Invest Like the Best with Patrick O'Shaughnessy
00:02:21 · Patrick O'Shaughnessy
[00:02:21] S0: My guest today is Jeremy Giffin. Jeremy has been on the show before as one of our most popular guests, and this conversation is every bit as enjoyable as the first. Over the last eighteen months, Jeremy has had hundreds of conversations with founders and the capital behind those companies. I don't know many investors with such a high rep count in the most interesting corners of private markets, so I asked him about everything that he has learned. We talk about what those lessons mean for founders and investors, why everyone has become subservient to the poster class, the hidden intellectual history behind Silicon Valley, and much more. Please enjoy my conversation with my friend Jeremy Giffen. So we're gonna have the chance to talk about, as we do on a daily basis, you and I, 57 different ideas. But I'm always interested to begin with you a couple questions about investing. I sit near you. We share an office, so I get to hear a lot of these stories every day. I think it would be really fun for you to turn your observations from all those, God knows how many hundreds of conversations with founders of these companies and with the capital that has backed them in the past to sort of share what you've learned from that frontier over the last eighteen months framed as advice for founders and advice for capital. I just don't know very many investors that are looking at situations like you are with such a high rep count. So what have you learned in the first eighteen months of doing this?
00:03:36 · Jeremy Giffon
[00:03:36] S2: You really realize in let's say long term private markets that the great filter for funds is their storytelling ability fundamentally because their product which is realized cash returns take a decade. The thing that you're selling in the interim whether it's through you know a quarterly update or your event or just your one on one conversations with your LPs is really just narrative. A particular situation that's very interesting that we've seen a lot of is companies where twofold. One is that the business is kind of old, but it started to do well recently. That's an interesting scenario because it's one of these instances where merely because the company, the story, again the narrative of the company is that it's seven years old. Let's say the company has really started to inflect. Maybe it's because of AI or maybe it's because of something else, but they're six or seven years into their life. It's very difficult for those companies to get funding because the story is well okay fine you grew 200% last year, in absolute terms you're only at 8,000,000 of revenue and you're seven years in. Whereas I think literally if you just change the name and told a different story and just sort of arbitrarily started the clock two years ago, that company would actually be like really hot. That's an interesting situation. The fix I think is just to be more flexible on narrative and story. A derivative of that problem is just the amount of businesses where they're in a spot where it's kind of working, things are starting to go well, but they're faced with three choices, which is basically they're not going to raise a significant up round, really they're staring down a bridge round, strategic like M and A, acquihire, or cutting to profitability, and those are just really hard situations. If you're in that situation, I think that's where you really want to get creative with the cap table. If you have some cash, buy back your investors, convert everyone to common, really start to spend more time on the cap table because otherwise I've been shocked at sort of how hostile insider bridge rounds really are, I think this is like an under discussed part of venture.
00:05:32 · Patrick O'Shaughnessy, Jeremy Giffon
[00:05:32] S0: How so? [00:05:32] S2: It's just they have 3x liquidation preferences or warrants or ratchets or other things. If you're extractive to the downside everyone sort of boos you, but if you're extractive to the upside where you say I want the right to invest at the same price in two years from now, They're both like similarly extractive but because one is like an optimistic extractive everyone loves that one. [00:05:53] S0: So what advice would you give to founders in thinking about their cap table from the start?
00:05:58 · Jeremy Giffon
[00:05:58] S2: We're obviously in volatile, highly uncertain period right now. No one knows if it's the death of software. I think it's certainly the most unprecedented and uncertain time since the transition the internet. What you want in that time is a lot of optionality and the ability to be nimble and the ability to really be able to do what is right for the business and not be constrained by the cap table. Maybe your business needs to become a services business, maybe you need to acquire other companies, maybe you need to run profitably for a while, maybe you need to change your whole business model. If per seat pricing goes away you need to pivot to usage. In volatile times it's always useful to have optionality. I guess the general piece of advice is unless you're certain that you want to just try this one thing and it's going to be huge or zero, you should think about optionality, which usually means raising less, raising from investors with a wider mandate, not getting stuck in all these weird problems where like you need to continue to raise more money and if you don't it's bad for employees, it's bad for recruiting, people's options get underwater, they start to leave. All those things sort of reduce optionality. It's funny because in general I think commitment is a much better strategy than optionality but I think in highly volatile times where it's hard to tell the future, you basically just want to control for being able to be super nimble, turn on a dime, do what you want, not be constrained by our capital set up in such a way that we can really only do this one thing which is also true for investors.
00:07:20 · Patrick O'Shaughnessy, Jeremy Giffon
[00:07:20] S0: Going back to the investors and the construction of an effective narrative for building an investing firm before you've delivered the ten year investment returns or whatever. You have this great idea called the billion dollar PDF. Can you describe what you mean by that and what the interesting components of a billion dollar PDF tend to be? [00:07:35] S2: This is sort of an idea that you and I came up with in a joking way that turned out to be true I think the more we thought about it, which is every once in a while someone basically crystallizes a notion right at the right time in the right way that becomes the foundational viewpoint or opinion on certain era. And I think it's just this idea of everyone's a little bit uncertain, they don't know what's going on and someone just needs to set the story and set the narrative and it doesn't even have to be right but there's just a sort of confidence of this is what's going on, this is happening. When those come together they sort of just set a new narrative that everyone can kind of rest on for a period really until the next PDF comes along and the billion dollar PDF thing is this idea that you can form billions of dollars of capital one way or another around simply setting a new idea. And then maybe you can think of capital as 10 year olds playing soccer, they all sort of just follow the ball around, the capital just follows the billion dollar PDF around the field.
00:08:32 · Patrick O'Shaughnessy
[00:08:32] S0: It's probably a good excuse to talk about this joint notion of posting a billion dollar PDF is just the ultimate form of that or something. And the furnace that is the timeline of predominantly x. That's where I get my timeline. There's other places as well. But it seems like these notions have taken over people's desires and attention. Everyone wants to ultimately have a spot on that timeline. It's a strange phenomenon. There's like five or six sub components of the timeline that I wanna ask you about, But maybe to start just how you're thinking about this strange modern phenomenon.