Invest Like the Best with Patrick O'Shaughnessy
· David George
[00:00:00] S1: So Marc and Ben have told the stories about the origin of starting the firm and their experience with the venture capital product and why they built the firm the way they did. And whenever they tell those stories, I'm like, "That's great. Man, wouldn't it have been fun to compete in that time?" That would've been awesome. The market is definitely more competitive now. It's become a lot more institutionalized. It's become a lot more institutionalized for good reason though. The thing that I'm telling our team and I talk about with my partners now is we're a grownup industry now. This is no longer some little bespoke asset class. When I started my career, you and I were getting out of college. There were probably one or two technology companies in the largest 10 market cap companies in the world. Now, it's eight of 10 and seven of the eight are West Coast technology venture backed companies. That realization hasn't really fully hit the finance industry. But if you look at that, tech has overtaken all of the market cap creation and is mostly driving force of the stock market and the economy. The private markets have become a real asset class. This is something I'm studying now because the venture industry was seen as this small non-scalable thing. Turns out there's 5 trillion of private market cap that is up 10X in the last 10 years. And it's honestly some of the best companies in the world. That market cap represents almost a quarter of the entire S&P 500. It's more than half of the Mag 7. So I think that we now are in the grownup in the big leagues and we need to start acting like it. So we've adapted our firm a lot to that realization. And oh, by the way, one other comment just on that industry, how it's changed. We just did this analysis. If you look at our public universe, so where do we spend most of our time? In the software consumer and FinTech stuff. The public universe in those sectors, there's less than five companies growing 30%. It's kind of staggering. That's a low number. Our portfolio on average dollar weight is growing 112%. And some of these companies are big enough to be the large companies. And if you look at the small cap universe in the public markets, first of all, public markets have shrunk by half in the last 20 years.
· David George, Patrick O'Shaughnessy
And if you look at the composition of small cap public companies, the quality I would argue is so much lower than what is available in the private markets. So the industry is real. It shouldn't be a surprise that the competition has intensified. I think about the competition similar to how our venture folks think about it, which is the market has become a barbell. So we're faced with the large multi-stage firms that have very strong venture practices on the one hand, and those are the fiercest competitors for us. I respect my peers there. They're trying to play the same game as us, which is when we have something special at the series A or the seed, we want to hold it really tightly, and they want to do the same thing. And sometimes they're effective at it, sometimes we're effective at it, but we have to battle that out. On the venture side, it's bespoke. And the retail analogy, there's the superstore like the Walmart and Amazon, which is how we would get characterized. And then the other side is like the Gucci store, the Prada store, which is like deep specialization. So Nat and Daniel would've been an example of the Elad. And then there's many others that do a really good job at what they do. So I have respect for a lot of the crossover folks who are in our world and have built private businesses, and have done a good job with it. [00:00:00] S0: So what do you do to beat these people? And I'm especially curious in the actual extreme versions of the answer, the lengths that you're willing to go to to win.
· Patrick O'Shaughnessy, David George
[00:00:00] S0: So what do you do to beat these people? And I'm especially curious in the actual extreme versions of the answer, the lengths that you're willing to go to to win. [00:00:00] S1: I think you would love to have some story that's like sensational in the moment where we did something crazy. The reality of the growth stage business is we win deals based on years of relationship building. We recently did a deal where the founder, we had worked with the founder so hard that he called us and he was like, "Hey, I'm ready to do this. I'll just talk to you." And I'm like, "Oh, wow. Okay. Fruits of my labor. Two years of this. This is good." And then at that point, it's one of the best companies in the market. And the dynamic that we are faced with is, "Okay, this is awesome. I got a clean look." I know for sure if he was going to market, he would get a higher price than what he just told me, but can I bear the price? So that's often the exercise that we have to go through as growth investors is what do we know differently about the product or the market, or what are our expectations that will allow us to do it that maybe aren't as obvious? [00:00:00] S0: What are you doing in those two years that earn you that right? Maybe that's where the extreme measures are.
