Good Investing Talks - What makes internet stocks attractive, Dennis Hong (ShawSpring)?

Episode Date: January 25, 2021

In this talk Dennis Hong and I are discussing the great opportunities that make investing in internet businesses so attractive.

Hello, everyone. It's nice to have you here for our last stream before the summer break starts. I'm happy to have Dennis Hong on today from Boston. Hi, Dennis. How are you? Hi, Tillman. I'm doing very well. How are you? I'm good. And I'm happy to have you here and to have a nice and relaxed conversation about investing, especially in Internet stocks. But before I start, I want to drop the disclaimer. And, drop a question for you because you're a passionate dog owner and for the beginning I have to question what quality a dog brings to someone who invests on a stock market what is the advantage for investor to have a stock but before you answer that give me a second and let me drop the disclaimer you find the disclaimer also linked below this video so you can have a look at it and see what's in there the main message is do your own work what we are doing here as a qualified talk and no advice and no recommendation so always do your own work and do your own

research thank you and i also want to say hello to the viewers because you're happy i'm happy to receive your questions through the chat you find the chat i think on the right of the screen so you can drop in your questions that I could take and ask to Dennis. But let's first go back to the question on the dog. What the dog needs for investors? Well, Tillman, thank you so much for having me here. I don't know if you've told the listeners and the viewers today, but you and I first met actually in Engelberg at RB Capital's Investor Day.

and I think you do an amazing service for the investor community by having some really interesting investors on. And you promised no hard questions, but I'll tell you, dogs are amazing animals. And I have this dog, his name is Darby. He's a golden retriever. And I think the one thing that I really admire about dogs is they just have an incredible open mind. They have an incredible, oh, everybody's a friend. And I think with the kinds of businesses that we look at, many of the business we look at, if you look at them on first glance, the financial statements, it may not be apparent that there's a really good investment here. Some of the businesses are initially quite cash burning. Some of them, just their balance sheet looks like a disaster. But the one thing that is really wonderful about dogs is that you're a good person until proven otherwise.

So I think with that, that's probably a pretty good segue into this discussion on what we find so interesting about some of the businesses that we look at all around the world. So how does dog react to volatility? Well, as I mentioned, you can see the corner of the screen. That's my dog bowl. I have to tell you, we're really lucky to have this office here in Boston. We're in this old art gallery on Newbury Street, which I think is probably most analogous to a very charming version of Rodeo Drive in Beverly Hills. And this building that we're in is an old art gallery and it's owned by a Dutch family. And they're really kind, very kind people who let me bring my dog to work. So I'll tell you that when you have months like March and everything is in free fall and the anxiety is palpable, it's really quite lovely.

to just have a dog who is just oblivious, just wants love and attention. So I do say, I do have to say that we're quite lucky. So he also gives the calm atmosphere, the dog, and helps you to focus on other things as well, if there's volatility and the market drops, I think. Yeah, I think that's right. I mean, it is one thing to kind of face this alone with your teammates, but it really is quite another thing.

When you have a dog that kind of visits throughout the day when he notices one of my teammates might be really stressed and pulling their hair out, he'll go and put a paw on their knee and say, is everything okay? Everything's okay. I think we have to do a test about returns and dogs in offices one day, but let's skip to other topics. I'm interested how you came to investing

and how would you describe your style of investing? But maybe let's start with the way you came to investing. Well, Tellman, that's a great question. I have to tell you, and I have this conversation quite often. I'm probably one of the last people that really should be in this seat. And what I mean by that is that I didn't have an illustrious background or a family that has a lineage in investing. I actually am the product of two.

South Korean immigrants, immigrant parents. My mom and my dad, they relocated from South Korea to this town, a pretty industrial town outside of Toronto called Brampton. And it was actually in my parents' convenience store in Brampton. That's where I learned about business. I helped them sell cigarettes and lottery tickets. My parents were oppression enough to insist that they didn't want their son to sell cigarettes and lottery tickets for a living. So I always knew I was going to go to university, even though they didn't formally go, I always knew that was in my plan. But I was really lucky. I mean, growing up, I went to public schools. I went to this pretty rough inner city high school where very few of the students went to college or university. And I had this really great

guidance counselor who was like, you know what, Dennis, you've got great grades, you've got an interesting story. Let's throw in a couple lottery tickets to the U.S. and see what happens. And at that time, I'd never lived away from home. So I was really scared. And I didn't even know what an Ivy League was. So I did some research. And I thought that some of these schools are so cool. So I applied to a bunch of them. I got into Yale, which in many ways changed my life and put me on this professional investor path. So I arrived on Yale's campus. At that time, I was on financial aid. And as part of the deal, I had to work. And I did something very pragmatic. I went to the Yale campus job board website, and I did a search for highest hourly rate on campus. And there was this position at the Yale Endowment. And at that time, I thought, oh, this is an easy job. Just call up alumni and hit them up for money.

Really simple. Obviously, that wasn't the job. And I did some research. And I thought, wow, like, there's like this really cool investment company here. And so I applied, I found David Swenson's book through the course of that research. And I thought, okay, I really want this job. I really, really want this job. So I interviewed, and I was really lucky at the last interview, it was David Swenson,

who basically just told me, if you want this job, you have it. And I said, yeah, of course I want this job. So I joined. At that time, there wasn't a lot for me to do. And what I mean by that was that by the time I joined, the endowment. David Swenson and his team had been in place for quite some time and they had largely evolved the strategy to what it is. It's modern day iteration today. So picking some very high conviction managers and very thoughtful asset allocation. It was really neat because I had a

chance to be at the same conference room as people like Seth Carman and sit across the table from people like Chase Coleman and Steve Mandel, which was very cool. But the managers I found the most interesting were these one or two-person shops. Oftentimes they were not really household names. And they had very simple structures, five to 12 stocks, concentrated. And they often sometimes just manage capital on behalf of just a handful of partners, maybe a family and yet. in the most extreme case, maybe just two clients. And it was extraordinary because that was a really important early impression for me because it was so clear that these managers had competitive advantage.

The fact that they had simplified all their variables and they were really focused on one singular optimization problem, which is generate great investment returns, you couldn't help but see why they had edge. It wasn't that they did better work than, anybody else with significantly more assets or that they had some kind of magical machine that told them what stocks to buy. But it was just a thoughtfulness around structuring their partnerships, structuring their investment strategy to be concentrated, long-term, deeply research

investments, and doing it on behalf of just a handful of partners. When you boil it down to so few variables, you can't help but see why they would have edge. And that was a really important, formative experience for me. And there's no secret coincidence why Shawspring, my firm here, is structured the way it is. It left a real impression on me. I was one of the lucky ones. I always knew I wanted to pick stocks. So anytime that I was at a conference room table with a manager, I was like clamoring to ask that manager, how do I get to your side of the table?

How do I get to pick stocks, right? Like, I really enjoyed the manager selection, and I really enjoy the asset allocator angle. But it was just the excitement around digging deep into public security and meeting with those managers and understanding those businesses and why this would make a good investment. It was just something I became really, really passionate about. So while I was at Yale, when a manager had like a really great investment idea, I dug in and I was just, it concluded. And for me, the conclusion for me was, I really want to do this. So I got the blessing of my bosses at the endowment, and they let me interview with a bunch of their managers. And I was really lucky I got into one of their hedge funds.

And it really was a really special opportunity for me to really grow and learn. And that firm was this firm called Matrix Capital, which is a very well-known Tiger Cup hedge fund run by David Goel. And it was a really great experience. I learned a ton. And I was there for two years, but I was the only associate at the time. And they were like probably a handful of really senior MDs, each with various different specialties. So I had an opportunity to work with each one of them. So I got to see a lot in a short amount of time.

