Invest Like the Best with Patrick O'Shaughnessy - Elad Gil – How to Identify Interesting Markets - [Invest Like the Best, EP.101]

Starting point is 00:00:03 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 investorfieldguide.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'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 Ascent Management may maintain positions and the securities discussed in this podcast. My guest this week has a fascinating background. He's a PhD in biology, but has split his time as both an investor and an operator.

Starting point is 00:00:56 As an investor, he's involved in companies like Airbnb, Coinbase, Instacart, Open Door, Stripe, Square, and Pinterest. Not too shabby. As an operator, he helped both Google and Twitter, scaled their businesses, in the case of Twitter, from 100 employees to over 1,500 in a two-year span. He's just written a book about these experiences called The High Growth Handbook, which is largely the topic of our conversation. Our talk is centered on what makes for a good investment and even more specifically how Elad identifies an interesting market. Operators and early stage investors will find lots of nuggets in this fun conversation.

Starting point is 00:01:27 Please enjoy. What is your general process for evaluating a young business and getting involved? I think there's sort of three answers to that. you the generic answer, the data-driven answer, because now I've invested in enough companies that I can look back and tell you what worked. And then I can also maybe share two or three non-intuitive items in terms of areas that I didn't expect when I first became an investor that now are really clearly obvious in hindsight. The generic answer is that really there's three things that I care about for early stage investing. And I think the biggest difference

Starting point is 00:02:00 between me and most angels or people who, you know, write these really early checks, is that I really focus on the market first. Is there a real new number? need for the product. Is there traction? Is it something that I would use or that I know businesses that would use? And so number one for me and probably number two for me is market. And most early stage investors say that the most important thing is team. And if Andy Ratcliffe, one of the founders of benchmark, I know you've had on, has a great rule that people call it Rakleft's law, which is basically if you have a great team in a terrible market, the market wins. If you have a terrible team in a great market, the market wins. And if you have a great team in a great

Starting point is 00:02:36 market something magical happens. And I'm a very strong believer in that. So first and foremost, I look at market. Second, I look at team. And third, is it people that I actually like. So if they call me at 10 o'clock at night on a Saturday, will I actually pick up the phone and want to help them? Because life is short. And that's literally happened to me. The founders of Stripe, for example, the first time they were buying a company literally called me at 10 and o'clock on a Saturday and asked to meet and talk through, how should they be buying companies? So, you know, once you've had a few experiences like that, you just don't want to work with people that you don't want to spend time with. Yeah, I mean, the data-driven answer, if I look back at the data in terms of what's actually

Starting point is 00:03:11 worked in the set of companies I've invested in, number one is that they launched a product or at least had a crappy demo when they started raising money. And so I think the fact that they actually built something, even if it was awful, showed a mentality of going and building. So that's one key thing. So just investing in a PowerPoint deck tends not to work well, although, for example, I think I invested in Open Door and Wish before they had much built. But even then, there was sort of something going on. Second is organic growth, even if it's a very small base. So most early stage investors really discount early traction.

Starting point is 00:03:43 Let's say, well, I went from 100 to 120 to 150 over two months, three months. You know, is that real? But in reality, if something's growing 20, 30 percent a month organically, just through word of mouth, usually there may actually be something there. So I think that's a clear sign, even if it's tiny numbers. Third is on the enterprise or SaaS side, if they have one or two major brands, that are using them that just found them randomly, then that's usually a very good sign. So when I invested in PagerDuty, which is now a very successful company on the ops infrastructure side,

Starting point is 00:04:13 they had, I believe, Amazon and Apple as customers. I don't know if they still do, but, you know, seven, eight years ago they did. And they didn't have a sales force. So it was just four engineers. And they were just getting traction because the product was so good that random people at big companies were finding it and adopting it, even if they were sort of overruling their own internal IT to do it. And then I think the last thing is utilization, even if the product is really broken, so if something looks really janky and you're like, how can anybody use this, but people are still using it? That's usually a really good sign. And I would say, for example, Snapchat in the early days, was kind of like that where most people, even in that demographic, didn't get it. And it was

