Invest Like the Best with Patrick O'Shaughnessy
00:21:45 · Luca Ferrari, Patrick O'Shaughnessy
[00:21:45] S2: By far talent density. We think about the jobs we offer as our most important product. So you need to know what your customer is, what you're offering, how you're differentiated and have the courage of really focusing on that sharply. I find a lot of companies are almost afraid of someone not liking them, some team member getting offended by some practices. And they are unappealing in general because they're too vanilla, too boring, they're nothing in a way, they're everything and nothing and certainly they're not appealing for the most brilliant and driven people who want very clear, excising opportunity. So we have focused pretty much from the beginning of getting better over time at it on being the ideal place for incredibly talented and hungry, determined professionals. We make a promise to them to surround them with incredibly high talent density. Just mentioned how selective we are, the entry point, we continue to be selective throughout. That certainly forces us to have difficult conversations and there are moments of stress, but overall it's a clear positive. Yes, it's a more intense, challenging workplace, but for people who want to be the best version of themselves professionally as quickly as possible, it's almost a unique opportunity. So that's our customer. That's the person we want to surround ourselves with. [00:22:59] S0: Why is testing yourself so addictive? What is it about it as a function that you and the team so enjoy?
00:23:07 · Luca Ferrari
[00:23:07] S2: It's difficult to tell. I suspect though it's a common trait of a lot of people who have achieved greatness in their vertical. I'm thinking for some reason tennis comes to mind. When I look at Novak Djokovic, Rafa Nadal, I don't know them personally. They both strike me as people who are absolutely turned on by the idea of testing their limits and pushing against those limits. I don't think they wanted to win for the sake of saying, Oh, won 23 grand slam tournaments. They love the idea that it was supposed to be impossible. And you know what? I'm going to prove it's not. It's one of the ways some humans are wired. But the truth is a lot of humans are wired that way and those humans are those who tend to have breakthroughs, excel in their fields, whether it's academia, sports, or business. And so if you feel that way yourself, if you want to win and excel in an area like we want to do with our approach, that's the kind of person I think you want to surround yourself with. Have you learned anything surprising about yourself or about how the world works in all these years of testing yourself? One thing I've learned that's cost me a lot of sanity and caused me some sleepless nights is that consensus is overrated and even dangerous at least when you're trying to achieve something. I don't like the model of the bright brilliant asshole or anything like that. I think you can not be a consensus seeker while being a perfectly respectful nice human being. I think that's the model I would espouse. But in general, if you're striving to stand out in your field, if you're very concerned about aligning everybody around that particular vision approach, not causing anybody to dislike you, criticize you, I think you're absolutely doomed to fail. Unfortunately, I'm naturally wired to enjoy consensus. I quite struggle with friction and criticism by nature. And I think, at least personally and certainly my capacity at the company that slowed me down, caused me some pain that in hindsight unwarranted and didn't bring any good to anybody. So I felt pain and others benefited as a consequence. And instead, when you have a clear idea, you believe that's the right approach and of course you have listened to input, intellectual honesty, openness, so it's not a matter of pride, just a matter of intellectual conviction.
00:25:13 · Luca Ferrari, Patrick O'Shaughnessy
Then I think being able to just accept disagreement, pissing some people off and just going very straight toward that goal is a superpower. Not perfect at that for sure, but I'm much better today than I was when I started. But at least the seven or eight years I think I was absolutely terrible at it. Thankfully others on the team were better and so as usual in a team you compliment each other. I think a lot of management teams are too worried about having a percentage, for example, of their team disagreeing with them, criticizing them. Instead, I think they should really try to, if they believe they've got the solution, the path ahead, they should be uncompromising in that regard. [00:25:51] S0: So if we rewind time now to the early days where you've got this core insight that zero to one is really hard and maybe somewhat random, You have this skillset that probably is really valuable and one to end, and you're gonna go acquire businesses and apply the talent and skillset to make the products way better, bigger, faster at everything. What is the first couple years of that process like? Like how are you looking for companies? Do you have enough money? I'm sure you must have started small. What were some of the first acquisitions? Talk us through the early lessons and early activity in the M and A markets.
