Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy
[00:00:00] S0: How much do you care about mission? It's an interesting part of the equation.
· William Hockey
[00:00:00] S1: You need a mission, otherwise people just go work at hedge funds. You need to say like hey, we are building something bigger. And I think we absolutely are. But I think mission can actually be a little bit distracting. I think a lot of times people focus a ton on, "Hey, what are the values of my company? What good are we doing?" And I think that's an important part of the equation, but I think it's – on a list of five things most important, I think it's probably on the bottom end of that five list. And I think a lot of times we can be kind of distracted by that. That's because, when you're pitching investors, investors want to feel like they are part of something. They want to feel that man, I'm not just recycling pension fund money into other capitalists. And that's what we do, we want to feel like it's bigger than that. And so I think we've taught people that, man, you need to focus on like the millennia journey. You need to focus on the impact that we're doing. And yes, numbers go up, but numbers go up is only one part of the equation. I think that's important for employees, but I think it's sometimes not the best. In the end, what do you want to do? You want to convince somebody to buy your product, and you deliver them enough of an experience that they can't build it themselves, and they're gonna pay a lot of their hard-earned money to you. That's the goal. And that person doesn't give a flying fuck about what your mission is. They just care about, does this product create value for me and am I willing to pay for it? That's it. And if you start to drink your own Kool-Aid too much, you kind of forget that.
· Patrick O'Shaughnessy
[00:00:00] S0: It makes me smile to think about your earnings and cash flows. It's such a novelty that a company like yours would have a bunch of this, so young in its life and at this scale. How do you pick your margins? How do you think about how profitable to be and why? You mentioned earlier that it's like having a funding round every year. Does that imply that you're actually spending it, so you're not paying taxes so that you can spend it on growth? How do you think about earnings in a high growth technology business?
· William Hockey
[00:00:00] S1: Our customers pay us for safety, and our companies pay us for longevity. It's a unique thing around financial services where – I'm gonna look at you as a customer, like I'm gonna be your best partner over like a 10 to 15 year period. Switching costs are really high. And they are putting a lot of like your customer trust and risk in you. So I am playing like a longevity and a risk game just as much for me as my customers. I take that extraordinarily seriously. And I think earnings and being profitable and sustainable, and not relying on somebody else's decision-making framework is extremely critical for our customers. And that's extremely important to me as well. I tell people, the risk falls on me. I can't pass my risk to some other venture fund or their LPs or something like that. I want you to be successful, because if we're not, I'm the one who takes the pain here. That's quite unique in Silicon Valley because at some point, your critical vendor could get acquired, or maybe the founder could get a $20 million offer from Anthropic. It's the rational decision for them to do that. In many ways, like we aren't competing with other Silicon Valley companies. We're competing against maybe them doing it themselves or maybe competing with them trying to build a patchwork of software vendors on top of like a legacy bank or something like that. And so I have to show that I am more sustainable than you. And I think that earnings is a critical part of that. And I think people are like oh, your margin is my opportunity type of thing. And my argument would be like, you run this business at a lot lower margins, you're going to be dependent on somebody else that you probably don't want to be dependent on. You also have to be introspective about your business. Is my business the type of business that, if I raise a bunch of money or I have a ton of earnings, I can throw all of that back on growth. And I think a lot of times enterprise software companies, they cannot ingest a huge amount of capital. If you give me a billion dollars right now, I don't know if I can grow it a thousand times faster than I am right now. And I don't necessarily think I should.
· William Hockey, Patrick O'Shaughnessy
And so what we do is we say, okay, like of this earnings, what goes to employees, what's gonna go to growth and what's gonna go to capital – which is pretty much in case something goes wrong or we have a couple bad couple years – NBD, we good, let's keep moving. Down to the extent of now we're like – hey, if something goes wrong for 10 years, how are we like, "We're good." There's a lot of societal change going on. There's a lot of crazy stuff going on in the environment. I can totally paint you a picture where the markets get insane for the next 10 years. How do I make sure I can survive that? Even if a lot of our companies go out or the economy has no changes. That goes back to that war chest, because markets go like this. Sometimes the line through it goes like this. [00:00:00] S0: You forget it when you're in one of the good ones. [00:00:00] S1: Yes, exactly. And we look at slope, but a lot of times we have down years. And you need to be able to weather through those down years. And there's so many incredible companies that just couldn't survive for a couple bad periods, and you really want to make sure you're not one of those. [00:00:00] S0: If you were in a classroom setting and it was a bunch of founders or would-be founders, and it was a Chatham House rules, off the record session teaching them about working with investors, and what investors care about, how they behave. Things to look out for. What would you tell them?
· William Hockey
[00:00:00] S1: I actually feel pretty lucky, where at Plaid in the early days, we actually had a pretty hard time fundraising. At first I think we probably chatted with like 80, 90 investors and we got rejected. Sometimes I think I have a reputation of being like, "Oh, William's so anti VC". It actually couldn't be further from the truth. Plaid would not exist without VCs, straight up. I just don't necessarily think the VC model is perfect for every single type of company. Or, maybe a VC owns like 10% of your company or 20% of your company, and maybe the employees or yourself own like 80%. There are different cuts of this you can make. But I think for me, picking investors is important. I don't think there's a lot of transparency in the environment on like, when investors are on seven-year timelines, which ones are on ten-year timelines, and which ones are actually truly super long-term oriented. So I think figuring that out. But I think the most important thing you should do is say okay, realistically, what does my margin profile look like? What is my revenue growth over time? How should I find a capital structure that matches that? And am I actually going to grow at a consistent enough period? Do I want liquidity in 10 years, so that the venture model makes sense for me? Because the thing that people forget is yes, growing a hundred percent on a $10 million base, or a $20 million base or a $30 million base – it's not that hard. Everybody likes to share these graphs on LinkedIn like, "We're the fastest company to get to a hundred million dollars of all time." That's awesome. But you know what's much harder? Growing above 30% a year off of a billion dollar revenue base. That is like 99 times harder than going from zero to a hundred million in three years. However, the venture model honestly only works if you can grow above 30% off of a billion, $2 billion base. And you have to really look inside yourself and be like, does my model make sense for that? And can I do that in a way that I can ingest hundreds of millions, if not billions of dollars of capital on the way and put really good use to that? Because I think sometimes, businesses grow at the rate of the market, or businesses grow differently than just dollar in, dollar out. And the venture model is built off the fact of you can make a company like an ATM.