Invest Like the Best with Patrick O'Shaughnessy - Jeff Jordan - Building & Investing in Marketplaces - [Invest Like the Best, EP. 276]

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Starting point is 00:01:10 start-to-finish product development, or developers that could be add-ons to an existing team. Check out lemon.io slash Patrick to learn more. 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. Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick

Starting point is 00:01:54 and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy asset management. This podcast is for information. informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Oshonacci asset management may maintain positions and the securities discussed in this podcast. My guest today is Jeff Jordan, general partner at Andresen Horowitz. Jeff has one of the most interesting set of experiences of the guests that I've had on the show. As an operator, he has been the general manager of eBay.com, president of PayPal and CEO of OpenTable.

Starting point is 00:02:27 As an investor, he was one of the first general partners in Andresen Horowitz and sits on the board of Airbnb, Instacart Pinterest and other notable firms. Given his vast experience, he is the firm's go-to expert on all things marketplaces, which is the common thread in our conversation. Please enjoy this great discussion with Jeff Jordan. Jeff, I really struggled as I was reviewing our research before I called today on where the hell to start with you. We've got such a wealth of stuff to cover.

Starting point is 00:02:54 I think marketplaces is such a common theme through your career that it would be a fun place to start, both because you've got so much operating and investing experience in this area. The place that I've chosen as an on-ramp is your notion of perfect competition. I think it's a really interesting idea that I'd love you to explain to us as an excuse to talk about all facets of marketplaces, building and investing. I got my first taste of marketplaces at eBay. Web 1, if you want to call it, that almost all of the best business models ended up being marketplace-type models.

Starting point is 00:03:23 Tao Bao and Alibaba, China, you have Rakuten and Japan, Ricardo Libre, and South America. Now, Amazon is largely a marketplace. At that point, it was brand new. There was no playbook early at eBay. I got there in 99. You're sitting there like, okay, what do we do? So the model that worked best in trying to figure out how to grow eBay was basically microeconomics. It is a perfect, at least it was a perfect economy where it was self-contained. And all of the things in economic theory of microeconomics were playing out on eBay. And so we made pricing decisions based on that, supply acquisition decisions. You just watch it would work as predicted.

Starting point is 00:04:03 I mean, it was fascinating. We started getting tons of requests from academia, including, by the way, the current dean of the Stanford Business School, I subsequently learned to get the data to test their theories. Fascinating little machine. My right-hand guy, Michael Deering of Harrison Metal, he had the same model, and so we just sit there geeking out on what happens when kind of thing. It was really fun.

Starting point is 00:04:28 So if you think about this notion of perfect competition, how should maybe a marketplace entrepreneur think about that concept? If you're designing a marketplace from the bottom up, why is perfect competition like a key notion in terms of how you should build or what you should build? Yeah, it's where supply meets demand than determines pricing. My partner, Andrew Chen just wrote a book called The Cold Start Problem. He was talking about the hard side of the marketplace and every marketplace. You're constantly challenged to keep it in equilibrium. You'd watch it play out on eBay, there'd be certain areas where an entrepreneur would find an inefficiency, where they could list items and make disproportionate yields because of scarcity. They were chewing off the very top of the

Starting point is 00:05:10 price curve. And then other sellers would observe that activity, fill the gap, and the pricing then would regress to where it rationally should be. Sometimes there's supply inefficiency, sometimes there's demand inefficiencies, and the two would very quickly resolve over time. Essentially, a two-sided marketplace. You're trying to figure out how do I keep these two in equilibrium? eBay, since it's like literally the perfect model of the marketplace is maybe the place to focus on for now, what kinds of actions did that mean when you were at eBay operating to try to promote price discovery or price equilibrium or something like that? Like, what were you literally doing? I mean, the most interesting thing is early on, we try all these initiatives that we baked on our own and debuted the community.

