Invest Like the Best with Patrick O'Shaughnessy - David Sacks - How to Operate a SaaS Startup - [Invest Like the Best, EP. 234]

Starting point is 00:00:00 This episode of Invest Like the Best is sponsored by Canalyst. Canalyst is the leading destination for public company data and analysis. I'd heard of Canalyst over the past few years and became more interested after meeting the founder and CEO last year to pick his brain about SaaS businesses. Founded by a former byside analyst who encountered friction in sourcing, building, and updating models, Canales is now used by over 300 institutions, including the largest money managers in North America and by a number of guests on the show. With detailed company-specific models, on virtually every investable public equity, Canalist clients are able to react more quickly.

Starting point is 00:00:35 If you've been scrambling to keep up with a deluge of IPOs and SPACs these days, Canalist has models on Robin Hood, Marquetta, Grab, and everything in between. Their pre-IPO models are built as soon as the S-1 hits and include all segments, KPIs, and non-gap figures. If you're a professional investor and haven't talked to Cannibalist recently, you should give them a shout. Learn more and try Canales for yourself at canalist.com slash Patrick. C-A-N-A-L-Y-S-T-com slash Patrick. If you're curious to hear more about Canales, stay tuned at the end of the episode

Starting point is 00:01:07 when I talk to Canales customer Ryan Cope from American Century Investments to discuss Canalist in more detail. This episode of Invest Like the Best is sponsored by 8 Sleep. Eight Sleep's new Pod Pro cover is the easiest and fastest way to sleep at your perfect temperature. It pairs dynamic cooling and heating with biometric tracking to offer the most advanced solution on the market. simply add the Pod Pro cover to your current mattress and start sleeping as cool as 55 degrees or as

Starting point is 00:01:34 hot as 110 degrees. It also splits your bed in half so your partner can choose a totally different temperature. I was so impressed after using 8Sleep that I became an investor. To embrace the future of sleep and get $150 off your new mattress, go to 8Sleep.com slash Patrick or use the code 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, stories, and strategies that will help you better invest both your time and your money. Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at join colossus.com.

Starting point is 00:02:21 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'Shaunsi asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaunacy asset management may maintain positions and the securities discussed in this podcast. My guest today is David Sacks, general partner at Kraft Ventures and founding COO of PayPal. During our conversation, we explore what differentiates enterprise SaaS from DTC subscriptions, what makes for a magical product launch event, and what key growth metrics David uses to measure success. David has written extensively on his idea of operating cadence,

Starting point is 00:03:08 and we explore how that applies to various functions within an organization. As time goes on, I am more and more impressed at the talent that existed within the original PayPal Mafia, and I couldn't help but asked David to highlight the superpowers for a few of his early partners. This was an incredibly informative conversation with fun threads throughout. Please enjoy my conversation with David sacks. So, David, I figured we'd start with a very fun short list of investment criteria that you've shared publicly before and dive into the detail behind some of these. My favorite of these is, can it explode? I just like this idea of looking at a company and going through this exercise of deciding whether or not it can explode. I'd love me to explain for us what that means to you,

Starting point is 00:03:47 what it looks like when the answer to that question is yes. So it's a little different depending on whether it's consumer or enterprise. I mean, I've had some experience with both. PayPal was a consumer play that was very explosive. And then I did Yammer, which was enterprise and by enterprise standards, was fairly explosive. But that means towards a magnitude less. For consumer, you almost have to be explosive because you basically have to go viral as a consumer product. Because the typical consumer, at least for any kind of social product, they don't pay or they don't pay very much. Consumer products tend to have high churn. As a result, you can't spend a lot to acquire that customer. So the only way to build like a very large customer base is to somehow go

Starting point is 00:04:34 viral. I mean, that by and large has been true with consumer products is that the big consumer companies didn't really spend any real amount of money on customer acquisition. They figured out a way to do it just like organically. Enterprise is a little different or B2B SaaS because for a functional SaaS company, you'll have more expansion than churn. the customers, those sort of revenue, the customers are willing to pay. Sometimes they're willing to pay a lot. And so that those revenue courts be around forever. And as a result of that, you can actually spend money on acquisition, and that's what makes the sales team pencil. And so in the enterprise context, the explosiveness is more around lead gen. Do you have a way

Starting point is 00:05:14 to sustainably create leads? And if you can use consumer tactics like virality to create sort of a rapidly growing top of funnel, that's a superpower for SaaS companies. So I try to invest in those kinds of companies. That was the thesis that we developed with Yammer, was to apply consumer growth tactics to an enterprise product. And I still try to invest in those types of companies today. Are there things that you see often, either in consumer enterprise, that are clear knows because it's clear they can't explode, kind of the negative version of the question? Yeah. I mean, so we have sort of minimum growth thresholds that we want to see to invest in a SaaS company.

Starting point is 00:05:54 Below a million dollars of ARR, we really want to see about 15 to 20 percent month-over-month growth. Between, say, one and five million of ARR, we want to see a company that's at least tripling you over year. And then maybe above five million of ARR, you could relax it a little bit, but certainly not below doubling every year. So yeah, we kind of have those like minimum growth hurdles. So obviously in any product, you've talked about this notion of a product hook,

Starting point is 00:06:19 like some very simple elemental thing, which I think will then drive that potential explosion or virality. What have you learned about what makes for a good product hook? Again, this is something I learned at PayPal. It's very important for consumer products that you understand exactly what is the single transaction or user interface, that atomic unit of the product. So with PayPal, it was putting in someone's email address and a dollar amount, and then you could attach a credit card to it and just send money. That was sort of the product hook. It has to be something that consumers are willing to engage in over and over again. So with Uber, it was putting a pin on a map to summon a town car to pick you up and then take you to your destination.

Starting point is 00:06:59 Google probably has the ultimate product hook, which is just a search field. You put in your search query, hit enter, maybe I feel lucky, whatever, is two choices. And that's an amazing product hook. And so with consumer products, you have to figure out what is the repeat transaction going to be? And how do you translate that into a very simple intuitive interface? Because consumers generally, won't stick around for a very complex transaction. People make the mistake of trying to get users to engage in a complicated behavior before they've gotten them to engage in a simple one. You can graduate users up to complexity over time, but only if you get them hooked on some aspect of the product. Twitter had this beautiful product hook, which is just, what are you doing?