Starting point is 00:04:50 still just working, even though the UI was kind of rough and it was tough to get into and everything else. I mean, there's other obvious criteria like, you know, talking to customers and seeing if there's real traction or looking at metrics, like negative turn. But in terms of the things that were just high-level data that I normally wouldn't have looked at, those are the things that in hindsight really correlated. I think there's one or two non-intuitive items, too. The first one is that reference checks, positive reference checks are a good signal, but negative reference checks on the founders are in a negative signal. They're a neutral signal. And so whenever I would invest in a team and I'd ask around and one or two people said, well, that person wasn't great, I would tend to pass

Starting point is 00:05:27 on that company or not invest. And what I've seen since then is that people who may be terrible in one context may be great in another. And so a great example of that is there's a founder that I didn't invest in out of Twitter who I worked with at Twitter when I was there. And he just wasn't very good. He was super nice, very smart. You'd see him in the hallways and he'd always be just kind of hanging out and talking to somebody. And so he had this reputation as being kind of lazy. And now he has one of the most successful startups out of that community. And I met with him for dinner recently, and I asked him, what changed? And his response was, I finally feel like my ass is on the line. And so that to me was very non-intuitive, the people who seem kind of meh. And it isn't, you know,

Starting point is 00:06:09 the standard entrepreneurial stereotype of somebody who's rebellious and fighting their manager. It was just somebody who's kind of lazy, you know, in one context, ended up being great and another. The other non-intuitive thing is that in general, the things that work tend to work early. And so you always talk about people grinding for five years until it finally works and an enterprise in other areas or highly regulated areas where it takes time to build a product that's very true. But in many cases, if people need the product, the second the product's available, it kind of starts moving. And you need to do some iteration to really get escape velocity. But at least the very biggest things tend to work very early. That's a really interesting one, that second one.

Starting point is 00:06:45 And a good segue into some of the discussion on businesses that are bigger, let's say have at least one product. it's established, it's working, et cetera. I'm curious how that same litmus test applies at bigger companies. So if you take a, there was a really interesting point in that maybe you could highlight in your interview with Mark Andreessen about product cycles and how a lot of these companies and companies in general are not static. They need to constantly be putting new things out, changing what they offer to customers. And those themselves could be thought of like startups or something within a larger business. So I'm curious, any distinct or useful lessons for companies out there who do have to iterate, who can't just do the same thing year in, year out, and expect to do well. I love that idea

Starting point is 00:07:28 of product cyclicality. Maybe you could highlight that and then dive in. And High Growth Handbook, one of the things that Mark Hendryson refers to is this fact that after somebody launches their first product, it's sort of like, what do you do next? And how do you think about changes in your business? And I think most product-centric founders, which is most tech founders, tend to get stuck on the idea that they're only a product-centric company. And so what they'll do is they'll continue to scale the product that's working, and sometimes that's efficient. But if you really want to build a truly, truly massive lifelong franchise as a company, often what you have to do is start thinking about your next set of products. And you need to shift from thinking of yourself as a product-centric

Starting point is 00:08:06 company into a company that's also distribution-centric. And so if you look at the history of technology, be it Microsoft or Oracle or more recent folks like Google or Facebook, really what they did is they had one product that worked so well and it was so much better than anything else in the world that it got a lot of distribution or in the case of Google. They were spending literally hundreds of millions of dollars a year on distributing toolbar and paying Firefox to be their homepage and other things. So they were very aggressive about distribution. Once you have that distribution, your next step or the next step in the sort of traditional playbook would be go and buy companies or build new products and push them out against that distribution channel that you now have.