And in that time, I became the resident technology and internet expert. And I was put in touch with a mutual friend, by a mutual friend to this guy called Brad Gersner, who founded a firm called Altimeter Capital, who, by the way, you should try to get him to interview. with you. But we were put in touch by a mutual friend. He was training at a firm called Power Capital here in Boston. And I was training at Matrix. And we both had a passion for internet and technology. And we really hit it off. And, you know, Brad launched Ultimiter on November 1 of 2008. It was an absolutely horrific time to raise money, but an awesome time to invest. And Brad approached me a couple months after he launched. He said, look, Dennis, I'm looking for

a young guy to come in, be my number two, help me scale up this firm. And I told Brad, look, I'll help you scale up this firm. When it's time for me to do my own, I hope you're there to back me up. So I joined. It was early 2009, and I just turned 25. And in my mind, like, I was thinking that I always knew in my head, I wanted to start my own fund when I turned 30, but I joined this small startup hedge fund because I wanted to help Brad, because he was a, he was a, he was a, he was a really great friend and a great mentor. And he continues to be a really great friend and a mentor of mine. And I just thought this is a great opportunity. Now, you know, a $2 million launch, those are the chances that that thing scales, a $2 million launch, that's a long-tail probability.

And so in my mind, I thought I was going to be here for a couple of years. It was a horrible time, right? We were in a financial crisis. And I thought I was going to be there for a couple of years and start my fund. Well, actually write a great business school application. about what I learned as a hedge fund entrepreneur at Altimeter and then start my fund and go on my way. But I joined at 25 and I wake up. I'm 30 and we'd scaled this thing from 2 million to 400 million. And it was time in my mind, I was like, in my mind, I was like, it's time for me to do my own. And, you know, I took a very atypical path to starting Shostpring because I'll tell you, when I looked at my background, just where I come from and then my experiences, right?

Endowment, Matrix, Altimeter. I thought it was an interesting background. But I didn't think that any institution was going to take me seriously. So I thought about this is a mental model, Tillman. Seth Claremont, who was the founder of the illustrious firm, Bow Post. You know, I remember that he went to Harvard Business School and then got his MBA and then launched out of Harvard Business School, raising money from three professors and started Bowdo Post Group. And in my mind, that was the path for me. I thought that I was going to join, go to HBS, and I applied to HBS. I got in and the thought process was I'm going to network with 900 really smart, driven, rich men and women, my classmates, and see if I can show them how smart I am about business investing and maybe raise some of my classmates and come out the other side with some sort of a fund like Seth Clarkman did. So that was the business model.

But I went to HBS and I actually launched a small fund, like $5 million, mostly my own money and a handful of individuals, including my old bosses, who are willing to give me some token support. And I managed money and I went to HBS. I had a really, really great first year. But then the family investment office of a very well-known technology entrepreneur based here in Boston, his CIO reached out to me and was like, what are you up to? And I said, well, I'm going to do what Seth Clarman did. I'm going to go to HBS get my MBA and then come out, raising some money from my classmates and start a fund, like a real fund. And the CIO basically said, well, why don't we just help you? And, you know, it was like it was kind of awesome because, again, like just coming from where I came from, I just didn't think that anybody would be willing to give me a shot.

So I thought about it. It would mean that I dropped out of HBS. And the only problem with that was that it really offended my Korean sensibility to drop out of Harvard before finishing. Well, actually, probably more disappointing my mom. But it was like the right decision. I mean, this investor had known me for years, years. They'd invested in funds that I was working at. And so they were willing to take a shot.

and they invested. We launched Shaw Spring on July 15th, 2014. That's six years ago, six years ago and seven days now. And we launched with $11 million. And that was kind of the beginning of this journey. So six years later, we're $700 million. And we have eight institutions, a bunch of university endowment funds, charities as well as some really interesting entrepreneurial

high net worth families we'll have a ninth institution on August 1 another university endowment but it's it's been quite some time it's been a journey so that's kind of where we are today so Tillman now I'm sitting here in front of you I don't know how I deserve to get interviewed by you

but here we are there's an interesting story to hear and That's the thing I'm doing. What would it hurdles for you with founding Shorespring and making it grow? So many things. Okay. So the first thing that I sort of think about, right? When you launch an investment firm, there's really two optimization problems as me,

the founder of an investment firm. The first optimization problem is to try to gather as much AUM as possible. assets under management as possible, because that's good for me. I get all the fees. That's a problem on the other side. The second optimization problem, Tillman, is that I have to generate returns, right? So I have to generate returns to justify my existence as a business. Well, you know, it was pretty easy for me to sort of dispense with optimization problem number one,

because we have a fairly explicit strategy where we articulate that we're going to put our investor's capital into five to ten of our very best ideas. So we run a very concentrated fund. And that type of fund, the tendency is for quite episodic, sometimes alarmingly volatile returns.

So it's not right for everybody. So I'll tell you that. You have to like five to 10 ideas and the journey you're doing. Maybe you have to get a dog as an investor. So starting out, I did what any other hedge fund entrepreneur or investment firm entrepreneur is going to do. You try to sell.

You try to show people what you've got and try to convince people to give you money. But that's how you tell you, it's super hard. A fund like ours is really hard to sell. It's not right for everybody. So I think that for me, optimization problem one is kind of out. And I sort of made the bet that if we build the foundations and establish the foundations for building a thoughtful investment strategy and generate good returns for the investors

that are willing to come along for the ride for us, then that should be the optimization problem. So for me, since we've launched, we made a quick decision that we need to really focus on optimization problem number two, which is to put in the elements in place to generate outstanding long-term returns. And so, like, you know, whereas like when I first started, I may have had grander ambitions to build a very large fund and try to gather as much AUM as possible, you know, we really, really just focused on building the very, very best strategy that we can and just focus on doing a good job for the investors that, that we're willing to come with us on this journey.

So we haven't grown very fast. And I always articulate to our investors, as well as any perspectives, it's been pretty consistent. We've attracted probably one, maybe two institutional investors every single year. That tempo, I think, has been the right tempo. We let investors take their time to get to know us. So one of our investors, it took them four years. They were a really terrific institution that was a wishless investor for us.

They came to visit us when we were tiny, $11 million. I don't know what they thought we would be, but they spent their time getting to know us, getting to know me as a human being, and I got to know them as human beings. And then four years later, they said, I think we're ready to do this. And so I think that for us, we keep it really simple, right?

Like this is a multivariate problem that we call investing, to the investment business. there are variables that are under our control and there are variables that are outside of our control and I really thought about in the beginning pretty quickly that we need to think about the variables that we can control because ultimately if we think about those in a thoughtful way

we can reverse engineer our way to good returns as well as building a really great partnership So that's definitely something that we've always had kind of from the outset. So that's number one. But number two, okay, so we're a small team. So here in Boston, we've got four people, including myself. I have an operating partner. His name is Paul.

And I have two guys, two young people who help me on the investment side. And actually, they're not so young anymore. I mean, we've been together, all together for quite some time. but I'll tell you that one of the things that we really need to focus on from day one is that we need to maximize return on time and effort spent. So this has implications for every aspect of this investment from business, but maybe just applicable for this discussion, how do we take a universe of 40 to 50,000 public companies

and narrow that down to five to ten businesses that we hope, and our ambition truly is to generate Hall of Fame returns. How do we do that? And I think that we had to invest a lot of time establishing those foundations up front. We had to think about very carefully just what's going to be scalable, repeatable, replicable over time. And in the event that we've made a mistake, and I'll tell you that our performance since we've launched has been pretty good. But, you know, we're going to make mistakes, right? So I tell our investors and I tell our prospective investors that I think two out of three

of our stocks will probably have very good outcomes. One of the three will probably really stink. And that's okay. But in those instances where we haven't quite gotten it right, we need to be able to reverse engineer how we got to that decision. So we learn from those mistakes. So right up front, you know, I have this young team. And I have this preference for mentoring and teaching.

I love mentoring or teaching. I think if I wasn't doing this, I probably would be like a university professor or a teacher of some sort. And I'll tell you that because I recruited my teammates out of college, effectively I'm their first job. He sort of had to start from first principles. So what are we trying to do here? We're trying to compound capital. And to me, compounding is a very simple definition. Actually, so Peter Kaufman, the CEO chairman of Glen Eyre, who helped Charlie Munger edit his book, Poor Charlie's Almanac.

