Invest Like the Best with Patrick O'Shaughnessy - Brad Gerstner and Rich Barton – Thriving in Changing Markets - [Invest Like the Best, EP.197]

Starting point is 00:00:00 This episode is brought to you by Coifin, one of the fastest growing fintech startups. I discovered Coifin earlier this year when I asked Twitter for the best Bloomberg alternative, and the overwhelming winner was an intriguing new product called Coifin. Coiffin is a web-based platform that lets you analyze stocks, ETFs, mutual funds, and other assets all in one place. I now use it daily to track what's going on in the market, and I think if you try it, you will too. Coifin has tons of high-quality data, powerful functionality, and a nice, clean interface. If you're an individual investor, research analyst, portfolio manager, or financial advisor, you should definitely check them out. Sign up for free at coiffin.com. That's k-o-y-f-f-in.com. This episode of Invest like the Best is also sponsored by Assure.

Starting point is 00:00:40 Assure is changing the way investors manage private transactions. When we recently launched our own venture fund, positive sum, I found out my biggest investor used Asher to manage their investment. With Assure, investors can eliminate nearly all the admin cost of private investment. On top of that, they handle all the backend legal taxes, accounting, and compliance. When you outsource to assure, you'll have more time to nurture your investor relationships and do more deals. All of it with a straightforward one-time fee. Learn more and try assure for yourself at assure.com slash Patrick. That's a ssu-r.com slash Patrick. Hello and welcome, everyone. I'm Patrick O'Shaughnessy and this is Invest like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies.

Starting point is 00:01:29 that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaunicee asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaunosite Asset Management may maintain positions in the securities

Starting point is 00:02:01 discussed in this podcast. My guest today are Rich Barton and Brad Gersner. Brad is the founder of Altimeter Capital and is one of my favorite active investors. Brad and Altimiter were one of the largest investors in Snowflake in its earlier days and continue to invest in iconic modern businesses with an extreme focus. Rich has one of the most impressive resumes in the business world. He founded Expedia, Glassdoor, and Zillow. He's a longtime Netflix board member since before they went public.

Starting point is 00:02:28 He's a venture partner at Benchmark Capital and he gives back through the Barton Family Foundation. Our conversation covers Rich's power to the people strategy, Brad and Rich's perspective on taking companies public through SPACs versus IPOs and their perspectives on how to build a great company. This one is so fun, we even discuss how to come up with company names, talk about the importance of the Wizard of Oz, and explore the importance of big, hairy, audacious goals. I really enjoyed this conversation with two of the smartest people I know, and I hope you will too. So Brad and Rich, we're going to cover a lot of different ground, but we have to begin with how you two know each other? Who wants to begin with the story of how you guys met? I'll bet it's like

Starting point is 00:03:07 Roshaman. I bet it's two different versions. Hey, Patrick, this voice is Rich. Maybe Brad, you go first. Rich and I met in 1999. I was helping David Fialco and Joel Cutler do their first pre-general Catalyst deal in Boston. It was an online travel deal. I was at business school and Rich had started Expedia and we ended up building a platform that was a little bit of Shopify meets online travel. We were building booking engines for cruises and vacation packages, which really hadn't been done yet. So we ran part of Expedia's business on an outsource basis for them. And Expedia was taking off. And in pretty short order, Rich decided that this was going to be important to his business. And so decided that perhaps they ought to buy this company and make it

Starting point is 00:03:57 part of Expedia, which launches down a 18-month odyssey where Barry Diller, led by his head of M&A, Dara Kashar Shahi, would end up buying both businesses. What's your version, Rich? That's kind of it. It was pretty dramatic, though, Patrick, because while that deal for Expedia to buy NLG, while that was happening, that negotiation and deal was happening, two really wild things happened. One was Barry Diller bidding to buy Expedia. So Expedia in an M&A process for Diller to purchase Expedia, which was then a public company and take it private. And then the second thing that happened

Starting point is 00:04:40 during this negotiation was 9-11. It was pretty interesting because, as you know, most M&A agreements have what's known as a MAC clause, material adverse change, MAC. And it was some somewhat debatable whether or not 9-11 constituted a Mac for Barry and Dara to try to wriggle out of buying Expedia. So it was a pretty ambiguous, interesting time. I have to give Dara and Barry a ton of credit for just what my dad would call it. He said, kill the squirrel. Kill the squirrel means just stay on target, don't swerve. And Barry and Dara basically, Barry came out and said, look, if travel doesn't come back after 9-11, then we all got much bigger problems. Let's move forward. And so that deal happened and Expedia simultaneously bought NLG, and that's how Brad and I met. Brad and I clicked immediately.

Starting point is 00:05:37 There's certain people you connect with in a business context, and it's like you're dancing, strategically dancing immediately. Brad was has always been one of those people for me and I for him. So we've had terrific conversations and a lot of fun over the years too. What's behind that last piece? Like what is it about the instant click? Was it some sort of complementary strategic thinking? What drove that? From my perspective, the idea that while what we're doing is important,

Starting point is 00:06:08 it's but a small piece of this life that we're leading. And I always found Rich just to be insatiably curious about life, wanting to understand not only that which we're working on, but all the other things. So we spent as much time in those early days talking about the life journey as we did about the business journey and we're constantly trying to look around the corner.

Starting point is 00:06:30 And we spent that summer rich of 2001 before September 11th. I remember in New York and Barry was trying to figure out all the other things in travel that he was going to go by. It was really interesting, Patrick. The one thing that Diller figured out in the mid-90s is that these transaction businesses that he had been in, catalog businesses, ticket master, home shopping network, were all going to go on the internet and the economics were all going to get a lot better.

Starting point is 00:07:00 In many ways, it was the Cambrian explosion of e-commerce and online travel was the first thing to really work in e-commerce, sitting around and thinking about how this was going to impact all of our world. And of course, I think that a lot of the ideas we had were right. They were just 20 years early. When Rich and I originally met at dinner, my hope was that this podcast was going to get recorded at his sunrise bar at Burning Man. Unfortunately, we have to be doing it via remote. Since my listeners will have heard from Brad a bit already, Rich, I think some great framing would be a few of the things we discussed, most notably the awesome concept of power to the people. And this is a concept that's behind all your businesses or in large part behind them, but I think

Starting point is 00:07:41 it's just an elegant concept more generally speaking. Can you walk us through power to the people and sort of how you alighted upon that principle? I think that as we get older, we look back on our lives and our careers and our relationships and we kind of construct narratives that make everything fit together. I don't want to undermine the argument I'm about to make. But this is one of those things that I didn't really realize how I felt from a pattern perspective until the third or fourth instance of this. But my fundamental insight early on, I was at Microsoft.

Starting point is 00:08:12 The internet was new. Online services were pretty new. The graphical web had not happened yet. It was tasked with a small team of really sharp people at Microsoft with basically cooking up internet ideas. It was really fun. We basically turned loose on this problem by Bill Gates and said, look, what is going to happen as a result of everything connected,

Starting point is 00:08:39 all computers connected to each other? and then ultimately mobile devices, which we really hadn't contemplated yet. One of my fundamental insights, along with Lloyd Frank, who's my co-founder at Zillow, and was at Microsoft and Expedia and Zillow with me as well, was that a regular person armed with a connected PC that's plugged into the internet was going to, in effect, storm the Bastille, was going to be armed with a weapon to tear down every wall that's separate. separated that consumer from information that may have heretofore been withheld from them by industry

Starting point is 00:09:19 people who made a living based on withholding that information. It was pretty clear that that was going to be busted. We called it power to the people. Travel was kind of the first instance of that where I don't know if you remember, I'm sure you do, Patrick, because when we were young in our careers, booking travel was this incredibly difficult thing we had to go through a gatekeeper who typed on a computer. So you knew he or she was looking at a computer screen. Exactly. I remember, I was looking.