Starting point is 00:05:52 And we found out the leverage was way more to watch what the nascent behavior, the community was. doing and seek to amplify it. So the iconic thing there was Simon Rothman, who's bounced around. He's a Valley veteran now. Early on his career was just an early exec there. And he has a very high interest in collectible cars. And one day, I think he was searching for Maserati or Ferrari and expecting to see little replica cars. And he found real ones. And it's just like, why are people selling Lamborghinis on eBay? Well, it turns out Lamborghinis are only sold on the coasts. And so if you're in the middle of the country, it's very hard to buy one typically, and eBay entrepreneurs were figuring out, okay, here's what we do. So we took that nascent behavior and built eBay Motors,

Starting point is 00:06:38 which then made it much easier to list and discover cars, generated the supply, and created the awareness. The best actions we had was watch that nascent community behavior and amplify. When you're looking at a new marketplace for the first time, I'll hold off on the discussion between horizontal and vertical marketplaces, which will come to at some point. But if you're just looking de novo at a marketplace as an investor with your investor hat on, what are the features that you are zoomed in on most quickly that matter to you with all this experience? Two main ones. One is fragmentation of the marketplace. I often have used the difference between Open Table and Fandango in explaining this, open table, the average restaurant owner on Open Table owns one restaurant. And so aggregating them is a pain in the ass.

Starting point is 00:07:25 Once you've aggregated them, it's a very valuable thing, whereas Fandango basically has deals with the five or six major theater chains. And any one of them can have market power because if AMC pulls out of Fandango, I am motivated to go to AMC.com and figure it out. And I was explaining this theory to a fellow board member, an accolade, Michael Klein. And I explained the theory, and he looks at me very quizzically. And I go, what? He goes, you do know I'm the founder of Fandango, right? Oh, crap. One is fragmentation.

Starting point is 00:07:58 The other is ideally lead gen. You're creating relationships that otherwise wouldn't have been created. The thing you try to avoid is, okay, I have a relationship with my car repairman, my hairstylist, my whatever, and it's a frequent relationship. Those don't do well because the service provider will pay a little bit for convenience. They'll pay a whole lot for a new customer. Ideally, you have a combination of currently inefficient market that's very fragmented, and lead gen is a part of it. So Airbnb has lead gen. Hosts are being introduced to guests they never would have known. It's spectacularly fragmented. The average host owns one property. It has those two characteristics.

Starting point is 00:08:37 Maybe we should just go read Andrew's book to answer this question. But what have you seen in common amongst marketplace businesses that are especially good at thinking about that lead gen part of the equation? Because the fragmented supply side or the fragmented supplier base, like you said, it's a pain in the ass to get them all. But it's kind of straightforward. Like you've got to go get them all. What about on that other side? What's shared in common amongst the most talented people that you've seen thinking through this problem of lead gen? The best models are ones that don't really rely much on paid acquisition.

Starting point is 00:09:07 The best entrepreneurs have figured out hacks to get user demand at scale through a user proposition. And one of the most brilliant hacks on this was the open table hack that preceded me. The team figured it out ahead of time is they build a widget that restaurants could put on their own websites to empower online reservations. The typical behavior at the time is I want to go to the slanted door. Okay, let me search on Google for the slanted door so I can find the telephone number. Go to the website and you see this widget that says make an online reservation. It's just like, oh, I'd rather do that than pick up the phone and have that experience of, can you hold, sir, get back to you, and they call multiple restaurants, just awful.

Starting point is 00:09:45 And so we put it on there. And what it ended up doing, the diner would click on it and was redirected to the slanted door page on Open Table. They would then discover, oh, my God, I can make an online reservation at all these. And they'd come back to Open Table. They wouldn't go back to Google. They'd quickly learn a behavior to go to Open Table. So Open Table was getting paid to acquire their restaurants. consumers. While I was there, we didn't spend a penny on demand acquisition and we're growing

Starting point is 00:10:11 very nicely based on that. So the best models don't really rely on paid. They figured out some other way to get that distribution. Setting aside the negative aspect of concentrated supply base or Bad Lead Gen, what other red flags do you see that worry you if you're looking at a new marketplace business? Like, what would be things that you would not want to see if you were considering investing? cohorts just tell you so much about what is happening. One of our partners, Olivia Moore, just wrote a very nice blog post on Leaky Bucket Problem, where if you can attract a lot of people, that's the very bullish sign. If the cohort curve never bottoms out and just keeps going down, that's just plain smashing it at the ground. I get very worried on that metric. If you just

