Invest Like the Best with Patrick O'Shaughnessy - Brad Gerstner – Public and Private Investing - [Invest Like the Best, EP.179]

Episode Date: June 23, 2020

My guest today is Brad Gerstner, the founder and CIO of Altimeter Capital, a multi-billion dollar technology-focused investment firm. Brad and his team are known for a deep expertise in internet-enabled businesses, including Expedia, Facebook, Uber, and many more. We discuss the evolution of opportunity in this style of investing, including the important shift to private investing, where so much of the value creation now happens. I won’t soon forget our discussion of consumer intent on the internet and how it has shifted, the role that essentialism plays in Brad’s business and life, and the rise of the Chinese internet giants like Bytedance. Please enjoy this great conversation with Brad Gerstner.   This episode is brought to you by the MIT investment management company (MITIMCO) Reach out or learn more:  Email: [e-mail] Website: https://mitimco.org/partner/ MITIMCo 10 year Letter: https://mitimco.org/wp-content/uploads/2017/03/MITIMCo-Alumni-Letter.pdf MITIMCo brochure: https://mitimco.org/wp-content/uploads/2019/01/MITIMCo-Brochure_web_2018-12-05.pdf   For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag   Show Notes (2:32) – (First question) – Overall investment philosophy at Altimeter (5:12) – Most interesting thing in the landscape today (11:16) – Disrupting the tech giants moving forward (13:56) – The investing opportunity in the backend of the internet (16:42) – His take on old line businesses and how technology could shift his view on them (18:56) – Lessons from company founders whose platforms rely on consumer discovery (21:32) – Running his business on essentialism             (21:40) – Essentialism: The Disciplined Pursuit of Less (26:11) – Tactical applications of essentialism (29:46) – Applying essentialism outside of business (31:16) – What travel has taught him about business (33:43) – What we should know about the Chinese internet market (37:11) – The emergence of bite sized transactions across the web (39:22) – Bite sized work (42:43) – How early on can you figure out what company would win a vertical (45:36) – What problem space would he tackle today (48:49) – Collaborating in the private markets (57:27) – Pricing businesses as a key component of his investment choices (1:02:47) – Fascination with life sciences and software (1:04:12) – What about the future excites him (1:06:48) – Kindest thing anyone has done for Brad   Learn More For more episodes go to InvestorFieldGuide.com/podcast.  Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on Twitter at @patrick_oshag

Hey everyone, Patrick here to highlight a very unique sponsor. This week's episode is brought to you by the MIT Investment Management Company, also known as Matimco, the Endowment Office of MIT. New and small investment funds, listen up. Matimco is looking to find investors starting funds today. Matimco is partnership-driven, long-term focused, and has an extensive history of backing investors early in their careers. These partners are key to delivering the outstanding investment returns required to support MIT's pursuit of world-class education, cutting-edge research, and groundbreaking innovation. Matimco is focused on finding and partnering with the best investors across the globe no matter the market environment. No firm is too small, too young, or too non-institutional. If you or someone you know is currently in the process of starting a fund or recently launched, please email partner at matimco.org. Again, that's partner at mitimco.org or discover more on their website, www.mt.mco.org. Some of MIT's best partnerships have been initiated.

during challenging market environments. Matimco looks forward to hearing from you. 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 that will help you better invest both your time and your money. You can learn more and stay up to date at investorfield guide.com. Patrick O'Shaughnessy is the CEO of O'Shaunacy Asset Management.

All opinions expressed by Patrick and podcast guests are solely their own opinion. and do not reflect the opinion of O'Shaughnessy asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy asset management may maintain positions and the securities discussed in this podcast. My guest today is Brad Gerstner, the founder and CIO of Altimeter Capital, a multi-billion dollar technology-focused investment firm.

Brad and his team are known for a deep expertise in internet-enabled businesses, including Expedia, Facebook, Uber, and many more. We discussed the evolution of opportunity in this style of investing, including the important shift to private investing where so much of the value creation now happens. I won't soon forget our discussion of consumer intent on the internet and how it shifted, the role that essentialism plays in Brad's business and life, and the rise of the Chinese internet giants like bite dance. Please enjoy this great conversation with Brad Gersner. So, Brad, this has got to have been one of the most interesting investing periods of your career. I'd love to begin by giving the audience some perspective on your overall investment philosophy. We're going to talk about lots of private and public investing, some of the businesses you founded

life in general, but I'd love to begin with just an overarching investment philosophy that you hold out for Altimeter. First, thanks for having me, Patrick. It's great to be here. I love listening and it's fun to finally get a chance to do it together. I really founded Altimiter in 2008 with a view to invest in the world's best technology companies, both public and private. At the time, I think it was a fairly differentiated view that most LPs were looking for firms to either be venture capital firms or to be edge funds.

They didn't particularly coming out of the depths of 2008, didn't love the idea of a fund that did both. But from my perspective, we always viewed this as more of a throwback fund. It was a way to compound my own capital, do it in partnership with great long-term investors who viewed the future of technology the way we did. Our objective is to find terrific companies that can be multi-year compounders in secular growth areas that are denting the universe in one way or another. We thought then and we believe even stronger now that a lot of that value creation would occur in the private markets. So when I started in the venture business back in 99, 2000, a big exit was a couple hundred million dollars or a billion dollar exit. A billion

dollar exit to a single venture firm, put them in the Hall of Fame. But if you look at it today, we have internet companies that are going to go public after having created $200 billion of equity value in the case of bite dance or software companies that go public after generating tens of billions of dollars in enterprise value. And so a lot of that value capture has moved to the private markets. From our perspective, we want to participate in that value capture and these long-term compounders over the life cycle of the business. And oftentimes companies we invested in early venture, mid-venture rounds, a series B a Series C, we're the largest buyer in the IPO. And we may own those companies for years after. And so when I think about generating

alpha, one of the keys for us is obviously stock selection, but it's over the last. lifecycle the business, allowing our compounders to compound, and then making sure that we own them in sufficient concentration that it can really move the needle for the fund. You've been famously involved in a lot of the online travel companies, as one example, booking.com and Uber and Airbnb and I think Expedia. I'm curious, those are trends now that seem obvious in hindsight, and of course the magic is getting them right before they seem obvious. What is the most interesting thing in the landscape for you today? If you rewind the clock a little bit, I've been lucky enough to teach the securities analysis class

