Invest Like the Best with Patrick O'Shaughnessy
· William Hockey
[00:00:00] S1: I’m a product of Silicon Valley. I've been there since I was 21. Started some of the top companies in Silicon Valley. I am a product of that. But I think as you get older and as you travel more, you have the ability to probably look back and be more retrospective on the society you grew up in. And SF and Silicon Valley, it's an elite dominated society whether we like it or not. It's probably more akin to Wall Street in the 1990s than it is to what we want it to be, which is like a research lab in Cambridge in the 1950s. Maybe that was Silicon Valley in the 90s, but it's not anymore. And what then happens is elites end up building software for elites. And I think that has somewhat made sense, because if you look at consumer buying patterns, people buy something that's aspirational and then it moves down market. But when you do that, you can start to drink your own Kool-Aid a little bit too much. And I think that has probably happened in Silicon Valley. Because we talk to each other, we build for each other, and we think that the market is each other, but we don't actually look broader than that. And the companies that figure that out, they do really well. If you look at AI, our research labs are doing fantastic. Because that's a consensus-oriented problem. If you take a bunch of people that are super smart, and you pretty much blind off everything from view, and you can all talk and you can all share ideas, and that's a fantastic research place. And we are going to win on that alone. But as you think about applicability to people's everyday lives, people in Silicon Valley don't live everybody else's lives. They don't live their lives as Americans, they don't live the lives of other people outside the world. And so our ability to actually build software or have ideas or perspectives that resonate, is probably at a low point in the entire time I've been here. Silicon Valley is not a popular place, and I think we tend to forget that. We think we're at the top of the world, but – I don't know what our approval ratings are, but I think they're probably pretty dang low. And I think that's for good reason. I think it's something that I at least try to focus on a lot, because I have to build software, and I have to build products that are applicable to outside the walls of San Francisco and New York. But that's probably less and less the case.
· Patrick O'Shaughnessy
[00:00:00] S0: One of the things that you've done that's so unique is not raise money, but built at a pace and a scale that looks as though you raised a ton of money. Suffice to say, it's huge. Talk about that decision, what building a company where you and the employees basically own the whole thing feels like, relative to having built a marquee company that was venture backed. I want to go into all the various lessons that you've learned, we'll spend a lot of time in this section. But at a high level, why did you choose to do it this way in the first place?
· William Hockey
[00:00:00] S1: I started Plaid and I did the standard Silicon Valley playbook. You have to ideate, you have to build stuff, and then you put a deck together and you go to these 80 venture capital firms, and hopefully one of them gives you money. And then every year you move up the alphabet. And I think that worked, and Plaid's a very successful company. I'm very lucky to have started it. But the things that Silicon Valley sometimes gets confused by is – okay, you're a venture funded company, and if that's the case, you're ambitious and you're gonna build amazing software and you can make amazing products. Or you're like a bootstrapper and you're gonna like to write a lot of thought pieces on Twitter, but you're gonna hire subscale people and you're gonna grow small amounts. It's gonna be a cute lifestyle business. And I think you can actually be highly ambitious. I think you can hire the world's best talent. You can build a massive doubling company without actually being able to be addicted to venture money. What we do is we say, okay, we are going to grow by our earnings. We're gonna make sure that 100% of employees and myself own the company for the foreseeable future. It makes it a lot harder. It does definitely put some constraints on your business. But not only for, you know, the net worth of myself or my employees, but also culturally, it's actually quite a bit more effective. Because, being long-termism is probably a little trite saying, but I think it does actually help us do that. I think yes, Silicon Valley companies are probably more long-term oriented than your average business in the US, but I think the hamster wheel of VC doesn't actually allow us to be long-term. Because if you are having to spend a lot of money for employees and you're burning a rate if you have to raise every year, year and a half, you end up optimizing for that next fund raise. And you say okay, stablecoins are cool this year, so I need a stablecoin strategy. Okay, AI is cool this year because I need an AI strategy. And so your business, maybe it's going the general direction, but it's definitely taken a pretty windy way to get there because you need capital. And so I think it's very rational what you are doing, but that's not gonna be the straightest line to your goal. I sometimes make this joke, VC money is kind of like heroin.
· William Hockey, Patrick O'Shaughnessy
It feels good, it's amazing, but you gotta keep shooting up. It's very challenging to get off. I know very few people that have... [00:00:00] S0: Tried heroin once. [00:00:00] S1: Yeah, I tried heroin once and they're like, "Wow that was awesome, I'm off" right? It's like, how many people do you know that have raised $100 million in a Series A and then they're like, "I'm done." It just doesn't happen. And I kind of think that, man, if you raise $100 million, you should be able to build a couple of billion dollar business after that. Why do you need to keep raising then? And there's a lot of structural reasons for that. And the fact that San Francisco is a bit like a factory, is by design. And I think that is, it can be quite effective. But I think for the ambitious founder, I actually don't think it's the right thing. And for us, you know, I can invest in things that I think are gonna have a 10 year payback. I'm totally fine with it. If we grow 80% versus 110%, it doesn't really matter that much. As long as we're profitable, as long as we're building the software we want, and as long as we're growing at the rate that we want, I just don't have the same constraints. And that is, I think freeing in a way that most companies can't operate. [00:00:00] S0: What's an example of something that you've done or made a long-term investment in, that you think you wouldn't have done if you had been venture backed?
· Patrick O'Shaughnessy, William Hockey
[00:00:00] S0: What's an example of something that you've done or made a long-term investment in, that you think you wouldn't have done if you had been venture backed? [00:00:00] S1: We bought a regulated bank when we were early. It’s probably a little bit cooler now in this new administration, but we bought a regulated bank during the first Biden administration. And that required us to not grow or not focus on revenue for two to three years, and do a bunch of stuff that inherently didn't scale. Buying a bank is not a software defined problem. That's not a great use of venture capital dollars that you expect to grow. A relatively non-consensus bet at the time. There's just no way that could have happened. There's no way – somebody would have been like, "Oh, we want you to buy a software company, right? We want you to do stable coins, we want you to do AI." That's just not a fundable thing. So I think being able to just invest behind that for a multi-year period before we actually take on clients. People think they're long-term focused, but it's just not. I think we're able to do weird stuff with employees that doesn't scale. [00:00:00] S0: Like what?
· Patrick O'Shaughnessy, William Hockey
[00:00:00] S0: Like what? [00:00:00] S1: We pay employees like, "Here's $2,000 a month to go to your rent or mortgage if you live two miles from the office." Well, that doesn't inherently scale, but it's massive. Because now I can get people who live close to the office. They feel great because they're getting a huge part of all of their housing and stipend in San Francisco subsidized. But is that going to be a good use of venture capital? Probably not. So we can just do all this stuff from an employee perspective, from a retention perspective. What we do every single year, we take 25% of our earnings and we just buy back our shares with employees. So we just run our own tender every single year. It's been great for retention, it enables us to actually get liquidity to employees when they need it. And it allows people to believe that we're in this venture growing business. But if you're in a VC business, you're like, hey, you should be using 100% of that money for growth. We say well, actually we don't necessarily think that. We're quite profitable so we can afford it. So we can invest in growth, but we can also invest in employees. [00:00:00] S0: That's a really good example. So maybe just to pull it apart a bit more. Are you granting equity to people in a similar way that a normal startup would, vesting over some period of time? And then just every year saying, we'll buy back some portion of that to provide – that's how it works literally.