Invest Like the Best with Patrick O'Shaughnessy
00:15:48 · Micky Malka
[00:15:48] S2: I think it's this combination of finding amazing people that you can see through their soul, through their motivation, and you can see that they will do whatever it takes to win and to build that mission that they find themselves to. At the beginning, when you start backing them super early, you don't know. You just don't know. But you try to see signals and follow through them. Before we said to our investors, hey, fintech is dead. It didn't come out of the blue. A year before or eighteen months before, we presented this pyramid and said, there's 3,000 companies that got backed in the last decade in financial services around the world. We think there's 50 winners. There'll be 50 companies that are gonna compound for the next fifteen years. They have asymmetric brand knowledge. They know how to use time, people. They know how to deploy capital in ways that they will just be compounders for a very long time. The kind of services that the Berkshire hathaway that the world would love to have. Which in many ways, you look back at Berkshire, that's what they did in the seventies and eighties when they started to buy American Express and GEICO and the Wells Fargo, they looked at compounders when it was not obvious that they were gonna compound for that long. And they hit the macro right. And then we said there'll be 200 companies that own an asset, a license, a software, a customer base, a product that will be acquired by this compounders. So they'll be taken out one way or the other through M and A. There was gonna be another 500 companies that are gonna get to profitability because liquidity was drying up, the market was starting to get out of favor for this space, moving more to AI. And those companies will get profitable and they will trade at a multiple of earnings and just do fine and private equities will buy them or they'll live in a cash flow business. And there was 1,500 that should not exist. And they will disappear over the next number of years. So that thesis put all of our attention to look at, all right, who are the compounders? Are they public? Are they private? Are they both? Do we know which market who? And we spent over a year and a half just studying that and placing bets all over the world around that.
00:18:04 · Patrick O'Shaughnessy, Micky Malka
[00:18:04] S0: What's an example of one of a compounder just to make it... Bring it to life? [00:18:08] S2: The first one that comes to mind is probably Robinhood. I'm on the board, so I gotta be careful with what I said. But it's a company that every time they have time, the millennial customer in a way that they're growing with them. So think about it, Vlad and Baiju started a company when they're 26. The oldest are the millennials. They're now 37, 38. They're the oldest. Probably the [00:18:33] S0: millennials The
00:18:33 · Patrick O'Shaughnessy, Micky Malka
[00:18:33] S0: millennials The [00:18:34] S2: millennials are are Exactly, they're 40. So they've time and they started to offer the first trading account when you needed one, when no one gave you one. And now they added retirement because guess what? The generation that has kids and they're thinking about it and they're adding all of these products that they have a chance to wake up in twenty years and be the Schwab of that generation because they grew with their customers for a very long time. That power of compounding generational wise doesn't happen overnight. It takes a long time to build, but you can see where they're going and they're growing with their generation. And every generation, if you look at history has one of those, or at least one of those. Very few will cover very generations, but at least there's one winner per generation. E Trade had that chance for my generation. But E Trade got into mortgages too early, with a very weak balance sheet and blew up, and they became a sleepy company. They had a window. They lost it because they used their capital base wrongly. I think Robinhood is doing a much better job. [00:19:34] S0: Vlad told me this story, and it's an incredible story. And it speaks to the sort of relationship that Ribbit has with its companies and the founders that it backs. Can you tell the story of that crucible moment when things were going sideways for Robinhood and you were a huge part of getting them through that?
