00:37:50 · Yoni Rechtman
[00:37:50] S1: Yeah. It's, they basically run these parking lots now entirely autonomously and they monetize the payments Harder to not pay. Yeah, And so the basic idea in all of this stuff, in our view, is that like, there's a lot of markets that are screaming out for, like, software or AI, but are, like, fundamentally unsound places to build a business selling it. So rather than trying to like, you know, invest a tonne in sales and marketing to bring this product to market that nobody wants to win a very, very small amount of budget, you know, each one of these customers, like, Why don't you just go, if economics are transformational enough, just go and buy the business, transform it yourself, own all the upside, and compete on the basis of technology using M and A as a go to market motion. So this is I think where this is very different than private equity, where our view is like, is really trying to be laser focused on product not process. So we meet a lot of people who will say like, well I'm just like really smart, I went to this school, I did this thing. Like we're just gonna be really good asset owners here, and I think that is an awesome private equity approach that is actually gonna perform really well in this moment. Where like we're gonna know how to use these tools the best, we're gonna integrate them the best, but it's not necessarily built for scale or built for repeatability or built for defensibility. So we're very interested in these opportunities where we can underwrite like a product team to go and really validate some kind of transformational, economically transformational product in a market that we think will support this kind of motion. But, you know, you could envision buying a professional services firm, you know, that has like, you know, call it 10 or 15% EBITDA margins, and if you've built a product that you think transforms that into a, you know, call it 30 or 40% EBITDA business, like that is huge value creation for yourself, obviously. It also means that you can afford to buy these businesses like much more aggressively, like maybe not quite as sensitive on entry price, like maybe you can pay, you know, 11 times instead of 10 times earnings, something like that.
00:40:11 · Yoni Rechtman, Eric Newcomer
So you have your pick of the litter on which business you wanna buy, and if you can go and start buying increasingly large businesses over time, as Metropolis has done, you have a chance to, within a relatively short amount of time, own this like huge cash flow generating, really really like unique asset, and just like run it forever and take it public. So we're not interested in these opportunities to say like, we're gonna go and fix a broken business and like modernise it, and you know, we really want to think about, and this is I think why it really is fundamentally venture, is like be very very focused on the upside that we can create in these businesses, rather than thinking about how we can make money through, you know, financial engineering or turnarounds or any of that. It's just a different go to market for software instead of some different business model for us. [00:41:09] S0: But all the competition for these businesses has got to drive you crazy, Now there's all this money pouring in, so every strategy's gonna have, all of a sudden if you have a dry cleaning business, all these VCs said, oh I need that company, we're gonna
00:41:09 · Eric Newcomer, Yoni Rechtman
[00:41:09] S0: But all the competition for these businesses has got to drive you crazy, Now there's all this money pouring in, so every strategy's gonna have, all of a sudden if you have a dry cleaning business, all these VCs said, oh I need that company, we're gonna [00:41:23] S1: bring AI to it. So I think the answer, just like anything else, is it means you have to be willing, like a few years ago it was unconventional enough to even be thinking about this strategy that like, that alone was the off kilter, unique kind of end of one approach. I think today we just need to be looking in weirder places. I think we need to be looking at like weirder types of teams. I think we need to be looking at them earlier, different kinds of interventions, different kinds of product approaches. But it's the same, it's like [00:41:53] S0: Private equity at least respects expertise in the domain. Whereas venture capital often scoffs at the people who've been running the dry cleaning business or whatever, and then they don't understand sort of the particular things that make a business succeed or So I don't
00:41:53 · Eric Newcomer, Yoni Rechtman
[00:41:53] S0: Private equity at least respects expertise in the domain. Whereas venture capital often scoffs at the people who've been running the dry cleaning business or whatever, and then they don't understand sort of the particular things that make a business succeed or So I don't [00:42:10] S1: know if I agree with that premise, honestly. I think that if you're coming in to sell software to that, I mean, let's use like real examples here. You know, if you're coming in and you're like building Toast for you know, SMBs and restaurants and stuff, and you don't have like Toast the payments processor. Yeah yeah yeah, Toast the like, you know Right. Yeah. You don't have like a ton of respect for your customers, and you're not like really willing to listen to them and understand them, and like, they're not gonna buy your product. It's not gonna work. You're gonna build the wrong thing. Like, I don't think that it's unique to this instance to say that you need to like, if you think about these companies that you're acquiring, if you think about them as your customers and your partners [00:42:51] S0: You're just saying any successful entrepreneur would be Any successful. Empathetic to Yes. Their But it's just easier if you've grown up in the bit, or it's you know, I'm in media, you watch people get into media sometimes. [00:43:00] S1: And you're like, don't know who of the Famously business private equity is extremely respectful when they go in and buy media companies.
00:43:00 · Yoni Rechtman, Eric Newcomer
[00:43:00] S1: And you're like, don't know who of the Famously business private equity is extremely respectful when they go in and buy media companies. [00:43:07] S0: Right, well there, but those strategies are just like, you know, burn them and take the profits as we can. Whenever somebody says, oh, I really, I'm not from media, but I'm a smart guy, I'm gonna like really reinvent it, it doesn't usually work. [00:43:20] S1: I mean this is one of the reasons why we tell people build then buy. Like don't start the business and immediately go and [00:43:29] S0: So become that thing, like do a version of it first. [00:43:31] S1: Well what I mean is like go and service them as customers first. Build a product that is like really good and transformational to them first. Maybe it's a lot cheaper to build software than it is to go and buy a business, especially So you should be able to test and validate that what you've built actually justifies going and raising a bunch of money to buy these assets. And in the doing, you're gonna learn a lot about the like customers and partners that you're serving. So I just don't, I think it's a different go to market, but I don't think that it is exempt from the same kinds of like basic physics of business building, which is like, you know, customer centricity and like deep respect and interest in solving problems for them. [00:44:18] S0: If you had
00:44:18 · Eric Newcomer, Yoni Rechtman
[00:44:18] S0: If you had [00:44:18] S1: to bet on one other investment firm doing roll ups, who would it be? I think to some extent it might just be like, look, the whole collection of like kind of what I would call bulge bracket venture is doing this well. They're taking a very different approach to this than we are, which usually starts with capital rather than starting with a product. I don't think it's wrong. I think it will trend towards a very different kind of outcome. But like every every one of the, like, you know, mega funds, which they increasingly look indistinguishable from the mega private equity funds and even the mega hedge funds, you know, They all have teams now focused on this. I don't think that they will be wrong. I just think that they will wind up selecting for different kinds of people and opportunities that we will, and they're gonna capitalize them very differently. So one of the reasons this whole idea is so attractive to them is because it's an opportunity to go and, like, deploy Mondo dollars from day zero. That's not our approach. Our belief always is that, like, too much money too fast throttles progress, and like you know, have an overstuffed pig and it dies. It allows a level of you know, poor discipline loose [00:45:32] S0: You've talked some about you know, king making in venture capital. It can work, I mean, if you throw enough. I mean, OpenAI right now is sort of proving So a too big to fail