at Columbia a few times, the old Graham and Dodd class over the last decade. As a guest lecturer, and I bounced around doing a case study with Glenn Fogle on Priceline with Spencer Raskroff on Zillow. And one of the important lessons that I'm trying to teach to this class, which is very quantitative oriented, is that Buffett, although he comes out of the quantitative school, he has a quote where he says, my highest returning investments, those that have really made the cash register ring have come from simple qualitative insights applied to a big business opportunity. And he points to Geico that they had 1% market share, a superior product in a massive market. And if 1% could go to 10%,

you would have a company that would command for decades to come. The high-quality insight that I had dating back, frankly, to 2002, 2003, was that all search and discovery was migrating toward Google, that all intent on the internet was going to be funneled through this super aggregator, and that if you could figure out how to optimize yourself within the Google ecosystem, that you could effectively build really big businesses in the underbelly of Google. And so booking.com is the one that's most famous. We started investing in it when it was a billion dollar business. And price line became the single largest global advertiser on Google and built a $100 billion vertical search business by providing better access to hotels and hotel

inventory. But that business would not have existed without Google. You know, If you look at the vertical search engines that we invested in in this first, if I think about the first era of the internet being dominated by search, we had an insight that vertical search was going to be a significant beneficiary. So my largest investment when I started investing on the public side in 2005 was Google. But on the private side, we invested in companies like kayak, Zillow, where we led the series B and I went on the board. I started a company called Room 77 and OpenList that were both vertical search engines. And all of the online travel agencies were really vertical search engines, Yelp, TripAdvisor, etc. The high quality insight was simply that Google was going to do more searches in the future than they did in the past, and that the revenue per search was going to go up over time.

Play that forward. By 2012, we had a couple seminal events occur, and all of this is background. to why we're interested in what we're interested today. But in 2012, a couple important things happened. I remember in a period of months, Facebook goes public at $38 a share. It breaks its IPO price. You have desktop search for queries that we follow, like hotel queries, actually went negative on Google in 2012. What happened was the rise of iOS, the rise of iOS, the rise of iPhone.

phones, created this platform where discovery and intent was beginning to shift to the supercomputer in your pocket, to applications that were on the homepage of said supercomputer and away from Google. And that had profound implications for the defining thesis of the internet that we had invested against for a decade. And it was going to have implications for Google, but Google is probably the best position to deal with this because, as you know, they famously under the United States. monetized the platform for years, but as Bill Gurley and I often talked about back in those years, the tax collector would eventually come. And TripAdvisor and Yelp went from being the biggest beneficiaries of Google, would not have existed without Google to testifying to the Senate about

the rate of Google's tax collection. And all of that was bound to occur as Google's own query volumes started to diminish. And so you had the rise of this new way that people were discovering information. People were discovering destinations they wanted to travel to, clothes they wanted to purchase, etc. So fast forward to the themes around internet we're investing against today. It's really the rise of the super app. So we invested in an early round in bike dance, which happens to be one of our bigger private holdings today. And the observation in China was that we saw the shift away from search away from Baidu. I mean, Baidu's worth 50% less today than it was six years ago, notwithstanding the fact that all of the big internet platforms in China are worth multiples today

of what they were five years ago. Because you had the rise of WeChat, you had the rise of Bightance, you had the rise of Pindoto and Baba, they were giving people access to the information they want, whether it's purchasing information, shopping information, news information, entertainment information, and they didn't have to be funneled through Bidu to discover that information. Facebook became our largest position in 2012, while we've managed the position over a period of time. It's still our largest position in the fund today. And that was driven by this insight that, yes, aggregators were going to accrue the lion's share of the profits. but we had this pretty significant shift away from search.

Search is clearly still important, but increasingly commercial intent is occurring in other places. Looking forward now, how much room do you think there is to run on what I'll call the mobile platform that has maybe kicked Google off the crown, if you will, as the center of intent? And how carefully are you always looking for a platform shakeup that might materially change that thesis.

I'm looking at, we presented our investor data stat. In 2006, the top six or seven global internet companies represented about 5% of the NASDA. Today, they represent about 35% of the NASDA. So the big have gotten bigger at an accelerating rate. And I would argue, in some ways, the era of search, democracy, the internet. Notwithstanding the monopolistic accusations that were thrown at Google, right, it gave rise to a booking.com. It's very difficult to build a large application if you can't be discovered. And so we have the big, getting bigger, adding more and more capabilities

to their platforms today, whether it's payments, whether it's chat, whether it's micro apps to allow you to purchase things within that application. And so from our perspective, when we look at take BiteDance today, which is most recently valued at $150 billion, we think that company still has 5 to 10x ahead of it. As consumers increasingly turn to those platforms, whether it's TikTok outside of China, or whether it's TOTI or other video assets they own within China, to consume content and monetization dollars will ultimately follow. When we think about the future, we're always paying attention.

You know, one thing that I would say is, if I remind my team, it's just as dangerous to be too early as it is to be too late. And I was talking about, I was worried about the future of search and the future of vertical search starting in 2010. But look at Google's compounded at about the rate the other big platforms have in the U.S. they've done an extraordinary job of diversifying the business, raking more out of their ecosystem, and continuing to grow earnings at over 20%. And if you look at the things they're investing in today, developing today, they may very well bridge to an AI future where despite the fact that their

core product desktop search went into a state where it was shrinking, they managed to grow earnings consistently right through that period because it's such a productive and innovative company. We've talked a lot about what I would call the front end of the internet, the places that aggregate consumer attention or demand. We haven't talked about the back end. So I've become fascinated with the cloud, generally speaking, its evolution gaps in things that you can access on the cloud that are coming on to market. Talk to me a little bit about how you view the back end of the internet as an investing

opportunity. I think we'll look back at this and still view June 10th as the middle of the COVID crisis. But our single biggest area of investment over the last decade, certainly in the venture space, has been in the digitization of the enterprise. You have famously a trillion dollars of enterprise spend that's shifting to the cloud. It makes sense. It should occur there. It's less expensive.