00:19:50 · Micky Malka
[00:19:50] S2: Yeah. That January of twenty twenty, twenty one? I think the story starts nine months before. There was a moment in, I think April or May, right when lockdowns were happening and where their growth, because people were starting to trade and open accounts and get into the markets because of all the subsidies and incentives, that their system went down for two days or one day of trading because they collapsed. They were just opening too many accounts. They had anybody remote. It was bad. And they had a lot of bad press. And I remember having a call with Vlad that afternoon and saying, hey, is this gonna happen against us? I don't think so. I think we have a solution. Okay, you're growing way too fast. What else do we need to... We always think about this framework about brand. How do you communicate? About people, how do you talk to them? About how you invest your time and capital. So we went through it. In And the capital piece, we said, how is your capital base right now to sustain this level of growth? He says, we're fine, but it can... It could get stressed if this keeps going. So nine months before, we sat with Jason and Shiv, which is part of finance team, Jason is CFO and Shiv works with him, and our team here. And we put together a term sheet that had all the terms with brackets ready on what it will take to put emergency capital in. We thought about it, we wrote it, We discussed it. We went back and forth. We didn't need it. And we both agreed it was perfect, and we put it in a drawer. We never knew why we could need it, but it was a good thing to just know that we had it there. So you fast forward to January, and GameStop happens and all these meme stocks happen and the regulators come with this super crazy unheard rule out of the blue saying you have to put all your customers exposure that they have put on in the last day from your balance sheet in collateral while the trade settles. It's unheard of. So the request was for $3,000,000,000 at five in the morning before market opens. Exactly. It's insane. So I get the phone call and Vlad tells me this. I'm like, no. He says, what do mean? No. No. You call back and you say no. That's crazy. That's unheard of. They're doing the math wrong. This cannot be... I mean, the customer's money was in the bank. Yeah. But you're gonna attach it. It's their customer's money.
00:22:06 · Micky Malka, Patrick O'Shaughnessy
You can only attach it the day of settlement. So understanding this business, because I had built a brokerage dealer when I was 17. I had built an online broker dealer. We understood everybody here, understood the business model. So we knew there was no capital risk. It was all requirement of some liquidity risk. There was no liquidity risk. It was capital constraints. So he calls me back and says, we're gonna talk to them, but I need the money. So I said, okay. Give me half an hour. Give me an hour. And I wake up the CEO of Silicon Valley Bank, back then Greg Becker. And I said, have I ever asked you a favor from you? And he says, yes, once. And it was very painful. And his favor was helping Coinbase get bank accounts in 2013 because no one will open the account to them. [00:22:51] S0: Oh, interesting. [00:22:52] S2: And it was the first bank account that Coinbase had for the first three years. I said, well, need one. And he says, what's up? He says, I need to overdraft every line that Ribbit has for $500,000,000. And he says, what? By when? I said, by nine in the morning. And he says, what happened? So I explained to him what happened. He said, let me call my team. And our team here, we were multitasking with Robinhood team on the term sheet. Already had it done. We were just feeding the brackets. At the same time, talking to Silicon Valley Bank, defining how to do this. And by their credit, by 09:30 in the morning, we were wiring $500,000,000 to Robinhood. Wow. And with that term sheet, a lot of capital followed later that day and later that weekend.
00:22:52 · Micky Malka, Patrick O'Shaughnessy
[00:22:52] S2: And it was the first bank account that Coinbase had for the first three years. I said, well, need one. And he says, what's up? He says, I need to overdraft every line that Ribbit has for $500,000,000. And he says, what? By when? I said, by nine in the morning. And he says, what happened? So I explained to him what happened. He said, let me call my team. And our team here, we were multitasking with Robinhood team on the term sheet. Already had it done. We were just feeding the brackets. At the same time, talking to Silicon Valley Bank, defining how to do this. And by their credit, by 09:30 in the morning, we were wiring $500,000,000 to Robinhood. Wow. And with that term sheet, a lot of capital followed later that day and later that weekend. [00:23:43] S0: What an incredible day. Where does that rank in the craziest days of your career? [00:23:49] S2: You know, there are those days that you remember where you were. [00:23:52] S0: Yeah. You can picture [00:23:53] S2: the You picture everything. I tend to walk when I'm on the phone, when I speak. I'm not good sitting. I will tell you that that day I looked at my watch, I had done a full marathon walking on the phone. I had done almost 24 miles of walking in a room, in an office just walking because I needed to think and react and call. So I will never forget a day. [00:24:15] S0: Thinking back on it, what lesson do you take from it? What did you learn that you didn't know prior to going through that experience?