Starting point is 00:10:55 need fresh meat to grow, you'll reach a growth constraint at some point. You have an incredible, interesting operating background before even getting to Andresen Horowitz at Disney, then eBay, then PayPal, then Open Table, then Open Table. You mentioned some of these things. I'd love to go one by one and hear what stands out most in memory in terms of major business lesson learned, starting all the way back with Disney, which I think you're basically most of the 90s you were at Disney working with Meg Whitman. What stands out in memory there as the biggest lesson learned? The amount of young talent that Michael Eisner and Frank Wells attracted to that company was just remarkable. So I was, in the Consumer Products Division. It's the third child of the company. The theme parks and the

Starting point is 00:11:35 entertainment studio, so Consumer Products was like, okay, it's a bit of an afterthought. The execs I worked there, but Meg was a hiring manager, so she had a okay career. I worked with Paul Pressler, who became CEO of the Gap. I worked closely with Steve Burke, who had a long career at Comcast and NBC Universal. Everywhere you looked, there was unbelievable talent. That made an impression on me of A company had a 10-year run that was amazing, and it was driven by a bunch of 30-year-olds at the time, which was very counter to what Hollywood was about. So the big lesson for me on Disney was just talent. Talent density.

Starting point is 00:12:11 Obviously, eBay is sort of like patient zero for this online digital marketplace concept. I'm sure working with Pierre there was a fascinating experience. You were there right in the thick of it. What stands out as the most important things that you learned as an operator at eBay? I learned to be an operator. I'd only had a couple semi-operating jobs up to that point. While I was CFO with the Disney stores, I was also responsible for managing the Disney stores in Japan, but we had someone on the ground, so I was kind of overseeing the person who was overseeing it. When I got to eBay, I'd never really run anything. And so I joined, Meg was building bench depth. So she found a job for me and had me managing two people, one of whom promptly quit to go run a Baja fresh franchise, which at that point might not have been the best financial decision, unless he owns Baja. fresh at this point. I was managing one person. Then a few months in, she were organized and gave me eBay North America, which was the eBay.com website. Seven years later, I was managing 5,000 people.

Starting point is 00:13:06 One of the blog posts that I get the most comments on is, I think it's titled, leaving it all in the field. It brings a sports analogy to managing a hypergrowth business, because early on, you're the player. Things are crashing around you, and you're making every call, just like there. And then there was a point where I remember one night, when I go home, I get to work at 5 a.m. and it's 7 at night. and they're still a line outside my queue waiting for me to make decisions. I go, this is not scaling. I got to change something. And you become a coach.

Starting point is 00:13:32 You hire a bunch of people. You try to get them into a place where they make most of the decisions similar to how you would. And then the mode's very different. You turn into a coach. At some point, with hypergrowth, they can't make all the decisions. So they have to build a team. They become the coach and you become a general manager. And you're further and further from the action in the field each time.

Starting point is 00:13:53 And then taking a logical conclusion of PayPal with 5,000 people, I was commissioner of the league. And it's interesting, the job is fundamentally different. You're not in the action. You are orchestrating. I called it a bunch of shun's organization, motivation, communication, and I didn't like the job anywhere near as much. I was very gratified that I actually appeared to be pretty good at it. But my career was just, I continually went back to earlier stages. eBay grew, I went to PayPal, PayPal, PayPal, grew. went to OpenTable, I opened table grow. And there's a point at which the good news is I got pretty good at that stage of growth, consumer marketplace businesses at that stage of growth.

Starting point is 00:14:31 The bad news is the learning curve just shout out like crazy. When I'm operating, I'm always on, always stressed, always tired. And then you throw on board on top of it, and that was a pretty toxic accommodation. Darcy told me to ask you for the story of how you got the job at Open Table. When I was 15, my dad died. If I was going to have gas money, I had to get a job. A friend of mine had just gotten a job at Joe Thaisman's restaurant. I started there on weekends as a dishwasher, and it turned out the chef who worked 13 shifts a week

Starting point is 00:14:58 recognized that I was a little different than some of the other employees in the kitchen, and he said, hey, if you do these four things, I can come in a half hour later. So I did the four things next week. Yeah, if you do these eight things, I can come in an hour later. Within a couple of months, I was brunch chef. And it was funny because the general manager didn't work Sunday morning either. And so when this chef quit, the general manager goes, what am I going to do? and he goes, well, Robert's cooking the nights and Jeff's cooking weekend. He goes, that 15-year-old?