Starting point is 00:09:48 I got to go to Chicago, then Dallas, and then they get back. And I'm trying to use this very low bandwidth communication path through a travel agent. And I remember just wanting to jump through the telephone, turn the screen my way, and do it myself. Anyway, that is power to the people. Expedia came out of that. Glassdoor, I'm a co-founder, came out of that. Zillow came out of that same thing and several other things that I've invested. or been a part of have basically leveraged that same fundamental principle. We want power.

Starting point is 00:10:16 We want control. We will get it. What did that feel like in the early days? For example, like the Zestimitt's a good example of information given to people in high fidelity constantly without clacking on the other side of the phone, someone looking something up. Was that always intentional early at each of those company examples that you sat around and said we need to come up with what the information is and figure out a system to get it to the people quicker? Yeah, for Expedio it was simple access. Just let me see the schedules and prices and let me shop and dream to my heart's content because I will spend more time than the professional is willing to spend to get the schedule just right for me. With Zillow, it was about just providing information, but we were working on price discovery. We believed firmly that in the real estate market, price discovery was just clunky, super clunky. And our original idea was actually to run an auction, to actually have every home. be auctioned with that didn't work out very well. But in the process of playing around with that and testing that idea, we landed on the Zestimate, which is an estimated market value of

Starting point is 00:11:19 every home in the country, updated every night. Started out fairly inaccurate, but it didn't matter. It was provocative and it's gotten a lot better over time. When we lit upon the Zestimate, the light bulb went off for us and we realized we were onto something really new and special. Brad, how did you first encounter these businesses? I know obviously Expedia is near and dear, But as you watch these not just richest business, but other internet businesses that were servicing information, what was your assessment of them early on as an investing analyst mindset? Well, had I not joined David and Joel to do the online travel company we were talking about, I was headed to Silicon Valley to join a company I thought was already too big at a few hundred

Starting point is 00:11:59 employees called Google. Really since 1995, 96, when I was in law school, I was already like rich in an Amherst. with the idea of human empowerment through access to this information. And so Rich and I clicked on that subject very quickly. And part of the reason that we were early investors in Zillow and went on the board there was just this idea. I remember, in fact, sitting in Rich's office and he had put together a 75 slide deck about Zillow. And he kind of threw it down on the table. And he said, Brad, we don't need to go through the deck. It's a massive industry. It has massive inefficiency. here's the price.

Starting point is 00:12:39 You either want to be on this journey or you don't want to be on this journey. And we did it. And it was just an extraordinary journey. But one of the things about that, to Rich's point, the historical revisionism of the narratives. I mean, the entrepreneurial journey is so fascinating because in part for Zillow, they careened down a path of an ad supported model, in part because they were so wildly successful with this estimate. All of a sudden, you had a business with tens of millions of people, clamoring to get into your front door. And it was pretty easy in the first instance to put some

Starting point is 00:13:12 Google AdWords up against it. And then you said, well, we could provide some really powerful leads to the people in the ecosystem. And then you look at today, just now, really 10 or 15 years later, getting back to the business of total transformation of the real estate transaction process. I would say many of the early businesses, certainly in that first decade of the internet, it was dominated, as you and I've discussed, by the metaphor of search. And search was all about information discovery. And whether it was a vertical search engine, a horizontal search engine, it was about turning the screen around, giving it to the people. When Rich said that to me for the first time, it was as though we had always known it to be true. I want to come back to the next

Starting point is 00:13:56 transformation of home buying a bit later in the conversation. But before we leave this concept of transparency, I actually think it's an interesting segue into the first of several topics that we have plan, which is Altimeter Growth Corps and SPACs, more generally speaking. This is a topic that I think is fresh and so. Everyone's kind of scrambling to figure out where they stand on it. And I think there are certainly some negative connotations with SPACs from history. But I want you both to walk me through your logic and thinking around Altimeter Growth Corps where Brad, you're the sponsor, Rich, you're on the board, and talk through how this may be the way that you're doing it, an advantaged product, I'll call it, to offer to later stage founding teams as they think about bringing

Starting point is 00:14:36 their companies public? Well, our logic was actually very simple. We wanted to give the world's best founders and companies a better, a less dilutive, and a faster path to the public markets. I mean, remember, I started my career as a securities lawyer, and I'm just shocked that while the rest of the world has moved forward, over the last 25 years, if anything, the traditional IPO has gotten harder and less efficient. So like any good entrepreneur, we ask the question. What if we took the mechanics of a SPAC IPO, which has some distinct advantages, and married it with the full capital market capabilities of Altimeter? And we think it gives you the best of both worlds. I mean, at a minimum, there are clearly now three legitimate paths to an IPO.

Starting point is 00:15:25 You can partner with a bank like Goldman. You can partner with a sponsor like Altimiter, or you can do a direct list. and we think that banks do a pretty good job, but they operate in a pretty Byzantine system. I mean, think about this. It's a year-long process where you don't know the price for your shares or even who your shareholders are going to be until the end of the line. And you assume all the market risk during this time. And then, of course, the bank is very involved in the pricing and allocation of your shares, which Bill Gurley and others have argued leads to, chronic underpricing. But I mean, even if you don't think this mispricing is as big a deal, when you combine it with the bank's fees of 6 to 7 percent, this becomes very costly to the

Starting point is 00:16:17 company. And on top of that, of course, you can only give historical financials, which leaves most investors in the dark about a high-growth company's future prospects. Now, juxtapose that against partnering with Altimeter, where our principal goal is long-term ownership in your company and to do whatever we can to enable your success. We don't act like agents. We act like owners. We're totally aligned with you. So, I mean, we can get you public in a fraction of the time, reducing market risk. You set the price. You tell the story with forward-looking forecasts. We serve up a world-class group of mutual funds and hedge funds as your shareholders. You ring the bell. It's your IPO.

Starting point is 00:17:06 And while the day of the IPO and the day after the IPO are nearly identical as if a bank took you public, we don't charge your company a fee. None. Zero. All the costs are borne by the shareholders of the SPAC who gave us part of their shares when we set up the SPAC as a finder's fee for helping them invest in a world-class company. I mean, it's very similar to our VC funds where we get paid for helping our investors invest in companies like Snowflake. Rich, what's your perspective on all this as an entrepreneur? I think probably if we reround time, five, 10 years, this isn't something you would have considered for one of your companies, but a lot's changed very quickly with very different sponsors behind some of these vehicles. And this must be really interesting for you to watch from the

Starting point is 00:17:53 entrepreneur's seat, but also with a lot of experience as an investor. What's your take here? Patrick, in hindsight, I should have considered it. Even my last IPO, which was Zillow was 2011. SPAC was still a backwater and a little bit kind of sketchy, had a sketchy reputation. So it really didn't even hit my radar. But in hindsight, I absolutely should have considered it. I have some experience here with taking Zillow public. I took Expedia public.

