Invest Like the Best with Patrick O'Shaughnessy
· 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.
· William Hockey
[00:00:00] S1: Structurally, we look exactly the same as a high growth startup. We go after the same people. We have all the same perks, if not more. So we operate very much like a high growth Silicon Valley startup. We happen to also be quite profitable. What I can tell people is – our profits every year – imagine that's our funding round. Each year on January 1st, we raise a massive amount each year. That's how I view it. There's part of it that's going to be used as a tender, that we're gonna buy back company shares. And the rest of it, we're gonna put to growth. Oh, by the way, you also haven't diluted at all. By the way, you also don't have any pref stack. By the way, we get to make our own decisions. That's super compelling. So I can hire someone and say over a 10 year period, you're not gonna be diluted. I think what some people forget is if you're an early stage founder, you're gonna lose probably 50 to 75% of your equity value due to dilution alone. You may lose 10 to 80% of your upside by the preference stack. These are weird economic things that people don't really understand until they've been doing this for like five, six, seven, eight, nine, ten years, or they've seen an exit. With us, we say, hey, don't worry about that stuff. What I give you is what you're gonna have. And by the way, you have liquidity on a yearly basis going forward. That's super compelling to people.
· Patrick O'Shaughnessy, William Hockey
[00:00:00] S0: How have you honed the communication of that idea to a new employee so that they get it? Because I think so often people just say, oh, I got this many shares and this is the valuation. And if it goes to this valuation, I can just do the math, but that's not actually the math of what they'll take home. So how do you frame it to people? [00:00:00] S1: We're far from perfect. I think one of the things we do is we target people that this is their second company. We are probably not the best place for a new grad to land. Because for a new grad to land, they're gonna go through this calculation of where are all of my friends going? What is the number one company on Hacker News I read all the time? What are all the thoughtfluencers talking about on Twitter? And it's actually not a bad strategy. Like if you're a new grad, that's probably relatively fair. But you aren't really gonna be thinking about some of this kind of nuance. And it's honestly not as hard as you think. It's actually quite refreshing. We go to people and we're like, hey, we are super fast growing, but we provide you the liquidity. Oh by the way, here's some very basic math on preference and dilution. And here's why you can actually make way more money for the same equity value. It's a hard story for a 21 year old. It's actually a pretty easy story for a 25 year old that's been through like six rounds and four pivots at their previous company and doesn't have anything to show for it. [00:00:00] S0: Does this empirically show up in employee retention numbers versus Silicon Valley norms?