He has this great definition, which I love. Compounding, constant, continuous, dogged improvement over very long-term timeframes. That's what we're trying to do. Find investments that are growing at constant, continuous, dogged improvement over very long-term timeframes, which then biases towards businesses that are growing their intrinsic values. And the only way I understand how intrinsic value grows is because revenue, earnings, and free cash flow are growing at constant, continuous, dogged improvements over very long-term timeframes, which indicates to me that there's probably some sort of high-quality characteristic to what we're looking for, right? So I told my team in the earlier years, just go on Google, find a mental model on Google, how to find high-quality company. Well, when you go to Google and you do that, what is a high-quality company?

You get all kinds of hits, right? You have some kind of porter's-five forces, and maybe they tell you, you've got to find a barrier to entry or some kind of network effect or maybe some kind of pricing power or switching cost. But those are all abstractions. It's not helpful. So we actually had to invest some time up front in our early years to really think through how do we identify high quality quickly? Because again, I'll just bring it back to everything we do here as a small team is that we have to return, have to maximize return on time and

effort spent. So it really began with for ourselves defining a mental model for high quality. We spent a year, we wrote a four-part letter. Actually, I learned a new word through that process. that a four-part series is called a tetralogy. But we came up with this heuristic on high quality that we call ecosystem control. And what ecosystem control is that every single business exists in an ecosystem of itself, a customer who is the initial catalyst of cash flow

into that ecosystem, because that business is providing a good or a service that customer wants. And that cash flow passes through various different ecosystem constituents. They could be like the business partners and the suppliers. They could be the employees. They could be the management team. They could be the investors. And what we find through case study after case study after case study is that the very best companies or the highest quality companies, they exhibit this characteristic that we call ecosystem control. We wrote 100 pages

on this and I know we only have very limited time together today. I invite your viewers to contact us and learn more if you're interested. But I think really the only question that we really need to answer for ourselves, very simplistically, again, is that do the business's ecosystem constituents, do they love the business? So the business, do the customers love the business?

Do the business partners and the suppliers, do they love the business? Do they employees love the business? And we've come up with different metrics internally of ways to measure these things quantitatively. And it's been a very, it's an elegant mental model because, because one of the most important things in this screening mechanism of 50,000 companies worldwide is like, what shouldn't be invest in? What's a non-starter? So if the answer to any of the ecosystem constituent questions of

whether or not this ecosystem constituent loves the business is negative or no, it's like thrown out, it's a non-starter. It's a non-starter for us. But for the businesses where we think it could be true, Then the hypothesis could be true that this business has ecosystem control, and therefore the hypothesis could be true that this business is high quality, it potentially becomes a candidate for us. So over six years, we developed the shopping list. It's about 300 companies internally that we focus on. And they cross geographies, they cross sectors, they cross verticals.

We think the hypothesis could be true that these businesses exhibit ecosystem control. But really, we kind of focus on how does that. is this like 300 stock universe carve out. It's really kind of three areas that we focus on over time. We love the aggregation business. So aggregation business, you know, the most common euphemism for that is a marketplace or a network, a digital network. And they're really neat. Why? Because there is often a very elegant asset light manner in which these things scale. And once you have sort of a competitive advantage and being the very best marketplace of whatever you do, you often have a winner take most or a winner take all type dynamic and you

become a quite good business for a very, very long time. We find that in this area, the base rates of success as an investment are quite high. And so they've been a really neat area for us to focus on. So I carve up the world of marketplaces really in two ways. You can be a horizontal marketplace, or you can be a vertical marketplace. So you think about like a horizontal marketplace as being like a general classifieds type business, right? So like Craigslist is an extraordinary business, right? That business probably crossed a billion dollars a couple of years ago. This is growing like really fast. Like that year crossed a billion was growing 50%. This is like a business that started in 1996. They basically monetize two cities. They're in hundreds of countries,

hundreds of cities, but they monetize basically two cities, right? New York and San Francisco and charge like $3 and $10 for a real estate posting or like a job posting. It's a really neat business. And it's still the de facto place where people go to find roommates, apartments, cars, jobs. At one point, it had like a nice dating classifieds area. But it's a neat business. And we find examples of these all around the world. We actually recently just took a stake in one based in Japan.

And so it's like a really, really neat area to find ideas. Then there's vertical marketplaces, right? So every horizontal marketplace, you can rip it apart, right, to different verticals. So in property, in this country, you have like Zillow and Trulia and Redfin and the UK, you have right move. In France, you have Sillogh. In Australia, you have R.E.A. group and so on and so forth. In the automobile vertical, you have True Car, Car gurus, Cars.com, and so on and so forth. In dating, you have Match.com, OKCupid, Tinder, Bumble, Hinge, and so on and so.

Jewish dating. Exactly. But the reality, though, right, is if you understand just one mental model, right, the aggregation business, have a mental model for marketplaces, you have created an enormous return on time and effort spent by just understanding one mental model, and you have suddenly a universe of opportunities across geographies, across verticals, and so and so forth. So that's one area where we specialize. The second area where we specialize is we love vertically integrated businesses. There's certain elegance to vertical integration that I think is sometimes underappreciated by

investors. So you probably have a lot of investors who you might talk to Tillman that say we only like asset like compounders, but we actually really love capital intensity. We love operational complexity. We love really, really interesting businesses that have this vertical integrated component. And we have two examples of these in our portfolio. So like jd.com is a vertically integrated e-commerce business in China. Carvana is a vertically integrated transactional e-commerce business focused on used cars in the United States. They're in totally different geographies. They're in totally different sectors. But what's common is that they're both vertically integrated, vertically integrated in the sense that both of them are involved in the activity of directly

procuring supply. So it could be general merchandise for JD or like the actual use car for Carvana. They're involved in warehousing those and preparing those things for sale. They're involved in the logistics activities for those types of goods all the way to last mile delivery. So it's not, it is actually coincidental that JD and Carvana hire the men and women whose job is day and day out. So the last mile delivery is vertically integrated too. They hire the men and women whose job is day and day out to deliver cars in the case of Carvana to people's houses and general merchandise to people's homes in China. And what's neat is that when you think about the coronavirus shutdowns all around the

world, whereas the pure marketplace guys who are very reliant on third-party merchants and third-party logistics companies to fulfill their customer promise, both JD and Carvana, we're able to grow effectively unimpeded all the way through the crisis, which is a really, really neat concept. But the thing is that they take a lot of time to build. They take a lot of money to build. They're very, very difficult to build. But if you can really... You can make a lot of mistakes. And you can make a lot of mistakes. But if you've figured this business model out and you've gotten a careful control over the entire value chain of that customer experience, you can be a very good business for a long time because it's very hard to replicate.

And then, Tillman, the third area that we find some neat ideas is this area that we call cognitive reference. Have you ever heard of that? Nope. You have to explain it. You have to explain more things, but start with that. You know what it is. You do. So we didn't come up with the term cognitive referent. Actually, it's a term coined by a Harvard Business School professor called Rory McDonald. But it's an area that we found very intriguing as an area where we found some pretty interesting investment. So think about it in two ways. Product cognitive referent or a service cognitive referent. Product cognitive referring is really interesting. So think about if you go into a pharmacy

and you say, excuse me, do you have any Kleenex? Do you mean Kleenex, the brand name that is owned by Kimberly Clark? Or do you mean Kleenex that is top of your mind and synonymous with the generic category of facial tissue? Ping pong ball. It's the same thing, right? Ping pong is actually a trademark that's owned by a company, but to you, it's synonymous with the generic category of table tennis balls. So that's a product cognitive reference, but I think that service cognitive reference are even more interesting for a simple reason that they are harder to replicate than products, but services are often like, they have controlled distribution, often through a native app or a proprietary app. So think about this. I Ubered it. I Ubered it to the office today.

or I'm going to go Airbnb and in Paris this weekend. And you think about like Airbnb, right, as a cognitive firm, it's an ecosystem of hosts and travelers who are looking for each other to facilitate bookings in unique, experiential, alternative, often urban accommodations. Booking.com and Expedia, good businesses, by the way, they kind of do the same thing. But I got to tell you, Tillman, no one's ever said, oh my God, Tillman, that Expedio is incredible. Or, gosh, those booking.coms, they're so great.