Starting point is 00:18:21 I was on the board of Netflix when we went public. And so I have a good sample set, put it that way. here's how I think of it. And forgive me because I'm bridging into a little bit of a Zillow advertisement, too, but you'll forgive me that. But I really think the parallels are true. I actually have oftentimes gotten a chuckle with Brad and others about how the investment banking business does share some characteristics with the real estate business. And then I'm sure you can immediately see some of the parallels. But I will tell you that I believe the SPAC might be Zillow offers for getting public. suffer me to explain what that means for a sec, because a lot of people out there might not know what Zillow offers is. It's a relatively new offering at Zillow, which basically goes to a seller and says, look, I'll give you a fair price for your house. I will handle the renovations. You're going to be required to do before you sell it anyway. You can pick the date you move. I'll help you finance it. You can line up your next transaction, your buy transaction with the sell transaction. So you

Starting point is 00:19:26 don't have to move into your mother-in-law's house for three months, okay, while you do it. It basically enables a home seller to get price certainty, time certainty, and not have anyone traips them through their house, going through their closets, and using their bathrooms. So this is a new product that Zillow launched a year and a half ago. It's doing really well and is fueling a bunch of growth at the company. And I believe that it feels to me, my spidey sense is tingling, that a really reputable spec, I hesitate to even call it us back, but Altimeter Growth Corp, a really reputable group of people with a great board of directors and terrific cap table already lined up is a lot like that.

Starting point is 00:20:07 Just click your heels and get public. That's kind of how I think of it. I don't know how it'll all end up working out, but it feels like potential innovation to me, and I like innovation. I know you've both been on calls with investors into, and prospective investors into Altimeter Growth Corp. What's been the most interesting or surprising observation you take away from that experience, which you did over the summer? First, let me just say, you see right there why I love being around Rich.

Starting point is 00:20:34 I mean, the comparison to Zio I would have never made, but I think it's really interesting. You have two agents, each charging 6%. They're both working in a traditional process. Most people don't even think about whether or not there's any way you can change said process. And when I went to Rich and when I went to Devicharia, who's been involved in five traditional bank-led deals, and I described the opportunity to innovate, to build something better on behalf of the entrepreneurs that we've spent our careers serving, partnering with acting as, it meant a lot to have them jump on board and say, listen, if we do this in the best way,

Starting point is 00:21:14 we can be in service to those entrepreneurs and we may actually advance, really advance the cause for the entire ecosystem. Specifically, though, Patrick, as to your question, what have the surprise has been? I would say two things. One is the voracious appetite today for all boards, all CEOs of these companies to investigate what Gurley has called the three doors, door one, door two, door three. I don't think there's any company thinking about IPO readiness who won't have slides in their deck that are now actively considering.

Starting point is 00:21:49 all three of those. But on the other hand, is just how early we are in understanding. There's just a lack of understanding about how SPACs work, how they're different, what it means for votes to be withheld, certainty versus uncertainty. My own sense is that the sponsor market will evolve in much the same way the bank market evolved. If you're a tier one company, you would never consider choosing a bank to take you public that nobody's ever heard of, even if they come in and say, I'll do the deal at 1%. You've worked too hard to get to that point to associate yourself to take the risk on a bank nobody's ever heard of. So you're going to go with Citi or you're going to go with Goldman or Morgan Stanley, et cetera. On the SPAC sponsor end of the spectrum, every retired

Starting point is 00:22:41 exec, every former entrepreneur, every former sports player, actor, now raising a SPAC. I think that there's room in the market for those SPACs for companies that would otherwise have a hard time getting into the public market. Because frankly, they don't have a lot of choice, just like those companies would also choose a bank you've never heard of. But if you're going after a tier one company in Silicon Valley, I ultimately think they want to associate with sponsors. I think the sponsor market will evolve in the same way the bank market has, where you'll have a handful of sponsors that really invest in building a problem. product that works for entrepreneurs. I think that crossover funds and you know the brands, but there are a handful of crossover funds where I think we're well positioned because I'm agnostic as to how a company ultimately chooses to come public because I can invest in the company as a

Starting point is 00:23:34 private investor. I can participate in a traditional bank led process or we can help them with our own infrastructure getting to the public markets. And to me, it's about innovation, it's about choice, it's about competition, in a way. that allows us to better serve these entrepreneurs who we partner with. And we just want to own parts of these iconic businesses that are going to grow in value over time. Rich, Brad said something really interesting there, a phrase value add investor. I'm really curious how you would define what that actually means at the private market stage and public market stage and whether or not that's different at all, having experienced lots of, I love how you refer to the best investors

Starting point is 00:24:13 as high octane fuel versus regular fuel for the engine. What does that mean? What does that concept means from the entrepreneurial side, value add investor, public or private? Ignorant or younger or new entrepreneurs sometimes think that all money is equal when you're raising money, especially at your first round and your later round. You think, oh, I just want to get the best price. Money is money. The ones who choose the wrong money learn pretty quickly of their errors. Company building is craftwork. It is not mass production work. When you pick money, when you you take money, you're actually taking a partner. Early on, it probably matters the most, but honestly, it matters at the IPO too, or the SPAC. It really does. One of my issues with the

Starting point is 00:25:01 traditional IPO process is that it basically randomizes your cap table, so your list of investors. It randomizes it for about two years. On the six months leading up to the IPO, things get all squishy, who's in, who's out. And then for pretty much 18 months after the IPO, you have this kind of parade of journeymen investors who were mostly looking to make a turn on your stock to flip your stock, faster money type people. And it's not until 18 months when the lockup comes off and you've already done your secondary and things have calmed down that now you begin to build your cap table for the long term. And that's not healthy for a business, Patrick. It's not healthy to have this parade of ever-changing investors who are all asking the same. same silly questions of the leadership team. That is one of the things I like quite a bit about both the direct listing and the SPAC route.

Starting point is 00:25:54 A company that's considering Altimeter Growth Corps as a SPAC already has a pretty good idea who the long-term shareholders are going to be. And there will be some transition at the SPAC because there will be private investors who seek some liquidity at the IPO. They can do that a whole lot more easily and with a lot less drama in a SPAC scenario. in a SPAC scenario than they can in an IPO scenario. It is like a big, this whole lockup thing is a really big deal for private investors and for management and founders, by the way. It really doesn't feel fair. Like so many parts of the IPO setup, it just does not feel fair. And so that's

Starting point is 00:26:33 one of the problems that get solved here. I'd love to transition to talking now about, I think, all of our favorite topics, which is the art of business building and what makes for great businesses. Rich, when we first met at dinner, I think I had maybe one too many Manhattan's. And the next morning, I woke up to an email from myself saying, ask Rich about the Wizard of Oz and Pygmalions. I've chosen to not look those up until now because I had no idea what the hell I was writing. I'm hoping that I didn't make those two concepts up. Can you tell us about the Wizard of Oz and Pygmalians? All right.

Starting point is 00:27:07 Well, we'll start with the Wizard of Oz, which probably more people are familiar with out there. in your podcast land, then Pigmalion. We can get to Pigmalion. But the Wizard of Oz is a device that I use when I talk about leadership and entrepreneurship. And how do you recognize future great entrepreneurs or future great leaders? The shorthand is the three characteristics that the seekers and the Wizard of Oz were seeking to follow the Yellowbrick Road to the Emerald City and have the wizard grant them. What did the cowardly lion want?