Starting point is 00:15:25 And so he comes in and watches me like a lab rat the next Sunday, you know, like, look, he can do that. I ended up at the time making pretty good money for cooking. It was the only job I had until I graduated from college. And I kept cooking after I graduated from college on weekends to make money. I ended up being an award-winning chef. We won Best brunch in Philadelphia. I do know it was one of the reasons I got into the Stamper Business School because the head of admissions told me. And then after benchmark had funded eBay and I worked closely with Bob Cagle, who has become a friend. And one point, I left eBay. I left PayPal. I'm unemployed. Benchmarked also invested in Open Table. Gurley comes to a Monday meeting and says, good news, bad news on open table.

Starting point is 00:16:07 Good news is Thomas Leighton says it's ready to go public. Bad news is Thomas Leighton doesn't want to run a public company. And so Kegel just goes, oh, you should talk to Jeff. He knows network effects and he knows the restaurant business because they're a chef. That was the open table interview, essentially. Incredible. And then what was that experience like taking it public and being that kind of first public CEO? Is that a completely different experience from some of the prior stuff and a whole

Starting point is 00:16:31 different set of skills? Describe that experience. It was surprisingly different to me. I'd run eBay.com and I'd run PayPal. And PayPal was a very autonomous job. I mean, I'd work for Meg forever. And so we got into a cadence where I knew when I had to tell her, certain kinds of news like, hey, I might miss the quarter. That needed to come early. But I'd

Starting point is 00:16:51 sit down with her 101, like maybe once a quarter. So I had a huge autonomy. Very interesting, when you go from being a division head to a CEO, the level of worry and the level of final quality control check dials up like crazy. And so open table is way smaller than PayPal, but I was more stressed because it's on me. Before it was on Meg. Now it's on me. That was interesting. The second thing is I'd never done a financing before. I'd always join companies that finished their financing. My first financing was the Open Table IPO at the death of the financial crisis in May 2009. You can really pick them. The NASDAQ was off like 70% and we go public. And it was the first venture back tech company to go public in like two years.

Starting point is 00:17:35 No pressure, no everything. And my first financing, that was super interesting. We did a secondary after. And so that was my introduction to the capital markets. What do you think you did well in the financing, looking back on it? One was risk mitigation. We were one of the first very small IPOs to go. When you're taking the risk of going out in a god-awful market, we didn't want to risk the company. I give a lot of credit to two bankers on the deal. J.D. Moriarty and Harry Wagner and Allen, we ended up highly concentrating the offering

Starting point is 00:18:08 into a handful of the best internet investors. had a strong history of if the company holds up their side of the deal, they'll buy and hold. They did large. I mean, this is Henry Allen, Logan, one who's at T.Rowe, Dennis Lynch and Sam Chiani at Morgan Stanley, investment, Mark Casey at Cap World, Will Danoff of Fidelity. They bought big, they wanted in, and they held for a good chunk of time, which makes very stable investor base and let me focus on running the business. Super mature. I'd go to Will, hey, how do you want me to update you? It goes, I will dial into the conference calls. And that's how it was like, okay, that's great. How many questions? Let me know. Do you want me to fly to Boston? No, not really. That worked very, very well.

Starting point is 00:18:50 It raises an interesting question about the communication between company leaders and big investors. You've now been heavily on both sides of that equation. How idiosyncratic is success there? Or is there, do you think, a general standard that describes great when it comes to companies communicating with investors and vice versa? I think it's the same public and private essentially on both sides of the table. Treating the investor like an owner. The worst thing for me is when the operator is not talking to you about their real problems and their real concerns. I was told that I was pretty good at, hey, this is going well. Hey, this isn't going well. Here's our plan.

Starting point is 00:19:26 For me, it wasn't a sign of weakness. It was almost a sign of opportunity. Open table hadn't really figured out its international expansion. And it's just like, hey, we haven't figured out internationally. The opportunity's X. here's where we're at. Here's our approach. If we're successful, it'll be great. We're working hard. Treating the investor like an owner for me as a philosophy I tried to use on both sides of the table. You mentioned earlier, the shape of the learning curve is probably very important to you.

