Invest Like the Best with Patrick O'Shaughnessy
· 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.
· William Hockey, Patrick O'Shaughnessy
They almost hate each other as much as they hate us. And the fact that they then choose the dollar is still so critical. Then you could argue that maybe the dollar's eroding over time and stuff like that, but still in the vast majority of, like 75% of global trade still is in the dollar. That's crazy. And we don't recognize that. The soft power that America has or even the hard power America has with that is so fundamental to our life, and the fact that we have such a strong economy. [00:00:00] S0: Do you talk to your team as though this is part of the mission? Almost like national security is part of the mission, because of the importance of the dollar?
· Patrick O'Shaughnessy, William Hockey
[00:00:00] S0: Do you talk to your team as though this is part of the mission? Almost like national security is part of the mission, because of the importance of the dollar? [00:00:00] S1: A hundred percent. One of the best kind of shifts I think Silicon Valley has done is we now are like – Silicon Valley, we take an active role in the national security of the country. We didn't six or seven years ago – even though American society, American GDP growth is, even more than ever, completely indexed on the success of Silicon Valley. Probably too much. It's way too levered in that regard. But now Silicon Valley, whether it be social media, whether it be defense, or whether it be software or whatever, we're starting to recognize our role in the world. And financial services is probably the most important component of that. You can ask any general. I have. They want to use a sanction before they use a missile. The great thing about a sanction, the great thing about the dollar, is you can enforce American dominance without putting boots on the ground, without putting anybody at risk. And sometimes, as we've shown in Venezuela, you kind of need both. The reason we were able to go to Venezuela is because we had fundamentally destroyed the economy before. [00:00:00] S0: How?