It's higher yielding. It's probably more secure. And so while we've been talking about the cloud since really 2002, 2003, and I remember by 2010, 2011, we actually saw decelerating rates of growth at a lot of cloud companies. And people started wondering, did we overestimate the cloud? Just as they wondered in 2005 and 2006, after the demise of companies like danger, whether we overestimated mobile. And the reality is we weren't even getting started.

So we look at, we break down the back end of cloud software really into system infrastructure, the infrastructure software that enables companies to do the things they want to do on the cloud and then application software. And whether you look at the TAMs of all three of those, by our account, we're still a decade away from having 50% penetration to the cloud. Now, let's say that COVID just accelerated the rates of digitization. And we know, you know, talking with fantastic CEOs of these companies, clearly their phones are ringing more today than they were six months ago.

all sorts of businesses needing to speed up their shift to the cloud. But the reality is the key pieces of architecture, whether you're talking Azure, GCP, and AWS, or whether you're talking about the cloud database providers, data warehouse providers, whether you're talking security and identity with companies like Octa, or whether you're talking about key pieces of application infrastructure like Tableau or Salesforce.

We still think we're early in that transformation. and the 20% penetration that has already occurred in the cloud mostly came from cloud native businesses. These were businesses like Uber and Airbnb that grew up in the cloud, right? For United Airlines, for an I-Heart radio, for the Fortune 1000,

they're just starting their journey into the cloud. Talk to me a little bit about how you view what I'll call old line businesses that, you know, You mentioned United as an interesting example, very real tangible assets, traditional business models, I would call them, but potentially places that could gain a competitive advantage from technology adoption. How do you look through that part of the investment landscape for opportunity relative to the more what I'll call pure technology businesses? I would say we spend 98% of our time thinking about the pure technology businesses, but certainly what I've dedicated the last two decades

to. But having started two online travel companies, I also, out of curiosity and from an investment opportunity set, follow the airlines. A very interesting business that obviously has been devastated by COVID, but it was in the middle of a transformation that had led to seven years of record profitability and really driven by two things. Number one, the rationalization of the industry. So we went from 60% of the industry being managed by 12 airlines in 2004, 2005, to 90% of the industry being managed by four airlines, which gave rise to pricing power and structural transformation within an industry that made the industry look very interesting. I mentioned at a conference, I suppose about a year ago, talking about the impact of artificial intelligence on various

sectors in the economy, that it seems to me that the opportunity, that will come from traditional industry applying more intelligent software to their businesses, the productivity gains that that will unleash may be bigger than the internet itself. And whether you take something like an airline, how we root planes, how we maintenance engines, we're going to be able to take massive costs out of these businesses employing technology. Now, replicate that across every industrial business in the world. I think that there's going to be powerful effects on the economy. I'm bullish on what that means for the economy more generally, but the value that will be delivered

will allow for significant value creation by the software companies that are providing those services. Tell me a little bit about what you've learned from the founders who have been able to execute these business models that rely on consumer discovery and intent on the internet. So you mentioned Zillow and Expedia, I think, of Rich Barton immediately. I love his power to the people concept. What have you learned from the entrepreneurs who have either successfully done this or failed at doing it that you think is important for those going forward trying to succeed in a similar space? Well, one observation, and Rich personifies this, is he identified a very large Tam in the case of real estate. So he had started Expedia while still

at Microsoft. And when he and Lloyd were looking for their next opportunity, you know, the observation simply was, here's a massive market that is a very poor experience for the consumer. And we don't know how we're going to fix it. But if we bring the same principles that we applied to online travel to real estate, and we bring enough bright engineers over out of Expedia and Microsoft, and we think about the problem long and hard enough, we'll sort it out. And when we originally looked at that investment, they thought, and I thought that the solution would be something more akin to Expedia where you disintermediate

the realtor and you create a marketplace for homes. Now it turns out that they famously developed the Zestimate that turned very quickly into a viral form of real estate porn for neighbors to look at the value of their neighbor's homes. And all of a sudden we had this massive advertising asset on our hands. Fast forward 15 years. And in many ways, the company's getting back to those founding principles, which I think can unleash a huge new set of opportunities, which is enabling consumers to buy and sell their homes in a much more efficient way. And so the challenge of starting a business is massive. And it's equally massive whether you're going after a small market or a large market. I might argue it's even harder going after a small competitive market.

So one of the things I've learned from founders, and certainly it is a critical part of our investment philosophy, is assume everything that you hope to be true occurs. How big is the prize? Focus on those opportunities with a big prize if it goes right. I'd love to hear a bit about how you think about the efficiency of your own process at Altimeter. I've heard that you're a big fan of the book Essentialism, which is, I think, a fascinating, almost like philosophy book on how to structure systems. And I'd love to just riff on your thinking on how this might pertain to running a successful investment business. Yes, it's not only a business philosophy for me.

It's a life philosophy. I love how Greg McEwan talks about it is the disciplined pursuit of life. less in my life, that equates to more happiness. But let's talk specifically about how it pertains to the business. If you're lucky in this business, you get to work with incredible analysts that are really anthropologists on everything going on around them. Like you, we spend a lot of time reading, a lot of time thinking, a lot of time studying, a lot of time talking to people smarter than we are about how the world might evolve. And then you have to be very patient. And have to look for asymmetric opportunities or that unique set of opportunities to present themselves

with the right team at the right time with right evidence that the market is starting to take to the product that they are building and i would say i stand in a very very long line of investors who've observed over the years that as buffett says you only need six punches on your card over the course of your career for almost all investors a hugely disproportionate um amount of their career profits that they generate, whether in public markets or private markets, will come from a few bets, a few great investments. And if you succumb to the ego that is easy to succumb to, which is, if I just studied this hard enough, I'll be able to figure it out. And you look at your Bloomberg every day and you have a hundred different opportunities you can

go invest in every day or maybe a couple hundred opportunities. people tend to overtrade, invest in too many things. It divides their attention. And so the opportunity cost is they're not there when the fat pitch comes or they don't have capital available when the fat pitch comes. And I would argue for myself, it leads to less happiness because I can't go as deep on a particular subject as I want to go because I'm managing too many things at once. So I would say if there's one hallmark of Altimeter more than any other, on the venture side, we say we come to fast nose. First, we don't do early stage venture at all. There are better practitioners than us. We don't have any competitive advantage there. I've started a few early stage companies. I'm certainly curious when I see them. We track them. But it's not where our advantages. And so we really focus on that series B to series D, 100. million to a billion dollars out of our dedicated venture funds and then out of the hedge fund we'll invest in what I call the quasi public market so this is all late stage private companies and then well

into the public market but at any given moment in time at the public markets we may have 75% of our portfolio in our top four or five ideas and if you look through our private investments you see much more significant concentration than you would in I think typical venture funds. you know, in a $400 million fund, we may have 10 investments. And I think that there are a couple of things that fall out of that. Number one, you don't have nearly as much FOMO because you're not just placing small bets on everything in a market. It doesn't look like a set of vintage returns.