· David George
[00:00:00] S1: Helping them as if we were already investors in their company. So helping them with candidates, helping them with customers, spending quality time and showing that we understand their business. Often that's the biggest thing. Honestly, for the companies where we're not existing investors, oddly enough, sometimes it's easier because our platform is so strong. Our brand is so strong. I'll give you another fun example, which was Dylan at Figma. When we first invested in Dylan at Figma, I was considering joining the firm from GA. This was 2018. I knew all the guys already at the firm. And so I'm spending time with Peter Levine, who's one of our partners. And I come in and I'm like, "Peter, what's top of mind? How are you thinking about the growth business? What can I tell you?" And he was like, "We need this tomorrow. We got to invest in Figma. We need this tomorrow. I don't know how we didn't. We missed it. I was late to it. We just need a growth business and it was a growth deal and we should have done it. It's crazy. We did GitHub early. How did we not do this one?" And he was just apoplectic. "I need this." That was very encouraging, exciting. So day one, I told you, I knew the six companies in the portfolio. I also knew the five-ish companies that I really loved. Outside the portfolio. Roblox was one that I was close to. Figma was another. So from the moment I joined, we had done the full court press on Dylan. He came to our summit. It was Marc and Ben bear hugs. He was really into crypto. We bear hugged him on the crypto side. We did everything we could with him, helping him with a board search. We placed a person in our network onto his board. We were trying to do everything and trying to catalyze a deal. And he was like, "I'll let you know when. I'll let you know when." So COVID strikes and he calls us and he's like, "Now's the time." Oh my God. This was in the moment of COVID where we all thought the world was going to end and everything was screwed. Stock market was way down. I felt like, "Oh, great, good timing." So at least we got the luck. So he came and pitched, we had done all the work and we're having the debate as a team. And me and my team, we're taking this traditional growth lens looking at it and we're like, "The market for designers is not that big. It's really small.
· David George
And if you do the math of the market size of designers and what they charge, I don't think the price makes sense at $2 billion. It's too limiting." And our venture guys were losing their minds in this discussion. They're like, "You guys are totally missing the point. The ratio of designers to engineers is basically double for the modern technology companies. So that's a leading indicator. That ratio's going to change. There's going to be double the designers in the world. More importantly, the whole engineering to design process is changing and there's a melding that's happening of front end engineering and design. So thinking about this as the market for design is way too limiting. So you're just missing the point." So we were debating it and it was like speaking past each other. And finally Ben called it off. He's like, "Okay, all right, we're not going to solve this tonight." And ultimately it was a call on the growth fund side and I slept on it and I woke up and I was like, "Look, this is an exceptional business model and we're squinting to believe enough on the market size. Great founder, great business model. Is the market good enough?" And I'm happy to take that risk. The risk I don't want to take is quality of business, quality of founder. But you really had to have a nuanced view of the market in order to get there, like with a traditional growth investing lens. And so fortunately we got there and it worked out really well. I bring up that story, one, to say that's an example of something where the price is the price and you have to figure out if you can take it, if you're willing for the very best of the best companies. But two, I think it speaks to the advantage that we have and what you need to be successful in growth investing. You need those product and market insights or you're just going to live in a spreadsheet and die in a spreadsheet. So everything that we've done, or I've done, and our team has done to design a process of tightly integrating with our early stage teams has been in the spirit of optimizing insights around people, products, and markets. And I think that's where you actually get success.
· Patrick O'Shaughnessy
[00:00:00] S0: One thing that I'm trying to do more of, because I'm just interested by it, is to hear about the minutiae of your day and life. In this incredibly competitive environment, I've become interested in how some of the best investors literally just run a given day and what that looks like for you. And I think you'd be surprised how in the weeds I'm interested in learning about. So err on the side of detail, I'm just curious what the actual life of your job feels and looks like.