00:25:51 · Patrick O'Shaughnessy, Luca Ferrari
[00:25:51] S0: So if we rewind time now to the early days where you've got this core insight that zero to one is really hard and maybe somewhat random, You have this skillset that probably is really valuable and one to end, and you're gonna go acquire businesses and apply the talent and skillset to make the products way better, bigger, faster at everything. What is the first couple years of that process like? Like how are you looking for companies? Do you have enough money? I'm sure you must have started small. What were some of the first acquisitions? Talk us through the early lessons and early activity in the M and A markets. [00:26:21] S2: The beginning again, had those 40,000 followers. So we were trying to get do some consulting, like I said, which never worked, basically brought no revenue pretty much. The first acquisition, I think we closed it within the year, so pretty quickly. And we paid $10,000 for it. I don't remember what it was called. It was an iOS app to personalize your keyboard, ultimately made $20,000 off it. Very good return in a short period of time at a tiny scale. And then that 20,000 went into a couple other acquisitions and maybe turned into 40,000 But again, similar nature, so small product, amateurishly built, certainly no institutional investors, no investors of any sort, definitely no professional management teams, typically one person. [00:27:03] S0: A guy to that.
00:27:03 · Patrick O'Shaughnessy, Luca Ferrari
[00:27:03] S0: A guy to that. [00:27:04] S2: Yeah, exactly. In parallel, we also launched a handful of products from scratch, learn things because if you don't acquire almost anything because you've got no money, you're also not learning. So we're trying to learn, hopefully make some revenue. We had a couple of mild successes, enough that it extended our runway. So many small things like that. And we kept adding and compounding, But slowly but steadily 10 ks turns into 20 ks and 40 ks and 80 ks and we've been compounding at pretty fast rates. If you look at our per share revenue or EBITDA growth over the past four years, where we are at a decent scale, it's about 1,300,000,000 this year, it's still about 75 percent per year. We're still compounding pretty fast. Ten years go by and you look back and you go, oh, wow. I remember we were making 500,000 a year. Now we're making 1,000,000,000. [00:27:47] S0: So in those early days, what were the key lessons that you were learning? What did you start to realize were the right attributes of an app, a piece of software, a company that you might acquire? What were the things that you were after?
00:27:59 · Luca Ferrari
[00:27:59] S2: It's always been the same things from a high level and that would be so far we've always focused on digital technology. We haven't bought supermarket chains, nor do we plan to. I feel you want to stay reasonably within your circle of competence. Ideally here and there you want to take a step outside of it. You need to keep pushing the boundaries because that will keep your TAM expanding as you expand within the TAM. But I don't think it would be wise, especially as long as the model works well, it's efficient to take massive leaps outside of the circle of competence just because. So digital technology, scale. Scale is relative, but because our approach is so hands on, so time consuming, I mentioned we can... Sometimes we radically rethink a business or at least several components of it. We will do maybe five acquisitions a year. Could be one, could be 10, max, if it's really a stretch. And each, some more than others, will really go super deep and rethink the details. The time investment and the effort does not scale linearly with revenue. So for us to do an acquisition that will bring in 500,000,000 in revenue is not five times as time consuming as one that will bring 100,000,000. Maybe it's on average a little bit more time consuming because it tends to be more complicated, but nowhere near linear. So we want to do fewer acquisitions but bigger. So first, criterion is scale. And again, at the time ten ks looked like a big bet. How do we feel like Ezele? Today we're actually hoping to invest easily 1,000,000,000 plus, but conceptually the same thing. The second thing is we need to be able to predict the future performance of that business, otherwise there's no way we can make a confident investment. We've gotten very sophisticated in times with statistical models and lots of assumptions and probability distributions, but at the essence of it, we need to buy stuff where we know where it's going. At least with sufficient confidence. And the last one is, we need to believe we can make meaningful substantial improvements to that business. Not that it's necessity, but it's difficult for us to imagine being able to make an offer that's super exciting for the seller and then being Okay, this is perfect. Buy. Probably they wouldn't sell it to us for that price.