Starting point is 00:27:41 courage. All right, courage. That's number one. The scarecrow was seeking if I only had a brain. He was seeking wisdom. And perhaps the most important seeker of all is that poor tin man who didn't have a heart. That is my shorthand. I use this actually in my everyday business life as I think about people. Do you have the right mix and the right balance of courage, smarts, and heart? And I believe those three legs of the stool, the leadership stool, need to be in balance. One can't be too much greater or longer or shorter than the others. Otherwise, the stool tips over. People who are too long of courage and short of heart and brains, we kind of picture some people like that. Likewise, we can picture people who are too smart. Don't have enough courage. We probably have people springing to mind right now

Starting point is 00:28:34 like that. And so it needs to be in balance. Anyway, that was, I think, I don't know if I was making the Manhattan's, but I'm sure I was drinking them too. That is the drink my grandfather drank and my father drank and I started drinking it in homage to them. And now it's just a wonderful way for me to have a cocktail unwind and pay homage to my granddad. Anyway, so, and now Pygmalion is the other concept you asked about. And this kind of is connected to the B-Hag. Is that Jim Collins, the B-Hag? Yes. Okay. So the B-Hag, big, hairy, audacious goal. Take a man to the moon. within the decade and return him safely to Earth. A computer on every desk and in every home running Microsoft software.

Starting point is 00:29:19 When these words were said by JFK or by Bill Gates, they seemed patently ridiculous at the time. These are bee hags. And yet, we humans have a way of rising to expectations. We have a way of having these be hags be self-fulfilling. Because after the initial shock of saying, That's impossible. Smart people then sit down over a beer or Manhattan or a cup of coffee and they say, well,

Starting point is 00:29:46 what if we could do it? How would that work? I've got an idea here. Okay, so we're very inventive species, especially in groups. We get these things done. And that refers to an effect sociologist, psychologist called the Pygmalion effect. And this is a recurrent theme in literature and movie of the artist. Pygmalion was a Greek sculptor.

Starting point is 00:30:07 And he sculpted a woman in marble so beautiful that he fell in love with her. And because he fell in love with her, she came to life. Can you name me an 80s movie that that brings? Yeah. Weird science. Okay. So I'll jump to it. Weird science.

Starting point is 00:30:22 Probably not many people out there have seen that. Go see it. It's pretty funny. Anthony Michael Hall. But my fair lady is that story. Pretty woman is that story. Anyway, it is a recurrent theme in literature, the big malian effect. There you go.

Starting point is 00:30:36 All right. So I wasn't crazy. I'm glad that I, I'm glad I emailed myself and followed up. Brad, it raises five interesting questions from the investor's perspective. Rich you mentioned earlier on the board of Netflix. The book just came out from Reed and the major takeaway from the book was this concept of talent density, especially early on in a company's history. Brad, since you're often now looking at companies relatively early in their history, how do you interpret these same two ideas of the leadership mold at businesses? Maybe we could talk about Snowflake, which has been such an interesting example of kind of unique

Starting point is 00:31:08 leadership and these big, hairy, audacious goals. I think that we referenced on the podcast last time. Rich once said to me, I think you're going to make a better investor than entrepreneur. I asked him why. And he said, because I think you lack courage as an entrepreneur. So clearly we know where Rich thinks I come down on those three things. I think what he said at the same time was that sometimes as an. entrepreneur, you have to over-indexed courage. You have to think about the world that you wish to

Starting point is 00:31:39 exist, not the one that does exist. As investor, I'm constantly looking at distribution of probabilities that those outcomes will in fact be achieved. One of the litmus tests for us when we consider any investment opportunity is, as we've discussed before, the size of the prize. Let's assume that everything you're telling me to be true becomes true. How big is the outcome? How big is the impact on the world? And clearly, man on the moon, computer on every desk, those are very quickly understood. And when we started thinking about the biggest trends, this was almost a decade ago, the post-internet trends, the explosion of data, and how we make sense out of data to yield useful insights. And in the First instance, it's just like, where do we put the data? How do we move the data around? How do we make

Starting point is 00:32:36 sense out of it? I mean, I remember when I was CEO of NLG, just having a system like Cognos that could give me a report the next day of what we actually sold the day before felt like magic. Obviously, 20 years later, we want machines to be analyzing all the data in real time. And we want the machines to make real-time adjustments to what I'm seeing on the Zillow mobile app or what I'm being merchandised on Amazon.com to enable all of this in a world where we were going to have more data created every year than in all prior years of human history combined. And where the tools around machine learning and artificial intelligence were very quickly going to be more intelligent at merchandising what should go on the homepage of Amazon than the most sophisticated

Starting point is 00:33:25 merchandisers who had 30 years of experience, it seemed to us all the infrastructure that would allow you to put that structured and unstructured data in a place in the cloud, access it, move it around seamlessly, and then really analyze it in a compelling way on the front end. So in the first instance, that's reporting. We were big investors in Tableau. But increasingly, that's about having intelligent bots that are combing through the data and providing suggestions or, in fact, just taking the actions. And so machines talking to machines, moving data around, that's been a central thesis around Snowflake. And when we looked at the team that were building that, the founding team, Benoit, Tiri, I mean, they had built it at Oracle. They just had a very

Starting point is 00:34:18 clear vision that the cloud was going to allow an architecture for storing, moving, scaling, and sharing data that was fundamentally different than anything that existed. And it was pretty clear to understand if they were right that the size of the prize was the biggest prize in all a software. And I still think that most people, you know, Jim Kramer wakes up every morning breathlessly and tells us that Snowflakes training at 100 times next year sales, no growth investor would listen to that and think that there's anything unusual about a company growing well over 100% in the most strategic location of all of software, 12 months forward multiple of sales is somewhat irrelevant to me. How big can this be? And anecdote after an anecdote,

Starting point is 00:35:06 this weekend, I was with the CEO of a software company, said, we started using Snowflake. We signed up for a $250,000 consumption contract that we thought would last us for 12 months. we burnt through it in two months, and our engineers love the product. We can't get enough of it. And ironically, even though we just quadrupled our insertion order, our contract, we're shifting workloads out of other places. We're dramatically simplifying our data infrastructure. So if you listen to Frank and the team today, in 2002, Capital One named a chief data officer. And I think there were the first Fortune 1,000 company to do so. In 2020, 57, percent of companies have chief data officers. This has become a strategic initiative by the largest

Starting point is 00:35:54 companies on the planet who understand that data is oil and Snowflake sits at the center of the operation to help those companies turn it into a strategic asset. Do you say a bit more about what you've learned about Frank's leadership style? He published this, I think it's a couple years old, but this fascinating article. His book is great too. Tape sucks. Awesome book for anyone looking for something interesting and different. The leadership style seems very different. It's aggressive. I would almost characterize it as military-esque or something. Can you talk about what you've learned about his leadership style, Brad? I'll talk about it in the context as well of Bob Muglia, the first CEO of the business.

Starting point is 00:36:31 Bob is an incredible product visionary, wrote some of the first lines of SQL server, really helped to build a vision and a narrative for the company that got them to significant scale. I think with that scale, it was pretty clear that you were going to have a business worth, let's call it, $10 billion enterprise value. Frank came along and said, I think we can take this company to a place that is much, much bigger. But we're going to be competing with the largest software companies in the world. In order to do so, he almost has a military-like style.

