Invest Like the Best with Patrick O'Shaughnessy - Henry Ward - Transforming Private Markets - [Invest Like the Best, EP. 273]

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Starting point is 00:01:18 cloud provider and tools, check off items on your customized to-do list, and let Vanta continuously monitor your security so you can focus on growing your business. Listeners can redeem a $1,000 off coupon at vanta.com slash Patrick. That's vanta.com slash Patrick. Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, 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 00:02:04 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'Shaughnessy asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaunosate Asset Management may maintain positions and the securities discussed in this podcast. I guess today is Henry Ward, co-founder and CEO of CARTA. Started in 2012, CARTA helps companies and investors manage their cap tables, equity plans, and ownership.

Starting point is 00:02:40 Last year, they launched CARTAX, a platform for private companies and their employees to access secondary market liquidity. Our discussion is a detailed exploration of private market infrastructure and Henry's views on building and enduring business. Please enjoy my conversation with Henry Ward. So, Henry, where to begin this conversation, Carter is such an interesting business because it is effectively infrastructure for other companies, a topic that I love and obviously you love too.

Starting point is 00:03:07 Maybe the right place to go is all the way back to the beginning and whatever the first insight or founding risk, however you want to frame the first key mental moment for you around this business and how it came to you, I'd love to hear that story and then build on it because it's been quite a 10-year run. Thanks for having me. I would break Carter's beginning or origin into two parts. One is the observation that started it and then the solution that we started building. And the observation was we live in this weird world where you have hyper liquidity in the public markets so much so that people are trying to buy machines closer to the exchanges. We talk about nanosecond liquidity. And then the private markets, there's zero. And everything's done in paperwork. There's zero liquidity to invest in two founders in a garage. It takes 30 days, tons of paperwork, $20,000 in legal fees and so on. And so that dichotomy was an interesting observation for us. our explanation for why this dichotomy existed was that there was no infrastructure for private

Starting point is 00:04:02 companies and private financial infrastructure that all the infrastructure have been built for public securities, but nothing for private. It was still trapped in contract law, which meant it was still trapped in paperwork. So that was observation one. The solution was, well, how do you build the infrastructure for private markets so that it can look more and resemble the public markets? And our idea was, could we build this database, which would be, think of it as like the MLS, but of private assets. I just wanted to know what everybody. owned. And if we had this database, that would become the central clearinghouse for all private market securities. And we could build an exchange on it. We could build liquidity. We could do all

Starting point is 00:04:35 kinds of things on this database. Think of it. If you're familiar with the depository trust corporation in the public world, that's what we were building. It's the DTC of private markets. The hard part, of course, is how do you get people to tell you what they own and get those assets? And our idea was, let's build a really easy and simple way for issuers to issue stock certificates, It's issue securities online via email, just like you would send money with PayPal. 20 years ago, we're going to send securities via email with e-shares. We're now called CARTA. Back then, we were called e-shares.

Starting point is 00:05:05 And in exchange for that service, they tell us who owned what. So if I issue Patrick 100 shares of Acme, Inc. stock, I now know Patrick that owns 100 shares. I record that in my database. We build this database. And that's what we launched in 2014. To really understand us, we're just a transfer agent for private markets. But now we've assembled a couple trillion dollars of private market assets. in the database that we can now turn into the infrastructure for private liquidity. That was the

Starting point is 00:05:28 origin story of how we started. I love the idea of how to solve the problem, which also makes me wonder how you thought about commercializing that solution. So we'll get to the end game or the current game, which is what's enabled by this big infrastructure, which is really interesting. But how did you first think about turning this into a business and what the original product would be, how to sequence products? You've done a lot of that now. So it would be nice for you to describe those, but also explain how you decided what to start with, which I'm always interested by. Our business model when we started was we charged $20 per issued stock certificate. Our competition was FedEx.

Starting point is 00:06:05 So, you know, as all early customers are, they're friends of the CEO, the friends of the founder. So I called on my friends and said, hey, don't pay FedEx $30 to ship your stock certificate to you. Pay us 20 to do it online. And that was the business model for the first two years. And then after we got enough traction on it, we then changed it to a subscription model. because what we realized was the real value is not issuing the security, the real value is tracking it in the cap table. And that's what people wanted because we were effectively building the cap table

Starting point is 00:06:31 bottoms up by issuing the securities. And so in 2016, we moved to a subscription-based model and became a very traditional SaaS business. But it's one of these great lessons I tell all founders that the business model you started with may not be the business model you end up with. And that was classic for us. Maybe go back again and give us a little bit of a history lesson of why there was such a large divergence between the infrastructure in public and private markets.

Starting point is 00:06:56 The point about collocation in public markets versus pen and paper still in privates definitely resonates, but that must have been the result of something. And there seems like there's a lot of friction that still exists in private markets relative to public. Obviously, you can't hit a button and buy. Why is this the case? What are the historical touch points that matter that got us to hear? It all goes back to the 1933 Securities Exchange Act, where they bifurcated securities that were registered as a termed for public securities that are available for public consumption, and then unregistered securities, which are only available for private consumption, where you have accredited investor rules and you have all these regulations that you have to follow and exemptions you have to follow, largely to protect investors. That was the goal of the 33 Securities Exchange Act that came out of the Depression. And so part of the registered securities problem was, well, how do you make this accessible to everybody at the time, million Americans and now over 300. And that created this wave of standardization in the public markets that created all the infrastructure that we could build around in the private market,

Starting point is 00:07:57 because there was no problem of scale. You didn't have to scale public securities. Back then, there might have been 50,000 people worth a million bucks or more that could actually buy private securities. It was all just kept in paperwork and contract law and became incredibly bespoke. And so you see all kinds of weird differences between private and public markets. So one example is pricing. In the public markets, prices to turn. by the last buyer, by the marginal buyer. In the private markets, it's determined by the first buyer, the buyer that gives you a term sheet. And so that's just one example of all the differences between public and private, where they just don't work the same because of that simple act that was put in

Starting point is 00:08:32 1933. Maybe say more about that last point and how that might change in the future. Like if it's 10 years from now, what could a price discovery process look like, especially for primary shares, secondary shares talking about carda X and private exchanges a little bit later. But I'm especially interested by the funny fact that so much private equity is priced by an early bid or something and there's not a lot of transparency. It's not really a great price discovery mechanism. How do you think that might change? It's so funny. The other corollary of having the first buyer set price is that there's no cost to waiting because you get the same price that everybody else does in the public markets. If you have buyers come in before you, they get better pricing because that naturally moves the

Starting point is 00:09:12 price up. And that's why you see this phenomenon and this herd mentality in private markets that you don't see in the public where lead investor comes into the term sheet sets a price and then everybody wants to follow. Because by definition, they get the best deal. They get the deal with the most information after everybody else has already been. They know who's going to invest. And that's why you see massive momentum into all these rounds once somebody has set a price, but there's nothing happening until that happens. I think what you'll see in the private markets as they mature and you see more bidders come in, used to be in the growth markets, just in the last couple of years, there were like seven people that really mattered. There's Andresen Horowitz, Sequoia Growth, D1, Tiger Global. There was like

Starting point is 00:09:52 seven bidders in this market that really mattered. And as you start to see more bidders come in, you'll see more efficient price discovery. Today, the way that I would raise capital as I'd go up and down Sandhill Road, I'd collect hopefully half a dozen to 10 term sheets, and then I would manually create the auction process. I think what you'll see is if you have 20, 30, 30, 40, 50 potential bidders, you now start to automate this. And CARTAX, which is our liquidity platform, is building out the ability to create auctions for primary stock. Of course, all this stuff is different because one of the great things that the public markets did is they standardize on common stock. In the private world, there's a lot of structure. So it's more complicated on how you

Starting point is 00:10:28 set up these bids. But I think that's where the world's heading. And if you look at why private market valuations have gone up so much is in the last couple of years, a lot of the large growth and crossover funds like Tiger Global basically saw this price discrepancy between there's eight bidders in the late stage growth market and there's an infinite number of marginal bidders in the public market. And so you're always going to have higher pricing in the public market because there's more buyers available. And so they were trying to build an index fund effectively on late stage private growth growth growth to arbitrage the difference between seven buyers in the growth market, private growth market and infinite number of buyers in the public market. Obviously, that's changed a lot

Starting point is 00:11:07 recently, but that was the strategy. What about this mission animates you still 10 years into the journey? So if you go to the website, it says equity for all. And I think this idea of making legible the private cap tables of the world, which allows for infrastructure and exchanges and all this other great stuff, I want to make sure I understand the core motivating force on you and behind the company. So what is the end state that you're trying to affect by virtue of building these products and this brand? So we have this historical worldview. that labor compensation really started with indentured servitude and it started with feudalism. And it progressed over time.