Starting point is 00:07:44 And you post your tweet. The product actually hasn't gotten that much more complicated, but now they can layer on new things on top of it. We took that same product hook and adapted it for Yammer, which was, you know, what are you working on? And that was just that initial way to get people to engage with the product, start creating content, and then we could build from there. Now, one difference between SaaS and consumer is that SaaS customers have a much greater willingness and need to kind of engage with a more comprehensive product. They're willing to put up with more complexity, and in fact, they often demand it. And I call this the race to completeness. I still think it's very useful to have a product hook in mind, like this simple transaction or what's the central

Starting point is 00:08:28 user interface. Very often it's a dashboard, you know, in the context of a SaaS company. Once you kind of have that singular product hook, you're in a race to complete the product offering, to beat competitors, to create something that's where the value proposition is comprehensive enough that people are actually willing to pay for it. Again, a little bit of a difference between consumer and enterprise. Seems like always in consumer, there's this kind of element of magic and design that matters ultimately. And that in SaaS, B2B SaaS, the playbook for how things work, how you run a sales team, how you do anything, has really matured. Does it feel to you like there's been a divergence

Starting point is 00:09:06 or B2B SaaS almost feels more like private equity now, even at the early stage than consumer investing does? Well, it's interesting. I mean, the thesis that I've been investing in, And really, that I was a founder with Yamron, was really convergence between consumer and enterprise. Nobody really remembers this, but the cloud started happening. I guess Salesforce got started in 1999. It was, I think, the same year that PayPal did. And of course, they were trying to get people to move their software to the cloud.

Starting point is 00:09:34 That was just getting started in the early 2000s. Even by 2008, when I founded Yammer, there was still an incredible distrust of the cloud. The most common objection we got to our product was, it looks great, can you burn on a disk, we want to run on our own servers on premise. We said, no, sorry, we're a multi-tending cloud product. So you really had two very different worlds between consumer and enterprise in the early to mid-2000s. And the thesis of Yammer was that actually we could bridge that gap. In other words, once you've moved software to the cloud, that's sort of the first step.

Starting point is 00:10:08 Why couldn't you use all the consumer growth tactics that have been figured out for cloud products on the consumer side of the house? why couldn't you make enterprise software go viral inside companies? Why couldn't you just go straight to end users, kind of go over the heads of IT and go directly, appeal to sort of this consumerization of the enterprise is what it got named. And so it used to be that enterprise products, those companies looked very, very different than consumer companies. You know, they were top down.

Starting point is 00:10:35 They were usually led by a sales leader. They had to go through the CIO. It was a very different culture. You know, it was like much more of like an Oracle type of culture, like a Facebook culture. In any event, well, I think we've seen

Starting point is 00:10:47 over the last dozen years or so is a convergence where now that all software is being delivered through the cloud, you're seeing a convergence of playbooks

Starting point is 00:10:55 from consumer and an enterprise. Now, that being said, I guess one thing I would say about SaaS that is a little different than consumer is just how benchmarked it is. I think this is kind

Starting point is 00:11:05 to get into your point. Everyone's looking at the same metrics. It's like, what's your MRR, what's the month of a month growth rate, what's your churn, what's your expansion,

Starting point is 00:11:14 and what's your PAC? And so it's incredibly benchmarked. And then we know how to compare those metrics to industry averages and tell who's tracking a buck. So the consumer is much more of a binary thing of like you either have an explosive breakout or you don't. And you kind of know it when you see it. Like, oh, that's working.

Starting point is 00:11:33 But SaaS is more tracked. If you think about the notion of that you've written about recently of individuals versus teams and how that figures into successful products, not just at getting customers, but at keeping them. I found this fascinating that in the data, I think what you saw, even sometimes within the same company, that the team version or the version of the product that caused two people to interact or collaborate

Starting point is 00:11:56 was just a drastically better business. Can you talk about all the reasons why that's true and kind of how you came to that conclusion? I came to this conclusion because I've looked at the economics of both B2C and B2B subscription businesses. So we're talking about software products that try to get somebody to subscribe. And in one case, it's an individual,

Starting point is 00:12:16 and another, it's typically a team or a company. And what you see with individual products are just very high churn rates. I mean, usually 5% plus per month churn. So what that means is by the end of the year, you're lucky if you still have half your customer base. It's very hard to get them to upgrade. You don't really see expansion in those accounts

Starting point is 00:12:34 because it's single player mode. Whereas with the B2B subscriptions, they keep adding coworkers and you can sell more seats. So what you see on the B2B, the team product, is that not only do you have much less churn, typically call it 2%, 1 to 2% logo churn a month, you actually have net expansion because you're getting more seats sold into the companies that stay with you than the seats that you lose from the logos that churn. So what that means is the subscriber base just keeps compounding.

Starting point is 00:13:04 Do you have a favorite example recently of this dynamic playing out inside of a company in terms of just like the expansion and the team dynamics? The one that I wrote the Substack post about was Open Phone, where they started off with more of an individual experience, and then they added the team experience. And a lot of products start this way. It's a lot easier for founders to conceive of and build, like a single player mode very often before a multiplayer mode.

Starting point is 00:13:31 Sometimes you'll see it go the other way, but usually it's single player first and you do multiplayer. And they have a good individual product. It's still a business product. It basically is putting a business phone in an app on your phone, so you don't have to get a second phone at work. Compared to industry benchmarks, the individual product retains very well, but it's still a net churning product.

Starting point is 00:13:52 Again, if you have, say, 50% revenue churn over the course for a year, you're effectively rebuilding your company from scratch every two years. It's very hard to build a very valuable company that way. Whereas once they launched the team product, you could see it normally wasn't growing faster, instead of churning 50% a year, it's expanding 100% a year. So that's a fundamentally better business. Is there any nuance between what I'll call a team, which is like you can buy multiple

Starting point is 00:14:17 licenses or buy it as a team, and companies where fundamentally the product is about team members interacting? Is it the latter that really drives the best outcomes in this kind of new paradigm that you've described? You have to have a reason for team members to want to use a product. So you need something that drives the seed expansion. And so those use cases typically involve some kind of collaboration within the product. That's the multiplayer mode.

Starting point is 00:14:43 But the important thing is just that you have seed expansion. That means the accounts can keep growing because nobody, I mean, no SaaS company can avoid churn. You will always have some amount of logo churn. What that means is that your revenue base will be deteriorating year over year unless you can get more expansion out of the accounts to stay with you. And that ability to get expansion is what makes B2B SaaS businesses so magical compared to B2C SaaS businesses. And so what I always encourage companies to do when they have more of an individual subscription product is figure out how do you get the team product as quickly as possible. And sometimes it's easier said than done because it's not exactly clear for a product standpoint what the multiplayer experience is supposed to be. But for a business standpoint, there's no question that the economics product are simply better than an individual product.