Starting point is 00:37:09 Anybody who knows him, it's a blue-collar approach to business. He doesn't much believe in massages. and lattes, but not because he's against massages and lattes in Silicon Valley. It's more because he has lived through market cycles where things get really tough. And he knows that there are market cycles and product cycles where you will be able to push the advantage if you've had the discipline during the good times to keep working out. It's like the professional athlete who doesn't get lazy just because they're winning. He's had an undeniable impact. And if you talk to really the diaspora of people who've worked with Mike Scarpelli and Frank Slootman, they're all cut out of the same cloth. I think it's

Starting point is 00:37:56 back to Rich's trifecta. I think they have those imbalance. And the B-Hag that Frank Slutman is laid out for that business is extraordinary. He thinks they should be the principal data architecture, that strategic data solution for every company on the planet. It makes me think of this. courage of your convictions idea and back to this idea of courage again. In the trifecta there, heart and brains seem to me more straightforward. Courage is kind of the most interesting. Rich, I'd love to put that word to you personally through the lens of some of the things you've done as leader, maybe of Zillow as an example, to the pop to mind or the acquisition of Trulia and this pivot of the business or engagement in this idea of eye buying, which you've already

Starting point is 00:38:36 talked about a little bit. Those are two huge, big strategic decisions. I'm sure there was a lot of uncertainty in each case. Talk me through how you as a leader of a business kind of worked through those things and whether or not and where courage became involved. I guess the first thing I'd say is an observation that it is easier for founder-led businesses in general. This is not 100% but in general, it's easier for founder-led businesses to make big, bold, what might be called, courageous decisions that are clearly bets on the long term with some obvious negative ramifications for more short-term-oriented shareholders in the short run. We're lucky to have set things up at my companies in a way to enable us to have to have

Starting point is 00:39:32 a governance structure that can actually continue to take those big bets. To the fundamental, I think making big bets like the Zillow offers bet or the truly acquisition, the Zillow offers one is more recent. It was going to require a large amount of capital, get us into a highly operationally, geographically distributed, operationally logistically difficult business, completely new for us. We knew we had to build all kinds of new skill sets and bring people from real estate, operations into the company and real estate finance into the company. We knew we had to start a mortgage business as well because our vision is to make this a one-click seamless invisible

Starting point is 00:40:12 transaction, kind of a magic transaction, just like all other e-commerce. This was a big bet. But to us, I guess I would view it. Well, first of all, it's good to have co-founders. It's good to have a team. It's really good to have a team of smart people. And I'll put Brad in this category of that support structure of people that I can balance ideas off of. I actually will give Brad some real credit to kicking me in the pants on this opportunity a little bit and then my co-founding team to be able to give us all the courage to hold hands and take the step together. But what it boils down to is just like an A-round investment, Patrick, or any investment that you're making. I would shorthand a venture investment as Tam, team, and to a lesser extent timing. It's really about Tam and TAM and

Starting point is 00:40:59 team and what we saw with these big bets was opening up a huge chunk of new land, new blue ocean, new total adjustable market for us to go into and highly confident that we could put a team in place to go after that. For a more mature company like Zillow, it was also a lot easier for us to do that given we already had 200 million users a month coming to the site. So I knew fundamentally our customer acquisition costs would be lower than any competitors because we could redirect. traffic. And so together, we had a group of people that made that decision together. What did you learn most so far about the differences between getting into kind of the real world, the physical world, versus more purely digital businesses that you had sort of managed before?

Starting point is 00:41:44 Any major learnings there thus far, realizing that it's early? When you have 93% gross margins, which is our media business and most of my other businesses, that can spackle over a bunch of kind of, let's say, not. super airtight operational practices, right? It can cover up for a lot of inefficiency. Getting fit, that's what we called this push by our new CFO, Alan Parker, who came to us from Amazon. He came in and he said, we need to get fit. And it feels good to be fit. And you feel lighter and stronger and faster when you're fit. It began a process of getting fit. We recognized we didn't have the expertise, a lot of the expertise in our midst. And so we were very aggressive about,

Starting point is 00:42:29 about pulling in real talent from other industries, from people who've done this before. So for example, to start ZO, we tapped a fantastic guy named Eric Prower and his team of people who had built one of the precursor companies to Invitation Homes, which is the largest single family rental reet. It's a public company, Invitation Homes.

Starting point is 00:42:53 He at Colony and his team had bought 30,000 homes, bought and managed as rentals, rentals, 30,000 homes and finance them. Here is a guy and a team who had done it before and was a good cultural fit with us. And so we brought him in. We brought many other folks, a really terrific leader from the mortgage industry to start our mortgage and finance operation, bringing in outside talent, having the courage and the humility to recognize that in the next phase, you're going to need a different kind of team and a different kind of person and then going out and getting the best is a very important part to success through transition.

Starting point is 00:43:34 Brad, I'd love to hear your take on some of these ideas, Tam, team, timing, fitnesses. I love this idea of getting fit. What company or episode does that make you think of? And what is your take on what I'll call a transition from these incredibly high gross margin businesses? I don't know what snowflakes gross margins are. But as you survey the landscape today, arguably prices are somewhat rich in certain spots. How does the idea of fitness apply to your thinking for your portfolio? Well, what we just described at Snowflake, if this is about fitness, then Franks Lutman and Mike Scarpelli are the Arnold Schwarzenegger's of fitness regimes, because that's precisely what they're talking about. Fitness enables you to take risks

Starting point is 00:44:20 that you would not otherwise take. You can surf a bigger wave. if you're fit. I think what you hear Rich describe is something really interesting. It's a second founding moment in the history of Zillow. They had built an incredibly successful $10 billion business that, frankly, in an ad-supported model, as these things go, is when you have tens of millions of people showing up every single day, this traffic didn't cost them a lot. They had built this extraordinary brand, right, you can get lazy in the comfort of that business model. And I remember the conversation with Rich that there was more to do. The original dream was not fulfilled.

Starting point is 00:45:04 You had not transformed this big industry. This big industries, as bad today as it was the day we started the business. And so I think for Rich, the opportunity and Lloyd and an incredible team that's been together all the way back to the Expedia days, for them to really have that second founding moment to reinvent an industry again, it was fun to watch them get re-energized about doing something that was they had a right to play, but they had to go rebuild, retool the entire business in order to take advantage of that. The founding moment concept makes me just want to go back to talent density one more time. I kind of glossed over that term. This concept, as I was reading that book, I'll never see

Starting point is 00:45:49 book cover and not just think talent density again. Rich, in the early days, what does that mean in practice? What mistakes did you make in the early days of some of your companies around talent density and what lessons have you learned? Jeez, the initial conditions of the universe, I mean, the physics of the universe is set back at the initial conditions, back at the Big Bang. 9.8 meters per second square had happened a long long time ago shortly after the Big Bang. And you've kind of got to get those initial conditions right because as you grow, they propagate. Taking the time to make sure that every hire early on is the right person and the right fit, the right combination of courage, brains, and heart is incredibly important. I've always been very focused on that. The mistakes you

Starting point is 00:46:39 ask about, I guess my advice to entrepreneurs out there, and I guess any business person, honestly, is that it takes some experience before you realize that you're not doing anybody any favors leaving the pitcher on the mound too long. You may love that person on the mound, but if it's clear that person shouldn't be on the mound, the quicker you get that person off the mound, the better it is for that person, the better it is for the team, the better it is for everyone. That's just something I've learned over the years by making mistakes, honestly. And I think that the referring to Reed's book, the Netflix book, that is a culture that really is super focused on making sure the pitcher doesn't stay on the mound too long