Starting point is 00:11:45 A lot of changes have made, including No More Child Labor and all these types of things. Labor compensation and how labor materialized at different economies has changed over time. And we're currently in this era that I'll call the payroll era where we rent our time for money. I think the next era of labor compensation is going to be an ownership one. And sort of the old adage that the future is here is just not evenly distributed. I think the future is in tech right now, where if you're a tech worker today, of course you get equity in the company you work for. You get put on a payroll system to pay your rent, and then you put on an equity system to participate in the upside of the company you're building. That has not

Starting point is 00:12:20 expanded outside of tech very much, but it's starting. We're seeing this, for example, in private equity. I think in five years, seven years, if you work for a PE back company, you will automatically get equity in that company you're working for just like tech. That trend is already starting. I think you're starting to see it in movies now, where you're, where people like Zendaya are giving equity out in the films. And the entertainment industry is moving from a royalty model to an M&A model where you create a movie, build a cap table on that movie, and then sell it to a streamer. So you're starting to see pockets of this happen. You can see Hamdi at Giovanni, who gave equity to all of his employees, including the dairy farmers.

Starting point is 00:12:54 So you're seeing this start to expand. Our mission is twofold. One is to make it so much easier so that when you start a new job, you're going to get on a payroll on an equity platform, which couldn't have been true before 2014. I think. 20 years from now, Patrick, it will feel weird. People won't understand how we want to go work for a company and all we got was cash. So that's part one. Part two is once all these people have equity, you have to give them the ability to get liquidity. And the public market isn't the answer for all companies. And so that's really the part two of the thesis is how do we create liquidity for these companies that will stay private? It's a one to play for us over the next 20 years. Say a bit more about liquidity in your efforts to create that world. Maybe starting with the frictions or the barriers, the regulatory problems. Why is it that pick your random late stage, very highly valued startup? And some employees that's been working there for eight years, most of their wealth is tied up in some private stock. Why is it that it's traditionally been such an illiquid, hard thing to manage that wealth versus he owns some shares in the public company that you work for? It's very easy.

Starting point is 00:13:58 10, 20 years ago in tech, going public was the way that you got liquidity. And companies went public a lot sooner than they used to. I mean, Amazon went public, I think a $200 million market cap. You can't imagine that today. The timeframe from starting a company going public was much shorter and the bar was much slower. Going public was the form of liquidity. And there was this ethos that I think venture and private markets created over the last 20, 30 years that nobody got liquidity until everybody got liquidity. So IPO was the moment of liquidity for everybody.

Starting point is 00:14:31 And in fact, there was this view that employees selling before IPO was a little bit. to vote of no confidence on the company. Fast forward to this decade, I think what has changed is because companies are going public later, some companies are just not going public at all. Employees are starting to question this idea of why would I go join this company for a lottery ticket on going public, which may or may never materialize? And companies are starting to solve this employee question by offering liquidity pre-IPO, often through us. For example, last year, we paid out $7 billion in secondary liquidity to employees. Employees took $7 billion off the table.

Starting point is 00:15:07 Prior to that, the year before in 2020 was $2 billion, and the year before that was $600 million. So it's starting to happen quickly. And I think we're getting to an inflection point where the best companies offer liquidity and they put it as part of their compensation package. And we do this. I'll do the employee pitch for CARTA. Hey, come to CARTA because we get great benefits. You get cash.

Starting point is 00:15:27 You get stock options. and you get biannual liquidity here, which if you go work for that other private company, you won't get liquidity. You're just hoping for a public exit. And I think the more that happens, the more companies will have to follow suit. And I think we're at that inflection point where companies are starting to have to do this to attract a talent. I remember reading about Karta X when it was first announced or posted online several years ago and thinking, wow, what an interesting way to sit on top of the cap table infrastructure that you've built to now provide a real secondary exchange for private markets and the possibilities that that might unlock,

Starting point is 00:16:03 how would you grade yourself so far, maybe describe car to accidents? I think I kind of just have described it in its basic terms, but I'll let you describe it, how you see it. And I'd love to hear how you think it's gone. Are you satisfied with the scale of it? What have been the lessons or the challenges you've learned building something notoriously hard to build? Because a huge de facto one doesn't exist like the NASDAQ or the IC or something like this for this market. We're definitely in the new market creation business. One question that asks is how you to find a new market. And our definition is anything where you've made a way for money to exchange hands that hasn't happened before. One example of that is even cap tables. We weren't the first cap table

Starting point is 00:16:40 writer. We're the first cap table rider to charge companies. And as an example, in CARTAX, we're the first exchange where we're charging buyers and sellers commissions to trade and provide crossing trades for them as a service. These things are really hard to get going. But when they go, they accelerate very, very quickly. How are to grade ourselves, I'd give us a B minus on Cardax. I think we're attracting a lot of supply, and now we're building up the demand side of the equation. All marketplaces start this way.

Starting point is 00:17:07 So if you're an investor looking at marketplace companies, all marketplaces start with this thesis that there's hidden embedded demand that you can't see. And then the marketplaces somehow figure out how to unlock supply. So if you look at Airbnb, you know, there's embedded demand that people wanted to sleep on people's couches and then Airbnb figured out how to unlock that supply and get people to do it. And the same for us. I think we have figured out how to unlock supply. I think companies are come to us at scale. We run 20 liquidity events a month these days to unlock supply and create liquidity on their cap tables. The challenge now is as supply starts to rise, every marketplace

Starting point is 00:17:44 has this question, how do you then have demand rise as well? And it's always that balancing act. And I think we're in the demand side of this equation. How do we attract more investors to CARTAX so that they can start buying into these pre-IPO liquidity trades. Maybe just describe the nature of supply and demand in this situation in as much detail as you can. So what is the supply, maybe even like with specific examples, where does it come from? Like, why does it come to Carter X? And then so far, where is the demand coming from? And where do you hope that it's coming from and say two years? Today, how supply works is a company will come to us and say, Carter, Carter X, we want to run liquidity. Can you help us? And we'll hopefully say yes. The company gives us the rules.

Starting point is 00:18:23 of the stock market. So one of the advances, Carda X is in the public market, there's one stock market rule set by the SEC, and everybody abides by those rules. And there's two exchanges that have their own nuances on top of those rules. And Carter X, we view it as the company gets to set their rules. So they get to set what the total available float is, who's allowed to sell, who's allowed to buy, how much people are allowed to sell and buy. They can figure the entire parameters, their own personal stock market. So they'll come to us and say, here's what we want to set up. Employees can sell 20% of their vested options. Nobody can sell more than a million bucks, et cetera. We'll set that program up for them. And then we'll find buyers that they approve. And those buyers then bid on that

Starting point is 00:19:01 supply. Most of the buyers today are institutional crossover funds. So it's all the people you think in late stage growth. We've talked about it. You'll see what will happen is the sellers will then put in bid their limit orders, how much they want to sell at what price on the sell side. The buyers will come and put in their limit orders, how much they want to buy in at what price. And then then we'll find a clearing price that clears the most trades. So everybody gets the same price. This is a periodic auction-based market, not a continuous trading market. And so everybody gets that same price that clears the most shares. One of the challenges that we have is that in the public world, I hate this term. It's so derogatory, but smart money and dumb money model of who's

Starting point is 00:19:41 the smart money, they go first and then dumb money follows. I prefer to say price setters and price takers. One of the challenges in the private markets is there's many, many price takers. They're very few price setters. There's very few firms that know how to price a private company. And on the employee side, they don't know how to price it either. And so one of the challenges that we're having is how do you set price when there's so few price setters? And in fact, many of the price setters aren't on card to X because they're the ones that are out finding founders. We attract more passive capital versus the active capital. And that's one of the things we're trying to think through. What about the extreme version of this where non-institutional, that core group of institutional

Starting point is 00:20:20 crossover, expert price center type investors on the demand side are driving a lot of the action on car to X? Do you think that's possible? What restrictions are there that would prevent, say, the same retail crowd that buys and sells in public markets from doing the same for strike shares in private markets or something like that? Today, it's a lot of institutional-driven. Finding alpha in the public markets today is really, really hard. And so they're all moving into the private markets to find Alpha. And finding Alpha in the private markets is much easier. There's a lot there.

