Invest Like the Best with Patrick O'Shaughnessy
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.
00:29:54 · Luca Ferrari, Patrick O'Shaughnessy
These are the criteria and they have remained the same, but the level of sophistication, our understanding of these criteria over time, it's incomparable. [00:30:02] S0: Maybe we could talk about Evernote as a great case study because I used to use it all the time. It was my, like, place of record for keeping my notes and book highlights and all these things, and people have heard of the brand. It was a big acquisition for you. I'm curious what you think of as like the milestone acquisitions in the history of Bending Spoons. I'd love to dive into that one. Just to hear an example of the whole story soup to nuts of how you found it, what you saw, what you did, how you thought about price, what your team did, what's happened since.
00:30:26 · Luca Ferrari
[00:30:26] S2: I mentioned earlier at the beginning, was all what we would call asset deals, individual apps and whatnot. And then we had a period of maybe three, four years where we saw that very basic small scale model work was going to saturate at some point in the not too distant future. And we figured we should do this at a bigger scale with structured companies with management teams and large teams of professionals and institutional investors. But will we be able to do as well or at least enough there? And we were quite... I think we lacked the confidence to take the leap immediately and so we started losing a bit of focus and looking at alternative strategies while taking tentative baby steps into that next level of the same thing really, but just... I guess it's a bit like I played locally now when I do an international tennis tournament to go back to the tennis. Will I be able to compete? And probably yes, if you're doing super well locally. Of course, you'll not be the best at that yet, but I think it's... You can empathize with there being a little bit of hesitation insecurity. And I think Evernote was the first such company like clearly within that definition. And it was very successful and so it gave us... And so was it for the sellers, by the way. I think it was a great deal for both parties. My guess is that we paid 50% more than the next best offer. So it was really a win win. Any good strategy needs to be somewhat win win otherwise it will not go far. We were invited to that process. At the time it wasn't something we took for granted because we were not so well known. So many times we missed out on sales processes that happened and took a look at it. I think we were very fast in making what turned out to be the winning bid. And we just saw a very good brand, although certainly slightly tarnished, but still a quarter of a billion people had used Evernote. You can say that of a lot of products.