Invest Like the Best with Patrick O'Shaughnessy
· David George, Patrick O'Shaughnessy
[00:00:00] S1: So, it turns out if your cars are driving optimal routes and fully utilized and not running into some of the problems that drivers have, it's pretty good. So, you can have a lot of coverage. There are something like 50,000 Lyft drivers in the San Francisco Bay Area and Waymo overtook them in market share. [00:00:00] S0: It feels like the appropriate time to disclose that you and I went to college together. The reason I mention that is usually when we get together, we don't jump into talking about investing, we talk about other stuff, which makes me realize, I don't think I've ever actually asked you, what is your investment philosophy or strategy or style or taste? What is it and how did it develop? [00:00:00] S1: My style and taste is very much, if I were summarizing one line, I like to pay fair prices for great companies, and everyone would say they would like to do that. The art in that I think is recognizing where greatness may lie, where other people don't recognize that. [00:00:00] S0: Unpriced greatness?
· Patrick O'Shaughnessy, David George
[00:00:00] S0: Unpriced greatness? [00:00:00] S1: No, it's priced, but not to the fullest extent. So, I've studied the history of technology companies and why they outperform and how they outperform, often in growth stage investing, it's always on the growth side. It's like, hey, the growth side is where you get things really right, I tell the team that, we can make a lot of mistakes on forecasting margins and business models and unit economics and all that stuff, but lots of people know how to do that analysis, that's out there, so where can you actually get edge? You can get edge from product insights, market insights, and people insights. So, how do we maximize our likelihood of doing that? On the people side, I'll start there because that's probably the hardest to do, and I've gotten it right a number of times and I think I have reasonably good taste in people, I really like a certain archetype of founder, I call them the technical terminator, I'm very close with Ali from Databricks, so Ali is the technical terminator. [00:00:00] S0: He's self-evident. [00:00:00] S1: It's self-evident. It wasn't self-evident all along, he actually wasn't even the CEO, he became the CEO later. [00:00:00] S0: But he started the open source project.
· Patrick O'Shaughnessy, David George
[00:00:00] S0: But he started the open source project. [00:00:00] S1: Yeah, he was one of seven. So, he was not the CEO, there was a much more established guy who we've partnered with on a lot of companies, he's been a co-founder of lot of companies, great companies have come out of his lab, Ion Stoica in Berkeley. The thing that I like about these technical terminators is they start technical and then you never know if these people are going to become commercially-minded excellent business people. So, you have the grounding, you have the products, those are the people that are likely to figure out the next product area because they're technical, because they're in the products. Mark Zuckerberg is an example of this. Elon's a great example of this. And then over time, they learn the business side. So it's been so fun to work with Ali because he knows more about sales ops and hiring processes and reporting lines, and all these things you have to do as a manager, than probably any of our CEOs, but he learned them all. [00:00:00] S0: Do you have a favorite counter example to the technical terminator? Somebody that is completely non-technical? [00:00:00] S1: Travis at Uber. So one of the elements of people judgment is what is the right founder for the right market? And that market was just a pure battle. [00:00:00] S0: You mean mayors.
· David George
[00:00:00] S1: Yeah. You fight mayors, you fight competitors. And by the way, there were competitors. So you just needed to be ruthlessly competitive and driven and operationally intense. And he's the perfect counter example. I was an investor in Uber at GA and he's the archetype, but there's a lot more of these technical ones that become great business people in my life. George Kurtz from CrowdStrike is a great example of it. I'll tell you one more example, which is not as obvious. Dave from Roblox. When we met him, I met him maybe 10 years ago or something in early days of whether it was actually working, and he was technically brilliant and he was so deep in the product. And he's the kind of guy that on the surface, if you didn't really know him well, you would be like, "Oh, he's a little quieter." And it turns out he's ruthlessly competitive. And he really cares about market cap creation and his stock price is going up for the right reasons. Dylan from Figma is a great example of this. He's so nice. He's one of the nicest guys in our industry, but he is brutally, ruthlessly competitive. The new AI guys and women, it's been really fun to see them develop this. Michael from Cursor, Shiv from Abridge, is a practicing cardiologist who has then shifted his attention to building a technology company. He lives in Pittsburgh and he commutes to New York to work most of the time. And I was with him in the office the other day and he was showing me the office and I'm like, "Oh yeah, cool. That great. That's nice." And he's like, "Yeah, I'm going to put a bed over there. I'm going to start sleeping in there." You're like a doctor with kids and stuff, and he's like, "No, no, no. I want to be working all the time when I'm in town." So I love that relentlessness, intensity, paired with technological capabilities, product understanding. And backing people like that, they're going to pour everything they have into winning, but they're also more likely to figure out the next things and navigate complex markets and changing environments.
· Patrick O'Shaughnessy, David George
[00:00:00] S0: If I had access to your entire calendar for the last five years or something and saw all the companies and the debates where you ultimately didn't invest but almost did, what would I learn from that batch of companies and founders? [00:00:00] S1: This is a very humbling job because we make so many mistakes. And errors of commission are really painful, errors of omission are really, really painful too. And they're more costly, just economically, because you can lose one times your money if you get things wrong in an error of commission, but you can forego making really high returns if you get it wrong. There are no common patterns. I would say when we get it right on not doing an investment, it's typically for the right reasons. It's typically because we see something that we don't love about the business quality. We feel really, really, really strongly about market leadership. [00:00:00] S0: Why? [00:00:00] S1: Do you know the Glengarry Glen Ross movie? [00:00:00] S0: I know the movie, yeah. [00:00:00] S1: You know the scene with Alec Baldwin? [00:00:00] S0: Refresh our memories.
· David George
[00:00:00] S1: There's the scene with Alec Baldwin where he's running a sales contest. A boiler room setting, and he comes in, he's running a sales contest, and he walks in and he's like, "Okay guys, new contest. Here we go. First prize gets a Cadillac. Second prize gets a set of steak knives. Third prize, you're fired." So we've adopted that as a way of describing most of the technology markets that we live in. So we happen to think, and I happen to think strongly, and my experience has been, the vast majority of market cap creation is going to go to the market leader. And this is probably underappreciated. We see this all the time with our peers in the growth investing industry where they say things like, "Yeah, even the number two player is going to be really viable." Maybe, but more often than not, that's not the case. That's obvious in network effect driven businesses, consumer internet companies, Google, Facebook, et cetera. It's less obvious in enterprise companies, but it happens just as often. There's no number two to Salesforce. Salesforce is Salesforce. Workday is Workday. ServiceNow is ServiceNow. And you'd feel a lot of pain if you did the number two, or God forbid, the number three in those markets. In early days of technological shifts, markets tend to fragment in ways that we don't foresee, and they end up being less competitive in certain areas and people settle into different areas. So on the model side, so far, the way it looks like it's played out is it will be more like the cloud industry. It's not going to be a winner take all. Certain technical advantages seem limited in timeframe. There's always this constant leapfrogging of the model industry. So I think it will look like the cloud industry in the sense that there will be multiple players. There'll be profit pools for them. Early days, we were saying, "Is this going to be aircraft manufacturing or is it going to be airlines?" Those are the two extreme ends of the spectrum. Aircraft manufacturing has high profit margins because there's really high capital intensity and it's extremely hard technically. So that would seem to mirror the model industry. Airlines, on the other hand, are horribly competitive industries and they all go bankrupt in the fullness of time. So it seems like the model industry is going to be like aircraft manufacturers or the cloud industry.