Starting point is 00:20:51 Right now, we only allow institutional investors to trade on CARTAX. But my hope is, in two years, to your question, we'll allow accredited investors. And then I hope in five to 10 years we'll find a way for retail for everybody to participate. We're working a lot with the SEC. We have a policy team that's working on amending the credit investor rule to be not a net worth-based or financial means-based metric or threshold, but rather a, an education qualification so you can basically test into being an AI. And if we can get that pass, we almost had a pass with the previous administration. We're working through it with the

Starting point is 00:21:25 current one. But if we can get that pass, that will wildly open up private markets to 300 million Americans. And we're really excited about that. Why do you think there's more alpha in private markets? Like, what's the evidence for that or how does it manifest? There's less competition from buyers where, as I said, there's seven institutional buyers that will buy in the private market. So it's easier to find stuff that's overlooked. In the public market, so many things are scrutinized. It's hard to find stuff that's completely overlooked. And then I think in private markets, what's really interesting is if you're asset manager,

Starting point is 00:21:56 you believe in efficient markets and you believe in efficient portfolios, and your job is really to understand the world as a Gaussian distribution and allocate correlations correctly. That is your job. And you believe the world is normally distributed. We know the stock market isn't completely normally distributed. It's got a fat tail on the downside. but it's close enough. And it's so close that we can create options and derivatives and all kinds of financial mathematics that work in the public markets. Private markets, especially in venture, are not normally distributed. They're power law. The best companies win it all and most companies never make it. If you want to find power law, you can't find that in the public markets. You can only find it in the private markets. You can only find it in the private market. And everybody wants to torque their portfolio to have a power law piece to it. And that's why I said there's alpha in the private markets. If you can find and take advantage of that power law, you have huge.

Starting point is 00:22:43 huge, huge returns. It's interesting the studies of the public markets that show long-term that power law thing exists. This is a small group of winners drives the outcome for the whole market. But in the near term, obviously, it looks pretty distributed. Obviously, very, very different for private companies. With that in mind, how is Carter the business mapped onto the success of its customers? Or is it not?

Starting point is 00:23:06 Because if your customer effectively is that power law distributed private market, a startup to begin, sounds like bleeding into private equity and much more broad in the future. But historically, I think you've grown on the back of the startup world and economy. Are you tied to the success of the underlying companies in any way? How have you thought about that, that you exist in that world, you serve that world, how do you tie your own fate to their outcome? There's two parts to how we grow with our customers. So one is our pricing model on the cap table product is basically predicated on.

Starting point is 00:23:39 We don't have seats. what we do is line items on the cap table, which conclude every time you add an investor, you get a new line item. Every time you hire an employee with auction grants, you get a new line item. So as these companies grow and raise more money and hire more employees, we grow with them and they pay us more. It's absolutely true. We see it. The vast majority companies don't grow and then in any individual cohort, but then a handful of these companies grow for everybody else. And we average out at roughly 120 percent, that dollar retention. But you could see the power law dynamic happening in a cohort by cohort.

Starting point is 00:24:10 basis. We just get the law of large numbers by cohort, which is great for us. So we grow in a more normal distributed way. The second thing is we build a lot of products on top of the cap table. One of the criticisms of investing in e-share slash carda in the early days was market size. How big is the market for cap tables? That's what every investor said to us. The investors that invested in us didn't see us as a cap table company. They saw cap tables as a wedge to not just liquidity, but all kinds of other things that you could build on top of the capital structure of a company. The cap table is what gave us optionality. And I would say now we've got eight, nine different products that we sell into the venture ecosystem.

Starting point is 00:24:49 And one of the things we look at when we think about what new products to sell to build, the cursive optionality that we have, which we have so many options to go after, is we've asked this question, what gets easier and what gets harder to build. And so some things, if we wait, actually get easier because we get more natural. network effect, we get more critical mass, et cetera. Some things actually get harder if we wait because competition's coming in, because incumbency gets stronger if we don't change behavior, et cetera. And that's how we decide what to do first and what to do second is what gets easier to do if we don't wait. That's a big piece of it is adding new products to sell into our customer base.

Starting point is 00:25:26 How do you make those kinds of decisions faced with an infrastructure that, like you said, gives you optionality, enables you to build other stuff? How do you decide what's a good idea and what's not? I'll leave it at that. I mean, it just seems like when there's lots of options, sometimes it's very difficult to know what to focus on. So as a manager of a business now, abstracting away from the specific problems you're solving, what do you think are the right ways for other entrepreneurs to think about that problem of where to focus? I took something from our friend Mark Andreessen, or he talked to me about Andreessen Horowitz. There's no bad ideas. It's only timing. And if you have that belief system, he'll walk you through this history of ideas that happened that

Starting point is 00:26:06 were before their time, but then actually ended up being a good idea. I can do it for like webband versus Instagram car, but the Andreessen people can do it for like the last 150 years. So we've taken that. But what's so great about that model is the question isn't what's a good idea, what's a bad idea. The question becomes is now the time for this idea. And that's such a different way to think about investment decisions. I love that framework. We're not investors. We're operators. So we have our own framework, which is there's no bad ideas. The question is which aperture you look at for this idea. And so if you're looking at an aperture saying, hey, we're trying to solve this one problem for a user, it feels like we should do this for this user. That aperture is

Starting point is 00:26:46 correct. When you're a product manager focused on your user and the user wants feature X, we should do that. But then if you look at it through a different aperture, say, what is core to our mission over the next 10 years? That feature may not actually be important to us. And we're both right. And so the question is, which aperture do we look through? I'll give you one really, Good example. If you talk to some of our CEOs that are customers, some of them don't like to give vesting email reminders to employees. This is a really weird one, but they don't like it because they don't want employees worried about equity. It's also sometimes they don't want employees if they leave to know that their options can get exercise. There's some weird dynamics that happen with some companies and investing email reminders from employees. And so if you look through the aperture of what do I do to make my customer happy, you might say we should turn that off if a customer wants that. If you look at through the aperture of our goal is to normalize equity as a means of compensation and educate the world about equity, we absolutely would send everybody vesting reminders and teach them about how important it is that they exercise their options. And both are correct answers. The question is,

Starting point is 00:27:50 which aperture do we want to look through today? And that's how we look at everything, is what's the right aperture to look through a decision and then make a decision through that aperture? And my job as a CEO is not to opine on yes, no versus good ideas, bad ideas. my job is to help the executive team to figure out what's the right aperture for decision making. There's this great idea that idea of one of N versus N of one companies that I think I first became enamored with through David Haber, another mutual friend of ours, also at Andreessen. And I think he might have credited you with this model. Maybe talk about that concept a little bit and whether it also applies to this product, this decision framework, not just at the company level, but down at the feature level. I am a huge fan of the one of N versus N of one framework.

Starting point is 00:28:32 And I just have to give credit. I probably talk about it more than anybody else because I'm such a disciple. But this actually came from Arjun at Tribe Capital, you may know. He told me this framework, and I just ran with it. So an N of one business is one where the market structure allows for a monopolistic effect, where there can be one and one winner, the end of one winner. A one of end market is one where there's lots of competition. You almost think of it like Peter Teal's competition is for losers, right?

Starting point is 00:29:00 He has a very black and white view of the world. There's either perfect competition or there's monopoly and there's nothing in between. And we subscribe to that view. And our job is to never enter one of end markets, never enter anything where the end state of this marketplace has to be one with multiple competitors and only enter markets where we have a real chance of becoming the end of one player. And that actually makes it tricky because when you enter new markets to be an end of one player, by definition, you have to go to relatively small markets because large markets are really hard

Starting point is 00:29:32 to become an end of one player. It takes a lot of time. You have to have the scale to take over these end of one markets like Amazon, still not end of one, but boy, are they heading that direction. That is the balancing act where the investors that invest in Carter, the criticism might be, hey, they only go after small markets. The bullish case is, well, hey, but they win all these markets. each time they win a new market, it gives them optionality to build on top of that market and go into something bigger. And so far, we've been able to execute against that strategy. What are some of the key principles of how you run the company that map back on to that idea of N of one market, company, whatever? Like, what is different do you think about running a company that that explicitly is the goal or the strategy,

Starting point is 00:30:16 is to just be in markets that they can dominate? Yeah, I used to have this conversation a lot with Canada. that I was trying to recruit. Back in the early days, especially, I'd compete against Instacard, and I'd compete against MongoDB, and gusto and payroll companies and health tech companies. And what I would always tell them is I would say,

Starting point is 00:30:35 hey, when I had a candidate that, say, had an offer from a payroll type company and an offer from me, and they were trying to figure out the two. And I would say to them, hey, there's two types of businesses that you can pick from. One is a business like this payroll company you're competing with that has line of sight to, at that time, a billion in revenue seems crazy. Now I would say 10 billion in revenue.