Starting point is 00:08:43 And so for Microsoft, that ended up being different components of office that over time they either built or bought. In the case of Google, it was products like Chrome and Android and Maps and image search and all these other things that ended up branching off of the original product and then getting pushed down the channels that they built. Facebook did it with Instagram in terms of accelerating their growth or WhatsApp. And so in general, the history of sort of the tech companies they've done well is start with one great product that's working in a singular way and then add more. And I think the companies that tend to tap out are the ones that have one product that works really well, but then they never add that second product liner. They never do that reinvention

Starting point is 00:09:22 or they don't iterate fast enough on their core product and new entrants a few years later or big incumbents start competing and it really slows down their market. I always think about marketing, distribution, sales as probably a deeply underappreciated part of business lore. I would love to hear your thoughts on, again, I guess this is both as an investor in a lot of these businesses that have scaled a lot, but more specifically as an operator in the businesses you founded, but also at Twitter and Google, what that looked like, what success looked like for a business trying to scale its methods of distribution, how much of that is a playbook versus creative, new creative approaches to gaining an audience. I think that the build and they will

Starting point is 00:10:02 come attitude is disastrous typically, and we probably undervalue the ability to build good distribution. So I would love to hear your biggest takeaways and lessons from your experience there. Distribution is definitely underrated. And I think that just like companies tend to have in the early days, a singular product strategy that works, the thing that is really underappreciated is the companies also tend to have a singular distribution strategy that works. So usually companies try three or four different ways to distribute. And every once in a while, there's a company that actually pulls it off. LinkedIn grew off of SEO, as well as certain viral mechanics they built in and a few other things. But in general, a company will only grow off of one distribution channel that works

Starting point is 00:10:43 really, really well. In Facebook's case, it was basically early on email scraping and really focusing on sort of viral person-to-person distribution. In Google's case, in the early days, it was word a mouth, but it actually very rapidly switched to partnerships. And I think that is one of the unwritten things about Google's story. People always talk about how it just grew organically 80% month every month. And that was true initially. But the one time that Google had to take take down their site was when they onboarded, I can't remember for his Yahoo or AOL, and that company had so much more traffic than Google, the Google actually took down its own homepage for a day so that they could serve that new traffic from that partner. And so in general, what you find

Starting point is 00:11:22 is that companies find that singular way to distribute early on. And then after that starts working for long enough, they start broadening and saturating distribution. So for Google, that was across mobile. It was paying for client distribution like Firefox and the toolbar that they would literally sort of cross-install with Adobe and other things and other means of effectively either paying or partnering for distribution really aggressively. And I think the companies that tend to sort of under-execute or end up, you know, you end up with a $5 billion company, which is amazing, but you could have been a $50 billion company. Often it's because they weren't aggressive enough on three things. Distribution is first and foremost. Second, tends to be M&A, so they don't, they don't buy new

Starting point is 00:12:01 things and diversify into new areas. And then third, they may just not have been aggressive about thinking about new product lines or iterating on their product internally. You wrote a lot about the importance of recruiting and sort of the things that you recommend people do when thinking about hiring great people. Maybe touch on that as it specifically pertains to distribution. So what are the common, I guess, features of people, excellent professionals that you've encountered in your career among on the distribution side. And then I'd love to hear the same on the product and other sides. Common threads tend to be that they're aggressive but ethical. And so there's sort of the right type of greedy in terms of driving the success of a product.

Starting point is 00:12:39 I think distribution these days can take so many different forms that beyond that, there's very different characteristics depending on the type of distribution that you're building out. So if you're building an enterprise sales team, the type of leader that you need there and the way that they're going to lead and grow a team is going to be very different. If most of your growth is more similar to what Facebook was doing, where you really need people who are growth marketers and are very quantitative and focused on if I tweak 10 pixels on this recruitment email, how much more conversion will I have? And so really depending on the type of distribution that's working for the company, you're going to need pretty different skill sets.

