Invest Like the Best with Patrick O'Shaughnessy
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?
00:54:52 · Eric Vishria
[00:54:52] S2: Work with really special people. You wanna work really hard. You wanna work smart and get lucky, and you need it all. It really all has to come together. There's a lot of things that are timing dependent, you have no control over as a company. And you know, take the service example is a good one, which is, this is our second, you know, we took it public this time in May, but we tried to take it public in twenty Been taken public at a much, much lower valuation, and it didn't work out because of Cepheus and all this stuff. So timing matters. The advancement of that eighteen months made all the difference in the world for a bunch of things that were honestly outside of our control. There were some things that were in our control, getting inference running and everything else, but there was a lot of stuff that was outside of our control. These are all the classic things we just gotta focus on what you can control. That's one of the things that's really different than software companies, which software companies, aside from Fully in control of your destiny in that way. With hardware companies, you don't. There's an entire supply chain and all of the, so the, uh, HBM's a thing, DRAM's a thing, and TSMC's a thing, and a lot of those cross geopolitical borders, and so geopolitics gets involved and, and that makes that complicated. That's a really big difference, and so you gotta get lucky on the timing and macro and other stuff. But I think it really starts with working with these crazy people with unbounded opportunities, and if you work with these crazy special people You get lucky from time to time, you're bound to. When I was twenty years old, I was working at an investment bank. Ben Horowitz, Mark Ben, had started Loudcloud, it was still in stealth, and Ben gave me an offer to be his assistant. I was talking to this associate who seemed like this elder at times, probably twenty-five. He said this thing to me which stuck with me. He was like, "Do you golf?" It was like classic banking question, "Do you golf?" "No, I don't fuck golf." But he's like, with golf, you keep on practicing, keep getting the ball in a three par, like close to the pin, close to the pin, close to the pin, close to the pin. You keep getting the ball close to the pin, and you keep practicing, that's hard work, that's like working smart, that's what you wanna keep doing.
00:56:56 · Eric Vishria, Patrick O'Shaughnessy
Getting the hole in one, that's luck. I kinda love that framing I use with my kids actually. What it says is like, "Yeah, there's luck involved, and there really is luck involved, but there is actually a way to increase your luck. And the way to increase your luck is get a lot of balls close to the pin. Eventually, one will drop. " I'd like that. Each of us invest in one to two companies a year. I think in my twelve years, I've invested in eighteen companies total, crazy. Which is a relatively small number, so it's very high conviction and very high commitment. I have a lot Working with these very special people in these [00:57:29] S0: opportunities, magic can happen. What have you learned about the best reasons and conditions for going public?
00:57:37 · Eric Vishria
[00:57:37] S2: Benford does these Monday night dinners, and so we had a CEO last night, multi-hundred-billion-dollar private company, and we had this whole conversation, so it's kind of fresh. I think that ultimately, when you go public, you have a range of new opportunities and what you can do. Public trust, because there's some transparency that comes with being public, being a public company, you obviously have a currency that you can do things with that ends up being there. You have an unbelievable ability to raise capital, which I think is why the labs will ultimately go. Although I think the trust thing is actually a really important element of why they should go, and it's beneficial to the world and to America if they do go public. It's like, see what's going on. Yeah, see what's going on. Everyone can see it. I think that's like a really beneficial setup. There's another element of it, which is, what does a collegiate athlete want to do? Go pro. They want to play at a higher level. Is it harder? Yeah, it's harder. Is the competition tougher? Yeah, the competition's tougher. They move faster. They're tougher, they're bigger, they're stronger. The stakes are bigger. The stage is bigger. The scrutiny is bigger. All of that's true. It's That can get to this tremendous scale without going public, because things have gone through their execution and excellent lots of free cash flow. They've had lots of free cash flow and they've done really well over a really long time, and I think that's fantastic, good for them, but in general for everyone else. Get out there. The other thing that I would tell you is, there are windows for a particular type of company. The SaaS companies that went public in twenty twenty-one, a whole boat of 'em have struggled and it's been tough in the public markets because their stock's ripped to this multiple compression issue. They were trading at thirty times, they've four-axed in size, but now they're trading at six times. It turns out you're under, still. That's a tough place to be. I will also tell you that there's five hundred something- Probably SaaS companies that are between a hundred million and five hundred million that are private. What happens? Those employees never got a chance to sell. Those employees don't have annual tenders. Those employees don't have an opportunity to exit.