Starting point is 00:30:58 But they had line of sight to a billion in revenue when they were a series A or B company. The question was, could they out-execute? There's a billion dollars easily available on TAM for a payroll company or for a database company. The question is, can they just execute better than any incumbents and get there and build a better, faster, cheaper product? For us, we've never seen line of sight to a billion in revenue or 10 billion in revenue in any one product line, we're like that company that sort of has a machete and we're hacking

Starting point is 00:31:25 our way through a foggy jungle and we're building the path as we go. The first type of company, I would call an execution company. They know exactly what to do. The question is, can they organize a team and execute against that plan better than anybody else? For us, we don't know what to do. We have to keep innovating and finding new markets because in any existing market, we're going to run out of oxygen. And we've raised venture capital. We've raised too much money to just flatline. And so we constantly have to innovate and find new paths. And the question is, which company do you want to work for? High performance execution team or an innovation discovery company where we're constantly

Starting point is 00:32:00 beating our own path. And for some employees, it was better to go to an execution company. I would say everybody that comes to CARTA is here for the journey, not the destination, because we don't know what the destination is. Let's just imagine there was like two classes of five amazing job candidates, a designer and engineer, whatever the lineup was. we could run a sliding doors experiment. So that five-person group went to payroll company in one world and they went to Carter

Starting point is 00:32:24 and another world. In what ways are those two paths in the actual experience of doing the work the most different? I understand the concept, but in practice, like in literal terms, what is different about those two paths or those two kinds of companies and therefore those kinds of employees and how they operate? I would say that the experience of the employee is a top-down versus bottoms-up management style. If you're an execution company, like a database company or a payroll company, they know exactly what to do. The roadmap is defined from the top.

Starting point is 00:32:54 Execution is measured and progress measured. OK, all this kind of stuff. And so they're given the thing. Here's what you got to go do and you just have to go do it. And it's great. And you'll do it really well and all that kind of stuff. I think employees that come out of those companies become great executives. Because how do you become a great executive?

Starting point is 00:33:09 I call it deterministic management. You know exactly what to do. You have a roadmap. You have a plan and your job is to operationalize that plan. and they become great executives. If you work for a company like ours, we have no idea what to do. It's very bottoms up. We intentionally organize that the best ideas come from the bottom. And my job is not to actually make decisions on what to do because I'm not close enough to the customer, to the markets, to all these things. My job is to give people the framework that they make the

Starting point is 00:33:35 decisions on what to do. So, for example, my framework is only end of one markets. We only do new market creation. So we're not going to try to invade an existing market. We're going to find a way for money to exchange hands that hasn't happened before and make that true. I give all the frameworks for how to make these decisions, but you really push decision making to the bottom. And what it feels like for employees is it's scrappy, it's exciting. It's also incredibly chaotic and they have no idea what's going on half the time. And I would say the best thing, if you want to be a founder, Carter is the right place to do this. If you want to be an executive, this is a terrible place to learn to be an executive. But if you want to be a founder, this is how you do startups. We have

Starting point is 00:34:11 the Carter Cartel, we affectionately call it, early stage employees that are have left to do startups, and there's a dozen of them already. We breed founders. That's what we do here. What do you do to make that so true? What is the empowerment that's happening? What is being pushed down, I guess, to that bottom that allows that experience to happen for them, like deliberately from you and leadership people. A big part of it is roadmaps and decision making is pushed all the way down to the people that matter. So we're very good at allowing experimentation to take place. I'll give you like a very practical example of this, which is really hard, hard to figure out. Let's say a director level or senior director or something, their project tried a new product or new thing,

Starting point is 00:34:53 and it didn't work out. And now their performance review is coming up. We do a four point rating. Four is the best. One is the worst. Do you give them a two because it didn't work out or do you give them a four because they tried? That question is, it seems so simple, but it's such a fundamental question because if you give them a two, nobody will ever take risks. Because they'll only do things they know that work. And if you give them a four, people will want to take risks because they know that they'll get rewarded for that effort. And we're a company that gives force. Most companies won't. If you ask most companies, what do you do when somebody tries something and they fail at it? They'll say, well, we're an outcome-based company. Results matter. We're an input-based

Starting point is 00:35:32 company, not an output-based company. The results will be the results. What we question is, did we do it the right way? I had an interview with Frank Slutman from Snowflake recently, and obviously he's sort of like the prototypical, hard-charging, intense, focused leader and manager. His style is sort of fascinating for me. And obviously, that's not the only style that works. How would you characterize your style of leadership and management, which are distinct, obviously, separate things? How are you as a leader and a manager? How hard do you push people? And what's your philosophy on this, given that you yourself have been a startup? You have to move fast. I'm a huge fan of Snowflake and Slubin. I mean, the numbers they put up are just, I mean, it's like the Steph Curry of B2B SaaS. It's just amazing. We all aspire

Starting point is 00:36:15 to execute the way that team does. I would say though, and maybe this is why we're not a snowflake, but I'm the opposite of Franksleman, literally the opposite. As one example, I don't push hard because I believe that people will work harder for themselves than they will for anybody else, including me. This is really such a subtle thing. Most CEOs, if somebody does something well, they'll say, good job with approval. I'll say congratulations because they didn't do it for me. They did it for themselves and good for them that they were successful at it. I give them the credit that they gave themselves for doing a good job rather than making it paternal.

Starting point is 00:36:51 I also do something else. I do this exercise with execs where especially newer execs that are promoted or recently started working for me. Do this exercise. I'll ask them, hey, what's the difference between working for the CEO and working for everybody else you've ever worked for in your career? And I'll usually get business school answers. Like you have to be collaborative, you have to be cross-functional, all this kind of stuff. I say, all of that's true. But the biggest difference is it's the first time in your career, you work for someone that

Starting point is 00:37:18 knows less than you do. I'll pick on my CFO. When you were the director of finance working for the VP of FPNA, that VP became VP because they did your job and they did it well. And I always say it must be so disappointing. You spent 25 years to work your way up the ladder, building your career to finally get to the C-suite and work directly. for the CEO and you find out he's an idiot. He knows nothing about what you do. You can't get any

Starting point is 00:37:41 help from this guy or gal. And so your job has to be to tell me what to do. And that's such the difference from the hard charging CEO where like, I know best. I've done all this. I'm in charge. I tell by C-suite, you need to tell me what to do because you've done this way more than I have. This is my first CEO gig. What circumstances make you your toughest? What happening at the company or what behavior or opportunity brings out the hardest charging version of your leadership style? I think the hardest charging version of my leadership style is when I go into micromanagement. I'm a big fan of extremes. There's complete competition, perfect competition or monopoly. I kind of view there's autonomous management, let people do what they want to do and stay out of

Starting point is 00:38:24 their way or micromanage, but don't live in the middle. And it comes down to confidence. So if you have confidence in the executive or product manager or whoever it is that you're working with, let them run. Be there, help them give frameworks, give ideas, be a thought partner to them, treat them as a peer in this, but let them run. This whole trust but verify thing, just trust, see that it works. And if you trust them, they'll come and tell you when things aren't working. They'll tell you when you should be worried, but leave them alone. If you don't have confidence in them, micromanage them incessantly. Because management and all this stuff is an apprentice, ship. They really need your help and not just from afar. They need you shoulder to shoulder,

Starting point is 00:39:05 desk to desk with them helping them. I take those two sides. And 90% of time, I'm trust and let people go. And then the 10% of time, I'll sit and I'll invest with them. And if they come out the other side of that micromanagement investment, which micromanagement, you know, it's a bad word, but I think it's a great thing. I think it means you care. And they come out better. And now you trust them. That's fantastic. And 50% of time that'll happen, 50% of time, you can't help them. But now you know you made the effort and you can figure out what to do after. How do you know when something, especially with this bottom up style of building and sort of pushing responsibility to the edges, when something is wrong and someone at a high level needs to stop an initiative, you know, shut down a product,

Starting point is 00:39:47 eliminate a team, the hard parts of sort of pruning what's not working from the top down. How do you do that in this way of company building? It's really hard. And it comes down to culture is often overused term, but I would say I hate to put everything on culture because there's so much more to organization building than culture. But I would say in this one, culture matters a lot. One of the old management maxims I hate is don't come to me with a problem without a solution, which is the dumbest management thing I've ever heard because then you don't get any of the problems that don't have solutions, which is the ones you really want to know about. If anything, I'd go the other direction. Don't come to me when you have problems that have solutions because you've already figured

Starting point is 00:40:28 out. Come to me with the ones that you don't have solutions for so I can help. And instilling that into the culture of my job is, I'm a servant leader. My job is that when you have problems, you don't know what to do, come to me because I might be the person that can help you. And ingraining that culture and that feeling all the way down the leadership stack to the support analyst that goes, I have a problem with a customer. They're unhappy.

Starting point is 00:40:51 Can I escalate that? because I don't know what to do, that is critical to uncovering problems in the organization. What is your favorite example of something that just didn't work that seemed really promising and you pursued or whatever got to some stage or development or even as a live product? And ultimately it was just a bad idea and a bad mistake. I love these stories of learned failure. So what's your favorite example of that in Carda's history? I started Carter X too early.