Starting point is 00:13:16 Based on the list of companies that you listed that you're either an investor or an advisor to, it made me think of a question I've been pondering around lifetime value of customers. So Airbnb of the companies you mentioned is probably the most pertinent. internal investment capital allocation, et cetera, at these companies, obviously, and as an outside investor, hinges on this lifetime value versus acquisition cost equation. I know there's all sorts of flaws with LTV to CAC, and we can read about those elsewhere. That's kind of beyond the scope today. But it is a useful framework. And Airbnb is an interesting one where there may be rules of thumb, but it's something that could be very spotty where a customer could do an Airbnb right now and then not

Starting point is 00:13:55 come back again for a year or two years from now. But that sort of needs to be part of. of the equation. How do you think about that as an operator and investor when you're dealing with a business that's a paid service, so it's not Google, it's a paid service that people may use sporadically. So it's not like a pure subscription, but there's sort of spotiness or lumpiness to when the customers engage with the company. In general, most businesses tend to have a little bit of head, torso, and tail to the distribution of customers that they have. And there was this book, I can't remember what it's called it. It was the tail effect or the long tail, something like that. And I basically tried to argue that most internet businesses are really based on

Starting point is 00:14:33 the long tail. And in reality, that's really false. If you look at almost every single business, Google or, you know, Apple or the like, in some cases, you really have just mass market retail, which is closer to the Apple case. But for many businesses on the commerce side, you do have power users that are driving a really significant portion of either your revenue or your margin. and in some cases they're both the head and the torso of the distribution. So they're the top 50% or the top 20% or something in that range. And so often the overall economics of your business may be driven by those folks versus everybody. So sometimes a way to get a signal is just to ask,

Starting point is 00:15:11 what are the power users doing and are they sufficient to support their business in their own right? And how quickly can we convert people over into these more active users? And so rumor has it, and I don't have any direct insight into this, But the rumor was that with Uber, if they had like a handful of what they called whales in the early days of the business in a single city, you know, there was five or ten people that could literally cover the cost of launching a new Uber office at the time when it wasn't competitive, you know, when they were first getting started because those individuals were constantly ordering black cars, which were a higher margin, and they'd use them for everything. And so sometimes your power users can actually carry the entire business for you. And looking at LTV and KAC, I think is a very important exercise. But if you do it for the average versus my customer segment, you actually may lose a signal in terms of what's really working. Does that suggest that the best back to distribution strategy is to just focus on satisfying those power users?

Starting point is 00:16:04 I think it really varies by business. I think in the early days, you absolutely want to delight a small number of users versus create a social experience for everybody. I think it was Paul Buchide or somebody who first coined that perspective, which I think is a correct one. I think typically, and this is an old concept in terms of Jeffrey Moore crossing the chasm, which is who are your early adopters and then eventually, you know, how do you make it to mainstream? I think if you don't have a product that a small number of people really love and view is crucial, it's very hard to see how you get to mass market. So coming back to the, you mentioned this idea of organizational structure. This is something that has become sort of a popular topic these days.

Starting point is 00:16:43 There are the old ways of doing things. Maybe there are some new ways of doing things. the hierarchical or organization as hierarchy has been, you know, a long established and productive way of running an organization. I'm curious what flaws you see in that traditional model and maybe what nuance there is around existing hierarchies and whether or not there are radically new ways of organizing a business or a group of people to be productive. You know, when all is said and done, I don't think people have fundamentally changed over the last 10,000 plus years of evolution. I mean, we've changed in some ways and there's different evolutionary pressures that we're reacting to and you see that.

Starting point is 00:17:19 For example, I'm an Ashkenazi Jew and Ashkenazi Jews have gone through very strong bottlenecks, which is why as a group we have higher incidence of different genetic diseases that we've just inherited. And so, you know, there is constant pressure and evolution happening in humanity. But when all is said and done, our basic drivers are the same. Rulov, both at Sequoia Capital, has this great saying that every product that you can think of is fundamentally driven by one of the seven deadly sins in terms of successful products. And so which sin does it line against? And that may imply how you think about the product area. And so I think organizations are similar in that there's always room for innovation. And I can mention one or two innovations that have happened over the last decade, for example. But when all of a sudden

