Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy, William Hockey
[00:00:00] S0: Easy for this guy to say. [00:00:00] S1: Yeah, easy, yeah. But I did not have any money. Without going into too much of the details of it, I pretty much funded the entire company with debt. Went to a bunch of banks, and I said, here's a bunch of Plaid shares. Please give me money. And the best I got was a SOFR plus 10% loan at 5% LTV. And so I pledged over a billion dollars of stock to get $70 million. And I bought the bank for $70 million. I haven't had a lot of money in my bank account for a long period of time. And yes, and I ended up, the business became profitable. I got to pay off that loan in a period of time. But in the process, I practically got margin called three times and almost went bankrupt multiple times. [00:00:00] S0: Talk about that stress. Let us in the room on that.
· Patrick O'Shaughnessy, William Hockey
[00:00:00] S0: Talk about that stress. Let us in the room on that. [00:00:00] S1: Yeah, I mean, the first three years were definitely the most stressful in my life. Because I had a fundamental thesis that we could pull this off and we could build a business that 100% of employees and myself owned. But to do that in a world where you need to invest and not make money for multiple years is very, very challenging. And with the regulatory climate at the time, it was intense. And I have this loan I have to pay off. It was probably the most intense period of my life. And as a founder, you have to shelter that from everybody. You need to be transparent, you need to bring people in, but you also need to not bring people all the way in. I had pretty extreme conviction myself, and I thought, I knew 100%, over a multi-decade period, I can pull this off. But there's that crazy quote of, "Markets can stay irrational longer than you can stay solvent." And it's true. And I'd look at that quote and I'm like, which side of that equation am I on every day? And we ended up making it through and I got an amazing place now, but I think the idea of like, billionaire buys a thing and self-funds it, it's probably a little further from the truth than people think. [00:00:00] S0: What's it like getting margin called? What is the literal thing happening? How do you manage through that?
· Patrick O'Shaughnessy, William Hockey
[00:00:00] S0: What's it like getting margin called? What is the literal thing happening? How do you manage through that? [00:00:00] S1: Suffice to say, you owe a bank a million dollars, they own you. You owe a bank a billion dollars, you own them. Like, I think that's a little bit true. I mean, there's a reason that margin lending in private companies is not a great business, because when you want to take collateral of that stock, that's usually the exact time when you do not want to hold that private stock. I have immense appreciation for the people that did it for me. I'm not quite sure they got a great deal out of it. And I'm not quite sure I would definitely be in that business. [00:00:00] S0: The reason I feel this story is important to tell is that it's these things where so much of the value gets created, the extreme entrepreneurial risks. The act itself, but also the psychology behind it. And I'd love you to just riff like one bit more what the psychology was like and how your mind is different after that three year experience than it was before. Even though you, I know you'd already been through the entrepreneurial ringer with Plaid. What changed about your mind, your perspective on the world? How did that experience affect you?
· William Hockey
[00:00:00] S1: I think that the good founders bet on themselves and take an extreme amount of risk to do that. And I think the extreme amount of risk part is something that we no longer have. But when there's literally only one door in front of you, you don't have a choice. You have to go in. And that fear, that innate desire creates another part of you. It creates creativity, it creates inspiration. It's an extremely valuable part of the founder journey. And in many ways, I think in Silicon Valley we've actually removed that. If you think about most founders these days – I talk all the time, you talk to a 23-year-old and like, "You know what, I'm thinking about go going to be like the 12th employee at this company or starting a company for myself. And I don't know, I'm kinda like mixed." And we've created this incredible environment in Silicon Valley that it's really safe to start a company. And there's a playbook and you go through YC and assuming you're moderately competent and went to the right high school and college, you're gonna get a $3 million seed round. And worst case scenario, you can go work at like a great company as an engineer. You'll have "Founder" on your resume and life is good. And that has created a lot of value. But I'm not quite sure it's created a lot of great founders and a lot of great companies, because there is no risk in that proposition. And if you go back to even pre-2008 or something like that, you're on the edge of the knife. And I think that creates just so much intensity and creativity and fear that is such a critical part of the founder journey. And I don't know why we don't talk about it more. We don't create environments where a founder has to bet themselves. And I think if we did that, I think we'd actually be in a slightly different place. I always am somewhat perplexed by -- I'm a second time founder, but I'm not alone. There's a lot of great founders I shall not name that have made a bunch of money. And you go digging. They're like oh, here's my second company or third company. And you dig into that. Of the hundred million dollars they've made, they're putting like a million dollars of their capital at risk and they've raised like $500 million. And I'm always like, why? If you believe in this so much, if you're going to dedicate your life to it, why the fuck aren't you going all in?
· William Hockey, Patrick O'Shaughnessy
And if I'm an employee, I look at them and I'm like, "You're asking me to go all in, but you can't go all in?" Because the weird thing is an early stage employee takes way more risk than an early stage founder. [00:00:00] S0: Explain that.
· William Hockey
[00:00:00] S1: So let's just talk through an example here. So I'm a 24-year-old, I'm making TTC perspective 400k, 500k at Google or Meta or something like that. And I'm gonna go to an early stage company and I'm gonna go get 1% of this company, and I'm gonna make $90,000. Well, I've now changed the trajectory of my life. I can no longer buy a house. I can no longer go on the vacations I want. So I'm making a four to five year trade off where I'm saying "I'm gonna make pretty much no money over the next four or five years. But maybe in five, six years I'm gonna make millions of dollars that I couldn't make at Google and Meta." That's actually a lot of risk. To say I'm gonna live with my friends instead of living by myself. I'm making massive, massive changes to my life. But as a founder, you're not. It's a much higher likelihood at the next round, regardless of your company, you'll be able to sell some secondary. You know that if it shuts down, you can go get employed at a great company, you have CEO on your resume. That first employee? They have first employee at a failing company. That's actually not a great resume line item. And so we've de-risked the founder, but we haven't de-risked the early-stage employee. And I don't think we should actually de-risk the early-stage employee, for what it's worth. I just think we need to increase the risk for founders. I think we need to make failure much more expensive. I think we need to say hey, you're a second time founder and you have liquidity. Put all of your money into that. If you're gonna be asking this of employees, you should ask it of yourself. And I don't think we're having that conversation enough. And I think starting companies is just too fucking safe. And it's caused a lot of companies to be just super safe companies. They're like hey, we're gonna pivot to AI and wrap OpenAI, wrap Anthropic, whatever. That's not bold, that's not ambitious. And it's because we are attracting founders that actually maybe want to be employees. They don't actually think about the long term. They actually don't think and say hey, if I don't pull this off, I'm gonna become bankrupt. My life is over. And I think that's pretty healthy. That's when you bring out the rawness of humanity. And I don't see that very much anymore.