Invest Like the Best with Patrick O'Shaughnessy
00:35:02 · Patrick O'Shaughnessy, Luca Ferrari
[00:35:02] S0: How do you know when there's pricing power? If prices are 6% higher, you've made it a better product so maybe that's why the price can go higher. But how do you think about price charge to end users across your universe of applications that you own? [00:35:15] S2: It really depends on each case. I'll give you another case that's quite different from Evernote and that would be Meetup. So Meetup historically you could only use it as an organizer. You could only use it if you paid for it. And since we acquired it, we introduced a free tier so you could organize. We actually do quite a lot for free. It kind of qualifies as a price decrease in a way, like we give away more for free. And we actually increased the price for the more advanced use cases for the truly dedicated. Based on my observation, there's room for being more sophisticated about pricing, which is different from increasing prices. Being better at segmentation, what's paid, what's given away for free, personalization, communications, experiences that ultimately all blend into monetization and the maximization of user LTV. Our direct experience is that there's a wide range of levels of sophistication in the market. I'd like to think Bending Spoons being at the very top of that sophistication spectrum. Whether that translates into higher prices or lower prices or same prices, I don't know. It certainly translates into a very different overall approach to monetization. [00:36:20] S0: Just as a quick aside, why is it called Bending Spoons?
00:36:23 · Luca Ferrari
[00:36:23] S2: So when we started, we knew that we weren't going to be a one product company. We still wanted the name to connect to something for us. A lot of companies are named after somehow after the problem they're trying to solve or not all of them, or the product they're trying to deliver. Of course, that wasn't an option for us. We figured, okay, why don't we look for a name that's more connects to some principles or values that we find inspiring? One of my co founders, Mateo, is a big fan of The Matrix. Watched the movie the night before, I'm not sure. But anyway, he told us, why don't we call it Bending Spoons? He watched the movie and there's this little bold guy who bends a spoon with his mind, and I... Yeah. I think it's cool. Initially, we didn't like it. I still have a spreadsheet with different names. At Bending Spoons, think we gave it like four out of five stars. There were a couple others that got more stars. The one I remembered, in hindsight, thank God we didn't pick it. Appeal. We were doing only apps initially. Now we do all sorts of technology and software. Appeal. I think it's awful for some reason. The Luca from 2013 thought it was brilliant. So it got five stars out of five. But we picked Bending the reason why we liked it was it connected to two principles or values. They're still very dear to us. One is call it the power of the mind. The idea of bending spoons somehow, at least to me, it inspires this vision of a powerful mind that can do things that appear impossible. And we're big believers that the human brain has incredible potential if you work on it and at it and try to really give it the tools. And the second reason why we loved it was that even if you have that brain, it, again, just intuitively feels to get to the point where you can bend spoons, you've probably worked really hard at your craft. And we like the idea of almost anything in life that has value, you got to work at it. I think it's true with a family, romantic relationships, your craft as a professional, your abilities as an athlete. I think almost anything that will really give you satisfaction requires work. And so it... And plus, it was a unique name. We hadn't heard of any company called The Bending Spoons, and so we figured it's probably memorable. Let's go for it.
00:38:23 · Patrick O'Shaughnessy
[00:38:23] S0: I love it. And I love that movie. So now knowing the reference, it's great. Going back to the Evernote acquisition, you mentioned you paid 50% more than maybe the next highest bidder. How do you know the right price to pay? Like how do you think about pricing assets? As you buy bigger and bigger ones, we can talk about Vimeo, we can talk about AOL. These bites of the apple are gonna get bigger and bigger. Price matters of course, you have the ability to do a lot after buying it, so maybe that allows you to pay a higher price. But still, I'm sure you wanna pay a good, fair, responsible price. How do you think about it?
00:38:51 · Luca Ferrari
[00:38:51] S2: One is how do you determine your returns as a function of price? The second one is how do we stay disciplined so we will really not pay more than we believe is right based on our expected returns, opportunity cost, what else we could be doing with that capital and at what returns. So the first one is a matter of sophistication and the second one is a matter of psychology really, think, discipline, patience. And the third one is how well do we negotiate? How efficient are we at positioning the ultimate price on that curve? The fastest but stupidest approach would be to immediately offer the very most you can pay. The opposite of offering a ridiculous low price is probably equally stupid. So we want to find the right balance. Interestingly, we actually are much closer to the former. We believe it's better to have a reputation for someone who offers a very fair price immediately but who's not going to be very willing to negotiate much. So the first one, how do you determine that return as a function of price curve? You've got to be very sophisticated at knowing what you're doing, having first party data for benchmarking, asking the right questions, having good models, but the output of the model is only as good as the assumptions you put in it. And we certainly have very sophisticated cohorted models and whatnot, but main advantages in being able to run these businesses a lot better. We don't win because we're good at predictions. We win because we can run them better so we can offer a good price. But it's certainly marginally important to making good predictions. And so you want to have twelve years of experience running many businesses from the trenches in the details. Private equity, I think teaches you a lot more. So you understand why things went a certain way with certain business. You're wiser when you set the assumptions for your next acquisition in a way that I think if you stay on the financial layer or kind oh, talk to management every week, you think you understand, I don't think you really do. There is a cost to pay, it takes time. But then on the bright side, you're basically smarter at predicting the future when you find yourself in a similar situation again. So assumption setting is critical for us.
00:40:45 · Luca Ferrari
We have many assumptions, each has a probability distribution and we debate assumptions extensively without ever looking at what the model will spit out as a consequence. That's forbidden. Because we think that if you see the P and L, basically the business plan as you do it, there are all sorts of biases. It doesn't look good enough and you're like, Oh, maybe this is conservative. Let me push We do not look at the output, only at the inputs. We debate, analyze, dig for more data. Once we're happy, that's the best we can do. At this stage, we run a Monte Carlo simulation and then we look at the distribution of IRR, NPV and that's the truth. Nobody can say, Now that I see it, I think maybe we were a bit pessimistic with the assumptions. No, too late. This not the truth. This is what will guide our negotiation. So that's phase one. And then you make an offer. As I said, we try to make an offer that's sometimes the maximum we'll to pay or close to it because we think although we could probably get a better deal in the moment if we started lower, then we don't want to establish a reputation for people you can push around and get more out of. We're more like the Warren Buffett model of, I'll give you what I think is actually a very good offer and I'm okay if I hear no, but don't think you can get 25% more out of me just asking. And then you've got to be disciplined when they ask for more than you're willing to pay. You absolutely need to not have fallen in love with that particular business and say, okay, you know what? That's not to be, we'll move on to the next one. What's your
00:42:05 · Patrick O'Shaughnessy, Luca Ferrari
[00:42:05] S0: walk away rate? Like for every AOL, Vimeo, Evernote that you buy, how many did you want to buy that you ultimately didn't? [00:42:11] S2: We need to define this because we look at actually thousands of businesses each year. We don't make an offer to thousands of businesses. I'd say we probably make an offer to twice as many as we buy. You know what? We have never lost a bid before. There has never been a business we made an offer for and someone else got it. Those we didn't buy were ultimately the seller just chose not to sell to anybody. So that tells me our offers are typically super competitive. It also tells me we're probably not very good at negotiating because I think some level of failure rate would indicate a more optimal strategy. I guess you you fail, you learn, you get better. [00:42:42] S0: Can we talk about the history of the financing of the business? Because like you said, you've done very little direct equity capital raising before you've done some debt. Has most of this just been build up of free cash flow from earlier businesses until you have enough to buy the next thing and then just rinse and repeat?