Starting point is 00:41:19 I would say this is actually the third swing I've taken at creating a lot. a liquidity product. And I've done it twice before. Both times objectively failed. And part of it was me noticing, but mostly it was the team realizing, hey, given the constraints and how we're going to measure progress, and they set it up. It wasn't, hey, I consider success AB and C. They're like, Henry, here's how we think of a success, ABNC. And I'm like, that sounds reasonable to me. Let's run with it. And then over time, as they kept reporting, they weren't getting to AB&C. And it was really painful because we believe the team believed it's so hard for a team to admit failure, especially to the boss. And it's so hard for me to watch them suffer as they're trying to get this thing off

Starting point is 00:42:02 the ground. And those things are really tough. But for most part, I would say 90% of that team stayed with Carter. It wasn't like we disbanded the team. That team was a failure. It was like they were heroes for trying. And that's the most important thing. I have this another management thing. if a team does a bad job, you should be upset. And I have this rule with my execs, you should never show that you're upset, full stop. There's no excuse for it. And it's because once you show you're upset, for any reason, people won't want to tell you things. And it's hard. It is hard. When you see really stupid things happen, like, it's hard not to get upset about it. I can do 99 things right and be cheerful, positive, optimistic. And that one time I'm upset about something,

Starting point is 00:42:44 that's what everybody will remember. So what do you do instead of getting upset? Like, let's say someone does a terrible job or just a lazy job or, you know, something is clearly not to the standard. And you are upset in a literal sense. What do you do instead of showing that? I get curious. So the big question for me to figure out is if I feel like this was not a great job, what does the employee think? Do they think they did a good job? Do they think they did a bad job, but don't want to admit it? Do they think they did a bad job? And now they're going to tell me they did a bad job? All of that is such important questions. Because depending on, on how the employee feels, it decides my solution. If the employee thinks they did a good job,

Starting point is 00:43:23 I have a different problem. I have a expectations problem. And I have to find out why this employee thinks this was great and why I don't. And I could be wrong. Maybe I'm missing something. And they actually did a good job, but I just don't know it. So it's a discovery process to figure why the employee thinks they did a good job. If the employee thinks they did a bad job, but they're being defensive about it, that's a very different problem. That's not about the project. That's about the employee. Why is this employee feeling defensive? So for me, it's an entire discovery process. And I'm sure the hard charging CEOs that are listening to this go like, Henry's kind of a wuss. You know, he thought he doesn't force the issue. I'm the opposite of that. I'm a discovery,

Starting point is 00:44:00 curiosity type leader, not a hard charging execution leader. So then I'm curious how you spend your time. Like if I were to come shadow you for two weeks or something or a month, what would I see you doing? I think you'd probably see me do two things. So, One is a lot of external stuff. I try to focus helping the company on the outside. I leave a lot of the operational detail to my exact team. I think you'd see me do a lot of that. And then the second is, I hope you would see me do a lot of positive mentorship.

Starting point is 00:44:28 So meeting with one-on-ones with employees, helping them think through problems, meeting with teams, helping them think through problems, doing roundtables, getting advice. I mean, one of the things I love about Andy Grove's book, first chapter is he spends like 12 hours sitting in meetings all day. and then at the end of the day, makes one decision. And he's like, all that mattered is I get that decision right. I very much feel like my job is to mentor, help, and then occasionally make a decision and make sure that decision is a good one. And so you'll see me getting a lot of information.

Starting point is 00:44:57 We were just talking about this with Mark Andreessen and his fire hose of information. I try to set that up for myself too. Maybe say a word of what you've learned about. You've given a lot of these interesting management concepts. I'd love any interesting similar concepts on product. You've got now beyond Captable, a number of different things that you do for your customer. What does great product, especially in the world of software, mean to you? What are the characteristics of a great product for Carta, but even more generally? There's this great image I

Starting point is 00:45:24 shared with all my product managers. I'll try to describe it, hopefully, in words. It was like two styles of product management if you want to build a car. And the first one was this iteration of how to get to a car in pieces. You start with a chassis, and then you start with the wheels, and then you start with a steering wheel, and then you put in a steering wheel, and you put in seats. And at the end of this, you'd get a car. And the other style of product management was you start with a skateboard and then a scooter. Then you put a stick on it. It becomes a scooter. And then it becomes an electric scooter. And then it becomes a go car. And then you get to a car. I love that one because what's so powerful about that is the first version of this product has utility in the second style, but not in the

Starting point is 00:46:02 first. And so we talk a lot about everybody wants to build a car. Like we know that's what we want to do, but that's not the hard part in product management. The hard part in product management is, the path to the car and how do you provide utility along the way? And this is one of the things that big companies get wrong a lot because they have so many resources. They're like, we'll just go straight to the car. We'll build the chassis. We'll build this. We have executives that know how to operationalize this. We have a roadmap and a plan. But if you're in a discovery company where you're like, you're not sure what this car is going to look like, you have to start with utility early. And this is why it works really well for founder-led companies because that's what

Starting point is 00:46:39 venture is like. Nobody gave me a billion dollars to start card out. I started with 200K and then a million and a half. And each way, I had to show utility. I had to show something that at that stage of the company was sustainable. We could build off of. And big companies don't have that. And so they do these massive projects that often fail three years in, where we instill that deeply into our product teams, even now we're 2,000 employees, that your job is to build a scooter first and not the chassis. I love that. It reminds me of one of my favorite books by this guy, John Gall, called The Systems Bible. And one of the principles in the Systems Bible is there's no such thing as a complex system that's just designed, complex, and implemented. Every complex system

Starting point is 00:47:22 that works is evolved from a simple system that worked first. And that really makes me think of that skateboard, scooter, car way of thinking about product. Same question for teams. Define what a great team looks like, especially given that it sounds like you are really pushing the fate of the company down on to relatively small teams at the edge of the business, not from the top down. So what does a great functional team look like, in your opinion? I talk a lot about this with my execs where I have this interpersonal theory about how people talk and work together. And I call it process and content. So process is how you work together. Content is what you're talking about. And so most teams and management C-level execs talk a lot

Starting point is 00:48:04 about content. What's the right budget here? What's the right product here? What should we do here? All of it's around the decision making and what's the right decision. And I spent a lot of time with them, especially with execs that come from bigger companies where vigorous debate is good because it gets you to the right answer. Another management maxim I can't stand is debate is good. And what I talked to them about is what I care most about is process, how we work together, how we talk to each other. You'll give this example where two execs are arguing and not getting along and upset about something, but they ended up getting to the right decision, to the right outcome and agreeing on it, they would consider that success. I would consider

Starting point is 00:48:42 that failure. I use this phrase, friction is failure. And most people think friction is good because it shows like a healthy debate. And so to me, it's a great exec team works really well together and is okay if they don't get the right answer. My favorite lines that I learned about partnerships is great partnerships work where when the relationship matters more than the answer. And I think That's true for teams. How we work together matters more than the answer. And we're okay making mistakes to preserve the collaboration of what we're working on together. I like this line of questioning around aspects of the business. So I'll keep going. What defines great in go-to-market, whether that's marketing, sales. You can tell me what matters more for Carter. What have you learned

Starting point is 00:49:23 about what great means at doing this part of the company building motion really well? For us, I have a very specific answer. I don't know that I can speak for all companies, but definitely for us, we are in this, I would say, later innings transition of moving from a single product company to a multi-product company and the platform, yes, multi-product and I would have to say multi-customer because we both sell cap table software and compensation benchmarking software to companies, but we also sell back office and fund administration to venture funds. If you look at any lifecycle of a company, obviously they start with an idea and they're trying to get the product market fit.

Starting point is 00:50:02 So that's stage one, is trying to get to product market fit. Then after product market fit, most companies die before that ever happens. That's the first wave of death. The second wave that happens is they get to product market fit, but they can't scale effectively. And that's stage two, which is how do you scale this product that seems to be working? A lot of companies die there, but much, much fewer. That tends to be a little bit easier. Getting to product market fits the hardest part.

Starting point is 00:50:27 And then at some point, unless your databases or payroll, you're going to run out of oxygen there. You're going to have to have a new product or a new customer, expand the market. And then it becomes a multi-product, multi-customer company, a platform. Vast majority of companies die there. That's where you get the single-digit billion outcomes. Two billion dollar market cap and always will be. But if you want to get the 10, $20, $100 billion in market cap, you have to become multi-product.

Starting point is 00:50:51 Being in the midst of doing it right now, that's actually really hard to do. It's harder than I would have thought. And building a GTM motion that becomes the pipelines of distribution where we can invent a new product, we can acquire through MNA, Corp Dev, a new product, and then push that through the lines of distribution to our customers in a scalable way. That's really challenging. But the teams that can do that, it's incredibly valuable. Because now, if you get a good product market fit, and a lot of that can be experimented with outside, you just look at these startups, you see which one's getting traction and you buy it and you push it through your pipes. That is how you do

Starting point is 00:51:24 Salesforce level execution. And what about building those distribution pipes themselves? So, definitely see this happening with lots of the best companies. Twilio comes to mind as when they bought Segment. I remember being really interested in that. Salesforce, obviously, it's a quintessential example of building great relationships with the buyer and then constantly solving more and more problems for them. That means you need the relationship with the buyer in the first place. So what have you done? Do you think that's effective there that's allowed you to beat relevant competitors, even though understanding you know, you're going after a certain type of market where you can dominate? what have you learned about building those actual relationships and those pipes?