Starting point is 00:17:58 done, people want to have direction. They want to know what they should be building. They want coordination. Some people are going to inherently act badly. So you need processes to deal with that. And fundamentally, to have the most impact, you're going to need to coordinate. It's sort of like, if you were making dinner with a couple friends, you'd probably want to figure out who's bringing the salad and who's cooking the main course and who's bringing the dessert. Otherwise, you end up with five desserts. And so anytime you just get rid of any organization or hierarchy, you end up with potentially a lot of sweets, but maybe not a lot of anything else. And so I do think the holocracies and all the various, you know, the valve style approach, like all these things I think are actually pretty flawed in terms of their approaches and tend to not work. The flip. of it is every once in a while, an organization or company will have such strong product market fit that it doesn't seem to matter that they kind of had a really stupid idea around org structure or a terrible approach to org structure. And so they succeed despite themselves. And then they're held up as an example of, oh, look, there's another way to do it. And so I actually

Starting point is 00:19:03 think I know the insides of a handful of these companies, not all of them. And I think some companies could have been 10 times more successful if they'd actually organized properly. But they didn't and then they're held up as an example of oh yes this alternative approach works well. Another area that I know you're interested in, I'm sure it's at least in part as a result of your PhD in biology, is I guess health and longevity. I would love to hear about your background, the thinking background there, why you're interested, what area specifically you're most focus on. Is it selfish? Is it as an invest in thesis? I'm also fascinated by this topic, so I would love to hear your opinion. So my background for it is I worked at the Salk Institute,

Starting point is 00:19:41 many years ago on gene delivery into the adult brain. And then later I worked on this pathway in Cialigans called the Dauer Pathway or the Daff Pathway, which basically integrates signals across insulin, aging, and cancer and mammals. And so if you knock out one of these genes and these little worms, they'll live two or three times longer as healthy adults and then they'll just crash out at the end. And there's two or three other lines of evidence besides the genetic manipulation that shows that longevity is just a program that you can perturb. Examples of that would be FDA-approved drugs like rapamycin or metformin,

Starting point is 00:20:15 which in multiple organisms will increase lifespan between 10 and 30 percent in the case of rapamycin and mice, for example, there is something known as peribiosis where if you take young blood and you give it to an older animal, they'll have certain regenerative capabilities restored. And if you take old blood and put it in a young animal, you kind of screw things up. So there's sort of factors going both ways. And then there's things like caloric restriction where if you decrease the amount of calories, you take per day to a certain level and multiple organisms again, you end up with longer

Starting point is 00:20:42 lifespan. And so there's lots of evidence that suggests that aging is a program that you can perturb. And there's 20 or 30 years now of data and genes and all the things that normally would be translated into products. But there just hasn't been that focus by either the traditional biotech venture community or by pharma to build drugs against this area with one or two small counter-examples. You know, Novartis actually ran a trial with rapamycin and elderly adults around immune response. There's companies like Unity that I think may have already gone public that is focused on what are known as inalytic.

Starting point is 00:21:16 So one area of longevity-related drugs, but there felt like there was a real market gap. And so I got involved in terms of seeding one company called BioA, which in Drescent Horwurst did the Series A4. I helped really early on with another company called Spring Discovery, which is applying machine learning to different areas of sort of assays for longevity. So they're doing some really exciting stuff. And then I've been helping Laura Deming, who's a really smart investor, more in an advisory capacity around a accelerator she's building for anti-aging startups called Age 1. And the idea is to basically fund the next generation of regenerative medicine companies at scale. I'm curious through all your investigation across this topic, what you've changed in your own life. And obviously this isn't any sort of medical advice or anything like that.

Starting point is 00:22:01 But what all that you've learned invested in, investigated, has actually caused behavioral change. You know, when all said and done, there's a set of basics that people should just be doing, and everybody tells you these things, and a lot of people just don't listen, and that's basically exercise regularly, eat well, sleep well, form meaningful relationships with others. Actually, those things have real impact in terms of how long you're going to live and how well you're going to live. I think in terms of more drug-centric interventions, a lot of people in the aging communities

Starting point is 00:22:30 will do very simple things in terms of taking a baby aspirin once a day. that helps with heart disease and colonel cancer. They'll take a certain statin. Some literally helps with heart disease and some people think with certain neurological disorders. And then there's a smaller subset of the community that takes metformin. And so from a drug's perspective, those are the main things. There's lots of things I would stay away from that I know some people do like human growth hormone or some of these other things, which I just think are not very good ideas