And most people sort of smile a little bit when you say those things, but it's kind of true because it's kind of natural to say, I'm going to go stay at an Airbnb or I'm going to go Airbnb but no one ever says that by Expedia booking. And that has real implications actually on the unit economics. So cognitive fronts have two competitive advantages in that LTV over KAC equation, so long-term value, which is just how much cash flows come in over the lifetime value of that customer, over the cost of customer acquisition. So if you have cognitive reference, you immediately have a huge competitive advantage on CAQ,

right, cost to customer acquisition, because you have immediate recall. And then on the LTV side, you have very high levels of customer retention because you have this cognitive reference. You almost are synonymous of that category. And there's nothing more stark, actually, then, to just look at the businesses at face value, like juxtaposing Expedia and booking to Airbnb. So Expedia and booking, up until last year, we're spending $9 billion on Google AdWords

just to get people to go to their websites. Airbnb, in comparison, spends very little on Google. So we try to look for cognitive reference of all kinds. So if I were to kind of just summarize again, just my little talk, we're looking for five to 10 stocks. And we have very high underwriting threshold. So we're looking for 30% IRAs. And here internally, we often say we're looking at five axes over three to five years.

And we're only looking to do this within this universe, our shopping list, where the starting hypothesis is that these businesses exhibit ecosystem control or they're very high quality of businesses. But then within this 300, I think there's three different mental models that we have specialized in, where we've identified some of our best ideas. The marketplace business model, the vertically integrated business model, and then the cognitive referent business model. And all we're looking to do is generate

HoloFrame returns on behalf of 15 to 20 partners, full stop. We're at nine partners today. We're trying to boil down the number of variables in this multivariate problem we call the investment business. And that's all we want to do. One question.

How do you measure love in businesses? You said you have a certain framework to do that. I'm sorry? What was the question? How do you measure love, but people love businesses? What are your variables for that? Yeah, so there's a lot of different ways you can do it. We do quite a bit of consumer research.

And so we look for evidence of just a universality of praise. But there's other ways to do it. So I'm sure you're familiar with this concept of an NPS, Net Promoter Score. It's a fairly easy quantitative way to measure how much a consumer loves a business. So an NPS score, what it is is, it's really a survey of like a sample of people. And I have a sample of 10 people. How many of those are willing to evangelize or recommend that product to a friend or family member or to somebody else versus the detractors who basically say avoid this business? And what we find is that the very, very best businesses exhibit very high levels of NPS.

They have very high levels of net promoter scores. And that has real implications, right? Because if you have more word-of-mouth advertising or you have customers who are willing to evangelize for you, that's enormous competitive advantage on the CAQ line again, right? Cost to customer acquisition. And then your loyalty is higher, right? So then your retention is much higher. So what we find over time is one way we can measure quantitatively do the customers love the business

is by just having these like NPS scores. Actually, you can do this for employees too. So we have something called an E-NPS. and this is where an employee net promoter score, what percentage of a random group of employees are willing to evangelize this company as a place that people want to work versus those that say,

oh my God, stay away, don't ever work here. And so we've found little ways over time through pattern recognition, but also just finding ways to quantitatively measure and validate those patterns. How do we measure how these ecosystem constituents, how do they love these businesses? Do you also take the quality of management

management into account for this, how you experience the management, for instance? Yeah, I think that's an important part of our process. So, you know, I started my investment career at the Yale Endowment, doing something very different, but in my mind, I actually find that there's quite a lot of synergies between what I did at the Yale endowment, which is assess investment managers and their partnerships, the structure of their partnerships and their strategies, but also them as people. It's really important, especially because we want to own these businesses for multi-year periods. So we look for evidence of structures and incentives for how a manager wins.

And if the manager wins, do the shareholders win? When we first started the fund some years ago, we actually looked at some really big companies like Visa and MasterCard and this is like that that are run by really good managers, but we consider them more professional. managers. But over time, you know, this crop of portfolio companies we have currently, the vast majority, actually all of them, are effectively owner operators. So it was the entrepreneur that scaled up this business, started the business and scaled this business, and continues to run the business. But that entrepreneur also has significant personal holdings of stock, and which represent a very significant percentage of their net worth. So Tillman, for us, it is really important for us to be able to gauge the intentions of the management team to public shareholders

and really for us to understand what are the incentive schemes. You know, there's a saying that, show me the incentives and I'll show you the results. I'm a really big believer in that. I think that that's a really, really important thing to be able to get right, considering just our intention to be long-term, multi-year shareholders of these businesses. That's interesting. to the audience thank you very much for the first question that came in

you can drop more questions for Dennis and if you like the interview as I do please hit the like button that's a nice support thank you very much for this like I'm interested also on the thing you said

about complexity and maybe getting more detail on what you like in it and how do you get a sense that it isn't creating mistakes in a complex environment and to not getting things done but trying to figure things out that don't work. Can we dig in a little bit more into the heart of the question?

I'm not, I'm interested in what you like about complexity in this, this investments, because sometimes it's hard to build complex structures and you fail and this might also impact. your return oh do you mean some of the more complex businesses that we like for example like vertically integrated businesses yeah so we don't look at everything we've only really specialized really in three different mental model types over the last six years and vertical integration is one of them so when we look at a vertically integrated business which is probably the most complex of all the business model types i mean like a marketplace is pretty straightforward in relative terms, right? You build a nice

website and you try to scale up liquidity on the different types of parties and try to attract and create a virtuous circle of value creation. Which is complex as well, but but vertical integration is tough, right? Like, think about, think about like what

I mean, just a simple example, right? Think about what Carvana promises. So you come to our site, you can pick from any, you can be anywhere in the country by the way, come to our site, you can pick from 20,000 vehicles on our site. In comparison, if you go to a brick and mortar dealership, you're limited by just the lot size. And CarMax does this really well, but they probably only have like two to 300 cars that from you can choose from, depending on whichever lot you go to.

But in Carvana's case, you go to the website, you can pick from 20,000 cars. And then on top of that, you'll find a car that you really like, and it's typically one to $2,000 cheaper than the brick and mortar competition. And then what we promise is that we're going to help you finance it, we'll warranty it, we'll deliver this thing to your house. You can try for seven days. If you love it, you keep it. If you don't like it, that happens occasionally. That happens about 5% to 7% of the time. You can return it. But 50% of those returns ends up in exchange. They want a different model, they want a different color, any number of things. And that's an exceedingly difficult proposition. If you think about it, moving 20,000 cars around the country to be located where your customers are,

that's an insane amount of value chain control that you need to have to fulfill that customer promise. It's easier said than done. You can lose a lot of money in some fields. But you know what? Do them badly. Carvana had a hack. So, you know, Carvano was born inside the fourth largest chain of physical car dealerships in this country, drive time.

So in some sense, they had the benefit of already probably like $2 billion of physical plant infrastructure in the ground. So if you think about it, if you and I wanted to create our own vertically integrated e-commerce business focused on used cars, probably putting $2 to $3 billion into the ground in the United States, it's just table stakes. So there has to be some sort of unique competitive advantage. I will tell you that we don't look for complexity just for complexity's sake. I think the reality is, Tillman, we've got nine stocks, and we don't turn over the portfolio

very much. Actually, it's been pretty consistent. We've only added maybe one or two ideas per year. The rest of the time, the vast majority of the time, I actually spend most of my time studying are already nine businesses in our portfolio because I think I think those are really terrific the quality of those businesses is is really great we know the managers of those businesses we're familiar with those businesses we've underwritten those businesses so anything getting into the book has to represent a higher quality and a higher return threshold than anything in our book

we run fully invested by the way so anything new has got we got to take away from from something we already own so the bar is very high But that means that our time is freed up here internally for looking at ideas with kind of above average levels of complexity. We don't see complexity for complexity's sake. I mean, I'll tell you that I would kill to be a great biotech investor. But nobody in my firm, certainly I don't. I don't have a scientific background. I don't have a PhD. I don't have an MD. But we can spend some time in Southeast Asia earlier and then most other institutional investors and do some legwork and develop a network, develop some relationships, and hopefully those networks and relationships

do pay off over time. So that's what it kind of made by complexity. We don't seek out complexity for complexity's sake. But when we do look at something like a vertical integrated business, we need to understand, like, do they have a hack? Is there something unique about this business that's going to give them a competitive advantage over anybody else. And otherwise, it's not obvious. But for those instances tell them that we prefer to wait. You know what I mean? Like, there are some investors, right?

