00:16:16 · Luca Ferrari
[00:16:16] S2: mean, I like I said, I I I did co found a single product startup when we failed. So clearly, we reached... We took a lot of risk. Think the short answer is no. I think that there are probably executive teams that substantially miscalculate risks. But I think primarily the reason why they don't take some risks isn't because they got them wrong by 20%, but because they hate the median case. And they should. Look, it's like if you're a VC and you may be better positioned than me to to elaborate on this, but you may want ultimately you invest in say 50 companies you what you care about is the overall returns from the portfolio and you you may want each of these companies to go 100 miles per hour against the wall and you know that the four or five who get to go through the door, which is very narrow, win a 100x and the others will crash and burn. Whereas if they had taken it more slowly, would have lost the opportunity of winning, but they probably would have had better chances of being somewhat sustainable, decent businesses. You as a VC, the more cautious approach is bad because your expected outcome gets worse and your median outcome doesn't actually get much better. But for an individual company, while their expected outcome would be better if they went a 100 miles per hour, their median outcome would be massively worse. It could go from I end up with something to I end up with nothing. Right? And so it's not irrational for some of these teams, whether it's entrepreneurs, professional managers to try to protect the downside against the downside a little bit because ultimately that's, you know, they only have one life and one career.
00:18:11 · Anish Acharya, Luca Ferrari
[00:18:11] S1: I mean, that's what I appreciate so much about what you guys do Luca, which is that for, you know, extraordinary companies that have been innovative and have achieved scale, you know, but perhaps haven't gone all the way to the stratosphere. They have an opportunity to keep building and creating value with Bending Spoons. [00:18:26] S2: Yeah. I think we are a a very important and perhaps missing up to now element of a healthy innovation ecosystem. Proof being that, you know, we... Every time we have made an offer to someone to buy their company either they chose not to sell or they sold it to us not to someone else. So when you have such overwhelming call it success rate Yes. It means you're really finding great product market fit in a way, like you're really solving a problem that people have. [00:18:57] S1: Yeah. Yeah. Yeah. Absolutely. So you've talked a bunch about sort of Bending Spoons in terms of the focus on clear strategy and extreme focus on talent. It feels like credit and capital markets has been a key part of what you guys have achieved as well. Can you talk about some of the lessons from leveraging debt effectively? Because some companies have gotten in trouble, and yet you guys have benefited and been so strategic in how you use debt and debt markets.
00:19:22 · Luca Ferrari
[00:19:22] S2: Sure. So... Well, for... Debt helps you basically do more sooner, faster and assuming your expected returns from those investments are higher than the cost of debt, it's always smart to take that with the... With one big caveat, which is assuming the risk of defaulting on your debt remains negligible. Cause obviously if it becomes significant then it's not a no brainer any longer that taking the extra risk makes sense. Now as an intellectually honest disclaimer, I think if you take, you know, companies that at some point went bust but hadn't had issues up to a certain point and you asked them, they would all come across as very bullish about their usage of debt. So we have been doing fine and have not even come remotely close to having issues with it, but it's still important to remain cautious because it's not the people who went bust thought they would as they raised the debt. I mean, I guess in some cases there were some perverse incentives to still raise the debt, but in most cases they thought they were fine and then things turned and they had issues. So I think it's important to be paranoid in general when when taking on any significant amount of debt. We have stringent limits. We self impose trying to keep leverage ratio well below three x. It's currently about 2.5, 2.4. Historically, it's been closer to two than to three. Always been in a position to be able to pay back 100% of our debt before maturity even under severely adverse scenarios. We try to refinance most of our debt every year to to keep maturity five plus years out. We hedge 100% of our debt against interest rate fluctuations so we know exactly how much interest we will pay in the future. We're highly diversified, we have a very high level of profitability and high cash conversion. So there are all sorts of things that mitigate the risks associated with leveraging up and and my assessment right now is that our risk of defaulting on our debt is close to zero. It's extremely extremely low and so we're better off having that debt than not. But again, cautious, don't overdo it particularly if you're not sophisticated and you don't fully understand the cash flow consequences of it. Start small, develop knowledge, good modeling, good processes and checks and balances and then maybe take a little bit more.
00:22:01 · Luca Ferrari, Anish Acharya
But again, any project that could be huge would probably require a decade plus to get there and rule number one to win and you know be be that huge success is not having failed in the meantime and so I think often it's better to take two three years longer but take no or very limited risk than than speeding up and then crashing and burning. [00:22:24] S1: I mean, think these are great rules of thumb, know, perhaps encouraging a bit more ambition in product and the size of the swings and a bit more caution in credit and debt. We've seen many situations where founders tend to underestimate the probability of things going sideways with debt? [00:22:40] S2: Particularly if you rely on one segment, market, one product, one revenue stream because boundary conditions can change quite abruptly. You're still not fully insulated if you have a diversified portfolio because diversification is a complex concept and it depends on whether you're diversified or not. It depends on against what particular phenomenon and you could you know your... But your different... Supposedly diversified assets could be highly correlated when it comes to the response to that particular phenomenon. But so again, with care. It's tricky, but if done properly, it's a massive boon. I mean, there's plenty of companies who have used that consistently in history, you know, Broadcom, TransDigm and have done incredibly well for many decades. And they wouldn't have done nearly as well had they not used that. So...
00:22:40 · Luca Ferrari, Anish Acharya
[00:22:40] S2: Particularly if you rely on one segment, market, one product, one revenue stream because boundary conditions can change quite abruptly. You're still not fully insulated if you have a diversified portfolio because diversification is a complex concept and it depends on whether you're diversified or not. It depends on against what particular phenomenon and you could you know your... But your different... Supposedly diversified assets could be highly correlated when it comes to the response to that particular phenomenon. But so again, with care. It's tricky, but if done properly, it's a massive boon. I mean, there's plenty of companies who have used that consistently in history, you know, Broadcom, TransDigm and have done incredibly well for many decades. And they wouldn't have done nearly as well had they not used that. So... [00:23:32] S1: Yeah. Yeah. Interesting. My theory is that everything is correlated, but that's a subject for a different talk. [00:23:38] S2: Well, I tend to agree. I mean... But not necessarily to the to the same extent. Yeah. Exactly. That's right.
00:23:38 · Luca Ferrari, Anish Acharya
[00:23:38] S2: Well, I tend to agree. I mean... But not necessarily to the to the same extent. Yeah. Exactly. That's right. [00:23:43] S1: That's right. Okay. Let's quickly talk about durability and moats as a favorite topic in Silicon Valley right now. You know, a year ago was SaaSpocalypse around Opus four five four six. All those names traded down 40% in backup, so I don't know what folks accomplished with the SaaSpocalypse. It seems like it was a little overblown, but it has brought about this discussion of where durability lies in a world where you can trivially create software with AI. How do you think about it?