Invest Like the Best with Patrick O'Shaughnessy
· Henry Ellenbogen
[00:00:00] S1: He was going to have Netflix and Qwikster. He had to go back because he violated customer trust and churn spiked. And then the other thing that happened was, in that period of time, he was buying back stock at $280 and the stock went to $70. And you know, I remember this really well, when I was at T. Rowe I led a PIPE to recapitalize Netflix. And Reed's a great entrepreneur for a lot of reasons. And I remember calling him on a Saturday saying, "Hey Reed, look, I could be reading this wrong, but there's a scenario here where the market's right and you have to raise money." And he said, "Henry, what are you even talking about? And I said, "Reed, I'm a huge admirer of what you're doing. I believe in what you're doing. I believe it's offensive, but I also believe it's a tough financial transition. You gotta go from a variable cost business model where the studios rent you DVDs on a usage basis, to a fixed cost business model where you gotta write big checks to people like Discovery and Disney to acquire content, plus the stuff—he hadn't launched any original, but you're investing in original programming and if you run this scenario that I'm doing on the potential subscriber losses in this transition, you're gonna run out of cash. Or at least the market's gonna think you're gonna run out of cash and your stock is gonna go down a lot more than $70." To Reed’s credit, he said, "I have not thought about this as much as I should. Let's talk tomorrow. I'll get the CFO on the phone. You go through your scenario, we'll go through ours and I can learn." At the end of the day when he showed it our data, he's like, look, I don't agree with your scenario on subs, but yours is not out of the realm of reasonable thought process. And he ended up raising a PIPE. We put in, when I was at T. Rowe, half of it, and I did that. And then TCV, Jay Hoag did the other half. This to me is the classic example of a market leading company embracing a transition. They obviously ended up winning. We did that PIPE at four and a half billion dollars. Look at the market cap of Netflix today. Yeah, it was a little messy, but it worked out well. So what does the public market do?
· Henry Ellenbogen
I think first of all, it sent a signal to Netflix that actually you're under a real transition here and maybe your assumptions on your financial model are… you need to have a wider fan of scenarios. Two, if you work at Netflix, you could say, well, you had the pain of seeing your stock out from $280 to $70. By the way, people think that was a great investment. I always point out to people a year later, it was in the fifties, right? So a year later, did it look like a great investment? But I think what it does, and you have to do this properly, you have to be resilient, you have to have a culture. But it allowed Reed to basically align external and internal investments, and actually get his entire senior team aligned on what they needed to do but also realigned on incentives. So I point out to people, I believe to build a great company, you have to balance growth, profitability, and innovation. I talked earlier about if you're a growth company, you don't have to trade on a PE, but you have to show that path. Back to the conversation with Duolingo and Toast and Affirm in that transition. And you're better off doing it sooner rather than later. And two, if you gotta go realign your internal team, well actually realigning people to the right mark is actually really helpful. And the people who want to re-up re-up, and the people who do it get handsomely rewarded and the people who don't obviously can move on. And I think that's really, really good culturally.
· Patrick O'Shaughnessy, Henry Ellenbogen
[00:00:00] S0: Could I correctly boil this down to the positive value of daily marks and the depth of public markets and their investors? That those two things in combination, the reason why being public might be valuable relative to the private alternative. [00:00:00] S1: I think I probably, because I used the Netflix example when they were fully formed and they were just my company. I also think that putting discipline into a company when your corporate culture has already formed… I don't wanna use the word stasis, but at a certain scale, it's hard to change. It’s not good. To run a company well, you have to be in the and business, not the or business. You have to drive growth measured by market share in the short term. You have to drive innovation or allocate capital well to position yourself better for the future. And you have to basically drive profitability. Partially profitability allows you to invest, but profitability actually forces you to drive efficiency and discipline through the organization and make sharp decisions on capital. And what I always tell people about this is you should think about your CFO's function not as a policeman, but actually as someone who basically sells standards that force you to make sharp decisions. I think people realize this more today than they did a couple years ago, but a lot of times when you prioritize and you focus on what really matters, agility comes in and you accomplish more. And when you try to do too much, essentially investment has no cost. A lot of times it's lazy and it's not sharp.
· Henry Ellenbogen, Patrick O'Shaughnessy
[00:00:00] S1: I think I probably, because I used the Netflix example when they were fully formed and they were just my company. I also think that putting discipline into a company when your corporate culture has already formed… I don't wanna use the word stasis, but at a certain scale, it's hard to change. It’s not good. To run a company well, you have to be in the and business, not the or business. You have to drive growth measured by market share in the short term. You have to drive innovation or allocate capital well to position yourself better for the future. And you have to basically drive profitability. Partially profitability allows you to invest, but profitability actually forces you to drive efficiency and discipline through the organization and make sharp decisions on capital. And what I always tell people about this is you should think about your CFO's function not as a policeman, but actually as someone who basically sells standards that force you to make sharp decisions. I think people realize this more today than they did a couple years ago, but a lot of times when you prioritize and you focus on what really matters, agility comes in and you accomplish more. And when you try to do too much, essentially investment has no cost. A lot of times it's lazy and it's not sharp. [00:00:00] S0: I feel like we've covered so much ground. I'm curious if there's any other ingredient in Durable’s story or your story that we haven't covered that you feel like is essential to understanding you and what you're doing and why you're doing it.
· Henry Ellenbogen
[00:00:00] S1: I think we wanna have fun and we actually root for everyone. The reason I say this is I'm a huge sports fan. I love studying sports. To me there's two types of competitive greatness. And they both work. There's Michael Jordan, who was such a fierce competitor that essentially if you didn't rise to his level, he drove you out of there and it works. And those Bulls showed up with a chip on their shoulder every game. And it was amazing and they were great. And then there are the people who play basketball and they say, this game is great. We wanna have fun and we want to elevate the game and we wanna win. And the people who compete with us, we think they're great and we're rooting for them. Now of course, if we're gonna play against them, we're gonna be competitive on that day and we're gonna win. But we want to actually have fun. We believe everyone can win. And I think that's Durable. That's really important to me. When we invest in people, that's the kind of person we want to invest in. When we do—we're public market investors at our core—if we have to, and we did, because we think it's right for our clients, have to go sell a firm, which we did because we believe from a risk reward standpoint, we have to go do it, we're gonna go do it. I always say it's not our money, it's our investors' money. We gotta be fiduciaries first. But when we did that, we want to see Max win. And we never stopped talking to Max. In fact, I think he would tell you some of the things in our relationship where he learned from me more than I learned from him was in the period of time where we didn't own his stock, because we don't think about it as a stock. We think about it as we wanna see Max win. And even the investors, I don't think about us competing against investors. I mean, there's so many investors who I respect, and honestly, if they're doing their craft well and they're high-quality people, we want to see them win. That is so core to the way we deal with people and the way we hold ourselves accountable.
· Patrick O'Shaughnessy
[00:00:00] S0: Is that the Steph Curry Warriors at their peak approach to contrast against the Jordan approach or something like this?