Starting point is 00:15:36 As you go down the list of your investing criteria, one thing you get too quickly is frictions to scaling. You've also written about this concept of blitz failing. Everyone talks about blitz scaling, but you talk about blitz failing more specifically. There's so much that we can cover in this area. And I think really where a lot of your writing shines is just like how the system of a business actually operates and works. I'd love to introduce some of your key concepts and then kind of match them together. The first is burn multiple. I just think I introduce it first because it's sort of this high-level metric

Starting point is 00:16:01 underneath which there are several other things that we can talk about. What is burn multiple? How do you define it? How do you apply it to companies? The burn multiple is a metric I came up with just to define it. It's simply your net burn over your net new ARR in a given period of time. And that period could be a quarter. It could be a year.

Starting point is 00:16:22 But let's say like in Q1, the company burned $5 million. it added two and a half million dollars of net new ARR, that would be a burn multiple of two. If you were to say burn $1 million in a given period and add one million of net new ARR, then you have a burn multiple of one. So what you're doing is you're looking at your burn as a unit of net new ARR. You're basically asking how much burn does it take to generate one new unit of ARR, whatever that unit is. So the reason why We came up with it. It's a measure of capital efficiency,

Starting point is 00:16:59 and there's a couple other metrics that are similar. Vestomer has one called the efficiency score, which is basically just this is the flip side. It's net new ARR over net burn. There's one called the hype ratio, which is your total capital raised divided by ARR. The reason why I like burn multiple is it just puts burn in the numerator. So you know that the higher your burn relative to growth,

Starting point is 00:17:21 the higher your burn multiple is going to be. And higher burn multiples are bad. where you want to be is, I'd say under two. So you're burning $2 for every incremental dollar of new ARR. I think if you can do that or be under, you're in good shape. And the reason why we came with this metric is we want to make sure people aren't cheating on growth. So like growth is still the most important thing. Like I mentioned, VCs won't invest in your company unless you hit certain thresholds, but the way a lot of entrepreneurs who are struggling can interpret that is, oh, I need to grow at all costs. You need some check on that. If they know that in order to raise

Starting point is 00:18:00 a series A, for example, they need to generate one million of AR. Well, there's a big difference in generating that one million of AR by spending $1, $5 million, 10 million, or 20 million, right? And so it's there to make sure, so you know how impressive the growth really is. I'm sure that obviously there's a lot of nuance here. There's no one size fits all. And as a company matures, that ratio should probably go down, early product development. It's probably going to be higher, et cetera. But what I do like about it is sort of like a can't hide metric. You can't hide from this metric at all if you're a founder because it's very high level, non-controversial numbers. You then go into some of the things that might cause a bad burn multiple. And let's just assume it's an

Starting point is 00:18:40 established company. So there's a product that people are using and like and there's a sales force or something. The first is gross margins. So you've written a lot of about gross margin. I'm curious kind of like what the arc of your interest in this topic has been over time. But talk us through the gross margin problem and just kind of what you see in gross margin as issues more generally speaking for companies that are struggling. In general, SaaS businesses should be just about perfect gross margin businesses because they are pure software businesses. The insight that Bill Gates had that made him the richest person in the world is that he could create mass market software if he actually cut the price and sold more copies,

Starting point is 00:19:16 it would be very scalable because the first copy of the software is where all the investment happens, right? That's all the costs. Each incremental copy of the software is free. So he was the first one to sort of have this insight around that perfect gross margins of software. That means you really want to have a mass market product. In any event, the software then moved to the cloud. And if anything, it made it even better because now the provisioning of new copies is new instances just happens through the internet. You don't have to worry about shipping software. So these should be just about perfect gross margin businesses, 80, 90%, the main cost is usually just in hosting on AWS or something like that. And so when you see much lower gross margins, you have to ask why. And I think

Starting point is 00:19:57 frequently it's because there's a couple of things. One is it could be a physical world product or there's a physical world component to the product. And as soon as you're operating in the physical world, you're going to have real cogs, real costs of goods sold. It's going to force you to operate to have some sort of supply chain and to have real operational. and that is just a whole other level of challenge for most entrepreneurs. I'm not necessarily against investing in companies that have a fiscal world component, but it definitely raises the difficulty bar. And the entrepreneur has to have the ability to manage complex physical world operations. It's just much tougher than just being a software entrepreneur. The other way you can see a gross

Starting point is 00:20:41 margin problem is through mechanical Turk. And what that basically is, is you hire people to perform work that the product is supposed to be doing. So like the customer just sees the product. They don't know that there's all these humans in the background doing the work. They may think it's all just software, but in practice, you've got a bunch of people in the back office pushing paper around. Now, why would you do this? Because let's say that there are connections to legacy providers,

Starting point is 00:21:10 like insurance companies or something like that, and they don't have APIs. The customer thinks that they're filling out. forms on your website and that gets transmitted. Let's say you're like an insurance broker or something and they think that's being transmitted directly at the insurance companies, but you know they're not because the insurance companies don't yet have APIs. That's like one example. Okay. Now the argument for mechanical Turk, like why startups should do it is I think what the founder would tell you is, well, look, we're just getting started. We haven't had a chance to write all the software yet.

Starting point is 00:21:42 We'll be able to automate this over time. And so it's very important that we've been provide a complete product experience, and if we have to sort of mechanical turk it, that's fine. So that would be the argument for it. And then the argument against it would be, well, the problem is that once you develop a dependency on humans doing the work, it's actually very hard to change that. First of all, you're creating an internal constituency inside the company who doesn't want their jobs typically to get automated away. And it can create a culture of throwing bodies at the problem. I don't think there's like a right answer to this. It's just something that I think founders have to be very aware of. And I think as an investor, if you see a gross

Starting point is 00:22:20 margin problem, you have to ask, why is the company have so many bodies? Because software companies are supposed to be about doing more with less, be able to scale things more elegantly. It's just a red flag to look out for. Another thing that can cause bad burn multiples is really inefficient sales teams. And one thing I see a lot is companies that have lots of growth, but it's just very expensive to finance the cost of sales. And salespeople, that get very myopically focused on revenue without thinking about the underlying economics of the business. What have you seen here? What have you learned here? What's common amongst sales programs that have gone off the rails? Or what's common amongst the absolute best ones