But you have to live with the fact you're either good or not good at the stock picking. So you either pick good companies or you don't. If you're lucky enough to pick good companies, then the returns, the alpha you can generate from a portfolio that is more concentrated will be significantly greater than a fund that looks more indexy for the period of time in which you're investing it. But listen, there are a lot of ways in this business to make it work. I know great momentum investors. I know great traders.

It depends on the game you're trying to play. We know the lane that we do well in. We know the game that we're playing. For me and for the team here, essentialism is our cultural North Star. It leads to the tradeoffs that we make every day when we're talking or when we're operating alone. And frankly, I think it leads to a much more durable and happy way, certainly for me to invest, when you can devote the time to a few core areas of focus.

Two more questions on essentialism, because I think it's just such an elegant idea, not just in business, as you said, my second question will be more personal. You've defined strategically what it means for Ultimiter to pursue essentialism. and it manifests as interesting portfolio concentration, but also thesis concentration. I'm curious if there are tactical applications of this idea that you use inside of the firm that you found to be effective, whether that's like the way you literally work or how you interact with the team, anything like that that you found to be valuable. Well, I had a luxury of working with a great investor named Paul Reader who started par capital.

And one of the things that I learned, you know, I really learned a lot of this from Paul. But he taught me there's a real danger to group think within an organization. And it's certainly an intellectual debate on the subject. But within Altimeter, what we want to do is hire deeply passionate people about their craft and give them an area of focus that's digestible. And then give them the time to think and to study that craft. And so as a consequence of that, unlike a lot of venture firms, we don't spend a lot of time in group meetings. We don't take all day on Monday to review the portfolio, to review the pipeline, to vote on companies that we may want to invest in. It's much more decentralized than that. By all areas of the business process are

organized around that. And certainly there's some upsides. It doesn't mean that we're not collaborating. We certainly like to gather others' opinions. But I would say, organizationally as a firm, it leads to less meetings. It leads to less emails. And it really devolves the responsibility to people to both do the analysis and to ask the question like, is this important to share? Does it rise to the level that we need to share? So I'll give you an example. At a lot of places, I say people have an idea of the day. And I have a few friends that you know well and they'll call me up. They'll be like, did you see what's happening to this company? buy this, you ought to sell this. You know, an altimeter, if you have an idea of the day,

you're not a fit. If you have an idea a week, you're probably not a fit. If you have an idea a month, you're probably, here it's study something for a few years. By the time you've shown up here, you've probably deeply studied something for years. And we tend to be way slower twitch. And so what allows us to outperform, and I'll tell you, far more money has been lost in the this business, and I'm not talking just ultimately, the venture business, the hedge fund business. Far more has been lost, betting on the end of times, trading out of your good ideas, trying to hedge out of COVID, then just making great bets on great companies and allowing them to compound. We are constantly, and this is where essentialism really plays an important role,

during periods of crisis like we've experienced over the last 90 days. I mean, we put hundreds of millions of dollars to work in the private software market at the end of March and early April because we weren't thinking about the next six minutes or the next six weeks. And we had built relationships with partners who understand that. And if you're slower twitch and you think about the trends and you have something like essentialism as your cultural North Star, it makes it much easier to operate during during those periods of duress.

What do you think the most interesting application of the idea is outside of business in the personal setting? I host a series in my place out here and we did one on essentialism. And we went around the room and I don't know, probably 100 folks there and everybody is hyper busy and a ton of activity. But it became pretty clear that there wasn't a positive correlation between activity and happiness. And I think for all of us, again, this period, you and I, before we started the actual podcast,

you said these have been some extraordinarily happy times for you, spent more time in nature, less time commuting into the city. I think asking the question, you know, is what I'm thinking about doing an easy yes, right? Is going to this dinner, is having this coffee, is having this meeting, is joining this board, making this investment, is it an easy yes? And if it's not an easy yes, then it's an easy no. And organizing your life with less, but enriching the stuff that you do choose to do, your children, your interaction with friends and family, your time in nature, your time spent with a couple management teams instead of divided across 15 boards. I can't promise that that

leads to maximum financial return for you. But I'm pretty confident that your return on happiness is going to be pretty extraordinary. One of the things it's clear you love, not just through your investments, but just through your own activity is travel. What has travel taught you either about business or just about life? First principle is thinking. At the heart, the red thread that connects everything that I've done is I'm an analyst. I'm curious, curious about the world, curious about how systems work, curious about how companies work, curious about new places, and you go to new places, and you see different ways of doing things. We had an extraordinary experience with my family a couple of years ago in Nepal where I partner with an organization called Give Power,

where we take solar power to different parts of the world and light up schools and health clinics and get the family involved and pretty extraordinary experience. And I remember leaving the country and my then nine-year-old now 12 said to me, Dad, they don't really have anything. They have a really simple life, but everybody's so happy. I think that there is both life philosophy that's impacted by that.

I think on the business side, I remember going to Beijing in 2000 and really talking about what was going on in the Internet and China in those early days. And back then, as you remember, I mean, they were just taking whatever was being done in the U.S. and copying it, Baidu was copying Google and C-Trip was copying Expedia.

