:00] S0: What flipped that for you? What evidence did you see from we don't know yet?
00:47:00 · Patrick O'Shaughnessy, Sarah Guo
[00:47:00] S0: What flipped that for you? What evidence did you see from we don't know yet? [00:47:04] S2: We invested when we didn't know yet. That's part of the fun adventure. We were like, it is possible. It is worth trying. Yeah. There's no genius here. That's a $10,000,000 contract. The other piece is actually you just talk to the scientist at the customer or somebody who leads a [00:47:20] S0: User of the tool. [00:47:21] S2: Yeah. The user of the tool or you see there are also end user adopted tools, product led growth tools that are working in the space. Well, the customer knows if it's valuable or not. The light bulb moment for the industry is when we will have a new indication or a new drug that clearly the trajectory of the thing was changed, created by AI. We should see a huge wave of investment and rightfully so, but it's going to happen. I'm, like, very impressed by the speed with which pharma and health care overall has said, yes, this is gonna make a difference, and we actually think it's gonna change the business.
00:47:59 · Patrick O'Shaughnessy, S3
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00:49:09 · Sarah Guo
[00:49:09] S2: It's aspirational. The most traditional form of early stage investing is you start early with a company. You have a significant position. You never sell the position, and then you work on the company until it works or a solder dies. There's wonderful alignment and simplicity to that. Mike and I have both had the benefit of being part of the journey for some companies where it took a minute to begin to work or it's, like, not obvious at the beginning. Sigma, Notion, rippling. You wouldn't bet on a company hoping that it's gonna take four or five years to, like, find the thing. I think everybody is a product of their own experiences, including investing experiences. The first couple years at base 10 were, like, very nonobvious as well. The ability to take a point of view that is not obvious in the market because the market or because of people's backgrounds, whatever reason, and then just suspend doubt and act with full belief until it's true or not. That's a great way to be a partner to somebody building a business. I am trying to build a partnership and I deeply believe this is a team sport. I was talking to a friend who runs another investing firm where he is like, we don't have individual ownership of our investments. And I'm like, that is nonsense to me. How could you run a business that way? Because somebody has to own the decision. I don't know if this is right or wrong, but I don't know any other way to invest by saying, Patrick, you must make the decision. Do you believe? Convince us. How can we help you make that decision?
00:50:41 · S3, Sarah Guo
[00:50:41] S3: Have you learned about risk taking? Behind conviction, it sounds like there is often a leap of faith of some sort. Obviously, if you knew everything and it was obvious, that would be priced in and there'd be no return opportunity. Is there always a leap of faith? Is that risk taking by another name? [00:50:55] S2: Unlike my good friends at Founderspond, I don't have an instinct to be contrarian. But I do think it is so fundamental to decide what you think and not worry too much about what other people think. Other people is the dominant narratives of the period or even what different players in the ecosystem that are really important declare one way or another. I think you just need to find the truth. The way I would relate that to risk taking is if you find the truth and it is wrongly priced and you hold on to that, you're in a good position. You want asymmetric information and then the confidence to hold the opinion when other people haven't come around to it yet. I think a lot about how to make sure we have the information that is better than other people's and then protect ourselves from noise. [00:51:42] S3: Describe that in one more level of detail. That's a great way of asking what conviction looks like today. You're building that shell. What are the keys to doing those two things well, both having the truth and protecting yourself from the noise?