Starting point is 00:22:58 that you've seen? What I would say is incentives work for better or for worse. And so the good part of the incentives is that if you put sales people on a plan and you have a product that has some product market fit, very scalable. You scale up your sales team and you'll be able to scale up revenue, and that works quite well. I'd say the downside of it can be, if you don't have a properly managed sales team, you have to be careful about what they're actually selling. The salesperson's job is just to close AAR. You have to essentially have quality control on your sales reps. You have to make sure they're not promising things that your product doesn't deliver because you'll have a downstream churn problem. But by that point, the salesperson may not be

Starting point is 00:23:37 involved. It'll be in CSM. And so what I've seen is that inexperienced sales manager, things that their job is just to hit the number, whereas an experienced sales manager understands that their job is to enforce good selling behavior without missing the number. They really want to make sure that sales reps are selling correctly. They're selling the right product. Even the deals that don't go anywhere, the prospects that say no, they're not like burning those prospects in a way that creates a bad reputation in the market. So there's a lot of subtleties that incentives don't, quite capture and you have to be aware of those things and compensate for them, or you could have sales team that goes off the rails. Obviously, before all that happens early on, especially

Starting point is 00:24:24 if you're investing like at CED or something, you're really buying into a team. What about teams or founders get you most excited? Like in what sorts of meetings do you find yourself like giddy or just excited to keep spending time with the founder? Well, for me, it always starts with a product demo. We have the saying that shows us a product on a PowerPoint. The same PowerPoint, can describe many different products. I don't really know what the founder is talking about concretely until I see the product and what they're trying to do. So we always try to begin with the product tour.

Starting point is 00:24:53 And then if I get excited about the product, then I'll get excited to learn more about the business. But it's like I think Naval said this, that your product is your resume when you go see a VC. No one cares where you went to school or whatever. Just show us what you've built. Any original product demo that was most magical when you saw it, or just one that stands out as magical.

Starting point is 00:25:15 Gosh, I mean, I would say that, generally speaking, products that we've invested in have been pretty great or we wouldn't have done it. I mean, so some of the SaaS companies that we invested in pretty early on, you know, we led the Series A of ClickUp, phenomenal product, really deep, comprehensive project management collaboration suite. We led the Series B for Sourcegraph, which is Universal Code Search. Those companies are both unicorns now. And then more recently, we led the Series A of Scrashpad, which is a great product for sales

Starting point is 00:25:47 reps and other people in revenue creating functions. Open Phone was another bottom of SaaS product that we invested in. And there's other ones too, but that's sort of a common denominator for me. One of the names you've given to this kind of operating structure for companies is the cadence. In the cadence specifically, I was trying to think about the right entry point for describing what this is because it kind of reminded me of Frank Sloopman's amp it up idea. like, yeah, it's great. You have a good product. You need to run a business with extreme efficiency.

Starting point is 00:26:15 And cycles and organization matter a lot. This visual and post on this topic where you couple product and marketing and sales and finance as two separate buckets. That's kind of an interesting weird delineation. I'm just curious why those two groupings. So the cadence is an operating system for companies, specifically SaaS companies. And it becomes necessary once you get above, say, 50 employees, 50 or 100 employees, on your way to say 500 employees. It works pretty well. And the reason is the very beginning of a startup, when you have a couple of dozen people,

Starting point is 00:26:46 everyone's in one room, either physically or virtually, and the founders are really running around telling everyone what to do and what to build. And there's not generally a lack of coordination or collaboration because the founders can just coordinate everything directly. By the time you get to about 50 employees, you're starting to see functional silos develop. You've got a product team, a sales team,

Starting point is 00:27:07 engineering team, marketing team, And the people in those silos are generally just dealing with their team. They don't really have a great sense of what's happening outside the company. And so it becomes necessary for the CEO to provide a lot more strategic alignment and to make sure everyone in the company is on the same page about what they're supposed to be doing, what they're supposed to be building. And so the cadences, my operating system, it's kind of the techniques that I developed first as CEO of PayPal and then as CEO of Yammer.

Starting point is 00:27:36 And what I kind of realize is that there's actually. two main cadences or rhythms that's happening in the company. One is around product development. Product and engineering, I find work best on a quarterly release calendar or a seasonal release calendar. Salesforce has been doing this for many years. I mean, the very beginning of the company, you just ship weekly. But as you get bigger, it becomes actually quite disruptive to your customers. If everything's changing on a weekly basis, you still do code releases. It's good code hygiene, not to let things build up, but from a marketing standpoint, it's easier to package up these big releases into something that's communicated quarterly. And so then what you'll do is

Starting point is 00:28:18 you'll build like a marketing event around this big quarterly release because most news in a company is sort of product created. So this creates the alignment between product and marketing is because product generates the news for marketing. So you're going to be organizing that whole side of the company, product, engineering, marketing around the big seasonal release. I'd like to do launch events. If you look at what like Banyoff has done in Salesforce or Elon and Tesla, they get tremendous benefit out of focusing the world's attention

Starting point is 00:28:50 on these lightning strike marketing events, these big launch events for their products, and then they sort of build around that. So that's one big access to the company. The other is the sales and finance system. So what I mean by that is sales is also on a quarterly schedule. What I find works best for sales teams is to put them on quarterly plans. And that's just my process of elimination.

Starting point is 00:29:14 Monthly plans are too disruptive. In other words, if their plan is changing every month, doesn't create enough predictability for sales reps. And if your sales plans are annual, that doesn't give you enough opportunities to make adjustments, sort of mid-course adjustments. So what I find is that the best sales plan, to put your team on a quarterly. And then those quarters should map to your company's fiscal quarters so that at the end of

Starting point is 00:29:38 each fiscal quarter, sales has a number, and then you roll from there into a board meeting and you discuss whether you hit your numbers or not. And so you've got sales and finance and board meetings all lined up on your fiscal quarters, and then you've got product marketing, engineering lined up on hitting seasonal releases. And what I like to do is to stagger those things by half a quarter. so everyone's here not on fire at the same time. I imagine if the sales team is trying to hit their numbers right as you're doing the big launch event. It's too disruptive.

Starting point is 00:30:10 And so what I like to do is schedule the big launch event in the middle of every quarter. And that's when product and marketing is hitting a deadline. They're sort of peaking. And then the sales team's going to be hitting their deadline at the end of the fiscal quarter. This is the cadence. If you just organize the company this way, everyone knows what they should be doing at any given point. time. And you can start to kind of march in lockstep as an army and create some predictability and routine in your company, as opposed to everyone just like running around all the time,

Starting point is 00:30:41 doing things in an ad hoc way. Can you talk me through the anatomy of a great launch event? So like Elon and Jobs come to mind theatrical releases, but there's a lot more than just that and a lot of different types. What is the anatomy of a great launch? What I would tell startups is they can start small. So you could start with like a one day event or even a two hour event. It used to be you would rent a hotel ballroom at the Palace Hotel in San Francisco or something like that. You would have maybe a keynote by the CEO and you would talk through the big product release and maybe you have demos. You might do a customer panel where you have the customers talk through use cases and there's nothing better than customer testimony because then prospects and other potential customers will hear your customers selling your product instead of you. And that will always have more credibility.

