Invest Like the Best with Patrick O'Shaughnessy
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.
00:52:21 · Patrick O'Shaughnessy, Luca Ferrari
[00:52:21] S0: More of an entrepreneur, yeah. [00:52:23] S2: Certainly. I think a lot of entrepreneurs take money from investors and have a level of entitlement that they should never be asked to provide a return. Oh, but why do you ask me to sell now? It's only been four years, five years. I think that's either naive or intellectually dishonest. Regardless of the particular bylaws that investors subjected to where maybe they could stay forever ultimately, an investor is trying to achieve some form of IRR with some timeframe. So you should remain very respectful of the fact that when you take anybody's money, if you ask me, but certainly institutional money, you can't find it shocking or disappointing or then bitch about it in the entrepreneur circles that they're asking, putting some level pressure with you to sell. [00:53:06] S0: You're in such an interesting seat because you're both investor and operator. And so you have the shared perspective that you're often buying things as an investor, but then running them as an operator. If you think across all the investors, pure investors that have come and studied Bending Spoons, some of them had made equity investments, secondary investments, etcetera. What distinguishes the best investors? What do they do that's most different from those that are, let's say, average?
00:53:06 · Patrick O'Shaughnessy, Luca Ferrari
[00:53:06] S0: You're in such an interesting seat because you're both investor and operator. And so you have the shared perspective that you're often buying things as an investor, but then running them as an operator. If you think across all the investors, pure investors that have come and studied Bending Spoons, some of them had made equity investments, secondary investments, etcetera. What distinguishes the best investors? What do they do that's most different from those that are, let's say, average? [00:53:31] S2: I'd say most good investors, they recognize patterns. So I've seen a certain business model work and they use that to select their investments. If done right, this is a very successful way of investing. And then there are the bad investors and the amazing investors, none of which is a pattern recognizer. So they actually assess each business in an ad hoc manner on its own deep fundamental merit, but it's much more difficult. That's what divides the truly outlier investors from the bad ones. Those in the middle, maybe even leaning toward good, are pattern recognizers. But in the truly incredible ones, you sit with them, they're not saying, oh, you are the Uber of bicycle. [00:54:12] S0: Yeah. You're the Berkshire for this.
00:54:12 · Patrick O'Shaughnessy, Luca Ferrari
[00:54:12] S0: Yeah. You're the Berkshire for this. [00:54:14] S2: They understand the almost the laws of physics to make a metaphor that makes so that the apple falls. And that gives them certainly a lot of confidence, but also the ability to see what others don't. Because ultimately, a lot of the time, good investment is not determining if something is good. Like a lot of companies, most of us, could tell they're good. But if everybody or even not quite a lot of people think they're good, probably the price embeds that goodness and it's not a great deal. It is what it is. It's like a lot of companies today in AI, again, I'm not going to name names, but some probably deserve their valuation, some will... Easier will prove or even cheap. But most, even the good ones, are probably too expensive simply because everybody wants to invest. In a way, it's the same thing. The truly outstanding investors will be able to find something that's really good, but few people think is good. And the only way to do that is not to apply a pattern because by definition, if it fit a pattern, then it's either by the pattern or good by the pattern, everybody is on board. It has to not fit the pattern and you have to find ways of determining it's good. It's very difficult intellectually. You need creativity, imagination, logic, rationality. It cognitively is next level.
00:54:14 · Luca Ferrari, Patrick O'Shaughnessy
[00:54:14] S2: They understand the almost the laws of physics to make a metaphor that makes so that the apple falls. And that gives them certainly a lot of confidence, but also the ability to see what others don't. Because ultimately, a lot of the time, good investment is not determining if something is good. Like a lot of companies, most of us, could tell they're good. But if everybody or even not quite a lot of people think they're good, probably the price embeds that goodness and it's not a great deal. It is what it is. It's like a lot of companies today in AI, again, I'm not going to name names, but some probably deserve their valuation, some will... Easier will prove or even cheap. But most, even the good ones, are probably too expensive simply because everybody wants to invest. In a way, it's the same thing. The truly outstanding investors will be able to find something that's really good, but few people think is good. And the only way to do that is not to apply a pattern because by definition, if it fit a pattern, then it's either by the pattern or good by the pattern, everybody is on board. It has to not fit the pattern and you have to find ways of determining it's good. It's very difficult intellectually. You need creativity, imagination, logic, rationality. It cognitively is next level. [00:55:16] S0: In that specific effort for Bending Spoons specifically, where have the best investors really dug in to get that physics understanding of your business that's different than how other things work? Like, where are the best digging?