Starting point is 00:47:24 and to keep that talent density. Yeah. Too many firms, I think, they're afraid of change. And so when you shift your cultural North Star and you realize that the ability to navigate change successfully is a strategic advantage. Rich just described all the pieces of the company that were re-architected to take on the second founding moment. To me, if I see a mistake to the point Rich made, and this applies to not only operating companies, it certainly applies to investment firms. I mean, Patrick, you're going to get pressure from LPs that if things are going well,

Starting point is 00:48:00 then all change is bad. I would argue that building a dynamic culture early on where the team, the five people that you're putting on the floor one year may not be the best five people to put on the floor the next year. And to embrace that, not change for changes sake, but to constantly be evaluating is the chemistry, is the balance right? Are you fielding the best people for the task at hand is really important? I'd love to take a step back and talk about sort of the state of the world and the markets today. Even Brad, since you and I last did this, at least on the record, things have continued to sort of be so different than the world prior to COVID that it seems like

Starting point is 00:48:42 if Kovo's the great inertia breaker, that some new inertia is starting to set in, whether that's how we're doing this call right now or other means. I'm just curious both from the investor and the entrepreneurial seat, how you would describe the state of competition, the state of company building and the state of markets today. Okay. Good. In general, In general, it is an incredibly accommodating market environment right now. We can talk about the irony embedded in that. I don't want to neglect the misery, the amount of misery out there right now and stress for so many reasons.

Starting point is 00:49:25 But from an innovation perspective and a capital availability perspective and a company creation perspective, it is a really fertile, creative. time. And it's being compounded by the fact that so many industries, pretty much every trend that you can name prior to COVID has been accelerated by COVID. And a lot of those trends are technology driven. There are a whole bunch of industries that have seen five years plus of future technology adoption happen in the last six months. There is a ton of opportunity right now. So what that means is there is more competition. There's more capital.

Starting point is 00:50:08 There's more competition. There's more innovation as a result. So as an innovator, I see this environmentally as we're not at an unhealthy level, I don't think. We're just at a very fertile spot right now. Let's just talk about valuations in the public market for a second. I feel obliged to do that. We started the year in our gross software index at 11 times. Now we're at about 14 and a half times two year forward.

Starting point is 00:50:34 In our internet index, we started the year about 23 times, and now we're at about 33 times. If you look at the multiple expansion that's occurred, it's almost the identical mirror image of the multiple contraction that occurred in the fall of 2018. And in Q4, 2018, we didn't have COVID. In fact, we didn't have any tech companies miss numbers really at all, despite the fact that the NASDAQ was down 25%. There was one reason the NASDAQ was down 25% and we had so much multiple contraction. And that's because we were surprised by the fact that the dot plot was suggesting we're going to have three rate increases in 2019.

Starting point is 00:51:11 So the cost of capital was going up and valuations retraced. If you look at what's happened this year, we've had the NASDAX up 25, 30 percent. Multiple have expanded. I would say we underestimate the Fed as the explanation for why multiples are where they are. And then you layer on top of that, of course, some companies who frankly had their business, has transformed, Zoom, Shopify, e-commerce businesses. And you get these step function changes in terms of the enterprise value for the business. But I might offer something here that is out of left field for a contrarian like me, which is the market has well priced in the fact that the Fed said we're going to be

Starting point is 00:51:55 on hold for two to three years. What it has been slow in pricing in is how dramatically different the arc will be for many of these digital businesses. I remember having conversations with Rich and many others in May. A lot of these companies had bounced 50% off their bottom. And we thought, whoa, we better hunker down here a little bit because we're heading into a recession. But markets tend to be smarter than that. They tend to move into the direction of maximum pain. And what the market saw here is that the cost of capital was going to be extraordinarily low for a long time and that we did in fact pull forward a lot of transformation. I think that when I look forward, people talk about political risk. We have an upcoming election. We're going to have some tough comps next year in the public market, certainly.

Starting point is 00:52:44 We have more complacency. People are paying higher valuations for all companies. They're being less discriminating in terms of the quality of teams and companies. But all of that will be dwarfed by the impact of when we have a press conference out of the Fed, when they say, whoa, we have a We had underestimated what we thought was going to happen with inflation, and in fact, we are now taking a closer look at where rates are. The dot plot will explode, multiples will contract, we'll have to play through that movie again. I think as life cycle investors, Altimeter tries to abstract that out of the equation by just saying back the most iconic founders, building the most iconic companies, and don't

Starting point is 00:53:29 get in your own way. You trade against yourself almost all the time. It's hard to find those companies. And when you find them, you need to build the mental model and you need to build the cultural North Star in your organization that allows you to resist the temptation to trade against yourself. Rich, I forgot to ask earlier. You mentioned how fertile a ground this is for innovation. And one of my favorite little concepts of yours was the made up word as a brand and the ability to tie this verb-like or cognitive referent-like. quality to those names. Can you talk about that very interesting little concept and it'll be an

Starting point is 00:54:05 excuse to talk about a business model question as well? Yes, I love to make up words for companies. I love to make up brand names. I think it's just a classic example of thinking long term versus short term. If you're thinking short term, you pick the easiest most recognizable word, put a dot com after it and that's the name of your company, blah.com. I don't want to insult anybody by giving a real example. A lot of companies have done that. And that's great. SEO is fantastic in the short term. Everybody knows what you do. It's easy. What's harder is to make up a word, but if you can do it and fill that empty vessel of a word with meaning and emotion, then long term, you've invented something that actually enters the language. And it is yours. And so it's much better in the long term.

Starting point is 00:54:58 So my rules of making upwards. I don't think every company should do it. Most, I think, but I don't think everyone should do it. But when I'm thinking about consumer brands, which is kind of my space, I have a few rules. One, the first one is high point scrabble letters. For the scrabble players out there, it sounds like you're one, Patrick. But for the scrabble players out there, you know that the highest point scrabble letters are ZQ. Those are 10.

Starting point is 00:55:25 X is 8. That's a pretty good one. I think J is eight. That's a pretty good one. And so you go. So why is Z worth 10? Z is worth 10 because it's the least used letter in English. It's the least used letter in English, which means when you see it on a page or you hear it, it stands out and is memorable. So brands that use memorable letters are easier to remember. Two syllables is good. I think fewer syllables is better. I think the sweet spot is two. Expedia was too long. It had the X, which was great, and it kind of invoked speed. We made that one up. It's invoked speed and

Starting point is 00:56:06 expedition. I liked all of that, but it was four syllables. It's just too long. You wouldn't name a dog. That's rule three. Makes a good dog name, which means it's easy to say. Rule four is something interesting about the letters. Palindromes are really interesting. Double letters are interesting. In all of these rules, Zoom is a really terrific one. They actually repurposed a pre-existing word and then refilled it with new definition, but that's a really good one. Anyway, Zillow filled all of those goals. So maybe I'm doing kind of a retrofit once again.

Starting point is 00:56:39 But this is the way when people call me and ask me about making up words, this is the kind of checklist that I run through. You reminded me of an episode. I think I heard you talking to Gurley about this, which was in the early days of Zillow, the thought exercise of what you would need to do. product-wise if you didn't have a single cent to spend on marketing. Can you talk through that contrast? Brad, I'm curious your take on this, too, like the alignment of go-to-market model and business model and how something like Expedia, which I think spent a ton on marketing

Starting point is 00:57:10 could be very different from Zillow. Yeah, I had come from Expedia. The team had, and we started Zillow, and Bill was on our board. Bill and Jay Hogue shared the A round. Brad did the B-round. then they were on the board. And Bill kept challenging me on the launch plan. So this was before we even had a product, before we even launched. Kept challenging me on this. And eventually he got to the point and said, just as a thought experiment, take the team off site.

