Invest Like the Best with Patrick O'Shaughnessy
· 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.
· William Hockey, Patrick O'Shaughnessy
Which is you put in a dollar, you get a dollar 30 back. That's not the case with most markets. So I think you have to look really intensely at yourself and your business to make sure that works. And there's so many amazing tech companies that works for, and that's why venture is a really good asset class, and Silicon Valley is probably the best place to accumulate capital of anywhere in the entire world, probably throughout all history. But that's not every single business. And you have to look really intensely at yourself in order to do that. [00:00:00] S0: Given your unique perch, what have you learned about how the world works through the lens of this dollar focus, this demand for dollars, being the operating system for the global dollar system. Through the lens of the dollar. What are your takes on the ways the world works or interests you that might surprise people?
· William Hockey
[00:00:00] S1: What the dollar does, it connects countries in very interesting ways. I think in the US when you can pretty much just build an incredible company by the US alone, you lose that perspective. If you look at the official stats, most economies spend less than 10% of their GDP trading with their neighbors. And that's been a big focus point of the OECD over a while. But when you actually dig into it, the unofficial trade that's going not over government rails, it's actually closer to 90%. It just shows how trade and how money and how that stuff really connects these cultures and connects these societies. And I find that super fascinating. We can talk about how that's impactful in a lot of ways, but that is something that we don't really get in the US because the US has this very unique luxury – we can almost somewhat sustain ourselves, and you can sustain businesses, only building for yourself. The US market is just so fantastic. I am so long the US, as I'm sure anybody building – you can sustain yourself. You can become a billionaire by never truly ever leaving America, or never interacting with anybody outside of America. And that's what it makes America so fucking unique. I don't think we get like how much of a luxury that is. But outside of the world, it is not. And that comes down to trade. That comes down to financial connectivity. That is so impactful and it's so important. I think you also forget how reliant the world is on the US financial system. Let's take two insanely developed countries. Let's take Qatar and let's take Switzerland, okay. You're shipping gas from Qatar to Switzerland. I would argue right now, probably neither one of these countries like love America a ton. That trade is denominated in dollars. The money that's moving from Switzerland to Qatar, Glencore to Qatar, the Qatari gas company, crosses the US financial institutions. It's crazy to think about. Let's think about who are maybe our two "enemies". China, Russia. China's a big importer of Russian gas and oil. It's kind of crazy to think about it, that trade is still denominated, for a vast majority, in the US dollar. That's mind boggling. That's a luxury. And that's such an insane national security strategy that nobody else has. Russia doesn't want Chinese currency. China definitely doesn't want the ruble. They barely have access to it.