Invest Like the Best with Patrick O'Shaughnessy
00:48:45 · Eric Vishria
You're excited to work with that person, 'cause like one, of course you think it's a really special opportunity and there's a way out, there's a path, and we can find it, but two, because of the joy of the game, the relationship, and like everything else, like that's part of it. It's very different. I've seen different models and lots of different models of venture capital work. Moritz was a writer, Dore was a sales guy, Gurley was an engineer, Peters a career venture capitalist. They're all different. Working with them, it's like when I call these people, I learn something and they push back on me, and then I ask them questions, and what I've realized is like so much of my job is they know the answer, they know what they want to do, they know the answer, and it's maybe asking questions of them. To maybe help solidify their conviction or solidify their articulation of what they wanna do and why, and you just keep doing that. Through that process, hopefully we get one percent better, a few times a year, we make a one percent better decision, two percent better decision, a few times a year. And if you do that over a decade, that compounds to real results. One of the questions that I ask myself before making an investment is, there are all these people that I care about through my life, like you care about yours, could I- Talk one of them into going to this company and honestly, intellectually honestly to myself, explain to them why this could be their life's work. And if I can't do that, I shouldn't invest. It just means that the project doesn't line up in that way. And so as long as we have one of those things, it doesn't matter that much what it is to me. It's just, it's important. It could make a big dent, and if it can make a big dent, and it's a special person, I'd love to work on it. Are
00:50:29 · Patrick O'Shaughnessy, Eric Vishria
[00:50:29] S0: there any other questions like that that you ask yourself before investing? That's a particularly good one. [00:50:33] S2: The other question, if this person calls me at nine PM on a Saturday night, will I pick up the phone? [00:50:38] S0: That was at [00:50:38] S2: the green button test. Yeah, yeah, yeah. It's a chemistry thing, and they have to feel the same way. Obviously, one of the other ones is, if it's right, does it matter? Which is different than this like first one, but it's-- there's so many things that we could be right on as a business. I looked at one last week, and I told the entrepreneur, I was like, "I really think that you can build an amazing company here, and you just shouldn't raise venture capital." But there's like so many things that you can be right on, but they ultimately just don't matter. Like nobody cares. That's a better way to say it. If we're right, well, nobody cares. If they won't care, then you're just not gonna build enough equity value.
00:51:12 · Patrick O'Shaughnessy
[00:51:12] S0: That's another useful one. One of the coolest things that's happening right now is all of that that you just described has higher stakes and more leverage attached to it, which is manifested most simply in more dollars and higher prices. You and I have talked about this notion of what high multiple on invested capital investing is like and what it has been like and what it's moving into. You did something recently which was you raised a growth fund for the first time in a long time. I think that is related to this concept. These companies need more capital, the prices are higher, the outcomes are bigger, maybe- We can earn the same multiple on a billion dollar entry price that we could on a fifty million dollar entry price ten years ago or whatever. Can you talk through that evolution, talk through the partnership's like way of thinking about it and talking about it, what you believe to be true that results in this decision to do this? Just go back to like, why
00:51:59 · Eric Vishria
[00:51:59] S2: did LPs, starting with Swensen and everyone else, why did they start investing in venture capital? And fundamentally, it wasn't because they thought they could beat the Nasdaq or the index by like three percentage points a year or five or whatever. It's because there are situations where venture capital could drive these insane multiples on invested capital from a financial perspective, that's what they're seeking. For the longest time, for most of the industry's history Two things were synonymous: early stage investing and high cash on cash multiples. The way to get high cash on cash multiples was to do early stage. That's it. Those two circles in the Venn diagram like almost perfectly overlap. The thing that's changed is recently, relatively recently. In the last few years, because outcomes have gotten so much bigger and these markets are bigger and everything else, the circle of high cash-on-cash multiple opportunities is bigger than just early stage. And it's not so-so big that there's a gazillion new companies in there that you can generate hundred x's on, that's not true. But there are certainly many outside of early stage where you can generate high returns. That's it, I think that's what we want to go after. You could argue we're a few years late, I think I'd take that criticism. But I think that opportunity exists on a go-forward basis, we should go do it. Everything else that we represent, which is the high conviction, high commitment, partnership, that has to
00:53:27 · Patrick O'Shaughnessy, Eric Vishria
[00:53:27] S0: still be there. As part of that discussion, what were like the other sides of the debate, such as maybe we would have said the same thing in '99 and halfway through 2020, as markets get exciting, the possibilities, we all do this extrapolation error, what were the counterarguments to like, let's despite all that, still not do it? [00:53:44] S2: Yeah. I think the biggest counter- Our argument that really made this time right versus two years ago or whatever was you need the team that can do it. It's just a different mentality. There are differences in how you evaluate and think about things. All the other stuff where there's, you know, why not change and stay within your circle of competency, and all those things are true, but that was like the biggest one. We had several examples over the last couple years where we had, I think, the right intuition on a company or an opportunity, we didn't do it. Because it was outside the box. That's obviously dumb, and I think it is quite different than a lot of things she does. We are really chasing these very rare special companies that have like very high cash on cash opportunities, where we think there just can be runaway successes and we can invest in them.
00:53:44 · Eric Vishria, Patrick O'Shaughnessy
[00:53:44] S2: Yeah. I think the biggest counter- Our argument that really made this time right versus two years ago or whatever was you need the team that can do it. It's just a different mentality. There are differences in how you evaluate and think about things. All the other stuff where there's, you know, why not change and stay within your circle of competency, and all those things are true, but that was like the biggest one. We had several examples over the last couple years where we had, I think, the right intuition on a company or an opportunity, we didn't do it. Because it was outside the box. That's obviously dumb, and I think it is quite different than a lot of things she does. We are really chasing these very rare special companies that have like very high cash on cash opportunities, where we think there just can be runaway successes and we can invest in them. [00:54:33] S0: Is there any lesson to be pulled from the many, let's call it twenty to one hundred x's that you personally have observed? I mean, it's such a crazy amount of return. Obviously, it doesn't pencil in the beginning. You can't make something pencil. If it was that clear, the price should be different. What have the twenty to one hundred x's taught you in aggregate, if anything?