I remember talking to a professor in those early days and he said, in China, a lot of the inventiveness, a lot of the entrepreneurialism has been lost for a couple of generations. And what you see happening in this first generation of internet entrepreneurs is the entrepreneurialism is still there, but rather than reinvent the wheel, rather than to create the new thing, they're just going to copy. what is going on in the U.S., he said, but fast forward a generation or two, and you're going to see the innovation come out of China. And as I look at what Bight Dance is doing as an example,

I remember four years ago when they came over and we made our investment, and they said, we'll be the first global internet company. That was before they had ever heard of musically, before they had ever conceived of the concept that would become TikTok. But to see, how, for example, the internet is evolving in China to ask the questions and then to think about the application of that in other parts of the world, I think makes you a much better investor. What's the most important thing for us in the West to know about what's happening in the business landscape in China? You know, we've talked a little bit about the Chinese internet, bite dance being, for me, one of the most interesting companies in the world right now.

Maybe for those that aren't initiated in the difference, you could describe sort of the Chinese internet company complex versus what we're used to here in the U.S.? Again, we started the conversation about how search-centric the U.S. was. The organizing principle was really Google. I didn't sit in a board meeting for a decade where we didn't talk about SEO and SEM. And really the winners of Web 1.0 were those who figured out how to gain Google. The muscle that was developed in the West, I think predating,

2008 was very search-centric. In fact, I remember back in 2007, Mark Pink is coming to me and saying, hey, I think I'm going to start a new business. I got no Mark when he was running tribe. And I said, well, what's the website? And he said, well, it's not going to have a website. I said, well, how can you have an internet business without a website? So we're going to build it on top of Facebook. And that was the first time that I really started thinking about this metaphor that we had been using to describe the internet was going to change with the advent of platform. like Facebook, and then of course iOS blew that out and changed everything. If you look at China today, perhaps one of the most significant trends I see is Chinese

e-commerce is way less about search than U.S. e-commerce is. If you think about the way items are purchased, we go to Amazon, we look for that wakeboard you want to buy for your kids, but you're typing into a search bar. If you look at China, an investment, probably our biggest winner last year was a company called Condodo, where 100% of their e-commerce is bought through the stream. People aren't doing search at all. On Baba today, similarly, if you look at Bite Dance from day one, was about algorithmically putting in front of you the content that would cause you to act on it.

In the West, the company that's the furthest ahead of it, in doing this, of course, is Facebook. And if you look at the power of the platform that is Instagram, I don't know about you, Patrick, but the number of friends I have who say, you know, I was in Instagram and it was unbelievable. Like, they showed me the surfboard I wanted to buy or the wetsuit I wanted to buy or the new bike I wanted to buy.

Contextually, we're all logged in. They know who we are. Their ability to market to us. And so in the early phases, this was about serving up content and entertainment to us. But now that content is actually e-commerce. And so as I look forward, I fully expect that a lot of the commercial intent, and I think this will be a challenge for Amazon, certainly one that they'll attack. It's a challenge for Google. Certainly one they're getting after. But I think Facebook is in an

excellent position is the way millennials and others are consuming content on their phone is they're not typing in search queries into a small little search box. Right? They're opening up their Instagram feed. They're opening up their Facebook feeds and other feeds they have on the phone. And particularly as it relates to non-discretionary items, I think increasingly they'll be purchased that way. It's a fascinating difference.

I've never thought about it in those terms. But it also jives with just the data on TikTok, the amount of time that people spend on there. It's sort of staggering. I mean, I tried it once because I was curious. is what the hell it was. And I had to delete it because it was so addictive. And it's pretty amazing to see how that seems to be coming to the West. It's here in spades. But I also just think this idea of long form versus short form when it comes consumption of content. As I look forward,

you know, and this is where Google and their knowledge graph, I think can be particularly powerful. I mean, it's slow and coming, but will invariably be here. What's the natural evolution of all of this? We have search base where I know, what I want, I go there, I type it in the box, I find the product I buy it. But that's a lot of effort. We have a stream-based experience where I'm just browsing, I'm in my car, I'm standing in a line, I see something, I tap on it, one click, I buy it. I've reduced a bunch of friction, I've entertained you, you've gotten something that you didn't even know you wanted. You know, it seems to me that this next phase, maybe it's in the form of these smart assistants,

the Google Home, the Alexis, maybe they'll move into our offices. But it's this predictive search. It's contextually understanding my life, getting me the things I need before I even asked for them. You asked earlier, what's the end state? Or how much more is there to run? I remember when I graduated from HBS in 2000, I thought I'd already missed it.

Google was already too big, had a few hundred employees. And the reality is we're just getting started. And the reality is today, when we look back two decades from now, there's going to be, I would venture to say there'll be more value creation and destruction over the next two decades than we've seen over the last two decades. And just as I wouldn't have forecasted a lot of the developments in 2010 that we've had over the last decade, I'm not exactly sure what it's going to be. But all of those things that reduce friction make our time more enjoyable, more productive. they're going to have a lot of deep traction in both internet and software. So bite-sized content has created this stream experience that's transforming things. I'm curious how you think about bite-sized work.

So sort of what I guess people call the gig or the passion economies, I think those are probably two slightly different things. What's your take on companies that are building platforms or services to support that general trend or idea? I'll answer that from two different perspectives, one from an investment perspective, perhaps, and the other just from a societal perspective. At a societal level, while we built a society where it envisioned, at least in the United States, it envisioned us all going to work nine to five for a company.

We had worked there for a long period of time. We'd collect a retirement package. Our health care would be provided by the employer because most certainly we were going to be attached to an employer. and it was a very static view of the world. And so the transition from that to something else, while ultimately may be better for all of us, is certainly going to have some dislocation challenges

and none more obvious than health care. So if you're a gig worker, you're not a full-time employee in this country, where health care is attached to the corporate employer, right, how do you get health care? Uber has talked extensively about their desire to be able to provide health care to their part-time gig workers without coming under all the other government regulations associated with kind of full-time employment. And as you know, there's a push by a lot of people to force all of these gig workers into being classified as full-time employees. And I, for one,

having talked with hundreds of drivers and delivery people over the years, I would say overwhelmingly, they love the flexibility. They love the ability to work part-time. They love the ability to work for multiple companies. And I think at a societal level, we certainly need to make sure that we evolve the social safety net, that we attach health care to people instead of to employers. But I'm most confident, we'll figure that out after we try a bunch of boneheaded things. But the idea of giving people flexibility and employment, the idea of allowing that single mother to work three hours a day and spend five hours a day with her kids, to allow the person trying to put themselves through college to deliver food for an hour a day via Dordash.