Starting point is 00:19:49 And I'm sure that part of the motivation for going from the operating career into Andres Norwich, which I recognize has a lot of operating elements too, is the constant learning curves that just gets deeper and steeper as you're working with new companies. But talk me through that transition from operator to investor, why you did it. What was notable about the early lessons learned at entries in 10 plus years ago? You nailed it. It was seeking a new learning curve. In my spare time at PayPal and at Open Table, I'd beat with entrepreneurs. That's actually how I met Alex Rampell. He was running trial pay and reached out and I became a seed investor and advisor. I was enjoying that side hustle way more than I was enjoying my day job. I had a dozen seed investments I'd made. And I remember I got a call from one of the leading venture firms. And that usually meant they needed one at a CEO. They

Starting point is 00:20:38 wanted a board member. And this time they said, hey, we're looking for a GP. And it's just like, oh, I've never really thought about doing that. I was intrigued because of the new learning curve. That firm had me interview one person at time. They had about 50 partners every week. So it went on for like a year. And so while I was doing that, I remember I grabbed my good friend, John Donahoe, who I've known since business school and played hoops with and were neighbors. And He's currently running Nike. I was running Bain at the time. And I said, you know me.

Starting point is 00:21:07 I'm thinking of this change. What do you think? He's incredibly mature. He gave me great advice. A couple days later, he calls me. And he goes, you know, Mark and Dresen's on my board, right? He asked me if I know anyone who'd make a good consumer investor. Do you want me to throw your name in the ring?

Starting point is 00:21:20 It's like, hell yeah. I'm sitting down with Mark and Ben a couple weeks later. They framed it. They get to know you. They didn't know John had back channeled with me. Pretty aware I'm being interviewed, but they're not calling it an interview. And I go, well, a lot of things. CEOs just heads down, a couple make one or vestment or sit on a board. Where are you on that

Starting point is 00:21:39 spectrum? I go, I got about a dozen companies. Let me tell you about. Next question was, what is interesting out there? Probably 11 years ago. What's interesting out there that we should be going? I mean, I just seen Brian Chesky present Airbnb at Allen conference. I go, Airbnb. And Mark looks at me quizzically, you know, they're raising, right? I go, no, I didn't know. And so we ended up, My first deal was partnering with Mark on Airbnb almost as I was walking in the door at Injuries and Horowitz. It was pretty funny. What were some of the early surprising aspects of coming at it from the investor side? I'm especially interested in like the pricing of rounds. I was told to ask you about pricing Instacard, for example. What lessons did you learn on the

Starting point is 00:22:20 investing side that were completely new and different in those early years? The good news is I was looking for a steep learning curve and it was way steeper there. I was like, wait, I'm in the same room. I'm just taking a different chair, how can it be that different? Man, is it different? Lesson one was it is a steep learning curve. Some of the early lessons and still learning them, which is the interesting part 10 years in, you have to continue to be adopting your decision framework. One was, whenever I saw a bargain, I should run. It's a sign of no heat. Whenever I did a bargain, I regretted it later. Whenever I was forced to pay up to date, that has been a very good basket of companies. And you mentioned Instagram. I saw Instagram

Starting point is 00:23:00 late when Curba was raising. I think he saw a blog I wrote on-demand economy and just reached out. And he goes, listen, really late process, but I'd love to talk to you. And so I have this great conversation. And I think it was a Thursday or a Friday. And he goes, listen, I have to decide by the end of the weekend. I'm getting so much pressure. I crunch away

Starting point is 00:23:17 on the weekend, digging into the details. I want to do what I get okay for my partners to go in with a number. And I think it was like, I go in with something that's a hundred times current GMV, like $90 million. And he goes, Jeff, you know, I've really enjoyed our conversations. I'd really love to work with you. But you got to know your less than a third of any of my other term sheets. And by the way, I'm deciding tomorrow. And so then do I want to play? If I want to

Starting point is 00:23:44 play, I got a triple. And so over a weekend, the interesting one, going back to your partners and saying, you know, I asked for 90, I need 300. That was a gut check, but there was so much to like about it. They're like, okay, I'm going to climb the ladder. I'm glad I climbed the ladder on it. A lot of the very best deals have that kind of pricing set by the market. It's not set by metrics. So you have to figure out, okay, do you climb? And I tend to climb if I think it's legitimate heat. Can you say a little bit about how much this rule holds up as you leave post product market fit in marketplaces? So like Instacar was Series B, it was like working to some extent. And I understand how a marketplace which has begun to work, which will thrive on a a pure network effect is the ultimate business. So paying up at least makes them sense. What about if you go pre-product market fit or away from the marketplace, network effect-driven business model, do you think that that concept changes of avoid bargains and be willing to over peck?

