Prof G Markets
00:20:07 · Luca Ferrari
[00:20:07] S2: I think you're right in many ways. Would say a big percentage of our acquisitions have been struggling companies. Not all, we have acquired several companies that were growing nicely, I'm thinking Commute Airtable recently we shared the growth rate. But yes, we have a bigger percentage of companies in our acquisition portfolio, let's say, that were struggling than say most acquirers. That's I think broadly speaking a valid characterization. And sometimes, yes, the team, the detective teams themselves tell us that, look, if I say I need to take difficult decisions, you know, in a way, let's, I'd rather you do it. So it's happened. I wouldn't say it's happened often, but sometimes it's happened. So what we look for is on a qualitative level, three things. We like to acquire large businesses relative to our current size. And the reason is, I described how we conduct these extremely deep transformations and integrations, those take a massive amount of time and effort. The good news is we found that we don't need, like the number of people, the amount of time we need to complete those transformations does not seem to scale really, at least not linearly the scale of the business. And so we're better off acquiring fewer companies and deploying those resources toward transformations that move the needle as opposed to acquiring a 100 companies, but not then not having the time to do anything really well. So we like to buy, say, five companies a year, give or take, that that are large. The second thing is we wanna feel confident we can predict their performance at least, you know, five or six years out with confidence. And that's an entire whole discussion of science, but on a high level, that's the answer we need before we decide to pull the trigger. And the third big criterion is we need to believe we can we can greatly improve those businesses. Hopefully, the product, tech, the org, monetization marketing, ultimately revenue and cost. You know, it's an it's an earnings game at the end of the day. So those are the three, you know, kind of big criteria, then how we get to those answers that's, you know, a lot of many steps and it's got complex. Well, other than the scale, the scale is very obvious. And once those are, you know, three checks, then then it boils down to the math of returns.
00:22:21 · Luca Ferrari, Ed Elson, S0
You know, among the companies that check check all three boxes, then we look for investments that will yield the highest returns so we we can compound as fast as we can. [00:22:32] S1: We'll be right back. [00:22:42] S0: Support for the show comes from Engine. The companies winning right now aren't cutting travel. They're booking smarter. Here's the reality. The average business traveler spends forty five minutes booking a single trip on a legacy platform. With Engine, that booking time drops to as little as two and a half minutes. And its AI powered personalization gets faster the more you use it. Multiply that across your team every trip every year. That's not a perk. That's a competitive advantage. Last year, Engine customers saved more than $300,000,000 on travel. And with the Engine X card, get up to 10% back on any hotel booking. 33,000 businesses have joined. Now it's your turn. Get $500 when your business signs up and starts traveling at engine.com/founders. Engine X Visa commercial cards are issued by Fifth Third Bank NA member FDIC. Earn up to 10% back end points on eligible engine travel purchases. Actual reward rates vary by purchase category and may change. Points have no cash value and are redeemable for rewards through our program. See full rewards terms. For details, go to engine.com/x/rewards-terms.
00:22:42 · S0, Ed Elson
[00:22:42] S0: Support for the show comes from Engine. The companies winning right now aren't cutting travel. They're booking smarter. Here's the reality. The average business traveler spends forty five minutes booking a single trip on a legacy platform. With Engine, that booking time drops to as little as two and a half minutes. And its AI powered personalization gets faster the more you use it. Multiply that across your team every trip every year. That's not a perk. That's a competitive advantage. Last year, Engine customers saved more than $300,000,000 on travel. And with the Engine X card, get up to 10% back on any hotel booking. 33,000 businesses have joined. Now it's your turn. Get $500 when your business signs up and starts traveling at engine.com/founders. Engine X Visa commercial cards are issued by Fifth Third Bank NA member FDIC. Earn up to 10% back end points on eligible engine travel purchases. Actual reward rates vary by purchase category and may change. Points have no cash value and are redeemable for rewards through our program. See full rewards terms. For details, go to engine.com/x/rewards-terms. [00:23:53] S1: We're back with Luca Ferrari. When we look at some of the names of the companies you've acquired, especially like AOL and Vimeo, these are sort of once great companies or once com... You know, companies that were previously known to everyone, sort of darlings of the tech industry that have gone out of fashion, I would say. Is that part of the strategy is taking these once big name brands and transitioning them, or is that just a coincidence?
00:24:23 · Luca Ferrari
[00:24:23] S2: I I think it's mostly a byproduct. We don't actually have a internally guidelines for our M and A team look for brands from a bygone era or anything like that. It's more that I think at least historically, maybe at least in the last five or ten years, maybe the future will be for us. We found that the market tended to undervalue the unsexy things. Yes. And in our view, overvalue the new and sexy sometimes to a fault in a major way. And so as we try to be rational operators, you can never prove it, I'd like to think we're being rational capital allocators and operators. When we were comparing, after having done the qualitative screening and done the math, we were comparing the returns we would get from the AOLs of the world, or I'm not gonna name names, but let's say flashier, newer, sexier things, we found that the latter would consistently give us much worse returns and we saw no reason to do it simply because people liked it, you know. So, know, AOL is is actually a very good business. It's not... Mean, it's not, obviously it's not going places, but 30,000,000 people use it as their, for many of these as their main email and they use it all the time and these are perfectly, you know, they're not less, no less valuable as human beings or as customers as people using the small, flashy, new email clients simply because they like AOL, you know. So we're happy to serve those people just as we'd be happy to serve, you know, the cooler early adopter. And it seems that many investors prefer to go toward cool and sexy, and we're happy to take the, you know, the less sexy things.
00:26:01 · Ed Elson
[00:26:01] S1: This is one of the reasons I'm fascinated by your business and it's a big theme on our show, which is that the best investments are the unsexy investments you want to capitalize when everyone has for various stupid reasons, written some company or some stock or some investment off. It seems like you are capitalizing on that dynamic. That is a very investment minded strategy, and you are someone who comes from... You were building companies. You were building software products. What is your background in investment, in financial valuation? Because it it does seem like a very a very... In a lot of ways, it's it's what classic value investors have done, and you seem to be in that camp. What got you to this point given the fact that you kind of had more of a software background?
00:26:59 · Luca Ferrari
[00:26:59] S2: Michael Fundersen and I studied very similar things, engineering, physics, I think that's really our background and maybe driving passion is technology and science. We just felt that applying that to business would be fascinating because it's actually business offers a lot of challenging intellectual problems. It's also rewarding financially. So we decided to go down that route, but we have, I believe retain that engineering and scientist, engineering and scientist mindset, and try to embed it as much as possible in the organization, in everything we do, even talent. Mean, way we recruit is completely scientific at this point. And then I'd like to think we're curious people, have studied, you know, there's plenty of... I think it's more difficult, let me put it that way, it's more difficult to learn quantum physics than, you know, how to calculate an IRR. So I think it's better to have studied STEM, and that's generally test... That tests your intellectual capacity and and gives you better problem solving tools. You can then learn other things if you if you put in the effort. So we have, you know, there's plenty of books on finance and economics, and you know, we're big fans, people like Warren Buffett or Tom Murphy or Harry Singleton, Benjamin Graham. There's plenty you can read, it's not rocket science, if you try to learn from people who are smart and have done it before, and then of course try not to copy paste blindly, but understand the boundary conditions they had, and the boundary conditions that apply to you, there's a lot you cannot, a lot of mistakes you can avoid. So yes, we try to be, value not necessarily in the way that it has to be again a business that's beyond, as past its prime necessarily, for us it's math, it just happens that the market values the, in their prime businesses so highly that we end up buying more of the past or prime businesses, but ultimately we just try to compound efficiently. That's all we're trying to do.