Like, looking at $11 million shot string, they thought maybe it could be interesting. Maybe it could be good. But if they're good, they're still going to be good five years from now. And that's the same with us, right? So if we can't get our heads around, like, what is the unit level profitability of selling one unit of service or one good? And can we make money doing that? And is that replicable, repeatable, and scalable over time?

Then we're okay to wait until those are apparent. But if we can figure it out, we're willing to go into the study of businesses with above-average complexity levels. I've looked at your portfolio composition. I think the biggest thing that has changed is your size of the cash position. Maybe to put it in a picture, cash became from a friend of yours to something you don't want to have. Or how would you describe your relationship to cash? So full stop, cash represents for me, a call option on future ideas, as well as our existing ideas in our book. So every year the market sells off, no question, right?

Like the average sell-off in the market, if you measure over, you know, 50 years, the average sell-off in the market is probably about 13%. But even that, two out of three years, you still have a market that's positive. And that's a really neat feature. So there's always going to be an opportunity to back up the truck on our existing book. But when we started the fund, our original thought process was as follows. Cash is a call option on new and existing ideas, so we should always have some cash around because in the moment that we have these peak distress, like a March of 2020, we're going to have

the cash. But, you know, one thing that we've sort of learned over time is that our partners, when the opportunities are really attractive, our partners really come through for us. we're in close, active, productive dialogue all the time with our partners. And so we also, I mean, I don't have them in your relationship. So everybody has access to me. I don't have an IR. I don't have a marketing person.

I am the IR. So I'm the PM. You know, if the results are bad, it's on me. And our investors deserve to have access to me. So I wouldn't have it any of the way. And again, that's why it doesn't scale, right? It's not a scalable strategy. We might have bandwidth through 15 to 20 full stop.

in this current iteration, but that's what we're happy to do. So our relationship to cash has changed over time for the simple reason that we've just had a nice relationship with our partners, knowing that the balance sheet on our partners, or the cash on our partner's balance sheet, we could access when the opportunity becomes really attractive. And lo and behold, like in March of 2020, I didn't have anybody panic. I didn't have anyone withdraw. In fact, actually, we had our partners lean in.

And think about that. What a competitive advantage, right? And we don't have very, we didn't run with very much cash, right? So like we spent whatever cash we had and then we said to our partners, this is a really attractive time to come in. Okay. The other thing is just a quantitative exercise, right? Actually, like, so Cliff Sosin and I, we've chatted about this.

Think about this, thought experiment. You and me, we have the chance to buy a business for a million dollars. Okay. We can buy that today. And we can earn 250,000 in cash earnings today. Okay. Let's say that in a recession, we can buy that business for 30% off. So we can buy that million dollar business for $700,000 in a recession. But let's say like a recession, what, statistically happens once every 10 years? What if we get to year nine? And there hasn't been a recession until year nine. We've basically given up. earning millions of dollars of cash earnings just to save 300,000 bucks. So the arithmetic doesn't really make a lot of sense. And I sort of thought, like, in my head, that, you know, having cash on our balance sheet, that's like kind of market timing. And that's not what we're, that's not where we're hired to do.

We're hired to put our investors capital in what we believe to be the five to 10 very best ideas that we internally have researched and that we're willing to put our own money into. I mean, I have all my money in this thing. I don't have any other money. So I'm very, very happy essentially this being my PA. That, I think, for us, really just dawned on us over the years. So it's just a factor that we've had six years with the same partners, and they've always responded in the way that we expected them to respond. And then just the mathematics of waiting around for a recession to save 30%, especially for businesses that are growing and generating good cash earnings just hasn't made a lot of sense for us and you have to get the

nine ideas right you're invested in things should work out well and on that there's a question coming from justine with your expected three third hit rate have you found characteristics in the losers which have caused you to adjust your larger selection framework that's a really good question that it's been some time since where we had truly an investment that hasn't worked out. And the last time that we had made a mistake was we bought this position in TripAdvisor years ago. And we thought, we thought that there was a real chance with this instant book initiative that they were going to try to take some of their traffic. And TripAdvisor is a fantastic property, right?

It's the place where people go to read about hotels and restaurants and experiences and so on and so forth. Great, great, great little digital media business. And we thought there was a reasonable chance they could maybe convert some of that traffic, not to leads to other OTAs like Expedient Booking, but solve some of that leakage and keep it internally. We thought they could do that. But we totally overestimated the capabilities of this management team

to build that type of a marketplace because it's really hard. If you think about it, you have to scale up a marketplace with millions of alternative accommodations in all the major cities of the world. That's an enormous effort. It's a human capital-intensive effort, right? Expedia booking.com have thousands of people,

boots on the ground, whose job is day and day out to go knock on hotel doors and say, excuse me, can you join our marketplace? And it was like not necessarily an investment that TripAdvisor was willing to make. And it was an earlier investment. And that's also kind of why we developed some of these mental models and frameworks. Like how does a great vertical marketplace get constructed? How does a great horizontal marketplace get constructed? What's common?

And maybe we would avoid that mistake on TripAdvisor. But there's going to be a couple of reasons why a business exits the book. A couple of reasons. One, we just are dead wrong, right? So TripAdvisor, we're dead wrong in the thesis. They didn't become an OTA. And number two, you know, the other reason is like some of our businesses age out. So the most recent business that we departed ways with was Tencent.

And Tencent is an extraordinary business. We've owned that for some time, and the outcome was fine. But at $500 billion of enterprise value, it's just going to be really, really hard for them to generate outstanding returns. And for us, again, we have this bar. We want to try to annualize our investors' capital of 30%. Well, let's just say that Tencent creates $100 billion in incremental enterprise value this year. That's a 20% gross return on that Tencent position. Let's say if they're repeating that 100 billion of entry creation every single year, you've run into kind of the base rate effects that this business is so large that you just have a linear decay in the growth.

So sometimes, like, our businesses will just age out. I kind of analogize it to some of the investors I really, really admire, right? So, you know, I really admire Chris Hahn at TCI, but he's managing like $40 billion. dollars. And for him to generate a 20% gross return, and he's been extremely successful doing this, he needs to find $8 billion in incremental gross profits. And there's only so many ways that you can do that. But for me, I'm $700 million. I need to find $140 million of value creation to generate a 20% gross return. And there's so many different ways I can do that. So we don't necessarily have to limit ourselves to the largest companies. And so we're constantly maybe

seeding the portfolio every year with one or two ideas that we hope will drive. the portfolio's return going forward. But I'll tell you something, we've made a lot of mistakes along the way. I am a lot of like errors of omission, errors of commission that we didn't invest in, right? Like we'll like, we'll study something for some time. And the thing that we have to do here at the firm, again, with just very few people, we need to fail fast, right? We got to maximize return on time and effort spent. And that's why we like invested in these frameworks and these mental models just to help us like fail fast. So that we make fewer of these errors. of commission now we'll always make well we'll make them I mean just over time

where it is absolutely clear you very best investors like have 51% hit rate I'm aspiring to a little higher than that but again like we're trying to allocate all of our efforts to one or two really great ideas a year but that's that's kind of I think how how I think about where we're at today there's a question coming from Henrik from the chat, it's how do you decide when to sell or trim a position? You answered it partly, but maybe is there another aspect

on that? Yeah, it's a good question. So one, clearly if we're wrong, it's out. It's just out. We are quite KPI focus, so we have key performance indicators for each of our businesses. And we've been fortunate, as we scaled up, we've been able

to bring on and retain a data science service. So we have this external data science service that gives us some indication of what's going on in our businesses on a weekly, monthly, quarterly basis. So it allows us to kind of stay on top of the businesses and make sure that they're tracking according to the KPIs we set out for them. I mean, I'm long-term, but long-term is the summation of a lot of short-term accountabilities. So I think that if we're going to represent that a business is going to grow 30% annualized for five years, clearly there has to be markers along

the way that show that we're going to achieve that. I mean, if we underwrite something and we think it's going to grow 30% annualized, but then suddenly we go to like 0% growth or minus 5% growth and we're just totally dead wrong in the business model. Like, we're wrong. So we have to find ways to course correct in that circumstance. But then trimming and adding, I mean, that's been a real process too. I do want, I think this is worth actually an in-depth discussion because we've learned a lot about portfolio construction along the way. It's like probably one of the hardest thing that we do. So let me tell you about what we do.