I would have loved those opportunities when I was trying to earn a few extra bucks when I was in college. So I certainly think that that future is here to stay. And I think both sides of the transaction are made happier. I'm not standing in an hour-long taxi line in the rain, hoping that more supply will show up so that I can get a ride across town because now we just have more drivers that take to the streets because we're offering them a good yield on their time.

And so the rider is happier, the driver is happier. And I think we head down that curve toward the optimal use of labor and capital. when we allow for these things to occur. There's way too much friction that exists today, but I think we're going to see more of this, not less of this in the future. How hard is it to parse early on, or I guess a different way of asking it would be,

how early on do you think it's safe to evaluate who might win a given vertical? So the Uber story has been fascinating to watch. Obviously, now we know that they're the winner, right, or the biggest in this field. But it seems like to take like the food delivery wars right now, it would be incredibly hard to parse who's going to emerge most victorious from this.

So how do you think about that? You mentioned earlier being too early as a problem. How do you address something like that in this space? I know a really well-known investor in China, and they said in 2005, 2006, they knew e-commerce was going to be huge in China. They wanted to make it a huge part of their firm bet. And so they did. They went in, they bet big on VIP shops.

And here they did all the work. They were right on top of it. They got the thematic bet right, right? But bet on the wrong horse. Their conclusion was, in 2005, we should have bought JD, should have bought Baba, should have bought VIP shops. We didn't have to make a bet on the winner. The market was so vast, it was going to be so big. And so I think when it comes to something like ride share or something like food,

delivery, once you get to the point of concluding it's a good business, good Tim, good management team, I think you can bet on multiple players. I think the bigger question in that world has been, is it a good business model? Clearly, over the course of the last 20 months, we had excess capital in the world, epitomized, I think, by overinvestment out of soft bank. That excess capital led to excess competition, excess discounting, companies were burning extreme amounts of cash, and I think it really obscured the profitability of the model. Uber just reported their quarterly reports, and I think their segment EBITDA margins in January and February for ride share were over 30%. I believe six quarters earlier, they were negative 20%. For us, where we spent our time was it,

is Uber going to win over Lyft or Kareem or D.D.? It was really to study the market. And our conclusion was that these were ultimately going to trend toward two-player markets. And in a two-player market where your supply base was highly fragmented, we thought that these marketplaces would ultimately end up with 15 to 20% rakes and 25 to 30% EBITDA margins like a lot of other marketplaces. and that was really where you had to develop conviction as opposed to who the absolute winner was going to be. So you started four, I think, different companies, operating companies, investment companies.

If you had to scratch everything today and go start another operating business, what problem space or area do you think you would investigate first? It's a great question. Well, let's be clear. In 1999, I started working with David Fiackel and Joel Cutler. They were thinking about starting general catalyst and they made it early investment. with SoftBank in the online travel space. I helped him put that deal together and became the co-CEO of that business. That business was kind of like the Shopify for online travel. SoftBank had another

investment that really was the Shopify, which was GSI Commerce run by Michael Rubin. And we sold that business in 2001 or our stake in the business to Barry Diller, at the same time that Rich Barton sold Expedia. Interestingly enough, Dara, Kasha Shai, was the head of M&A for Diller at the time. We were early believers that all of this commerce was going to shift online. As I look at the digital transformation today and say, where is the biggest gap? I think consumer is certainly got the biggest upside opportunities, but I also think it probably has the highest beta and the most difficult point of entry for success. I'm fascinated by all the gaps that still exist in software. I'm fascinated about the application of software and data to life science problems.

It would be very contextual as to where I was in my career. Rich Barton once told me, after investing in one of my companies, he said, you're a terrible entrepreneur. And I said, why? And he said, because you convinced us all to give you money. And now you're being too conservative in how you're spending it. Like, you just need to go for it. And it was really kind of that moment in time that I realized, you know, I'm trained as a lawyer.

my dad had started a business and went bankrupt and so we kind of lost everything when I was young and I spent a lot of time thinking about what can go wrong and as an entrepreneur that's a really challenging place to be as an investor running altimeter I get paid a lot to think about what could go wrong for me the beauty of building altimeter is it really is an operating business you have to figure out what your competitive advantage is you have to recruit a team you have to set a vision set essentialism is your cultural north star you have to raise capital which is the act of selling to these enterprise customers who happen to be university endowments etc and then you have to execute and your craft happens to be finding great companies where you can go be a part owner and for a long

period of time so for me i feel like i found my the perfect fit a place where i can scratch the operational itch the entrepreneurial itch but at the same time i think on my heart of heart I'm an analyst. I don't run Altimiter as some platonic guardian and let everybody else do the analyst work. I'm in the trenches as an analyst because that's where I'm most intellectually satisfied. And we run a very flat organization around that. So if I had to do it all over again, and if you ask the question out of the four companies you ran or started, which would you start again? I would say Altimiter. Fascinating. One of the great things about Altimiter is it's crossover nature, that it's doing both private and public investing.

And this shift from public to private as the zone of value creation is got to be one of the most important and interesting trends. And I would just be curious to ask a few questions around this long-term trend and how you think about it. So the first is around collaboration. So I've seen lots of occasions when you are making investments in the private market alongside or in collaboration with other great investors. I saw just scrolling through your feed that you and Eric Fisheria has.

something done together, I think, in the ML space. It seems like there's the opportunity to be fairly collaborative in the private markets in a way that doesn't really even make a lot of sense in the public markets. I'm curious if you agree with that and maybe if you could shed some light on your experience there. Yeah, it's greatly satisfying to do that. But let me first just click back and say, I started the investment business in Boston. And in Boston, there are a few great investors that I spent time talking to, Seth Claremont from Boulpost, David Abrams from Abrams Capital, Paul Reeder. And they were all running very throwback funds. These funds look like Buffett's original hedge fund. Like if you ask Buffett back in 1969,

why did you invest in a private company out of your hedge fund? He would say, well, I invest in good company. I just go try to find the best investment. My LPs, who happen to be my friends and wealthy families because before you had an institutional class of LPs, they just get a pro rata share of all my best ideas. And some of them are public and some of are private. And clearly he still runs Berkshire that way today. And so that was my exposure. And if you really look at the evolution of institutional investing, it was LPs who pushed the investment firms into specialization. We want the best at venture, the best at midstage private equity, the best at late stage private equity, the best at this type of hedge fund, absolute return, macro, et cetera. And so the investors

started forcing themselves into formulas that for me didn't look particularly interesting, looked very difficult to generate meaningful alpha over a long period of time, and certainly didn't optimize my happiness. So the biggest challenge that I had in raising Altimeter was, you know, saying like, this is what I'm going to do. And coming out of 2008, you know how many LPs wanted to invest in a hedge fund that was also going to have illiquid private investments? Precisely zero. It would have been easy. And I had plenty of people offered to make seed investments, but they said you can't do this or you can't do that.