Starting point is 00:31:29 you'll try to do a customer panel. You may have partnership announcements. You may have other news. And you try to package it all up into one event, instead of getting it out in dribs and drabs with a bunch of different press releases over the course of a quarter. So that's what I mean by a lightning strike is that you save up a bunch of announcements

Starting point is 00:31:48 that by themselves wouldn't be that impressive. But when you combine them, it actually looks very impressive. And then your financing might be part of that. You might announce that you just raise whatever. You're a $50 million series B. You just launched new Android app. You have XYZ partner integrations.

Starting point is 00:32:04 You have 50 new enterprise customers. You've hit some sort of ARR milestone. Whatever it is, you want to release and you package it all up into one big lightning strike that can pierce the clutter. Other things that kill companies in blitzscaling that we haven't talked about, a couple more that are interesting. The first is external dependencies. What do you mean by this as like a landmine for companies that are growing fast?

Starting point is 00:32:27 An external dependency would be if you have built your app on someone else's platform, the platform can always shut you down. And sometimes it'll be such an obvious extension of the platform that they introduce their own competitor. That's not a great place to be is when the underlying platform that you're on and you're dependent on to get distribution decides to compete with you. We experienced that a little bit with PayPal. PayPal went viral on eBay first. That was the first market that we really exploded in. And then eBay introduced its own payment solution. And it was worrisome existential set of circumstances.

Starting point is 00:33:04 We ultimately ended up selling the company to eBay because of that. And then eventually eBay spun out PayPal, now it's a $300 billion company. The reason why it spun out is because eBay became a small fraction of PayPal's total payments. But at the time, when we first created the company, it was like 70%. So we were very worried about that external dependency. And so what you'll typically see is this dynamic where, startups will race onto a new platform to get distribution.

Starting point is 00:33:31 I mean, that's why you do it in the first place is because, oh, hey, if we launch our app on Facebook, we can go viral and get millions of users like Zinga did. But then, oh, wait, Facebook changes rules. They've shut down our virality or they're planning on competing with us. So then you race off the platform, which Zinga did as well. So you'll typically see this dynamic of racing onto platforms to get bootstrapped and then racing off them to basically create a more secure position. But if you can't thread that needle and the platform cuts you off before you've been able to diversify onto other platforms, obviously it's a very,

Starting point is 00:34:03 very risky place to be. What about regulation? Are you willing to invest in companies that have existing or potential future regulatory variables, let's say, to their success or failure? The way I see regulatory is that there's sort of like black and white regulatory rules and then there's regulatory rules that are gray. So a, black and white will it be like a place where the law is simply clear that you have to do something. And my view on that is that founders need to abide by those rules. It's very stupid not to. And frankly, if you break those rules, say the way that NAFSA did way back in the day, like, you'll eventually be shut down. Founders think they can get away with it. But the reality is that it's just that no one's noticed yet.

Starting point is 00:34:46 Like when you're very small, no one really pays a lot of attention to what you're doing. But once you start getting to scale, people will notice. And then noncompliance will definitely catch up. with you. Now, then we have other sets of rules that are gray. This might be the even more common case because the rules, the laws were frequently written years or decades ago, and they never contemplated the new technology that the founder has come up with. I mean, we're in the business of disruption. So PayPal, like no one really at that time had thought that PayPal, they never wrote money transmitter laws for PayPal, right? And so now, we eventually learned that we had to get those licenses we did. But there's a lot of examples where the law is sort of gray. And actually,

Starting point is 00:35:27 another really good example would be like Uber and taxi cabs. Did Uber need to go get taxi cab medallions? I think the answer was no, because they weren't stopping to pick people up on the street. They were being summoned like a town car. And so then they just got the TPS licenses. But then what happens when it's completely P to P and you're not dealing with like a town car driver? like the rules around that were completely gray because the law never foresaw a scenario where people could summon another driver on their phone. That's a new technology. So in cases where the law is gray, what I would tell founders is go for it. If you're creating consumer value, like eventually if you get enough consumers happy with your service, generally speaking,

Starting point is 00:36:13 the law will eventually accommodate that because it wants to make consumers happy, right? But what you need to do is at the same time, go out and evangelize for your point of view. You need to go out there and explain why what you're doing has tremendous consumer value, why it's good for society. And sometimes I think founders make the mistake of just trying to hide as long as possible. And I think Uber saw and what Airbnb saw, Airbnb is another great case. They're not a hotel. What regulations apply to them, I think what they realized is we need to go out there and evangelize that what we're doing is very positive for the world. And we have to get out there with that message and we have to start lobbying and get public evangelism

Starting point is 00:36:55 so that we end up with the right regulatory outcome. Another aspect of growth that I'm really interested in is leadership and culture. It sounds so good that you would grow four times or three times or ten times in a given year. It sounds amazing. But I think anyone that's lived through it knows it's actually incredibly difficult on one psychology, on a million different things that are breaking, et cetera. What have you seen most commonly that breaks companies in the category of, leadership and culture as they're growing really fast.

Starting point is 00:37:22 Well, it's interesting. I ultimately think that company culture is a macrocosm of the founder's psychology. Anything happening in the founder's head, the struggles that are playing out, the person's attitudes will ultimately be writ large across the company. It generally happens through a process of role modeling behavior. If the founder is warlike, the company will develop a very aggressive culture. If the founder, frankly, cuts corners. the company culture could be negligent. If the founder is stuffing and corporatists, you don't typically

Starting point is 00:37:56 see that in startups. You see that in later stage companies. The company culture will frankly be corporatist and stultifying. The famous or chart cartoons, different companies like Apple and Microsoft, you know, the Microsoft one was a bunch of different business divisions pointing guns at each other. And look, that's a direct result of the fact that Bill Gates was very competitive. That competitiveness trickle down into the culture and things were set up that way. The org chart diagram for Apple was, looks like a son, Steve Jobs at the center, and then everyone else is like around the radius connected to him, right? So company cultures really reflect the founder's psychology. And where I think companies can go off the rails is if founders don't have a balanced psychology. I think this is one of

Starting point is 00:38:42 the areas where it can be very useful for a strong founder to have co-founders is because one person is likely to have all of the personality traits that you'd want reflected in a company culture. And so sometimes you need the ying and yang of like a Steve Jobs and like a Wozniak. So it can be very helpful to have that balanced, it's sort of high psychology. But if the founder becomes unbalanced, the company culture can become unbalanced. And we have a name for those. We call them wild stallions. There are these founders who tremendous horsepower, but they're a little bit wild.