And it's still going to be an evolving process for us. When I started the firm, I interviewed quite a few portfolio manager peers, peers of what I do. And it's also just like our partners, our institutional partners. I ask them like, how do you construct the portfolio? Right? Like why do you size like a position like X and, you know, to an allocator, I'll ask, like, why do you size a manager, you know, in this way? And it's hard. It's really

hard. The conclusion I drew is that I think a lot of people use gut instinct. And I think we did too, right? Like, we found ourselves doing it. In the early years, we were investing in like very high-quality businesses like Visa. And I feel more comfortable putting on like a 15% position in Visa. But I feel a little bit like ick investing in like a position like Just Eat, which is going to generate probably a far more superior return than Visa. Because Visa is a large company. And again, the base effects are going to run in, are going to catch up with that business. And Just Eat has this really long runway ahead of it to continue to grow supernormal growth. But why am I more comfortable putting Visa as a larger size and Just Eat as a smaller size?

Well, here's a reality. So most people, I think, do it by gut instinct. And what they're really probably doing is that they're trying to to minimize personal stress and not necessarily maximize return. So internally here, we spent, we spent some time really thinking through a portfolio construction framework. Because what I found with my teammates, we're spending a lot of time in our investor meetings, investment meetings, discussing like, well, you know, Visa probably should be like 15%. Tencent should be like 15% because, you know, like they just feel safe. And they're going to generate good returns. But let's like keep the, like, so like we had to hack, like, why do we feel that way? And, and, and we're, we could save ourselves a lot of time by just really understanding, like, why do we, why are we

so reluctant when rationally we're looking at, like, some businesses are generating much higher return than other businesses. So we came up with a framework where every single one of our businesses, when we underwrite a three to five-year return outlook or a three-to-five-year IRA, for portfolio construction purposes, we realize not all IRRs are created equally. And what do I mean by that? Some businesses are more predictable than others. Some business models are easier to execute than others. And some businesses, if they're based in China or India or Southeast Asia,

well, sometimes those can be pretty basket case economies. So we're going to invest overseas. We have to be paid. So for each of our explicit IRAs that we underwrite our three to five-year IRAs, we adjust them for portfolio construction purposes across three dimensions. So we think about the predictability of those cash flows. So I'll give you an example. So if we were to invest in a software SaaS business, that is a really predictable business, right?

So say like you have a customer who's willing to pay you $120 up front for a year's worth of service, every single month you recognize $10 of revenue. Very simple, very predictable, right? Ultimate. So at a score of 1 to 10, that'll rank very, very highly, right? But selling like a used car, that's pretty unpredictable. And it's really hard to know when somebody's going to be buying a car. So that will maybe rank lower on a score of 1 to 10.

That's, again, the predictability of the business. The second dimension is just the ease of execution, right? A vertically integrated business is just going to be much harder to pull off than a business that maybe like is like a food delivery app. So we'll rank order just a business against like the dimension of just the ease of execution. How easy is this business to pull off? And then the third area is just this catch on a macro, right? We're here in the United States.

U.S. dollars are home currency. We're familiar with the rule of law here. If we're going to invest in Southeast Asia, if we're going to invest in India or China, we need to be paid. So on a score of one in ten, there's a framework that we measure all of our IRAs. against. And then we have this adjusted IRA. And then we put this into a simple portfolio optimization model that we created internally. Usually for us, a starter position is a 10% position. And our rationale on that is that if you're not willing to put 10% of the firm's capital into the position, you haven't done enough work on the position. You don't have enough

conviction or it's not cheap enough. So it's 10% position or generally no position. And then we cap it out to about 20% at cost. So that's like kind of, that's the, and again, it's all dependent on just how attractive the business is from an IRA, an adjusted IRA angle. This is, again, just a straightforward quantitative exercise where I don't have to say, like, I feel safer making V's a larger position than Carvona a larger position. Well, now we actually have a quantitative framework where we can talk about in a fairly like systematic way, why we would size something in a certain way. Now, the other question that they asked was about trimming. Well, some businesses will do very well and become very large percentage of your portfolio. Generally speaking,

we are fairly realistic about the revenue earnings and free cash short trajectory of our businesses. So if the stock really, really runs ahead with no commensurate increases in intrinsic value, so no surprising increases intrinsic value, we'll trim it back. And that's the what our portfolio construction model will dictate for us to do. It's just common sense, right? A stock that goes up, a lot is much more risky than a stock that goes down, right? So like a $100 stock, you can lose $100. A $5 stock, you can lose $5. So for us, like we take a fairly pragmatic approach to portfolio construction because why, again, we're trying to maximize return on time and effort spent. So instead of like talking about kind of the abstractions of why

something should be sized in a certain way. We actually have some quantitative measures that actually help direct the conversation, I think, in a more productive manner, especially for portfolio construction. But isn't there the risk of over-optimizing? Of course. If you're just focusing on optimizing things because you have to get some ideas coming up, some insights that you can't optimize in a certain way. Of course, of course.

But you know what? It really helps us with like the outlier positions. So, for example, right? So we've owned C Limited for quite some time. And that business has twice hit close to 30% of our portfolio. We sized it at 20 because we thought it was a really exceptional idea. But every single time it went up, you know, the portfolio IRA or the position level IRA deteriorated. And we were not necessarily willing to hold like such an outsized position in something where we didn't see commensurate increase in

intrinsic value. Now, if scene limited was outperforming beyond our expectations, we may have more comfort in holding such an outsized position and have a reluctance to trim, but without a commensurate increase in intrinsic value and expectations blown out of the water, it behooves of us from a risk management angle to size. But you're absolutely right, right? We're not trying to over-optimize, but it's really to like create some guardrails as well as just a framework for us to have more intelligent discussions, more productive discussions than simply like, well, I feel safer with Visa being 15%. Or it also avoids these types of situations where one of our stocks has done really, really well. And we feel really compelled, just human natural moment. Sometimes human's

natural inclination is to continue to ride your winners. But then, you know, a stock, again, that goes up is inherently more risky. And so we generally try to. shy away from that and if we have sort of framework that is like rational and quantitative it uses some baseline for us to make those portfolio allocation decisions it minimizes some feelings that aren't productive in a certain way for instance here that's right there are some questions from the audience coming in and i'm also happy about more likes because we only got sick so please have the like button um it seewitz is asking a question about uh chinese equivalent of kavana have you found something my friend um stephen who's a very talented investor focusing on china stocks

based in toronto he claims that there's a really great business in in mainland china in the lower tier cities focus on luxury cars it's actually a very traditional dealership, brick-and-order dealership. It's called China Maidong. And it's a really neat company. We haven't quite got there yet. We're still doing our work on it. The founder is an MIT-educated engineer, and he's really neat. He writes these really great letters. You can actually just go to the website and download the letters. And I have to tell you that I thought Carvano is really good, but this May Dong is pretty exceptional. And I like the engineering mindset that this founder has brought to this business. He still owns like 60%. He and the founder

own like, he and his family own like 60% of the stock. It's not a big company. But I think from a, we have not invest in it. So that's the caveat. And I'm not making any recommendation to invest in it. But I think, I think that there's a possibility. You know, the thing about China, which is really interesting, is that there are many traditional businesses, the traditional kind of compounder businesses like CPG businesses and so on and so forth. That, are growing very fast. Just the structural growth of those businesses are already just the baseline growth is like 20 to 30 percent annualized. Because you have a, what's powering that is like kind of the structural consumption upgrade theme.

