Invest Like the Best with Patrick O'Shaughnessy
· David George, Patrick O'Shaughnessy
And the expectation I have set with our team and that Marc and Ben have conveyed, and I think we do a pretty good job of is, you got to be intellectually honest, you've got to be transparent and we openly expect disagreement. But once you disagree, you disagree, and then you commit. I think by doing it this way, you encourage people to fully explore the risks of investing and fully explore the rewards. You're never in this temptation to sell or to politic for a vote or try to influence someone's decision for the wrong reasons. If you really like something and you really want to push, we don't have that dynamic. So I think it allows us to more openly explore the merits of an investment, and I think it's been a reasonably good process. And we're small, so we move very fast. We do this very iteratively. It's not like we need to have a Monday investment committee process. My first investment committee decision was before I even joined the firm, and it was Mark Scott and I having breakfast, and we were deciding on an investment at breakfast. So I like to keep it informal, but we want to make it rigorous at the same time. The other thing I did that's a little bit different is when we hired the team ... By the way, I feel very lucky. It's one of the most special parts of the job for me. [00:00:00] S0: How big is the team?
· Patrick O'Shaughnessy, David George
[00:00:00] S0: How big is the team? [00:00:00] S1: It's about 10 investors, so it's pretty small. The reason we can be so small is because we have the early stage teams. But a cultural trade that I think we've done a pretty good job of building is just collaboration and the willingness to roll up your sleeves and help people. As part of the team's promotion criteria, evaluation, et cetera, I put in their contribution to collective investment judgment. Entry level, from the start, this is part of your job. You better be contributing to our collective investment judgment, and it's something that we're going to evaluate you on from the start. So it's a little bit different for a junior person to be faced with that. And a lot of times, the junior folks, when they join, they have to find their footing, and when do they chime in, when do they not? But I think it's made us better as a team at making decisions. [00:00:00] S0: If you think about the environments that are better or worse for growth investing of the type that you do, what are those conditions? If you could cook up in the kitchen the perfect environment for you to be deploying dollars, what are the features of it? [00:00:00] S1: Well, the optimal would be early product cycle, bad capital cycle, but those rarely happen and coincide with one another. If I had to pick, it's all early product cycle, for the style of growth investing that we do. [00:00:00] S0: What does that mean, early product cycle? [00:00:00] S1: It means we're at the outset of a new technological change. [00:00:00] S0: Beginning of a market wave?
· Patrick O'Shaughnessy, David George
[00:00:00] S0: Beginning of a market wave? [00:00:00] S1: Yeah, the new market wave. So maybe it's easiest to highlight in retrospect. It turns out that when you and I were starting our investing careers, we started at a really good time. [00:00:00] S0: You did. I was in public market.
· David George
[00:00:00] S1: Well, you were in public markets, and so you had to deal with GFC and stuff. But not withstanding that, it's capital cycle, that one. It's obvious in retrospect, but it's really hard to feel it in the moment, maybe less so because AI is so well-covered. And the question is, are we in an AI bubble now and not? Is there a good product cycle ahead of us? But turns out at the same time we had the mobile, we had cloud, SaaS, e-commerce all at the same time. And that was a great setup for us. If you look at all the mistakes that we've made as an industry, 2021 is very well covered. I always tell people, "The biggest mistake from 2021 is that we were actually late product cycle and we just didn't realize it at the time. There was a bit of a head fake with COVID, but we didn't realize we were late product cycle." And what that means in practice is the ideas are just worse. The market opportunities are worse. It's just harder to go be successful. Right now, when I talk to our investors, our LPs, they're all asking me all of the questions are, "Are we in a bubble? Is the market too hot? How are you dealing with valuations?" And I'm like, "Look, we're trying to be very balanced about this." At the same time, 10 years from now, there's going to be a bunch of really, really great companies. So we got to be in the market on the field. It turns out that the last two years, coming out '22 to early '25, I think were a really good period. I think this is going to be a great vintage of time to have been investing. We also have been surprised at how long the companies have stayed private. They've stayed on the bingo card for us longer than we expected. And that's been great, because we've converted those in a really attractive way. If you look at the last year of our activity, our portfolio dollar weighted is growing 112%, and we entered at 21 times revenue. So I'll have this debate ... First of all, I recognize that revenue multiples are flawed and all that, especially for traditional investors. But what I tell our investors is, if I could invest for the rest of my career in 112% growing companies that are really, really great and good in markets at 21 times revenue, I would do it in a heartbeat. I would do it in a heartbeat.
· David George, Patrick O'Shaughnessy
And, oh, by the way, we used to have this debate at GA, I think that's way less risky than something where you're buying a 12% grower in PE for 15 times EBITDA. In a weird way, it's less risky, because growth just takes care of so much for you and de-risks so much for you. I think above 30% growth, the market still doesn't fully value the growth rate. [00:00:00] S0: Why is that the case?
· David George
[00:00:00] S1: I think it's just hard to model. My conclusion, I've studied all these companies that are, I call them the model busters, but I've studied all these companies, and it is just so hard for any investor to build a 5 or 10 year model where high growth persists. It's just not natural. No one built a financial model for Google or Visa that had them growing 20 years into existence at 15% or 20%. It would just be totally unnatural to do so. If you look at the moment of the iPhone, and this goes back to the point about product cycles and how much you can get surprised, in 2009, if you looked at consensus estimates for Apple, and then compared for 2013, so 2009 consensus estimate for the year 2013, and compared it to actual performance in 2013, consensus estimates were off by 3X. That's a massive number, and that's the most covered company in the world. So I think you can be surprised on growth on these things. I get a big kick out of that, I try to learn a lot about it, but I think it's not natural to model anything that way. It's so natural to just say, "Hey, this company's growing 80%, then they're going to grow 65, then 50, then 40, then 30, then a terminal growth rate, and a terminal margin, and here's what our numbers are." It's very different than a company if it grows 80, and then the growth rate persists, 75, 65. It's like a 3X difference in your valuation. So you can just get it massively different. So that's why I love high growth. It's obvious, that's the math behind why I love it. But again, it's actually just hard to appreciate it because it's not natural to build a model that way.