Invest Like the Best with Patrick O'Shaughnessy
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?
00:50:18 · Luca Ferrari
[00:50:18] S2: I don't know if it's necessarily common because not all companies do that, but we have seen it that it's quite true. Thought it was a contrarian view, now that I know your friend thinks the same, maybe it's not as contrarian as I thought it was. But yes, I think people in general overestimate the value of R and D. Let me qualify. They think that generously pouring money into building stuff pays off. It's really not true at all. What we find is that there a very small number of things that pay off handsomely and most things are a waste of money. And while there is an element of you don't know before you do it, so for sure, a lot of it you do. For example, if you start from what your customers need, really focus on that rather than maybe what your engineers think is cool or fancy visions that have very little to do with the core problems you're solving, you're probably actually already taking big strides in a direction of greater efficiency. And by the way, it's not just about keeping costs more under control, it's also doing the thing that matters better. Evernote today has a lower cost base than before, but I promise you, if you take 10 users at random, power customers, power users, nine will tell you that it's actually higher performance, more resilient, a better feature set. And part of it is we've really focused on what these customers painfully need it. That helps you do more with less.
00:51:34 · Patrick O'Shaughnessy, Luca Ferrari
[00:51:34] S0: How do you think about taking capital from a fund that's a ten year VC fund or something or a private equity fund versus a Ballygiffer that's got capital that lasts forever when you're thinking about the right partners? [00:51:45] S2: All else equal, we do prefer a permanent capital. And it's not so much because even permanent capital could ask you to liquidate. It's just that you don't have to. And I think the fact that they don't have to reduces the probability that you'll find yourself in a situation where it's just an unnatural complicated moment. Incentives can become a little bit perverse. We haven't experienced that before, but I know stories of others having done that. But I think if there's an evergreen source of capital, I think you're less likely to find yourself in that unpleasant situation. I will add, I cite more with investors on this than entrepreneurs. Although in a way I'm... [00:52:21] S0: More of an entrepreneur, yeah.