Starting point is 00:57:38 We weren't very big at the time. Take the team off site and figure out what you'd do if you were to spend zero money on advertising to launch the product. And I'll have to say it was an unbelievably free. it was kind of like a B-Hag exercise, unbelievably freeing and creativity-inspiring, because when you realize you have no money to spend, you get super provocative and creative about the product itself. Because great business builders out there already know that the most important part of the

Starting point is 00:58:10 marketing mix is the product. That's number one. That's the most important thing. And so when you get the product right and you have a product that people want to talk about on the sidelines of the soccer game or, at the church coffee, back in normal life at least. But the product, it carries on the wind. It's virally communicated because it's so new and different and provocative, then you're on to something interesting. And that's what the estimate was for us. And with Glassdoor, we had a

Starting point is 00:58:36 similar thing. We said, if you share your salary and your title and how long you've been at the company, you can see everybody else's and see how you show me yours. I'll show you mine. And we rated CEOs too, and that was provocative. So that works. Brad, I don't think you and I have ever talked specifically about how you zero in on this part of a company's strategy about their early product-led marketing or marketing or sales and sort of how you underwrite a company along that specific dimension. Can you talk about what you've learned there? Just commenting on what Rich just said, I remember those early conversations in the boardroom, Rich, around Rich thought SEO was a dirty three-letter word. He was right. He was wrong for a minute, but right, ultimately.

Starting point is 00:59:21 Absolutely, specifically, because everybody probably doesn't understand. Basically, SEO is kind of free traffic from Google in the normal search results. It's not the paid for. It's the free traffic you get. And I was quite a snob and figured, look, if I build the greatest product, Google ought to find me. And by the way, I don't want to be reliant on Saudi Arabia from my oil. I want to drill my own damn oil wells so that I control my consumer. or traffic. I control my brand and I'm not beholden to anybody. Anyway, sorry, Brian. That was a very contrarian belief for the better part of a decade. It ultimately led us down the path. I remember sitting as well in your board meeting when Google co-opted the address bar and turned it into a search box. So anything that you typed into the address bar was now effectively a Google search. And I remember all of us saying the world had just changed, that they were now forcing everything into a commercial search. And to the credit of Zillow, tactically, we took advantage of it while it lasted, but we also developed the muscle to build

Starting point is 01:00:38 out a brand that people fell in love with. And if you look at the commercials today, I think there's some of the best out there. But to your question, Patrick, on product market sales, how do we get comfortable in the earlier phases of a business, I don't think you can make this up. It's the third leg on the stool. It's commodity to build a model on a business, to look at TAMS. But ultimately, we want to get into the weeds on the use cases. Why are people coming to Zillow? What is it with this Zestimit? What's the psychographic thing about people that causes them to want to understand what their neighbor's home is worth? Or in software, I just spent the morning talking with the president of a software company about specific use cases. I don't want to know the general

Starting point is 01:01:24 area that you're operating in, but why is their pull in the market? Why are people calling you? What specifically problem are they trying to solve? And I think that I find particularly, as you get later in the cycle, many people want to just invest against an area. And then down the line, you'll say, well, why did this one company win and these other companies not make it? And ultimately, I think deep in the heart of the company beats the pulse of somebody who really is committed to product. And when we were looking at Zoom early on, Zoom's decision not to require you to log in, their decision to make it super simple, that nobody was ever left out of a conversation. That product experience, while I think to the untrained analysts would say, oh, that's a marginal difference between Google's product or micro, Microsoft's product or so many other free products out there for doing corporate communications.

Starting point is 01:02:23 But it was obvious when you use the product. It just delighted you. So I would say next to Tam, understanding that product sensibility, that product passion within the company, oftentimes founder led is of critical important to us. I really like this idea. I heard the other day that a great way to tell this as a company matures is what percent of the slides in a board deck are still product roadmap versus everything. else that you might expect to see. I think what you're both saying is that you have to be smart,

Starting point is 01:02:53 you have to be fit around go to market and how your teams work together. But if you're not leading with exceptional product, it's all going to be for not. Really, really, really interesting concept. Before we jump to a couple of closing questions around, especially your joint effort on the board challenge and some of my traditional closing questions, I want to just take the opportunity to talk a bit about careers and how they seem to be changing with people doing a lot more things, maybe more than just one thing. I love the idea that the career is now a jungle gym, not a ladder anymore. Could you both reflect a bit on what you're seeing there and sort of advice that you might give early investors or early entrepreneurs as they think about their careers in this new world?

Starting point is 01:03:32 I've been spending so much time, Patrick, thinking in the last, since the COVID hit, about what work means in the new environment. And I have to say that anything I might have answered pre-COVID on this is actually back up in the air because it's clear that Zillow and many other companies are laying in all of this new remote work muscle, this kind of distributed workforce muscle and tendon and blood vessels and nerves. We're laying all this in, and we've been very aggressive about telling people, hey, go playing your life, go move back home to your parents if you need to do that, go get out of the city because it doesn't feel very good, and we're not going to ever require you to come

Starting point is 01:04:23 back to an office. So we've kind of encouraged this new muscle to be laid in because I do believe that work should wrap around the core of life and that life should be at the center of your world. work should fill in around that, not vice versa. Most of our careers, we've had to put work at the center of our lives and have life actually contort itself and form around work. And that is being transitioned right now. I'm fully supportive of that. One of the more difficult challenges we face in a Zoom world in a cloud headquartered company is actually onboarding people, team building, career development. It's just not going to happen in an apprenticeship way, the way it's happened in the past. And we're going to have to invent new ways for Zoom-based

Starting point is 01:05:15 digital apprenticeships. I think that people are much more fluid now. People have much more opportunity now. You will not have to move. If you're lucky enough to be wearing Lulu Lemon or Nike right now, which I am, that means you have a job where you don't need to move. probably for your next job, which makes movement between jobs much easier. I think we're going to see more liquidity in the labor market, and we're going to see companies that lean into the new cloud-based headquartered world zoom way ahead, pun intended, of the rest of the pack. As Rich said earlier, I mean, in some ways, we've all pulled the lucky ticket on capitalism. I mean, we're born during the greatest time in modern capitalism, both in terms of the fluidity of capital, building on generations of platforms to start companies.

Starting point is 01:06:12 And we have the ability, no matter where you are, if you're an artist, if you're a thinker, to have your materials peer reviewed. You can put them out into the world, have them kicked around, much like you do, Patrick, with this podcast. In so doing, you not only up your own game, but you can build your own brand, you can make your own course. Several months ago, I encouraged all the folks on our team to take the work that they were doing internally and to push it out on Twitter and have it peer reviewed because it's the best place to force them to kind of really refine their own thinking, to get feedback, to build the network, to build their own brand. And I think at a lot of firms, people don't want you to do that because it's about the firm brand or they're worried that you'll somehow become popular and you'll go ply your craft elsewhere. I have a separate thought on that too, which is we're all just passing through. We have a few decades that we get to ply our crafts and then other people will come along and they'll ply them better with a little more energy. I want to be the top of my game.

Starting point is 01:07:20 I want to associate with people like Rich who are at the tops of their games while we're here. here, but the other thing is paying it forward, allowing other people to utilize this platform to build out their own capabilities, and whether they choose to apply their craft here for the balance of their career, launch their own firms, work at other firms, building a set of relationships so that people look back on the place that they worked and understanding that we're no longer in a W-2 post-World War II world where you're going to have one or two jobs. This is going to be a place where people spend two or three or four years, I want them to look back and say it was the best two to three to four years of their career. And so that's part of our cultural mindset.

