Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy, Henry Ellenbogen
[00:00:00] S0: It must be very powerful when you're making an initial projection on a KPI or something to know that in the six months and year and two years and three years hence, it's gonna be looked back upon. You probably sharpen your pencil a little bit. [00:00:00] S1: You do. But I think what's special about our culture, and I always tell this to people before they join, and we tend to hire young people and develop them. But if you've been anywhere else, you don't believe us. People think when we get together and we do KPIs or do three year lookbacks or we'll do a session sometimes where we'll look at reinitiation in the portfolio, things we sold before and then we bought back. And a lot of times if we did that, why'd we sell it in the first place? Maybe we got it wrong. We don't do any of this in the spirit of “You made a mistake; this is an environment where you should critique yourself negatively.” It's like, no, we should be intellectually honest just like we want our executives to be. We want to be clinical in what we did, but then we wanna do in the spirit to try to learn from it and get better or put our data out there so we can learn from our colleagues who might have a valuable perspective to make us better. And if we can take the attitude of intellectually honest, self-improvement, humility; that makes us better. [00:00:00] S0: When you were doing your tour to learn about the franchises that were better at the end of the founder's run and those that didn't make it, what did you learn?
· Henry Ellenbogen, Patrick O'Shaughnessy
[00:00:00] S1: I won't mention the names of those who didn't make it, because the thing about not making it is a little bit like our investment memos when we invest in great people who are trying to build companies. A lot of them do great things and they just don't make it. In success, there’s a lot of good fortune. I think what I learned was if you don't architect the system on day one for success, then you end up with a lot of conflicts that sometimes undermine what you could have accomplished. We try really, really hard at Durable not to make compromises. If we go hire someone on the investment team, we want to go hire someone who one day could be a senior partner, or one day go basically manage the capital base. Or if we were to ever launch a new product, go launch that product. We're looking for people who can be as good as I am or Anouk is, or Corey is, or Kathryn. We want great people. For sure, you usually start in our parlance as an associate, you're gonna start supporting someone and you’re truly gonna be an apprentice in that way. And then even when you become an analyst, the first three years you're probably doing real analytical work, but probably you're early in your journey. But we don't wanna hire you, we don't want to promote you unless we think you can actually one day lead the investment organization and drive the firm. And the reason I feel that's so important is we just don't have that many slots. [00:00:00] S0: It's just like the companies, if you don't believe it can get better, you don't do it.
· Henry Ellenbogen
[00:00:00] S1: Right. That's hard. The other thing that's hard about it is when I went and looked at these firms, I do think a level of growth you have to pursue. Durable is a performance driven organization. We break every tie in pursuit of investment excellence. We haven't really, you know, marketed ourselves or tried to get new investments since 2022. And why is that? Well, I think we're performing really, really well, but I just believe markets are pretty full, and we're a long only firm. We're not gonna short, we're not gonna really try to time markets, but if you're gonna be our investor over time and we're gonna do well by you, we should probably take more of your capital when on balance, the entry point is lower than higher. We're gonna break everything. We're gonna really understand if we're gonna do less, what it means to be able on the public side to be able to own meaningful positions and companies to really be able to trade if there's quarterly volatility, such that we can buy more when things are attractive. Everything that—if we're only gonna do maybe five, I think since 2023 we've done 14 new private investments—so we’re back to doing five a year. If we're only gonna go do five and we're gonna start relatively small, a lot of times we start by investing 10 or $20 million, it's gonna make an impact for our investors, right? We’ve got to be be a performance driven organization. And for our entrepreneurs, we gotta be able to do exactly what we've done for Luis. We have to be able to do for Dylan, and what I think we're doing for Dylan, we have to be able to support Canva and Bending Spoons and the next generation of those. So we gotta go do that. With that said, I do believe that these investment firms that have persisted actually have done a good job of, at some point in time while the initial team was at its high performance and so had plenty of runway, started to prove that other people could participate in the investing process. That's something that we’ve started to do internally with how we approach the private markets. We gotta over time flush that out.
· Patrick O'Shaughnessy, Henry Ellenbogen
[00:00:00] S0: What is your pitch to all the great and emerging private companies out there that they should soon or eventually be publicly traded? [00:00:00] S1: This is controversial. This is why I love what we do. Because first of all, the world keeps on adapting. And when I first started investing in private companies, it was highly controversial that any late-stage private company would be valued at above a billion dollars, right? We talked about Workday earlier. When we led the investment round at Workday at $2 billion, everyone thought we were crazy. We invested in Twitter at a billion dollars, I was severely publicly critiqued. Now people look back at that and it's just like, wow, the idea that you would have a billion dollar private company that's not even newsworthy anymore. What has changed obviously in the private markets is that you can be a growth company that loses money and continues to, or be marginally profitable and not only be valued at a billion dollars, you can be valued at a $100 billion. And there's even a view—and I think it's thoughtful, I'm not criticizing it—there's even a view that you can be an indefinite private company. [00:00:00] S0: SpaceX or something.
· Henry Ellenbogen
[00:00:00] S1: Like SpaceX. Maybe Elon is correct and SpaceX never has to go public. That's really only happened in the last five years. Some people correctly pointed out this might be an incredible path for certain companies. And by the way, I think there's some truth in it. In the ideal situation, you are not beholden to short-cycle performance. So you can basically drive growth, innovation and at the right point in time, profitability and discipline in your business. But you can do it on a timeframe that lines up with your individual business or your own competitive reality and not have to deal with the public markets. I get it. I actually think it's very thoughtful. Here's the good news about life. We're gonna actually run an experiment. We're gonna actually know the answer. I'm not saying that's wrong. Here's what I think. First of all, I don't think it's for everyone, but I believe the path to building a compounder, or even what some people would say a generational company through the public markets is proven. If you understand how to do it, it’s actually very clear what you do. Let's go back to the compounder studies and then I'll give you an example or two. When you look at these compounders that were 6x companies in 10 years, the 40 of them, the average one of them has a period of time where the stock goes down 50% and it doesn't go down 50% only when the market is down 20. They go down 50% when they go through transition. So I'll give you an example for my career. Netflix started as a DVD mail business. To Reed’s credit, he realized that streaming was the future and he wanted to tackle this offensively. Like any transition, it's a little messy. First of all, he tried to split the company, he announced…
· Patrick O'Shaughnessy
[00:00:00] S0: I remember, yeah.