Starting point is 00:24:43 I don't know. You can look at my career in tech, and it's almost a one-trick pony. I look for companies that have the potential for a network effect. I typically look for companies have potential for a network effect, often through a digital marketplace dynamic. One of the most important lessons for me, another lesson learned. In the areas I invest in, which is a larger consumer, I think it's critical you have a theory on defenseability.

Starting point is 00:25:05 And for me, that defensibility typically has been network effects. I've done a few words, scale, a fewer, it's something different. But, you know, there's theories. So there are these incredibly attractive opportunities. Early on, mattress in a box. Companies went to $100 million in about eight minutes. Tiles, define things. $100 million in seven minutes, meal kits, $100 million in six minutes.

Starting point is 00:25:29 And so you're looking at these just growth charts vertical. And you just say, look at that, isn't that attractive? What do you want, growth? And then you say, like, what happens when there's six mattress in a box company? I learned very early. I did D to C before it was called D to C. I had a decent portfolio, but there was no defensibility characteristics in it at all. So I stopped doing D to C like seven, eight years ago.

Starting point is 00:25:51 And so I try to abide by that rule. That rule has served me pretty well. The one it didn't, ironically, was DoorDash. That's probably my biggest miss. And I had an opportunity to do, I think it was a B. Tony Clear was a kickass on it. He's awesome. Ironically, I met him.

Starting point is 00:26:08 Stamper Business School asked me to sit down with some of their entrepreneurs 10 years ago. And one they sent in was Tony Zoo with Palo Alto Eat. And so I spent a half hour with the guy. And by the way, he's delivering the meals. after classes over personally. It was that early. So I knew them and I just looked at that market and you got Uber, Cabiard, order ahead. There were 15 of them. And you're like, okay, I envision a future where you go into Orange Hummus and they have 15 iPads or chip printers all spinning out orders. And how do you make money in that environment? Well, you cap Travis. Market dries up and Tony executes phenomenal. That for me is the biggest

Starting point is 00:26:48 exception to my role. Need that theory of defensibility in a marketplace business. And kudos to Tony. It's awesome performance. As you start to dig in on the layers of what's driving marketplace businesses, consumer ones specifically, what tensions are healthy? There's a lot of stakeholders in marketplaces and not everyone can get the best of everything all the time. How do you like to look and investigate tensions inside of a network? Tensions are great because there's two sides or three sides and there's always tensions. It started at eBay. The sellers paid us. And so the obvious thing give the sellers what they want. But it turned out for me, what made eBay work was the buyers. So Amazon and Yahoo both launched auction products early at eBay. By the way, they were the guerrillas

Starting point is 00:27:34 at the time, particularly Yahoo. It was a hundred billion dollar market cap early. They launch auctions. They make it free. We charged a list. They made it free. Amazon made it free. And they quickly got millions of listings, but what they lacked were buyers. And so the sellers went there and it's like they put up billboards and no one walked by. And so they came running back to eBay and redoubled their efforts on our platform. Long had the philosophy that why the seller's kind is we had a robust buyer base. And so then growing the business requires optimizing the buyer's base. And so eBay and Open Table, we did things that the sellers, the business side didn't like. They viewed requirements. reviews on Open Table. At Open Table, I have like four web windows open. I have one for open table. I have one for a map because we didn't have a map. I had one for Zagat and Yelp because there were no reviews. And you're like, okay, I think I see the path forward here, providing an integrated experience. So we go to the restaurant and say, yeah, we're going to debut reviews and they go, you cannot publish a negative review from a customer. I don't know. You're my technology provider. What are you doing? You know, kind of thing. And you're just like, we did research.