Starting point is 00:39:16 and if they don't learn to get that under control, you know, they can go off the rails. I once heard Jerry Seinfeld talk about this concept with comedians. He said that he likened the talent that comics have to being like a horse. Some people are riding like a Bronco. I mean, some people have enormous talent, but they can't get it under control. Great comics who die tragically young because of a drug overdose or something like that.

Starting point is 00:39:41 And those were some of the most talented ones. And, you know, they were really riding a stallion, but they could not tame it. They cannot control their own psychology. If founders don't learn to do that, you will get a company culture problem. So let's just take the success case where you have like a stallion prone founder, let's call it, that is successful in sort of taming themselves and the culture. How does the rubber meet the road there typically?

Starting point is 00:40:05 Like what are they actually doing to make that possible? I think that the strong, hard charging founder would seek to balance that by getting advice from experienced people and just double checking that, yes, they're driving extremely hard, but they're also just making sure that the strategy is correct. The one core obligation of the CEO founder is to make sure the strategy is correct, because if you're executing against the wrong strategy, it doesn't really matter how hard you're working. I mean, if you're rowing in the wrong direction, rowing faster is not going to help you. I think a smart founder will just subject themselves to some sort of process,

Starting point is 00:40:44 of inspection. And this is where they should be building a good board of people who can do that inspection, right? And so it's a balance because you'll hear founders say, well, I just want to get the most pro-founder board they can. And yes, look, at this point, all VCs worth their salt are pro-founder, right? Everyone wants to support the founder. But the question is, does your board have enough relevant experience, having built startups that they can actually give you advice on whether your strategy is correct. And it's useful for founders to subject themselves to that scrutiny and conversation. I used to compare when I was running companies, what I would do, I would compare it to taking the Rubik's cube out of my head. Whatever the big problem was that I was like

Starting point is 00:41:27 noodling over, whatever was bothering me, I would take the Rubik's cube out of my head, put it on the table, and I would let my board start turning the Rubik's queue or let my exec team turn the Rubik's cube in front of me, and they're obviously having a debate about it. And then when everyone's expressed their point of view and we've kind of hash things out, I can take that Rubik's Cube and put it back in my head and start working it again. But hopefully they've made some progress. They've solved more sides of the cube. So I think that's what the hard charging founder has to balance because building billion dollar, multi-billion dollar companies is just really hard. And the odds that you're going to be able to figure it out all on your own is pretty unlikely.

Starting point is 00:42:06 The idea of the investor operator is this modern creation. And you're a really interesting person to ask about this because you, just in your own career, have done both very successfully, but also the PayPal group, the original PayPal group often called the mafia, just has this like crazy high percentage of people that have been both very successful operators and investors, which in the public equity markets, you almost never find like a great CIO or PM that was like a great entrepreneur. It's just there's not a lot of crossover. Can you say a little bit about that? Like what was in the water back then in that group?

Starting point is 00:42:39 And how do you think about just this investor-oper trend? Yeah, well, I think there was a lot of pattern recognition that we learned at PayPal about what's successful. And then it was those patterns and that playbook that we developed at PayPal was then adapted by the PayPal mafia who went on to both found their own companies using those playbooks or investing companies that they recognized were doing well. The timing was also good. We sold PayPal to eBay back in 2002. I've kind of joked that it's less of a mafia and more of a diaspora. eBay had a very different company culture. PayPal was very freewheeling.

Starting point is 00:43:17 It was kind of like the Old West. And eBay was very corporate, working at a big bank or something or consulting firm. And they promptly drove out the PayPal diaspora. We all got driven out. They kind of burned down our temple. And we had to go to create new homelands by creating our own companies. So the timing of that was good because, that was sort of the nadir of the dot-com crash.

Starting point is 00:43:39 A lot of other people had just left. The joke back in the early 2000s was that B-to-B meant back to banking and B-to-C meant back to consulting. Everyone was leaving Silicon Valley. And so you had this group of individuals who were cut from the same cloth. They were very entrepreneurial to begin with,

Starting point is 00:43:57 but they also just had a very positive experience building like a unicorn company with PayPal. And they learned all these playbooks for virality and team building. and how to build software products. They kind of had the feel to themselves. Would you be game to do, sort of highlight a superpower of some of your key

Starting point is 00:44:14 early PayPal partners if I tick off some names? Sure, yeah. Cool. So we'll start with Peter Thiel. Peter's superpower was that he could identify the handful of strategic decisions every year that were gonna matter 10x or 100 X more than everything else. And everything else, he had basically delegate. He was more in the delegator mode.

Starting point is 00:44:36 I don't think he's ever fancied himself like a true operator, but he was very, very good at the overall strategy of the company and recognizing when one of those sort of power law moments occurred from a decision-making standpoint. And then, of course, he was very, very good at recruiting and hiring great people and putting them into those roles so that he could delegate to them. What about Max Lechon? Max was during the PayPal days was the great technologist, and he was the CTO and built the whole engineering team. He was also very good. He had sort of like nerd charisma and was very good at hiring former classmates from U of I.

Starting point is 00:45:11 And then the other superpower that he had was that he kind of figured out the fraud problem at PayPal. PayPal was being taken for many millions of dollars by fraudsters. And he figured out how to build the systems that we would use to stop the fraud. And those technologies never really existed before. And I think post PayPal, he kind of graduated up to becoming CEO of his own companies and has the full range of skills. Elon might be an interesting one because there's probably many things you could say,

Starting point is 00:45:40 but what stands out as his superpower? I think Elon, there's nobody more ambitious and sort of visionary. He's not just creating a rocket company. He's putting people on Mars. And so, I mean, it's like unbelievably visionary and charismatic. The difficulty level is like off the charts,

Starting point is 00:45:56 but he also has the ability to execute. So you're combining maximum vision with maximum ability to execute. And that's why he's able to do things that nobody else can do. How about Ruloff? Rulov, yeah, it's a strange story that Peter hired Ruloff to be CFO. I think Ruloff was like 28 years old and had just graduated from Stanford Business School.