Starting point is 00:52:01 I think two things that we're learning. I definitely would not be so bold to say we figured it out, but we're trying to. So one is having a customer success organization, a CSM customer success manager organization that deeply understands the customer problem set is critical. And I know that sounds like a lot of business school buzzwords, but I can tell you exactly what that means. If you can figure out a customer health score, an automated customer health score, And then make sure the CSMs understand the health score and how to drive better customer health.

Starting point is 00:52:32 And customer health includes not just happiness, but engagement. Are they using the product? Are they getting value of the product? All of those things. That's key one. Because what you want is the customer, when they do have a problem, you don't want them to quit on you. You want them to call their CSM and go, hey, I don't feel like I'm getting the value out of this product. Tell me what I'm doing wrong.

Starting point is 00:52:51 That customer health metric with CSMs deeply engaged, part one is the key thing. Part two is this is unique to us, not true of all companies, but the products that we have for companies often have different buyers. Sometimes it's the same, but often it's different. So like our cap table product might be bought by the general counsel. Our 49A product might be bought by the CFO. And then our compensation benchmarking, Cardo Total Compensation benchmarking product might be bought by the head of people. The ability to parlay one relationship into an organization, into a broader relationship

Starting point is 00:53:25 where we can say, hey, we should talk to your head of people because they're hiring, they're issuing stock options to all these new employees, but they don't know how to. We have all the data. We can tell them what an E5 engineer at a series B-backed company should get in stock options. We can tell them that. Let us talk to your head of people and see if we can be helpful, figuring out how to navigate the organization this step too. I would say we're early days on that.

Starting point is 00:53:47 I don't have the secret sauce yet. What do you like least about managing a company that's now this size and this level of complexity. I'm a very classical zero to one product founder. I'm just your typical, you ask me what gross margin is. I have to look up on Wikipedia. You talk about what products we should build, that's neat. I love doing that stuff. And I love the early stage and building new things. The worst part, I would say, about my job is fighting the inertia of bureaucracy that builds into a company as it gets larger. It just happens. In part because the company gets bigger and you have to, you have to have more process, you have to have more standardization.

Starting point is 00:54:24 You have to tell people how to work in a way that you didn't when you were 20 people, like we are now at 2000. Partly also you have executives come in where you hire them because they know how to standardize and operationalize things at scale. And how do you work with these executives where I'm like, hey, but don't make it too bureaucratic. And like, that's what you brought me in for us to like make this place hum and turn it into a machine. And I'm like, but I don't want to be a machine. I want to be a garden of innovation.

Starting point is 00:54:51 And how do you balance those two things? And again, everybody's correct. It's just which aperture you're looking for. If we want to be an innovation-based company, we should look through the aperture of innovation and gardening. And if we want to be an execution, like we know exactly what to do, now go after it like sharks. We should go be that. Which aperture do we look through it today? I would say fighting the battles of bureaucracy is my biggest challenge. What do you fear most if that's the biggest challenge that's already there? As you think about the future of Carter, what scares you the most? Unrealized potential. The business and platform that we have is just, we have so much optionality that we're building on this.

Starting point is 00:55:25 I don't know what the inverse of peeling an onion is, but the more problems we solve, the more problems we get to solve. And it's just the solution space that we can go after, it just keeps expanding. I think the saddest thing for me might be 10, 15, 20 years. I retire and I say, well, we didn't realize their potential. That's, I think, what keeps me going. You mentioned data. We'll go into the specifics of how you handle data security, but the idea of data in any modern business, certainly in your kind of business, is really interesting to me. It seems like something that almost every entrepreneur is kind of going to have to think about how data is flowing through their business, how they use that data and maybe feed and enhance their own products,

Starting point is 00:56:01 or at least understand their customer better in some of the ways you've described. Give any advice you can to other entrepreneurs as they think about, okay, we're going to start generating some set of data by virtue of what we offer to our customer. How should they think about that as an asset, as a product, as a fuel source? What is your model for thinking about data in the modern business? I think data is super valuable, but I tell all entrepreneurs, I tell my exec team this now, you know, any angel investing that I do is that if your business model is predicated on data, you're going to die.

Starting point is 00:56:36 That was true in the last 20 years that you could build data businesses. I don't think that will be true in the next 20 years. That data will become commoditized. You have to do something else on top of it. Just having the data is not defensible anymore. When we think about data, I think we have two strategies. So one is, and this is very much a Salesforce strategy, one is embed ourselves into a startup ecosystem

Starting point is 00:56:59 or a customer ecosystem through integrations where other platforms can use our data for things that are useful to the customer. I think that's where all the value is going to be. It's not the data itself, but how do you materialize that data in ways that create value for customers, either via workflows or decision-making, whatever that is. And the way that you can do that at scale is obviously we can build our own stuff. But if we can integrate with other platforms,

Starting point is 00:57:22 ecosystem could build much faster than any one company can. So I believe, especially in B2B enterprise, deep integrations into the customer platform matter a lot. And then I think the second thing is when you do have this unique core data set, how do you use it to create new product areas that you couldn't do without this? And so I'll give you the example for us. We launched Carter Total Compensation last year, which is basically Radford, but real-time and in the cloud.

Starting point is 00:57:50 And we did this because we were getting option grant information from 30,000 customers that we have for every employee in Silicon Valley that gets stock options. And we also have their salary information because we integrate with all the HRIS systems. So we can tell everybody what a E6 engineer at a series B back company makes in stock. in cash, and then we can benchmark that for everybody else. And it's that materialization of the data. It's not the data itself. It's the science that we put on top of it to help companies make better decisions on

Starting point is 00:58:18 comp. That's the real value. And I think what is the data enabled you to do today that couldn't be done before? Going back to kind of where we started, as we think about the capital markets structure, the whole playing field, the infrastructure, everything in private markets today, what are the biggest missing pieces do you think that neither Carda nor anyone else you're aware of is working on yet if we were to have a perfect idealized maybe it requires you describe what the perfect idealized end state of capital market structure would be in private markets to

Starting point is 00:58:49 begin. But what is missing, I guess, is the core question I have that is interesting to you. I have a very succinct answer, which is what's missing is debt. It's really funny in Silicon Valley in tech. We're equity people. We don't understand debt at all. I have a very have all this equity in Karta as a founder, I can't get a loan for a house. And the entire world runs on debt, the entire world runs on debt, except for this one little weird anomaly and technology companies. I barely have any personal debt. Our company doesn't have debt, but we have tons of equity investors. We only understand equity. And the reason why that's true, or at least one reason why that's true, is that it's really hard to create debt instruments or loans when you don't

Starting point is 00:59:34 know duration of liquidity, how long it's going to last. And tech companies, because we don't know when they IPO, it's impossible for banks to calculate duration. And so it's very hard to figure out terms on loans. And so that's why debt hasn't been introduced. And I think one of the really amazing correlaries that will happen is that if CARTAX is able to create systematic liquidity in private markets, we can solve the duration problem. And if we solve the duration problem, then lenders can start coming into the space and employees can start getting loans for homes. They can get loans for a car. They can do all of that securitize against private stock.

Starting point is 01:00:11 And that I think will completely change the economics of venture capital. Obviously, that means car to X might yet be the next stepping stone to unlock something more. So what's next for car to X? If you give yourself a B minus, you said, and obviously it's just building any marketplace, it's hard. But this one sounds like it's kind of your white whale, right? Like you said, you've tried liquidity. This is the third time. And it just seems kind of obvious if you step back.