Starting point is 00:22:55 from a longevity perspective. So you've been a CEO, you've invested in a ton more, you've watched even more than that. I'd love to hear your take on the most. effective use of a CEO's time. So I think one of the most important decisions that any business leader makes is, I guess, allocation, allocation of time and capital and maybe strategy. But I'd love to hear your take on what the most effective CEOs do, maybe what the least effective ones do as well as a means to know what to avoid. Just a summary of your research and thinking on the role of a CEO specifically would be fascinating. Yeah, I can tell you what people talk about the most.

Starting point is 00:23:32 And then I can tell you about the stuff that people tend not to talk about, which are actually really important. So the things that people talk about the most in the role of the CEO is that you set the overall direction and strategy of the company. You build out the team and you choose the executives who are going to run different functions and then you manage them and help optimize their roles. You raise money and make sure that the companies will capitalize and has the money to survive. So those are the things that people talk about a lot. It's basically strategy hiring and capital allocation and direction. I think the main things that people don't talk about enough is number one. You're also ultimately sort of the chief psychologist of the company.

Starting point is 00:24:07 And you have to spend a lot of time on people issues that you don't expect. I think you also need to think about how you're managing your own time. And I think one of the biggest places where founders who haven't been through it before tend to break as things scale are sort of in two areas. Number one is they start doing a lot of stuff that they really hate doing. And they start to burn out because of it. So if you're a very product-centric CEO and you're spending all your time in sales compensation discussions or dealing with HR issues, you're probably going to burn out once you start to build

Starting point is 00:24:39 out a team who can handle those things for you. So one big sort of breaking point is just doing stuff that you hate. The second is just this inability to let go or to delegate or feeling challenged by the new people on board or things like that. And so I think those are really the biggies for somebody who is doing it for the first time. So you mentioned at the very beginning of the conversation, this notion of how important a market is for any business, whether you're investing in one or building one. And I would love to talk about how you identify that, what the actual nuts and bolts are behind market identification, maybe obvious and non-obvious. So of course, anyone can calculate an addressable market if it's straightforward. But a lot of the most interesting breakout companies are the market was huge, but non-obvious. And so I'd love to hear your thoughts on. on evaluating or identifying interesting markets. And then the second part of this section would be on how marketing then plays a role once you've identified an interesting market. So

Starting point is 00:25:38 unique ways of reaching a market after identifying it. I think there's three types of non-obvious markets. The first type is it's a brand new market, but it's growing really fast and it kind of comes out of nowhere and surprises people. And honestly, that's actually the rarest market. And that would be things like cryptocurrencies. It just kind of came out of nowhere in terms of hitting the scale that it did so rapidly. Certain types of 3D printing may fall into that. But most markets tend to take a bit longer. But there are some markets that are just brand new. There's a new technology and suddenly everything starts working. Maybe that was the internet in the mid-90s where suddenly you had browsers and that enabled a whole suite of things to run inside a browser that

Starting point is 00:26:18 really replaced the jinky interfaces of the past. So suddenly you have a technology shift and stuff starts working. I think the second type of market that are non-obvious are every once in a while you have a market that looks extremely crowded. And so you think there's tons of activity and it's game over, but in reality, it's still the really early days, either because the product isn't quite there yet or the infrastructure isn't quite there yet. Examples of that would be search when Google got started where there was a dozen other search engines. You know, when Dropbox and Box got started, there was a dozen other cloud storage services and everybody was saying, why is this different? But fundamentally what had happened is all these other companies that were kind of janky had identified a

Starting point is 00:26:58 real user need, but they just hadn't built a product that addressed that need properly. And so sometimes a non-obvious market is actually one that looks very obvious and very crowded. And so it's not obvious because there's still room for somebody to come in and dominate it, but everybody thinks it's game over. The third type of non-obvious market is one where there's an opening from a sales or distribution or channel perspective. And so that would be things like Zinga, really writing Facebook as a new form of of distribution and maybe SaaS companies entering on the low end and working their way up