So Chinese consumers are getting richer every single year and they're desirous of packaged goods and professional goods and less informal type goods, but more like branded goods and luxury items and so on and so forth. So in some sense, like in mainland China, and I think that it's kind of be an area that I think we focus continuously our efforts in finding some of these really outstanding franchises, you don't necessarily have to look at like the technology companies to find some really terrific returns because just the most, if you think of the equivalent of like Nestle in China

or the equivalence of some of these like branded CPG companies, that many, many investors like in the develop world, some of these like fairly traditional businesses are generating the kind of growth rates that will meet our hurdle rate. Interesting. There's another question from France, best wishes to Austria, France, and has to have you on.

Only if you want to answer that, so you're free to answer, which one of your businesses is the most shorted on the market and what makes you comfortable owning it. I like the question. Yeah, that's a great question. I mean, so the hallmarks of a Shaw Spring investment, ecosystem control or high quality, a 30% IRR, and there's often some kind of mystery. And that mystery can come in a couple different ways.

So sometimes when you look at a company at face value, it'll look like an absolute disaster. And that was very true with a number of our businesses, like most notable Carvana, right? So you look at the, when we looked at this like a couple of years ago, we looked at the income statement, I thought, gosh, this is the short. I'm absolutely certain this is a short. It's a car vending machine company. It's like garbage.

And at that time, like I was looking at the financial statements, and I was like, good, God, this is a cash-burning dumpster fire. So. In German say, boom's budd. So what I like about our businesses is that sometimes there's some kind of mystery. And the unit economics are not necessarily apparent from looking at the financials at base value. So there's a bit of digging that's involved. So that's one form of mystery.

And then another form of mystery is like there's often kind of like this hidden asset. So when we invested in IAC in 2016, so four years ago, we were investing in this holding company. So this Barry Diller's holding company. We're investing in a holding company for their stake in match group. which is the holding company for all the major dating franchises all around the world. And then within inside Matroop, we were really investing for Tinder. And that time, Tinder, we were assessing the financials. There's at a $50 million revenue run rate, not making any money.

We thought reasonably, like, this could scale to maybe like $300, $400 million and become profitable over like the three or four years. Boy, were we wrong. So that business did like over a billion in revenues, like 70% gross margins, probably like 50%, 60% operating margins if they weren't investing. It's an extraordinary franchise and still growing really fast. And so I think that for us, a classic shop-spring investment is one where we can really assess ascertain ecosystem control or high-quality characteristics, a 30% IRA, and there's often some kind of a mystery.

Oh, the other form of mystery is sometimes, sometimes there's like a larger player that seemingly is threatening this franchise. So an example is as like Just Eat. So years ago we invested in Just Eat. At that time, we took advantage of a dislocation because there's all kinds of narratives. Like Amazon was entering the market and Uber was going to destroy them and Deliveroo was like destroying them. But, you know, a lot of real franchises, a lot of really terrific franchises, especially like the marketplace type, when you have kind of that first mover advantage and you've seen. established yourself as a dominant marketplace, you can be a good business for a very, very long

time. And it's very common that the narrative that you're going to get Amazoned, it doesn't necessarily, it doesn't hold a lot of truth. I mean, I'm going to say something really controversial. I don't even know if Amazon's really that good at e-commerce. I think what they've built is like pretty exceptional in the United States, but within that context maybe what Amazon's been able to do in the United States is so notable because all of the competitors

are so weak. I mean, who is their competitor that's except Walmart? So if you think about... If the Chinese Internet space is more competitive in this matter. Oh, absolutely. Absolutely. I mean, Amazon was a very dominant

company in the early years of China, Chinese Internet. They, I think, had a third of the market at one point. Now they barely even register, not even 1% market share. So, and then even in Southeast Asia, you know, they've had some fits and starts in Southeast Asia, but you don't really hear about Amazon as like a heavyweight in Southeast Asia. And maybe India's interesting, could be interesting. But I'll tell you that the, when a big guy, when a big player is entering a market that impacts our business,

oftentimes those narratives are are overstated and it's it behooves of us to pay attention when a especially for a new idea that we might be looking at if like a big player is quote unquote entering the space it may behoove of us to pay attention because their ability to come in and really disrupt the leader the category leader i mean facebook dating same thing a couple years ago there was like this narrative that facebook was going to take two billion users mine all their information, and they make the perfect matches for people. And that makes sense, right? They have all the data.

But nobody wants to date on Facebook. And it's a little bit creepy. So, you know, that time when Facebook made that announcement in dating, I mean, matchstock went down. And that was not a great day for us. But when we really thought about it and really underwrote, can Facebook really make an impact and disrupt what Tinder has built? it was kind of a long-tailed probability for Facebook dating to be successful when you really just thought about the attributes that make a really terrific dating platform.

So I hope that's helpful. I think so. Otherwise, Franz can ask another question. I think it's also about incentives because in the smaller company, you have higher incentives to grow. And it's also the careers of the people in the company also betterly, affected by this than if you're at Facebook and only have a smaller part of a big business.

I have one question on how you discount political risks because you said, I think it's attached to the idea of getting paid for investing outside the US. That's such an interesting question. So I'm not sure like what context, in a U.S. context or the Trump administration or we're talking about like the Chinese Communist Party in China. Well, I have a couple of reflections on this. China is a remarkable place to be an investor because in some sense, yes, it is a very closed ecosystem. But within that ecosystem, there is an incredible capitalist dynamism. If you think about it, you know, Jeff Bezos has this concept of it being day one.

at Amazon. So the first day at Amazon, right? Amazon's day one and the excitement and the fears and the paranoia that other guys will come in and try to take your business. It's like day one every day for everybody in China. You have to be paranoid. You have to be a hustler, right? It's been remarkable. I've been like looking at Chinese stocks since like 2005. So it's been like 15 years. And it's a remarkable place to invest. When you think about it, it can be like one of the most entrepreneurial, one of the most dynamic places to invest because like if you have a good idea, chances are good that 50 other entrepreneurs have the same idea and have raised hundreds of millions of dollars, if not billions of dollars, to chase after that idea. But in that context,

if you out hustle, out work, and then you create a business, and by the way, the margins get competed away so quickly. I mean, it's funny, like, one of my friends who is an avid investor in China basically tells me that when an entrepreneur tells you that something's going to happen in the long term, what do you think, Tillman, like, long term means to you? What's the time span? 10 years? Five years? When an entrepreneur tells you long term, it means like 18 months. So if he or she hasn't figured it in 19 months, they failed. So there's often quite a very fast validation of an investment or a business strategy in China. But I want to just answer the question directly, right? And I'm going to answer it like a little bit more of an out-of-the-box way.

So, you know, a lot of investors ask me, aren't you worried that the Communist Party is going to screw up Tencent or Alibaba or JD. But, you know, it's been like probably over 20 years since Tencent, which was one of the first companies to go public. And they've had 20 years and they've had like relatively little interference in Tencent's affairs since that time. That seems to be a pretty good track record of non-intervention. So sometimes the question I have is that should I be worried about the Communist Party messing up Tencent and Alibaba? Or should I be more worried about the European Union breaking apart Amazon, Netflix, Amazon, Facebook, and Google? And it's really hard to say. It's really, really hard to say. So I think that for us, like, I absolutely think that if we're going to invest overseas, especially in an emerging market country, where it's not our home currency, not our home rule of law,

not our system, we have to be paid. So a 30% IRA is typically the bar for inclusion into the portfolio here in the United States. For anything we're looking at here in the U.S. or maybe even Europe, it's about 30%. But if we're going to invest in Latin America, Southeast Asia, China, that IRA has got to be materially north of 30%. Because when we do the adjustment factor for portfolio construction, that explicit IRA, the unadjusted IRA, gets adjusted quite a bit downwards. just given the quality score that we put on the macro front against that IRR. So I hope that's helpful and answers the question. I think so.