Starting point is 01:00:35 Maybe I'm wrong. But it seems kind of obvious that more liquidity is generally good for price discovery, for markets in general. So what's next? What are you going to be pushing on as a company to make Carter X really work? Liquidity is a tale of two stories. So one is there's incredible amounts of liquidity that are happening in this tender offer regime where following a financing round,

Starting point is 01:00:56 companies will allow excess demand of investors that couldn't get into the primary round to buy secondary stock from employees. And that's most of that $7 billion number last year comes from. And we do a ton of those. And so what we haven't been as successful about is all the bespoke transactions. I just want to do an auction or I just want to do something else. That has been slower to adopt. And so the question that we've got to ask is I think we have V1 of private market liquidity, which is a tender offer. We're doing a ton of that. I think we have V9 of private market liquidity. And we're trying to figure out what is V2 through V8? How do we bootstrap in? It's a little bit like my car versus scooter analogy. We built a car. Now we've got to go back and go, what's the

Starting point is 01:01:35 scooter? What's the electric scooter? And start building out that pathway. Because I do think private market liquidity, this is one of the really fun things about car to X. Private market liquidity is inevitable. I do believe that. Somebody is going to crack the code on this. And obviously, I think we have as good a chance as anybody, if not the best chance. And so talk about things that make me fear is what if we aren't the ones that crack the code and we were right there. We were on base and we just couldn't round out the corner. That will haunt me my entire life. That's what I'm focused on. Yeah, I love it. It's such an interesting future to imagine where this all functions with far fewer frictions for employees, for companies, for investors, et cetera. The one group we really haven't asked

Starting point is 01:02:14 about is investors. You mentioned that you've started actually, I think positive sum. My investment firm just became a customer of Cardas too. And you mentioned already that now you're serving venture investors or other investors as a key new customer. What have you learned about or from that group specifically? If you started more focused on cap tables, obviously of which investors are a key component, what have you learned about or from that group as you've worked with them? I'm learning that there's an explosion of emerging managers happening in the world. This may not be new news, but there's so many emerging managers that are creating funds that are finding niches and soft spots in the market that they're filling, whether it's geographic-based because

Starting point is 01:02:55 they're in Kansas City, Missouri, and they're the only venture capitalist if you're in Missouri to niche markets. I focus on this specific type of company or this specific sector. The second thing, they all have a similar problem. One of the things we're experimenting with is can CARTA help companies not just raise capital, but help investors find companies? Traditionally, the idea of an intermediary, whatever the private market equivalent of as an investment banker was really frowned upon. If you hired an investment banker to raise money, venture capitalists wouldn't talk to you. That was a negative selection bias. And part of the reason was there was like eight firms.

Starting point is 01:03:31 I live a block from Sand Hill Road. There's eight firms on Sand Hill Road that you just walk over to. And that's who you dealt with. And that's it. It was very niche. Now what's happening is the scale of venture is no longer niche. When I do angel investing and I talk to my founders, the number one question they always ask me is, who should I talk to to raise my series A or my seed round? And when I talk to emerging managers that

Starting point is 01:03:53 hire us to be fund administrators for them and I say welcome them the platform, the number one question they asked me is, hey, if you see any great companies, send them my way. So one of the things are really experimenting with is, has venture reached a scale where we can actually help investors find companies, help companies find investors and play this matchmaking role in the ecosystem? And it not be a negative selection bias. That's a really fascinating problem. I've been talking to a lot of our customers about. Are investment banks, speaking of that constituency, ultimately your competition? Do you think they view you as coming for their lunch?

Starting point is 01:04:28 I think they're not sure what to make of us. That's a yes. We're very close with Goldman Sachs. They're an investor. But J.P. Morgan just bought one of our competitors, Global Shares. They also have created a private markets trading desk. They're also doing venture loans. So they're coming in.

Starting point is 01:04:44 I still view them as a friend. We actually use them for Cardax as our. bank, you are definitely seeing all the banks come in and they're trying to figure out what to do with private markets, just like we are. So I would say today in the ecosystem, we play in that sub-hundred million. Goldman won't talk to a company if they're trying to raise 20 million bucks, but we will. And so we're filling this niche of sub-hundred million dollar capital formation problems. But we'll see. In five, 10 years, I definitely think there'll be crossover. What matters a lot to you that I haven't asked you about? I'm always interested in what are the

Starting point is 01:05:16 obvious things that I'm leaving out or things that you're focused on that I haven't explored with you. Talked about a lot. But what have I left out that has your interest or your attention? I think what's going to be really interesting is this public market dislocation that's happening in the private markets and how long the two differences can last. The typical adage is the private markets are three to six months behind the public markets. And so this price correction that's happened in the public markets should feed into the private. We're seeing a little bit of that in our late stage public companies, but much less than you would have thought now in April four months in since this started. And in the early stage, you're seeing it's as hot as it's ever

Starting point is 01:05:54 been. I think one explanation could be just given a couple more months, Henry, and private markets will correct across the board. I think the other side of this is we were talking about loan duration. I'll talk about capital duration. In the public markets, there's no tied up capital. You invest, you buy it, and then you sell it. And people can come and go. The capital flows are instant. In private markets, they raise these venture funds on 10-year cycles. And there has been so much money raised into these funds that's committed for a decade now that it could very well be that private markets continue to be hot and continue to have large valuations because all this capital needs to get deployed that's just sitting there

Starting point is 01:06:33 that's been committed for a decade, even as public markets repriced. And what that will do to the IPO timeline, what it's going to do to late stage companies, all that stuff, I don't know, but it'll be fascinating to see because there is a real argument. Famous last words, this time is different. There is a real argument that this time is different for private capital. Yeah, it'll be fascinating to watch. We've certainly seen little green shoots, I guess is the wrong word. Like you said, the onion, what's the opposite of green shoots, withering something, where for companies that might have had crazy quick deals that it's taking a little bit longer, you know, all of a sudden we can do our diligence, less crazy timeline,

Starting point is 01:07:10 and little things like that, but prices are still pretty exceptional, like you said at the earliest stages. It will be a fascinating one to watch. Well, Henry, I'm so interested by the infrastructure that Carter's built so far and we'll build in the future. I really appreciate you walking us through it. I ask everyone the same traditional closing question. What is the kindest thing that anyone's ever done for you? One of my favorite stories to tell is when Mark Andreessen led our Series E. And I remember having breakfast with him in Menlo Park in the morning.

Starting point is 01:07:38 I basically said, we're at the late stages, and I gave him the terms. And I said, hey, Mark, if you'll match these terms for me, I'll go with you. I'd love to work with you. We're having breakfast. He said, give me until the afternoon. I'll talk to my partner, so I'll get back to you. And so he calls me in the afternoon and says, hey, can I come by your house? I want to give you a term sheet.

Starting point is 01:07:55 And I said, sure. So he drove by, he brought the term sheet and a Lego set, my son, my toddler son. And he gave me the term sheet at my home. And I tell this to all the venture capitalists I talk to. for BC's giving a term sheet, it's routine. Do it all the time. But for an entrepreneur, it's seminal moment in their journey. And I tell all the investors, hey, if you have a chance to go to an entrepreneur's home and give them the term sheet, do it.

Starting point is 01:08:18 I'll never forget that moment. Amazing. Henry, thank you so much for your time. Patrick, thanks for having me. Next, you'll hear my conversation with Cannelist customer Giuseppe Coco of LK advisors. We talk about the good, the bad, and the ugly around proprietary models and how Giuseppe has made Canalyst a key component of his investment process. So Giuseppe, I think the place to start is with the concept of a deep economic model on a business. You've got a unique background in banking where I think you spent, got on so many

Starting point is 01:08:47 hours building complex models. And I'd love to just begin there. Just talk us through your early experience, building models, sort of the good, the bad, and the ugly. Yeah. So we started out with investment banking, which is very much on the private side. And there, obviously, you have a lot more information. And so you can go in a lot more detail. So you would look at, you would look at, the models that we were building for years were frequently 20, 30, 40, 50 tabs, thousands of lines long, only like to get to a very simple output. And, you know, you would spend hours just changing this, changing this, updating this.

Starting point is 01:09:20 It would literally take forever. And it was very difficult, almost like to audit. You would find something, okay, you know, this number should be this, this number should be that. And you would literally go back and spend hours and hours and nights, just trying to reconcile that. just because most of the times people are just adding more and more complexity to those models and always ask for incremental complexity.

Starting point is 01:09:44 What do you think is the most useful and the least useful part of how those complex models are built on the banking side? Obviously, precision is good if you can get to it, but false precision is bad. What do you think the good and the bad is of that style of model building that's so complicated? I think to a lot of people that provides false comfort because it's more like the more the area, but it's actually not the case. It's more sort of, you know, what are the relevant things? What are the key things that actually make a difference? And frequently, that unfortunately just gets lost in the detail. On the good side, to be frank, I don't think there is actually

Starting point is 01:10:16 much because you think of a solution like Canalist, which the first time I opened the Canales model, I was amazed by the level of detail and precision that they could get basically into their one-tab models. I was totally amazed by that. that it was even possible, you know, until that point, I mean, that hasn't even crossed my mind that it was really possible to build such a detailed and sophisticated yet simple model in a manner that they do. If you think about those early days and what Canalist does or when you first encountered it, what did you like about the service when you first encountered it?