Starting point is 00:46:17 We had had a CFO who had worked at a big bank and was sort of the gray-haired CFO that you'd want to IPO with. And something like three months before the IPO, Peter took that person to lunch and said you're fired. You're not smart enough, basically, was his complaint. You didn't know the numbers well enough in Peter's. Peter's very good at math. Rulov was like the smartest guy on that side of the house with the numbers and accounting background.

Starting point is 00:46:42 Peter's like, you're a CFO. You're going to take us public. Nobody else would have done that, right? And you wouldn't really see that done today. But obviously, look, Rulov was valetorian his class, completely brilliant. And the reason why I think he was great in that role is partly because he knew the numbers so well. And he created, first time I ever saw a cohort model, a revenue cohort model is when Rulov developed that. for PayPal. I didn't know what that was until I saw that. But also, you know, he has diplomatic

Starting point is 00:47:09 genes in his DNA and was very good at managing investors and the IPO roadshow and that whole thing. Last two. Reed Hoffman. Reed was in charge of all the biz dev relationships. And Reed's job was kind of to make sure that all the platforms that could switch us off didn't. He went to eBay and they wanted to kill us, but Reed would try and convince him. Reed has a very nice personality. and would sort of convince them, keep them at bay. And same thing with Visa and MasterCard, he'd manage those relationships to make sure that we didn't get switched off.

Starting point is 00:47:42 The start of our conversation was your investing criteria, which I first saw when you quoted Keith were boys' version of the same thing. So we'll close with Keith. What was Keith's superpower or is Keith superpower? Yeah, Keith and Reed were sort of flip sides of the same coin. So meaning that we had these huge platform dependencies at PayPal, and we were like constantly worried about how do we not get switched off? How do we not get switched off by eBay?

Starting point is 00:48:04 how do we not get switched off by Visa MasterCard? And Reid, frankly, was the good cop. Keith was the bad cop. He spun up an effort to make sure that the antitrust authorities, like the FTC, like the DOJ, were aware of any potential anti-competitive actions that these big monopolies might take against us. And it was very important in terms of brushing them back from the plate because these big monopolies, if they get the chance to stomp on a little competitor who's innovating and potentially doing something disruptive in their space, they will.

Starting point is 00:48:34 And Keith was a little bit of our pit bull to keep those big monopolies at bay. It's a testament to the insane collection of talent that, as we have to move on here and wind down the conversation, I didn't even mention the founders of YouTube. We're also at PayPal, just an incredible group. What about the world just writ large is most interesting to you right now? And this can be interesting in a good direction or a bad direction, things you might be worried about that are changing. What are the big zones of change or trends that have your attention? Well, I mean, if I look at things on like a 20-year time frame, the thing that really jumps out of me is just how much bigger the whole tech economy has gotten. I gone to Stanford in the early 90s, graduated, left for fears, got a law degree I didn't really need. And then came back for PayPal in 1999. Tech was still pretty concentrated around the Stanford area, concentric circles around Stanford. There was stuff happening with chips down in San Jose. the tech economy was still pretty small. And what you've seen over the last 20 years is just this giant expansion. So you had tech take over the whole Bay Area from San Francisco to the East Bay, and then it's now spilling out to every city. And partly because of COVID, you know, have remote work, distributed work, and people are creating tech companies everywhere. And of course,

Starting point is 00:49:51 you've seen the amount of venture capital that has just exploded as well. So the amount of capitalist available to fund all these new ideas. It's just grown tremendously. So, I mean, the big takeaway is just that the entrepreneurial economy, this sort of opportunity economy that we've created is just keeps getting bigger and bigger. And it's the thing that I'm most bullish about. It's much easier, much easier to start a company today than it was 20 years ago. 20 years ago, it was actually hard to get an introduction to a venture capitalist. You know, you actually had to figure out this place. You have to onlist your phone number. They call you. You'd have to figure out like this Sandhill Road thing was and how do I get a meeting there?

Starting point is 00:50:30 And now there's so many VCs and microVCs and angel investors, they're running around chasing every plausible idea and throwing money at it. There's also so many more tools to build companies, whether they're no code or low code development tools or whether they're legal tools like the safe note or something like that. I've just streamlined the whole process of fundraising. So it's just so much easier to get started to be an entrepreneur now than it was 25 years ago. The main reason I went to law school 25 years ago is I didn't know how to become an entrepreneur. It wasn't clear what you're like, what do I do? Now you'd never even ask that question. You could go to YC.

Starting point is 00:51:11 There's just so many different ways you could explore it. So that's the big positive trend that I see. And then the negative one is just a lot of the things I see happening in society. politics don't seem that great to me. My line on this is that we're in a race for the future between technological acceleration and socio-political deterioration. So we've got this very positive force in terms of technology accelerating, creating tremendous opportunity, and then our politics and cultures seem more dysfunctional and divided with more divisiveness, more sense of the country breaking down into warring political tribes. That part seems not so good to me. I don't

Starting point is 00:51:50 know which force is going to win. Two closing questions for you. One is sort of in the form of advice. You had this nice write-up where you identify cool lessons from the last dance, the documentary about Michael Jordan, one that really stood out to me in there because it kind of masked back out of the cadence and other things that you've written. And I take your work to be very real. Like, this is what's actually happening in the company. Let's focus on reality and not sit there in dream. It was item number five, which was the team wants to be pushed. Can you just give that as a form of advice, like what that means to you and why it's interesting? Well, first of all, I mean, Michael Jordan was the classic maniacal founder, right?

Starting point is 00:52:24 I mean, his desire to win was unparalleled. He had a founder mentality. Founders need to have that. Peter Drucker once said that all great things in business happened because of a man on a mission or a person on a mission. It takes a monomaniacal founder to create a great company. Jordan was sort of the founder of that team, but it also took co-founders. Jordan was playing on the Bulls team for about five years before they won their first ring. People don't remember that.

Starting point is 00:52:54 So what changed? Well, they got Phil Jackson as the head coach. They got Scottie Pippen in as Sir Jordan's number two. And then they also got role players like Dennis Rodman. And so they built a team around their star player. And then they got a coach who knew how to create a system, the triangle offense, that would utilize everyone's talents maximally. and specifically what they did is,

Starting point is 00:53:17 I don't know if this is getting too detailed. No, bring it. I love it. The thing that's fascinating is you would think that having the greatest player of all time on your team with Jordan, you'd have a very simple offense, which is just Doug Collins, the coach before Phil Jackson, what he said is give the ball to Michael and get out of the way.