Starting point is 01:08:04 I think it's an extraordinarily interesting time for people to be entering the workforce and participating. Brad, can you talk a little bit about the board challenge, why you set it up and what you hope to accomplish with it? Building on what I just said, this idea of passing through, I really do believe that we're all just stewards of this capital. we're stewards of this opportunity. So when we've watched the trauma that this year has brought, the trauma of COVID, the trauma of political protests, was at a political protest in Palo Alto, very peaceful and frankly, uplifting event that my 12-year-old turned to me really specifically talking about the inequities which exists on a racial basis in this country and just said,

Starting point is 01:08:50 what are you going to do about it? When we think about the opportunities, we've been given to play this game, certainly one of the places that Rich and I have connected on is we want to have fun, we want to practice our craft in the best way possible, but we want to have some impact. To me, there is a place where we could have impact here because all I had to do was look around our boardrooms, look around company leadership, and realize that there was a lot more work to be done. My initial instinct was that I was going to resign from my board and encourage a board that I was on to replace me with a blacker Latino director. That evolved like good entrepreneurial ideas into a two-sided marketplace idea where we said, let's just go create demand. Let's ask every board to add

Starting point is 01:09:36 a black or Latino director in the next 12 months. But on the other side of the marketplace, let's go build out a directory of talent, partnering with Valence, the board list, and many others, to showcase, to highlight younger talent that has. hasn't been given the opportunity to be on a board. So here we are eight weeks into this undertaking. We've had over 60 companies now take the pledge, five companies, including Zillow, that stepped up. Rich was the first call I made. I couldn't even get the ask out of my mouth. He said, I'm in. And they've already fulfilled the pledge. And what Rich's experience, I think, is like so many others, the second you move out of your natural network and you truly and authentically start looking at

Starting point is 01:10:22 the talent that exists around us in communities that are not part, perhaps, of our natural network, you realize I'm no longer checking a box and ducking my head. I'm actually taking advantage of a competitive advantage by tapping into populations that people aren't looking at enough. And so it's about improving the company, improving our communities. Our goal is that within a year we have 500 companies who've taken the pledge and that we begin changing, the corporate consciousness. If I think of corporate America 1.0 is checking the box and being done. Corporate America 2.0 is raising our voices, encouraging the companies around us, sharing our best practices, and realizing that we have a responsibility to not only build great businesses,

Starting point is 01:11:10 but we have a responsibility to leave this place better than we found it. I love it. And it's, I happen to be lucky and by random chance, no Zillow's newest board member. And yeah, I would probably place a bet that Claire is going to be perhaps the most interesting and best board member that you have. She is unbelievably awesome. She very well may be a superhero. I mean, I think she might be a superhero, Patrick. I'm so excited to have CCTV, Claire, on the board. Yeah. The only thing I would add is how can any company that's serving a diverse set of customers believe they can build the best products and services and market them in the best way to that diverse set of customers without having representative diverse leadership. It just doesn't make any sense. It's not only great for

Starting point is 01:12:01 ideation and creativity and getting results. It's just a really good business idea. I love it and we'll definitely keep close tabs on the effort. A couple closing questions for you guys. This has been so much fun. The first is for each of you and then Brad, I'm going to make up a new closing question for you since you've already asked my traditional one, but I'll get rich in the game, too. The first is, what question are you most trying to answer right now? In business and life? Pick. I would go back to what I was just saying, not to cop out.

Starting point is 01:12:28 We are in the midst of what I'm calling the great reshuffling. We are rethinking where we live, why we live there, where we work, how we work, who we live with. This awful scourge of a pandemic has given us the silver lining, I guess, is the catalyst and the permission to rethink everything. This shows up in the data that I see running Zillow in incredible levels of unprecedented engagement and shopping and move interest across the board and across the country. People want to reshape how and where they live. We are spending nine hours a day more in our homes now than we were before the pandemic.

Starting point is 01:13:15 So definitionally, mathematically, of course, we want to change how we live. I'm in the kitchen right now, which has become my office and my workout facility. Anyway, so the impact on work of that phenomenon is the question I am most focused on answering right now. It is basically an incredible period of creativity for HR thinkers and HR. HR architects as if they have the right leadership at their companies, they have been given permission to rethink work. How about you, Brad? What question you're trying to answer?

Starting point is 01:13:50 As Rich said, at a personal level, it's purpose, it's work-life integration. It's how to use this good fortune to have maximum impact. But let me throw one out there, which is I've teed up at a few dinner conversations here recently, which is it's our generation, I think, that's going to have to. totally renegotiate the social contract. What COVID is accelerating and highlighting is there's a lot of backlash at the moment against capitalism, this idea that it's benefiting too few. And I would argue that's not really a feature of capitalism so much, is it's a feature of a technology revolution. Machines are going to increasingly do the work that humans performed post-World War II in kind of

Starting point is 01:14:37 reconstructing the world. And so if you agree with that, then you realize this isn't a problem for today, but this is a problem that will become increasingly worse and that needs to be addressed. The good news is this. We have massively increased productivity, and AI and ML are going to do that, maybe even to the extent the Internet itself did. So global wealth, as measured by the mountain of labor and capital that exists in the world. The conveniences that will be available to people will be better than they've ever been before. But the distribution of those will be way more concentrated, as we've already seen. I think we have to, unfortunately, we're stuck in this paradigm of two parties, of very antiquated way of thinking about the distribution and redistribution of things.

Starting point is 01:15:28 and I'm interested in how we start thinking about things like universal health care and universal education as basic human rights in a new world order and that we don't turn against capitalism because I think it is the dynamism of competition and innovation that allows us to have the goods and services to improve everybody's life. But if we don't reconstruct this, And frankly, I think it's going to take thought leaders outside of politics to help to construct it. We're going to experience a lot more of the unrest and frankly, a lot more of the unfairness that we see around us. Rich, my final question for everybody, Brad's already answered it, is to ask what the kindest thing that anyone's ever done for you is. Oh, the kindest thing anyone has ever done for me. I should have been prepared for that.

Starting point is 01:16:20 I do listen to your podcast. The little things. I'm an empty nestor, as I said. early on, a recent empty nest drive, three kids in college, sort of. My COVID, college in the age of COVID is not quite what college is like. But I'm pretty odd by the simple kindness of my older boy, just facetiming me a couple times a week. Maybe human connection matters, seems to matter so much more now, but it's kind of, the pandemic has stripped away life to the fundamentals and we realize that these relationships are what life is about. So the simple kindness of a teenager who is willing to take time to call his dad and ask him how his day is going, that's what I love. Guys, this has been so much fun, so many interesting topics. I feel like I

Starting point is 01:17:18 could do this once a quarter with both of you. Thanks for all the time. Can't wait to get this out for others to enjoy as well. Enjoy the rest of your day. If you enjoyed this episode, you can sign up for a new email newsletter sent out each week called Inside the episode. Each week, I condensed that week's episode to my favorite big ideas, quotations, and more. I've been recommending books to members of this email list for years, and we'll keep doing so in this weekly email. You can sign up at investorfieldguide.com forward slash book club.

Invest Like the Best with Patrick O'Shaughnessy - Brad Gerstner and Rich Barton – Thriving in Changing Markets - [Invest Like the Best, EP.197]

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