Starting point is 01:10:50 Like, what did it replace for you? And because you didn't no longer have to do those things, what did it open up or unlock for you with your time? When I first started on the by side, you started out by the sort of models manually. My former boss asked me, you know, to build out like the models manually into this and do that. I mean, obviously, and then, you know, obviously like your work basically piles up. And I mean, it just takes hours. It can easily take a few hours until, you know, if we don't want to potentially even like three weeks,

Starting point is 01:11:12 depending on the degree of complexity to build a proper and running a fully integrated model for any of the companies. What Canada does is basically condense all of that process. So it's as simple as downloading, you know, any PDF file just from the internet. And you have the whole model there with all the relevant KPIs. with all the relevant drivers so you can overlay basically your inputs. I think from all the tools I have been using on the BISRite and I'm using today, it is the one that reduces friction the most. Giuseppe, I'm curious, where did you first hear of Canales?

Starting point is 01:11:45 Funny enough, I actually heard about Canales on your podcast in an ad. And, you know, it was one of those evenings. I was at home listening to a podcast. And like, you know, I heard automated models, auto-opdating. I was like, oh, my God, this is exactly what I need. And I'm curious if you've interacted with, others in the investing industry too that are using it more and more. Like, are you seeing more colleagues or even competitors or friends using it too? Is that part of the growing network of it?

Starting point is 01:12:09 Here in the UK, my previous firm, I started using it and our team started using it. And then, you know, a team that was sitting like next to it was like, okay, hey, what are you guys doing? You know, how are you doing this so fast? And then they started using it as well. So it became sort of viral. And then when I joined here, so RCIO, funnily enough, you know, when we first met, we talked about it. Like, you know, hey, this is this amazing solution. which I'm using as part of my process. He was like, oh, yeah, he's ex-fidelity. One of the channelist founders is also ex-fidelity. So he had it very much on the radar. And, you know, it wasn't even a discussion to get up and running when coming here. Maybe just talk about your

Starting point is 01:12:43 day-to-day life at LK advisors. What exactly is it that you are doing? What is the daily workflow so that we understand how it slots in? Depends on the time of the year. Currently, you know, we're going into earnings season. So what we're doing right now is lining up our numbers across the models for the companies that we're holding, seeing where our estimates are, and then obviously there's just like preparation work at the moment. The rest of the time is screening for real ideas, speaking to management teams, attending conferences, setting up calls. And for all of this, Canada's is extremely helpful because, you know,

Starting point is 01:13:16 you always have a single source of truth which we can refer to look at the numbers and to get a better sense for where that is and how, you know, something that a management team may say is something that we like. learn may impact our estimates and where and how they could potentially translate into value. That single source of truth thing is interesting. How historically in firms like yours or in your experience knowing other analysts and PMs, how is ownership of the model typically handled? Because it seems like one nice thing like you said about Canales is it's a single source of truth. Like it's almost its own ownership. You don't have to worry about it as much.

Starting point is 01:13:48 But how in the absence of something like Canales are models typically shared and responsibility for them shared between teammates? Maybe like even going back to the previous experience, I think generally in finance, and I think most people will agree that models are sort of, the model on a company, on the idea, or whatever it may be, is sort of viewed as the holy gray, the numbers that people use based their estimates on of value. And it's sort of like the most things, sort of, you know, what is the impact of fill in the blank, get X, Y, Zad.

Starting point is 01:14:17 So people hold it a very, very high regard. And people are very, I want to say, almost jealous of their mom. And everybody thinks that if you own the model, you own the process and you ultimately like have to do. But the model also is, it's usually in pre-canalyst type of times, it is extremely time-consuming and inefficient to maintain. The way it's normally like shared among sort of like teammates is usually it's quite easy for mistakes to sort of sneak in. Canalyst is great because there are no mistakes in their models. If you want to have something added, right, you can just read out to the support team and product analysis. and they were amended to your satisfaction.

Starting point is 01:14:57 So thereby using Canales, you don't need to worry about maintaining your single source of true. How would you compare how you use Canales from your sort of hedge fund days to what you're doing at LK advisors? Is it different? Is it similar? Is it highlighted anything for you about the product or products? It's a bit different.

Starting point is 01:15:15 I think in my previous role, the coverage universe was a bit more fixed, a bit more Europe focused. So it was more about updating, maintaining. forming a rolling view. I think in today's role, it's very different because our coverage and our universe is basically global. So when I came in, I had to think of, okay, so how can we actually like leverage this? And one of the thinking was, for instance, I was very keen to build a, what I would call a quality scorecard, which would allow me basically to, when you have to think about across developed markets, what is what most of what we do, potentially even like some

Starting point is 01:15:52 emerging markets, how do you compare, cross-compare companies on a qualitative basis? So we started building out this process, which looks at more than 250 KPIs, to help us build sort of a scorecard, which has to score any company along those KPIs from one to 10. And this is a process that we found very well working for us. And that without Canada list, I mean, it would have been virtually impossible. Taking years or something. Yeah, it would have taken multiple years. multi-periors. What do you think is interesting about where you sit? You know, you're in London,

Starting point is 01:16:26 obviously a global coverage in universe is probably a little bit more important to you sitting there than if you sat in New York or something. How does that transfer into the use of Canales and the global nature of what you do? Canales, over time, you know, since I started first using the product, they have expanded massively, you know, and wider into, especially like European companies, as well as EM and developed Asia companies. So the universe has expanded. tremendously. The other great thing is, you know, we work closely with their product team to make suggestions on sort of, you know, companies that we care about and companies that we know, sort of, you know, people here in Europe care about. And they are extremely reactive to

Starting point is 01:17:04 initiating and launching on new models when we ask them to that gets put on sort of like a wait list. So, yeah, we continue doing that as we, you know, take an interest in different companies here in Europe. And I think the roadmap is sort of, you know, to get to like sort of 10,000 companies slash models, which is a pretty wide scope. do you still do that's, I'll call it very manual, that you don't think is too high value and you wish could be automated? Another way of asking, I was like, what do you hope is on Canales product roadmap? I think it would be nice to have something what I would call a by-site consensus. If you ask many people in the industry today, by-side consensus is this very elusive

Starting point is 01:17:43 concept or whisper, what some people may even call it. It's like an sort of unformed expectation and it may vary. What would be amazing would be to have some sort of Canales user-weighted, anonymized average of what are actually the users on the other side thinking. And then, you know, sort of providing an opt-in or an opt-out, whether you kind of think you want to participate in that. I think that would be amazing. The other thing is they are currently working on this Canis platform,

Starting point is 01:18:14 and we have like an internal developer who's working with their team to scale this scoring mechanism that I have just mentioned to you through a Python-enabled web platform to basically run that even at larger scale through the entirety of their platform. And as that becomes basically more life and more consumer-friendly as their website, you know, I think that could open up very exciting opportunities and use cases down the line. I'm curious, Giuseppe, if there's anything that you think is lost in the process of outsourcing some of this model updating, another way of asking it would be, you know, If you're updating these things manually, does that give you some sort of felt sense for the business that you can't get just by looking at the numbers?

Starting point is 01:18:56 And do you think that's worth that at all? I mean, obviously, you're a big catalyst user. So I can guess your answer. But I'm just curious whether there is a downside to, I'll call it, outsourcing some of this manual work around updating the models. I think the first part is that once, you know, when I remember when I open my first tenant is small, you see all these things and it's more like, okay, how does this work? Right. You look like an introduction. It's like, hmm, you know, I like it.

Starting point is 01:19:16 Do I trust it? And I think it's more. when you have your sort of, you know, the companies that you know and you follow them and you have a sense for the history, obviously, you know, you need to look at the numbers and you just anecdotally get a feel for what it is. But I think the beauty of catalysts is again I mentioned, right? So you open a cannabis model, there are five tabs and they have these like beautiful summary sheets. And I almost find it a lot easier to just look at those trends and get a sense for how something has performed, what is driving X, what is driving Y? They actually, enhance, in my view, that process of understanding what is going on. I had this debate with multiple friends and my view is that it's totally overrated to say, sort of, you know, you need to build the model to entirely understand the business. I think you just need to like look at the numbers, understand and how they flow, which is, you know, what Canada helps you with and do. I think the other thing that I found super helpful that initially wasn't as intuitive is their

Starting point is 01:20:16 custom templates. So Canada says like standard. templates or an LBO, a DCF, coms, all these usual things. We have our sort of proprietary process of how we look at things, how we value things, the score cut that I've mentioned to you. So we spent, we invested a decent amount of time into building our own templates that correspond to our process that work exclusively on the kind of platform. Once we scale, we put in that, you know, it incrementally helps us understand and make sense or a business and wise we can continue to comply with how we do things and how we think about

Starting point is 01:20:51 things. Awesome. Well, Giuseppe, thanks so much for taking the time to do this today. Really interesting career arc that you've obviously done a lot of modeling. So a great set of experience to understand why this is valuable. Thanks so much for your time. Thank you. 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 - Henry Ward - Transforming Private Markets - [Invest Like the Best, EP. 273]

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