Starting point is 00:53:35 Like that was the strategy, right? But as it turns out, they could not win a championship that way because that offense was too easy to guard against. All they would have to do is double or triple team. and that was it. And then they would win the game. And so what Phil Jackson did with the Triangle offense was create a system in which

Starting point is 00:53:52 Jordan could either take the shot or if he gets double-team dished off to the open man who could then make the shot. And so it turned Jordan from a great individual performer into sort of a team player. It allowed him to make everybody else great too. And there's something obviously analogous with startups that obviously if you have the star player, the franchise player like an Elon, that matters tremendously. tremendously, but you still need a team around that person to be the force multiplier of that person. And that when this talent is there, like the PayPal talent or Jordans, they do want to be pushed.

Starting point is 00:54:27 They want the challenge. Right, exactly. And so what you saw in that documentary is as maniacal as Jordan was, okay, and even though that might have created some hard feelings at the time, I didn't hear anybody who was interviewed for that documentary regret their time on the Bulls. got to be part of something great. They got to be part of like the greatest franchise, the greatest team in NBA history. At the end of the day, everybody is happy to look back and be part of that success. And they do want to do something great. And so Jordan pushed them

Starting point is 00:55:00 incredibly hard, but they responded. And now the reason why he was able to do that is he was leading from the front. I mean, he wasn't asking anybody to work harder than he was working with Elon's companies as well. I mean, even today, Elon's one of the, the richest people in the world, he still works incredibly hard. That gives someone like Elon or Jordan the credibility to push the team that hard. I love it. It reminds me of some of the stories you hear about special forces teams that sort of come home and have an easier life and sort of long for the difficulty of working on a team. I asked the same closing question of everybody. What is the kindest thing that anyone's ever done for you? Kindest thing. You mean like in business

Starting point is 00:55:41 or in life? Up to you. When I was five years old, my parents immigrated to America. That was, like, very important for my future development. Look, I think they could have been happy and successful staying where they were, which was South Africa. But they especially had the conversation about where their kids would want to live. Immigrating to America was obviously a gigantic unlock for me to have opportunity in my life. Have you been back to South Africa much? I have been back a number of times, but it's been about 20 years since the last time I was there.

Starting point is 00:56:12 And what did it feel like going back there knowing that your family was originally? from there. I love that country. It was really interesting to see the change in the country. You know, I guess last time I was there was about the year 2000, Mandela had become present, and they completely transformed the country. Parti was gone, and things were very optimistic. And it was really interesting. I went to go see Robin Island, which is the island off the coast of Cape Town where all

Starting point is 00:56:37 the political prisoners were held. And it was a really interesting experience. The tour guide asked the group some questions. And I had just read Mandela's book Long Walk to Freedom on the plane ride over. The plane ride was like 13 hours. It's a long book. It took about 13 hours to read the book. But anyway, he called on the group.

Starting point is 00:56:55 He asked some questions and I knew the answers because I just read his book. And anyway, he was very impressed that I knew who some of his heroes were after the tour was pumping my hand and really excited that, you know, I knew who his heroes were. What a cool memory. This has been such a good conversation. I highly encourage those listening to go read everything you've written. I think as like an operating manual for fast-growing businesses, it's about as good as it gets. And I really appreciate you walking through some of those highlights with us here today.

Starting point is 00:57:24 Absolutely. Great to be with you. This episode was brought to you by Canalist. In this four-part mini-series, I sit down with Canalist client Ryan Cope from American Century Investments and talk about how Ryan found out about Canales, how he got involved in small-cap investing, and his favorite aspects of using the Canales models for him and his team. In this week's episode, Ryan and I talk about how he approaches new companies in the small cap space and how he first heard of Canalist. So when you're looking at, let's just imagine there's a new company you've never seen before, walk us through the way in which you approach a new company.

Starting point is 00:57:59 Yeah, so one of the other great aspects of the small cap universe is that it's so large. So there's always more stones to turn over, if you will. So one of the first steps that we would do is to pull up historical financials for a business. and make sure that we understand, you know, this is a profitable business. This is a high-quality business. This is not something that's super cyclical. We're very focused on balance sheets and free cash flow. We want to see that they can turn those earnings into free cash flow,

Starting point is 00:58:27 that they can then either redistribute to us in the form of dividends or reinvest in their business at high rates of return. When you think about the types of industries in small cap versus in large cap, in large cap, you have a lot of these like winter tick most type dynamics. Small cap seems like there's just a ton of diversification. How do you think about sectors or how you build a portfolio? This will start to bridge into how you use Canales. But it just seemed like you'd have to know a lot of different kinds of business models to do well in this space.

Starting point is 00:58:55 That's exactly right. So a lot of the companies that we own in our portfolio might be a supplier to one of those winner take-all larger cap companies where they're just making some niche but very critical component that goes into those larger processes or larger equipment. Yeah, you're exactly right. There's a very wide range of types of businesses that you have to understand. And I think it's something that on our team, all five of us really love that very broad business analysis, if you will. Do you think it's fair to describe, use the Bezos concept of undifferentiated heavy lifting

Starting point is 00:59:28 when it comes to the process of building company models? And here I'm interested in how you first heard of Canales and sort of the job that the service does for you. Yeah, that's a great question. So to answer your second one first, we first heard of Canales. panelists through actual testimonials from users on social media, Twitter, and then through targeted ads on great podcasts like yours, Patrick. I would say we were skeptical, though, at first on the reliability of the data. We've used lots of data providers over time. And especially when you get

Starting point is 00:59:59 down to the smaller companies, there's nobody that's fact checking, if you will. And so Canalis, one thing that we found very valuable is that human touch that Canalus adds. And we found their data to be significantly more reliable than some of the data dump providers that we've used in the past. Can you say a bit more about what that means human touch? So what very specifically is the difference between, you know, you open a canales model or you open a XYZ model from some other data provider? Like, what does that human touch create? There's a number of things. The first is just the reliability of the data. So they have people that double check every single input into their models. The second, and maybe more important, is really the driver's section.

Starting point is 01:00:40 So they have someone that goes into the model and understands really what is driving the revenue for a given company and breaks that out in drivers work. If you're trying to do a one size that's all pulled from a 10K, you simply cannot do that with the size of the universe in the small cap space. If you enjoy this episode, check out join colossus.com. There you'll find every episode of this podcast complete with transcripts, show notes. and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.

Invest Like the Best with Patrick O'Shaughnessy - David Sacks - How to Operate a SaaS Startup - [Invest Like the Best, EP. 234]

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