Starting point is 00:28:45 customer opened a review, they were twice as likely to make a reservation. You're working with them, and then finally, if we couldn't convince them, we gave them the ability to opt out. We will not show reviews on your page if you don't want it. Just know that every other restaurant's going to have reviews. You're going to look pretty stupid. So there are always those tensions. I almost always biased towards the buyer side of the equation. I mean, people come to Airbnb. The hosts come to Airbnb, because that's the largest guest network in the world. The more guests you have, the happier the host will be in the long term, you're kind of optimizing for buyers, for diners, for guests. And in spite of the fact that the other side is typically the one paying you. Do you have good examples of when the supply side

Starting point is 00:29:25 is actually the harder side of the network? I remember talking to Gurley about this and saying, like, usually if you get all the buyers, the supply will show up. But I'm sure there's some examples where it's different. Airbnb's been supply constrained almost since I got involved in the company. The supply is expanding, but they believe they do more business that they had more supply, high quality supply. So, I mean, it is interesting, particularly in the unconventional businesses. I mean, the first, I've said this bubbly, the first time I heard the Airbnb concept, I said, that's the stupidest thing I've ever heard. Like so many, yeah. I mean, I'm intensely private. I don't want someone on my house, a stranger in my house. I don't want to be in a stranger's house. It was just like,

Starting point is 00:30:01 oh, when it's that counterintuitive, the supply side, evangelical people to kind of say, I see it, and, you know, I enjoy it. And Airbnb was part economic empowerment, but also part, human relationships. They're people who like meeting strangers and talking to them and learning about them and figuring out. There are multiple satisfactions involved in that experience, but there are a lot of marketplaces, particularly the weird ones that can definitely use more supply. What do you think are the characteristics of founders that are most important in marketplaces specifically, maybe relative to the enterprise SaaS business or something? We specialize a lot into verticals. We have a crypto fund and a bio fund and a growth fund,

Starting point is 00:30:39 but even within the venture fund, we have a consumer vertical, a fintech vertical, a fintech and an enterprise vertical. The entrepreneurs, you could pick everyone. Anonymous person walks in the door, FinTech. Anex person walks in the door, Enterprise. Typically what the consumer founder is, typically they're really young, they're digital natives, and they've made observations about the state of the digital world that typically more senior workers with more experience don't make. So almost all of my strong entrepreneurs, the ones who have really broken out, they almost didn't have a job before they started the company. I think Brian worked a year or two as a designer at a firm in L.A. Ben Silverman had a couple years at Google as a PM, a PURB at a couple years at Amazon as an

Starting point is 00:31:25 engineer. This one came home to me, not the investment I did directly, but in my hiatus between PayPal and Open Table. I got an outreach from a young man named Mark Zuckerberg who was running the Facebook and had just relocated to California. I was like, okay, I'm intrigued. I'm heard of this thing. It's supposed to be really cool. So I go meet with them. And then we have tea on University Avenue to tell you how long ago it was because he can't do that anymore. He said, why did you reach out? He goes, well, Sean Parker told me to. He said, you're one of the better operators in the valley. And I'm like, okay, it's major street cred. Sean Parker is recommending me around. What is sitting down for? He goes, well, people who know me know that I've never

Starting point is 00:32:03 run a business before. I go, okay, got that. Yeah. People who know me may not know that I never worked at a business group. You're kind of like never. You don't know pay bans and OKRs and all the arcane knowledge that comes from being an employee. He's like, nope, none of it. All of the best entrepreneurs I've met, just go to school. Mark clearly was doing it.

Starting point is 00:32:27 He's reached out to me. He reached out to other people. Brian Chesky has a kitchen cabinet of like a dozen people who are world-class in their area of expertise that he pings with. I mean, John Dono happened to be one managing armies. John Ivy happened to be one on design. I mean, John, I think. Pretty good.

Starting point is 00:32:44 Yeah, you're doing okay. Ben Silverman once, we went to Sun Valley together, the Allen Company conference, and we're flying back. I go, how is your conference? I always make sure I disappeared at some point in mountain bike just because I can't do constant socializing. I can go, I had 51 meetings with different people at the conference. And I go, what the hell? You're not fundraising.

Starting point is 00:33:04 What do you do? He goes, everyone there has some special power. and I wanted it to know what they are. And so he invested 26 hours or something like that into self-improvement during a investor conference. And it's just that mentality. If you find entrepreneurs with that kind of hunger and thirst, I want to get better. I know I need to get better.