Starting point is 00:27:27 or alternatively companies that are starting at the high end like Tesla and working their way down. And so sometimes it's a little bit more about your distribution or market segmentation. And you realize, hey, this sub segment is really interesting and that's the way to start it. I think in the steel industry, the mini mills were a great example of this a few decades ago where everybody had these giant centralized mills and the mini mills would basically take scrap and melt it down and sort of resell it. And that was considered a really odd market segment and eventually it became a massive part of the overall market. So I do think it happens in sort of traditional technology markets as well or traditional markets outside of technology as well.

Starting point is 00:28:03 I love that list. It's such a helpful way of thinking about it. As you survey the landscape today, again, more from an investor standpoint. And of course, you know, you might be wrong, as is often the case with early stage investments. But what are the seeds of maybe one or two markets, that you've seen that fit those criteria today that may be underappreciated by investors? Number one is on the machine learning side, I think the semiconductor and systems layer for machine learning is a very large market that a lot of people aren't focused on. And really, it's building custom ASICs that will replace Nvidia GPUs and be much more performant from a power and performance perspective than what a GPU can do since GPUs are just

Starting point is 00:28:43 not optimized for machine learning. So I think that's one big market segment that there's not a lot of attention being put but I think you can imagine at least one tens of billions a dollar company in that market segment. And in general, with any technology wave, there tends to be a really large outsized semiconductor company that's created alongside. So Qualcomm and ARM were sort of the mobile wave in terms of massive outcomes. Broadcom was the networking layer. Intel and AMD were really the rise of the desktop computer.

Starting point is 00:29:11 And so I do, in servers, obviously. And so I do think that each technology wave also creates a massive silicon company in the crypto world, that's probably Bitmain right now is sort of that, that example on the ASIC side. So I do think there's room on the machine learning side. So that's one. Number two is the longevity topic that we talked about. And number three is, I actually think that if you were to take a Fortune 500 company and just take it apart and ask what are the pieces that you have to do over and over and over again,

Starting point is 00:29:38 you'd end up with a dozen really valuable, useful companies. I think Checker, the background checking API company is a good example of that where they just took background checking. They really upgraded it from a software perspective, created an API around it, and have developed a really compelling service initially for the gig economy and then shifting to other areas that there's probably a dozen other companies like that could be built that could be really outsized. You wrote a lot in the book about best practices for businesses, and obviously I think that's the primary reason to buy and read the book. I would love to ask about worse practices as one of these closing questions or ideas. Maybe the things that you've seen that most consistently

Starting point is 00:30:16 lead to bad outcomes at companies. And I'm just going to leave it pretty general like that. I'm not going to ask specifically about recruiting or product management or any sub-segment. But just very generally speaking, what the worst consistent practices you've seen at businesses that people should avoid? I think when all is said and done, companies that are growing really fast are really resilient. And you see every type of screw up you can possibly imagine happen. And somehow these companies still survive.

Starting point is 00:30:44 And sometimes as a founder, it's almost disheartening. because you're working so hard on your own company and you're scrapping and you're doing everything right and it still doesn't work because you're in the wrong market. And then you look at something that's in the right market and it's working beautifully and it's getting all these accolades in the press, but you know that inside is just terribly run. And so I do think that growth covers up for a lot of mistakes. And in fact, I interned at Cisco back in, I think it was 2000. And my manager had joined Cisco in like 91 or 92.

Starting point is 00:31:14 And his comment was always, growth covers up for a lot of mistakes. And so I think that happens with every great technology company. Just really stupid things are done. But the company somehow survives and then it professionalizes and then it eventually starts doing things really well if it really breaks out. In general, I think most of the screw-ups tend to be about choosing the wrong people to do things and having them consistently make terrible mistakes and then not doing anything about it. Or alternatively founders or sets of leadership fighting non-stop.