We are in 2020 and this is kind of a while here. And I'm curious what comes in the next month. There are still some left. So we have to be patient. Do you have already indications on how this year and the coronavirus infected that your business is your owning and what can tell us about that? It's been an amazing year

from analyzing in that angle. It's been a pretty unprecedented year, right? So what you had basically over the first part of this year is effectively governments all around the world declaring eminent domain over their own economies. Basically you had like one of the largest demand shocks

you've ever had in history, right? Economic history. And economy is also shutting down freely because people stayed at home and it wasn't only government. It's pretty amazing, isn't it? Never seen anything like that. So I will tell you that it's been a remarkable year. But the thing is that many of our businesses are quite interesting because they often are, are sort of the epicenter of disruption anyways.

So whether it be e-commerce is the disruption of traditional brick-and-mortar retail, whether it be digital payments, the disruption of cash payments and other traditional forms of money transfer, or even mobile games, right, competing for consumer attention from physical world activities to virtual world activities. So in some sense, like when I look across our portfolio, we had this like portfolio largely of mobile gaming, e-commerce, and digital payments. almost the kind of like a very interesting pandemic portfolio.

And I'll tell you, though, when everything sold off in March, right, and everything sold off, none of our stocks were immune. Like we had a very, very tough March, right? One of the worst 30 days of performance, 31 days of performance in the history of our partnerships in six years. But you know what, though, when you look at the businesses, putting the stock price aside, right? Because if the businesses are intact, we really thought about it in three different ways. Like we assessed our business across three different dimensions.

So we had a portfolio of eight stocks, and we assessed each of our businesses across three dimensions, right? And so we were in touch with each of our managers. So that's the benefit of forming long-term relationships with our portfolio companies. You get to know their managers, and they give you access. and we spent a lot of time with our LPs, our limited partners. And for me, I thought about just from an investment angle, the world in three ways. For each of our positions, it gave us an opportunity really to re-adjudicate and reassess, like, are these the companies that we really want to continue to hold, right?

Because, like, you have this unique opportunity to course correct if you want. And so we assessed, like, our business across three ways. So one, the most obvious thing, you know, we're fiduciaries for our partners. We want to avoid permanent capital impairments. And I think about the world, I think about this term permanent capital impairment, very simplistically, is the stock worth zero. So in an era or in a time period where there's an extended one year, 18 months, two years of zero revenues, zero revenues. Does this business have the liquidity and the balance sheet to make it to the other side and have the equity still be intact, be worth something?

And with each of our businesses, that was true. And so then the next level is we have these long-term thesis. And we have this thesis that this business is very high quality and it's capitalizing on a certain opportunity, e-commerce in Southeast Asia, or selling used cars in the United States in a digital format or online dating and so on and so forth, is that long-term thesis intact? We can accept that revenues and earnings and free cash flow might go down this year. It might go negative. But if we come to the other side, is that thesis still intact, right? Are we still going to be a very dominant business capitalizing upon what we wrote

as the long-term thesis for our business? And the third area, I think, is a very dominant business. And the third area, for us, which I think is probably really, really important, particularly in the context of we have a one chance, well, very rare chance to really make adjustment to the portfolio and take anything out and put something else in that meets this criteria. And this final criteria is, I don't want our businesses just to survive. I want our businesses to be improved. And I want our business to be even more competitively advantaged than when they came into this crisis. And there's this great quote by Andy Grove that I love, right? And I'm going to just paraphrase it because I don't have the exact quote, but it's like bad companies are destroyed

by crisis. Good companies survive them. Great companies are improved by them. We have an opportunity to buy anything in the world. We don't have to be married. to anything that we own at that time period. So every single position, why not, like add this additional selection criteria of having a business that is going to not only survive but thrive and actually become more advantage, be more competitive advantage coming out of this crisis, right? So I don't want our businesses, I don't want our managers to say, like, look, we're going to cut costs, we're going to trim down our expenses, we're going to shut off investing,

we're going to lay people off until we get a handle on this. I don't want to need that. What I want to hear is we're going to continue to push ahead with investing. We are really excited because this is an exceptional time where our business model shines. We're going to invest more to do more for our customers, to take care of our customers better. It's those types of businesses that I wanted to partner with. And I think that that's what made this period really, really unique. we don't often get sell-offs like this, right?

Like we get a sell-off like this, probably like once every 10 years. Like a massive sell-off like this. And at that time period, like, it's really just a chance to like reassess and re-adjudicate and take advantage of the fact that everything's down. And you now have a chance to really like kind of buy anything that you want. And why not buy those companies where everything's down, buy those companies that are going to take advantage of this crisis and become better businesses coming out of it. it than they were coming into it thank you i'm a bit sorry because we are hitting the 90 minutes hurdle

now and we're still having some questions but i think we should stop at this point and maybe have the chance to have you back on in a few months or something like this or if people want to reach out to you they are happy to do so i think yeah it'd be my pleasure i we always love connecting with really interesting people. I, you know, I'm a big believer in the adage. So Byron Wien has this adage, network intensely. This business requires a lot of luck. And there's no better way to maximize your luck than to know as many people as possible. So I love connecting with investors. I love connected with business people. So if there's something here that really resonates and you want to get in touch, I'd love to hear from you. And you're also on Twitter. Dennis Hong 17, I think it is.

It's the app. People can follow you. That's a great option. So thank you very much for the talk. Like maybe one question for the end. You like to post charts, a lot of charts. What is your favorite chart for 2020? Do you have one? Oh.

Maybe you have to retweet it on Twitter. Then people can find it there. Hey, Tillman, do you have screen share capability? I can. I think you can do it in a second. Yeah. This chart. Do you see it?

Yeah. This chart was so neat. So we created this chart internally, just to make the point that within this crisis, where all the economic shutdowns kind of happen, and what was really neat about this, it took 10 years in the U.S. to get e-commerce penetration from about 5.5% to the double digits. But then in the course of eight weeks through that shutdown, you basically had 10 years worth of penetration happen within eight weeks.

And it's like such a powerful illustration. We created this chart internally and got a little bit of notoriety. It was one of those charts that kind of went viral. And even I think the Shopify guys actually even noted it, which is kind of cool. Cool. But I think what's like cool about this is a lot of people kind of talk about how all these digital stocks, all these e-commerce stocks have really gone up a lot over the last like couple months. And if it's true that we entered a new paradigm, and there's actually

clinical psychology, a clinical psychology theorizes that eight weeks of habitual usage ingrains a habit. And if it's true, and, you know, many of these economies have been shut down for like eight weeks. And if it's, if that's true, then the trends that we've seen. seen kind of accelerate could have some persistency, which means that everything that you thought was going to happen in the out years, in the modeling, has suddenly been accelerated to the presence. So in some sense, like there's a real chance that the free cash flows and the earnings and the revenues you thought you were going to earn three, four, five years from now actually have been kind of brought forward into the present, which is why it's not surprising

to me that some of these stocks, these e-commerce stocks, these digital disruptors, these stocks have gone up a lot. And in fact, it could end up being that if we've entered a new paradigm shift, that these businesses could continue to be quite attractively priced from here on out. Is it interesting to watch? Because there's also the question if things go back to a lower level, but we will see. Yeah. No, it's definitely, it's definitely an interesting. Interesting. Yeah. Screen sharing.

Oh, did I stop sharing? Let me just make sure I stop this. There we go. Then, thank you very much. It would be great if you stay on for a second and to all the others. Thank you very much for joining us. If you liked the content, please leave like, a comment, or subscribe to my channel. Thank you very much.

Thank you very much, Dennis. Thank you, Tillman. It was great to be here, and I appreciate you making the time for me. Thank you. Bye. Bye.