And fortunately, I had a mentor and Paul Reeder who had started par capital with two and a half million bucks and grown it to at that point in time well over a billion dollars. So I had a roadmap. Bowpost started with less than $25 million, go through these distress era funds that had started pretty small and grown great businesses. And so that's what I did. I started with less than $5 million. And my first day of trading was November 1st, 2008. The vision I had, when I started at par in 2005, getting back to your original question, I said to Paul, listen, I want to run the technology book of your business, but I want to do both public and private. He said, great, just make good investments. So on the private side, we led that series being Zillow, ITA software, faircasts that we sold to Microsoft that became Bing Travel,

sidestep. On the public side, Google and owned price line and a bunch of, not a bunch, but a handful of other internet companies. And the observation was just that there were massive information synergies between these two sets of activities. And back to your point around collaboration, if you think about where the best research you do oftentimes on the public side, it's not calling up sell-side analysts at Goldman Sachs and asking them what they think about bite dance or what they think about Ali Baba. It's calling up Bill Gurley or Rich Barton or other folks who, you know, are listening to you. The networks that I developed having started businesses in the venture world were profoundly important in shaping my thinking that would lead to our biggest public investment.

It's a fascinating change. And like you, I'm so interested in just good investments, right? Good companies, right? That's what makes this whole game interesting and fun. It's surprising to me that there's not more of it. I would say one other thing, two other things. When I started this, nobody wanted them commingled. It was a hard sell.

I would say today, all of our LPs, and we have extraordinarily grateful for world-class LPs and nobody questions it anymore. And one of the thing we presented, I think, probably six years ago a slide that said was talking about how much incremental value creation was accruing in the private markets and why that was occurring. And there were three reasons. Number one, you had platforms that were now allowing companies to scale faster and in a more capital efficient way. So if you think about where Google went public, if you think about where price line went public, compare that to where bite dance is going to go public. Compare their path to $10 billion in revenue to Facebook. With every successive generation, the winners scale faster. They scale

in a more capital efficient manner. And in the case of bite dance likely will go public at $150 to a $200 billion dollar valuation. All of that value creation accrued to the private market investors. Compare where the software companies that are in the pipeline or that have recently gone public. Compare those valuations to where Salesforce went public. And I know you had Chathan he does a great job in Twitter reminding us all of this. But the fact of the matter is because of AWS, GCP and Azure, software companies are scaling faster and in a more capital efficient way. And as a result of that, for the winners, the first 10 or $15 billion of value creation is likely to accrue to private market participants. So it's not just that you have information

advantages. It's not just that there's less competition. It's not just that you can be a life cycle investor and invest through the period of time where the company's worth 200 million to 20 billion. If you want, if your fidelity, if you're TRO, if you're one of these companies that wants to participate in all of that value creation, you can't not be in the private markets. There's one other advantage to venture that I remind people, which is you can't sell. Illiquidity as a virtue. The biggest mistake we've made as a firm, and if I look around me for technology investors over the last two decades. It's what Buffett pointed out way back in the day. You show up at the office every day. You do your homework and you can't resist the urge to trade

because they're going to miss the next quarter or because COVID is going to cause bookings to go down or whatever it might be at that moment time. And so you did all this work. You bought the company. Now you sold it. And then it goes up 30% against you. And now you have behavioral lock. And you don't want to buy it back because it's up 30%. You're going to wait until it comes back down. But then it doesn't come back down. Or when it does come down, you're panicked about something else. And so here this business compounds in the case of Mongo at over 90% for the last five years

or ACTA at over 90% for the last five years. And then you look at your portfolio returns and you're like, wow, we own those in the private markets. How many gross profit dollars have we generated from those extraordinary returns? And I would say that that's where that cultural North Star having that deep alignment with your LPs and resisting that urge when you find those special companies in those big markets that are executing well. Great management teams always figure out how to expand their TAM. I mean, look at Mark Benio. Just figure out how to expand the TAM. I would say that this idea of public and private, we feel incredibly blessed to live in the heart of Silicon Valley.

And we're going to spend our lifetime investing against the continuing innovation that we think is going to drive our economy on both the software on the internet side. And we're far, far from done. One of the thing that we haven't talked about more than an hour in is price. Obviously, in the investing world, price is a really important determinant of outcome. And for a long time, really for the last 10 years, you can make a clear quantitative argument that the market drastically underestimated the potential of these big companies that we've spent our time talking about today. Today, you could make the argument that the market has gotten at least a bit smarter

and has priced these great businesses with a multiple, maybe more similar to that they deserve. How do you think about that multiple paid or price in general as a key piece of your investment process. Like trading, the number of times I've allowed a limit order or a behavioral anchoring in the private market, you do all the work, you find the company. Give you this example. We were within probably $100 or $200 million of doing a meaningful pre-IPO round in Zoom. The company was valued at around $5 billion. Compare it to where it is two years later. You have to be disciplined. you have to have a framework. You have to live by that framework.