Starting point is 00:31:43 or the creation of a more general toxic culture. Those are things that tend to be really hard to fix and can really create enormous drag on a company. Every once in a while you see a company that is crushed by competition because that competitor had just had dramatically better distribution. Microsoft effectively did that in the 90s, which is why they had all the antitrust hearings

Starting point is 00:32:04 is they would literally just crush their competitors through distributing things as a bundle with their OS. But in general, most companies tend to die of self-influenced. We're to really slow down of self-inflicted wounds through bad management, bad people choices, and bad culture. So my closing question for everybody is the same. And that is to tell the story of what the kindest thing that anyone's ever done for you is. You know, I think that in my mind, Silicon Valley is a place where people very openly

Starting point is 00:32:33 give back. And I've been helped enormously by that ethos throughout my career. And, you know, fundamentally, I think that, you know, there's the old saying that you die from a thousand small cuts. I think in Silicon Valley, I've benefited from a thousand small acts of kindness that have sort of built up over time. When I moved out here, I had literally no money, and I was in school debt and everything else. And I was sleeping on the floor of an apartment that I rented. I didn't have a bed for the first two years. I was just literally sleeping on a sleeping bag. And lots of people went out of their way to help me, to introduce me to companies I could join.

Starting point is 00:33:09 And so really, I think I just benefited from that collective, hey, we think. think this person is smart and will take a shot on them as an ethos. And, you know, that ethos to me is a most important thing out here. So, so I thought of one other question, just because your collection of experiences is quite unique. If you were forced on the back of this book to write another book on a totally different topic, what would you write on? I'd probably either write a novel of some sort, or alternatively, I would write something about markets. So why are some markets good versus bad? and why do some markets just tend to fail? I think there's a few great books in that area.

Starting point is 00:33:47 One of them, I wouldn't say it's a great book, but it's an interesting book called the Rule of Three. And it basically argues that many markets naturally will collapse into oligopoly markets of two to four players or two to five players. And often it ends up at three players. And why is that a stable equilibrium for many markets? And so I do think many people don't think enough about what is a real market structure. In Silicon Valley, the way that that's played out is, for a while, everybody thought that everything had to be a winner take all market. And that was because in social networking, everything was a winner take out of market. Eventually, you had one dominant player that really won.

Starting point is 00:34:20 Or in search, Google was so good that it eventually became winner take all. It's unclear to me that that's the case from most markets. And so I think it's fooled a lot of investors to not ever invest in anything where there looks to be a number one because they worry that the number two is just going to be worth a tenth as much. And I think that's sometimes true, but it's not always true. You know, I just want to make sure we've talked a lot about markets, and I found that to be an especially interesting part of the conversation, that we're not leaving anything out, any sort of ideas or insights that you have on evaluating markets that you'd want to leave us with.

Starting point is 00:34:53 I found your thinking there quite fascinating. So any closing thoughts on thinking about markets? I think one of the big learnings of the last 10 years is that the Internet has created markets that are larger than anybody in the world ever anticipated. And that's why we're seeing these companies start to flirt with trillion dollar market caps. Fundamentally, there's never been a time in history where you could reach so many people so frictionlessly around the world with so many services. And I think that's truly transformative. And it could be people on mobile devices. It could be people on all the other various types of computers that we have. But fundamentally,

Starting point is 00:35:30 we have this globally networked world with these massive available markets that you can get to with high velocity. And that's why I think we're seeing companies form and reach scale faster than we've ever seen any time in human history. And I think it's because of the power of mobile, internet, cloud, et cetera, coming together to create these truly massive outsized markets. So I think for me, one of the big takeaways is that markets are bigger than they've ever been. Fantastic. Great place to close. Thanks, you lad, so much for a wide-ranging, really interesting conversation. I appreciate your time. Thanks so much for having me on.

Starting point is 00:36:03 Hey, everyone. Patrick here again. To find more episodes of Invest like the best, go to investorfieldguide.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 Oshag, OSHAG. If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening.

Invest Like the Best with Patrick O'Shaughnessy - Elad Gil – How to Identify Interesting Markets - [Invest Like the Best, EP.101]

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