Invest Like the Best with Patrick O'Shaughnessy
00:42:58 · Luca Ferrari
[00:42:58] S2: Yeah. In short, the more sophisticated version is completely true what you just said for the first five years. Then we started using debt, Pretty basic debt from commercial banks. Not very high leverage ratios, 3.5x EBITDA on a good day, generally lower trailing EBITDA in the last twelve months. That helped accelerate. Before we couldn't use that because you need to have an established track record before they take you through your code. Since then it's been essentially that and reinvested earnings from that. We have raised a bunch of equity but mostly to fuel secondary transactions because if you're in business for a long time, you start to get into good scale, people say, Okay, I've invested in this company. And I'm talking really just team members because from the beginning we enabled people, we paid just cash, no variable pay of any kind. And people can choose though to receive some of their cash pay in equity at a discount. It's very unusual by the way. In time people have accumulated positions and that equity is worth nothing if there's never any liquidity. So we started organising secondary transactions every eighteen months, one year, two years. We've had maybe five, four probably since 2019. And so mostly equity has been raised to finance those transactions, but occasionally the first capital increase of any significance was in 2022, I think. So yes, have dilution from capital increases, very modest. Off the top of my head, I'd say maybe 10%. We could also not have done any of those at all. We still did them because we figured in a couple of cases it helped us get over the hump to close a deal we couldn't without that little extra. With that we were maxed out. But also we figured if we bring in a little bit more in terms of high quality international investors, that would be helpful. Credibility, firepower if we need to go after a huge acquisition quickly, just optionality. But we're generally very cautious when it comes to dilution. I think if you really believe in what you're doing, it should be painful to increase your capital base.
00:44:49 · Patrick O'Shaughnessy
[00:44:49] S0: I don't know if it was Evernote or some other one. We've talked about Evernote, so maybe pick a different one. I'm curious for another acquisition, whether it's WeTransfer or Commute or anything else, the AI photo sharing one, Remini, which I was just looking at out before we started this morning. Are there other acquisitions that have taught you personally the most about your own process, about doing this well that stand out in memory?
00:45:12 · Luca Ferrari
[00:45:12] S2: There was one time where, let's say we bought a product at the peak of, let's call it a viral moment. This is really not applicable to the type of businesses we buy today, but at the time it was a thing. It's many years ago now. And then as soon as we bought it, basically that viral wave was reaching and had reached the peak and that completely changed. We thought we had been conservative, it completely changed our assumptions and led to drastically inferior returns versus what we expected. And that taught us to be absolutely paranoid when it comes to the sources of user acquisition. So basically either we buy businesses where almost all the value lies in existing customers or users like people, okay, these have been acquired, it's just about now managing them as well as possible. Or if a lot of the value is predicated on substantial additional user acquisition or customer acquisition, then we need to really clearly understand the drivers of that expected acquisition and make sure that these drivers are things we can predict. For example, we know we can make pretty accurate predictions of word-of-mouth rates under normal circumstances, but not under sudden viral moments. We don't feel very confident making predictions of future rates of user acquisitions through paid advertising, for example. So that was a big lesson learned. Another one, we learned we actually went after Grindr, the LGBTQ plus dating app in 2019. So the app was owned by a Chinese firm and CFUSE was forced into sell. So a long story short, it was a big bite for us at the time. We're much smaller. It would have quadrupled the company. We didn't have an equally substantial track record as we do today. We went above and beyond to raise the capital. Almost won the deal. Ultimately, we lost it because someone else offered a bit more and we would have offered more still but we just had capped out on available sources of funds. So that was a failure. We worked, took us about nine months. My main thing and the main thing for several colleagues, at the time we were very small, we had an M and A team of one person. So it really paused our growth. Had we bought it, it would have been an incredible acceleration afterward. But it taught us to be very careful to put all our eggs in one basket.
00:47:20 · Luca Ferrari, Patrick O'Shaughnessy
And so in hindsight, I think we could have still tried to get it but maybe not obsess so much over it considering how unlikely it was to make it happen and try to place another few bets that year. If you look at our growth, those couple of years, it's way lower than almost any other year and that's the key reason. Like we put all we had into making that one thing happen, it didn't happen, we hadn't done anything else, had done some things but nothing that really moved the needle. So it taught us to be, think more in terms of probabilities. Not that we weren't before, but I'd say we've gotten almost obsessive of seeing the world in terms of statistics with that model of the world act accordingly. [00:48:00] S0: Can you talk about AOL a little bit? Obviously that's a name that literally everyone will have heard of and I'm fascinated to hear the story of you acquiring the business.
00:48:08 · Luca Ferrari
[00:48:08] S2: So people know AOL as the way to connect to the internet back in the day, in the nineties, even the eighties I think, actually I think they started. Pioneers, some point AOL was what Google was in the two thousands, it was the hot new thing. They had this outside in, it seems like a failed merger, Time Warner and whatnot, and then they had different homes. It's actually a very good business. It lost all the customers that they had to lose over the decades. And today it's an email inbox and a web portal with an aggregator of news and other content. It's a very good business with tens of millions of active users, very loyal users. Again, there's a lot of selection bias. People who wanted Gmail, have decades to go for it. People who really love that particular experience, they have lots of stuff there. And at the same time, we think, although the team has done a pretty good job, I think, at managing this business, there's a next level to be unlocked in terms of polishing the product, optimizing the offering, optimizing monetization. It's just a very good business that I think superficially people think, Oh, it's probably legacy old, it's worth nothing. But actually it's a wonderful business. In fact, again, probably named names for a lot of our companies in the broader messaging or email industry or segment. And if you just read the news you would think are doing super well and they're much larger. But actually, if you had access to user account, P and L, including in time, looking at trends, they are just not nearly as good. Like it doesn't even begin to compare. AOL is actually the fifth most used email inbox in the Western world. Crazy. Which is... It's something. It's a pretty competitive category. So is it Gmail? No. If Google ever wants to divest it, I would be happy to take a look. It's a very good business that will be even better, I hope, that's the intent, as we pour our hearts and souls into improving every facet of it.
00:49:50 · Patrick O'Shaughnessy
[00:49:50] S0: One of my mentors who's done a lot of investing and building software businesses over a long period of time said that one of the ways that he made the most money or was the most successful would be that he would enter in product situations where there were 12 things going on and there should only be three, that there was always just like too much stuff, too many features, too many products in the company. Have you found that to be true at all that especially with companies that are a bit older, that there's been this creep of stuff that gets added that's not necessary. Is that like a common element of your playbook to take 12 down to three?