But the desire, the biggest mistake most investors make is they over indexed to their 12-month return, their 24-month return. I mean, if you have to earn a return over the next six months, good luck. I would not go out and sell a product to anybody that said I had a special advantage at earning a return over the next six months. But if you ask me about the next three years, the next five years, the next 10 years, I think we have a real competitive advantage. For us, I don't even want to look at price targets over the next 12 months, right? Show me what you think this thing's going to be worth at

the end of 2023, because frankly, any great growth company is going to look expensive, perhaps excessively expensive over that shorter time horizon. And again, maybe it's because I grew up in the Midwest, maybe it's because I'm prone to look for the things that can go wrong. I don't look for cigar butts, but I always love a good value. The problem is if you spend all your time waiting for the best technology companies to be delivered to you at a great value, you won't own many of them. At least value defined in the next 12 months, but if you look out a couple years, I mean, Facebook, I think, is trading at nine or ten times our 2022 EBITDA estimates. Right, like that's not a taxing evaluation. If you look at it on this year, you may say, talk yourself out of it. So we go through,

we're relentless about comparing those prices. But listen, I was on CNBC, I think on March 24th, and I told the halftime report, the depths of this, that we had just covered our shorts, but we were really nervous. Like, we didn't know if this is going to last a week, three months a year. But we were confident we had LPs that would stand with us. And so we thought that the trade going longer in our best ideas was the right thing. I tend to believe that those opportunities where you can buy great companies at deeply dislocated prices, those are the exceptions. The harder thing is to continue to own a company that you love at a high price. And so if you look at it over 12 months, you're probably going to talk yourself out of it.

If you look at it over a longer period of time, I think it's a lot easier to do. And then one final thing I'll say is because we always turn a lot of it. on CNBC and you hear all these smart people talking about valuations. Stan Drucken-Miller talks who I respect an enormous amount, talks a lot about interest rates and liquidity as perhaps being even more important than earnings on determining price. And I think that when you remember the last time the technology sector really got hammered in that fourth quarter of 2018, it wasn't because of a bunch of big misses on the earnings side. It was because the market was worried that the Fed was going to raise rates three times in 2019.

That's what the dot plot was showing. So as investors, we also have to stay humble that we've been the beneficiaries over the last 15 years of massive liquidity and extraordinarily low interest rates. I mean, just in the last year, interest rates, the 10 years down 140 bibs, if I reduce my discount rate, on any growth software company by 150 bibs over the next 10 years, the multiple will go up by two to three terms. Right. So if that index last year was trading at 12 and a half times, it should be trading at 14 and a half times, all else being equal, simply because the discount rate is lower.

And so, you know, we don't spend an enormous amount of time thinking about that. but I think that, you know, that is, Druck and Miller's extraordinarily eloquent on it. And I think that that is a place where we've been great beneficiaries. And if there was a macro item that I worried about, it's less about cycles. It's less about viruses. And it's more about what the competing cost to capital is.

Brad, what today do you not understand well that you wish that you did? if there's one area that I really would love to invest in because I just I'm deeply passionate about it and I think it's going to so radically impact the quality of life it's the intersection of life sciences and software so we are I spent a lot of time just out of curiosity reading about it we really haven't made any investments there and I don't think we have any special differentiation there But when we look back over the course the next two decades, it reminds we've been laying the groundwork for breakthroughs in these medical advances for decades since we sequenced the human genome. And if you just look at how rapidly we're developing and how systematically, it's like software

development of these vaccines for COVID, right? They're sitting on top of two decades worth of research around SARS, around Ebola, around HIV. I think they said it took us two years to decode the DNA sequence for the original SARS virus. It took us something like six days for COVID-19. And so I think they're going to be exciting and profound developments that can equal the playing field for lots of populations around the world. But it's not something today that we are spending much time institutionally looking at or investing aside the life sciences piece, which could be an answer to this,

next question. What about the future excites you most? I'm an optimist. We live in an age where every day we're inundated with maybe it's particularly under this president, I don't know, but with a massive amount of information in our feeds that creates extraordinary cognitive dissonance. And the level of anxiety is, we're coming out of this pandemic, but the level of anxiety is so high. And yet you read, when I'm feeling bad, I read the Gates annual letter. Right. And by almost every measure, the world is radically better today than it was a decade ago. Whether this is mothers who are dying in childbirth, whether this is deaths from malaria, whether this is access to clean drinking water, whether this is access to basic forms of

education, whether GDP in developing nations. And so for me, I really believe that all of these productivity gains that have led to the massive improvement and the quality of the human condition over the last four decades are the result of enterprising people working on technology solutions to some of our most basic problems. And so that I'm not two pie in the sky, I'm reminded over the last two weeks of the fallibilities of the fallibility of. the human condition, the racial protests we have going on in the streets, right? Certainly, racial inequities have not been solved by venture capital and technology. Arguably, they're exacerbating the societal problem. The wealth gaps inherent in capitalism are going to be even

greater in a world of winner take most. And so I think we will most definitely have problems to solve. But I think, Net, when I look ahead, I could not be. more excited about how technology will bear on the future of our climate, how technology will bear on the human condition through life sciences, how technology will allow us to be even more productive in using our limited resources, labor and capital to generate more human happiness. But I'm not poignantic about the fact that there's going to be a lot of challenges along the way. And hopefully we can be a small part of levering these technical advances to solve some of these really important human conditions.

So my closing question for everybody is to ask for the kindest thing that anyone's ever done for you. Wow. It's a great question. Listen, my mother was a single mother. My parents were divorced. She was working multiple jobs. We didn't have a lot of money.

And now that I'm raising children, to think about how much it hurts not to be able to give your kid what they want. want. But just to make the sacrifices she's made that put her four children in the position that they're in today and me specifically helping me get a scholarship to college, which then sent me to law school and sent me to business school and really just gave me the economic freedom to pursue my interests. So I'm the beneficiary of extraordinary acts of kindness along the way, but the sacrifice of my mom would probably have to be front and center. I love all the categories of answers I get to this question, but maybe my favorite is versions of providing enormous opportunity for others, whether that's children or friends or people you hire or whatever. It just seems like one of the core kindnesses that we do. So I love the closing answer. Yeah, it's great.

Well, Brad, I've learned so much from you today. I really appreciate the time you've given us and the interesting investment strategy that you've prosecuted over the last now 12 years at Altimiter. Thanks for your time. Thanks for having me. Look forward to continuing the conversation. Hey, everyone. Patrick here again. To find more episodes of Investors like the best, go to investorfield guide.com forward slash podcast. If you're a book lover, you can also sign up for my book club at investorfield guide.com forward slash book club. After you sign up, you'll receive a full investor curriculum right away and then three to four suggestions of new books every month. You can also follow me on Twitter at Patrick underscore Ocean. O-S-H-A-G.

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