Starting point is 00:33:26 I'm going to invest time and get better. It's a pretty good attribute. I'm kind of blown away by watching Brian Chesky from afar. I don't know Brian. And recently he did an interesting thing on Twitter for the most recent Airbnb quarterly results, which was just so clearly in tune with how information for a business like that should get disseminated and also so succinct and concise around the things that probably really matter. And you already said it before.

Starting point is 00:33:50 Like you go from being a contributor to a coach to a focus on the shuns or whatever. Is that it is the people that can do that that can both start something from scratch but also manage a huge business? Is it just about that perpetual learning gene? Like, is that the primary thing that matters? I think that's a lot of it. For me, that's something I definitely try to assess. Do they know it? And you have really frank conversations with the entrepreneurs because my partner Ben wrote about the imposter syndrome. We all have had the imposter syndrome. I've had it as an operator. I've had as an investor. You know, it's just kind of like, what am I doing here? I'm in this room and trying to figure it out. The other thing is every one of the founders of the businesses that took off has superpowers of some kind. Now, they're often, the superpowers overdeveloped and the non-superpowers are. underdeveloped. And so there are always gaps as well. The ones who really figured out, lean into their superpower, and then supplement them with their team and the areas that are, they may not be.

Starting point is 00:34:48 So one of Brian's superpower is brand and communication. I mean, he is just world class at that. I've learned so much from watching him develop the position, the brand positioning for Airbnb. And it took him like a half decade to kind of get it right. But when he got it right, it was like a eureka moment for me. Like, oh, I get it now. And that ended up in the couple campaigns, live like a local, belong anywhere, that it wasn't just accommodation. It wasn't economics. It wasn't this. It was a lifestyle. Human connection and live like a local. You're not in Fidei and sterile hotel. You're in the mission. Aromas wafting into your Airbnb. It's, you know, you're living like a local. Each one of the founders have a superpower and good ones figure out how to lean into it,

Starting point is 00:35:32 how to supplement me with the areas that are like. So how far into the evolution of one of these marketplaces, do you think it's really important to start honing in on, I guess I'll call it Unine Economics or margins or something like on DoorDash or something for a long time it was, well, look, at scale, these will be amazing. And it's kind of nebulous, like what scale meant and when that would be. Like, how much do you think about maybe the margin profile of a marketplace as you're investing, especially if it's early on? I don't not look at it if the margin is not bad. In the extreme case of this was Instacart. The time we invested, he was earning something like 12 bucks, say, order in money to Instacart. And he was spending about 30 bucks.

Starting point is 00:36:11 And so, you know, it was pretty bad. That was pretty bad. The work I did that weekend was around profitability. And it turned out that he was just starting to do deals with grocery stores where the grocers would give him better pricing and share some of the incremental revenue from the economics. And that at scale would dramatically improve his economics. So one is you had to believe he'd get to the deals with the grocers. And then could he get to price parity? And he laid out this waterfall of this is how I'm going to make money. And it was very detailed. That Purva's superpower is optimization. He's just said, these are the 19 things we need to accomplish to make the unit economics work. And I'm halfway on this one and just laid out. And I even looked at that sheet in a while.

Starting point is 00:36:59 But, I mean, it largely came true. I mean, he made the unit economics work. The big swing was he got the deals with the grocers and then the advertising business. I think Fiji just announced it would be over a billion dollars this year. Amazon showed that's very high margin income. So the existence of that ad business means he can provide a very compelling value prop to the consumer because they don't have to pay the full fare for the delivery. They get it partially subsidized through the advertising venue.

Starting point is 00:37:28 And so that's been key to the work. but, I mean, the economics were awful when we invested. And so the leap of faith there wasn't people would want groceries delivered to their home. The leap of faith was he can make the economics work. It seems like so much of what drives the success of these models is buyer convenience. I guess just convenience in general for digital user is just always a powerful force. As you think about convenience, when does what typically starts as a horizontal opportunity like eBay tip into something like a goat or a stock X that's much more vertically focused in terms of what

Starting point is 00:38:03 is being bought and sold on the marketplace to increase convenience for the buyer. Tell me a little bit about that flip and that line between horizontal and vertical marketplaces and what you've learned there. It was really interesting. Early on at eBay, first you're worried about, okay, someone's going to build Amazon auctions, Yahoo auctions. We quickly figured out that wasn't going to happen. We had enough of a lead in that marketplace business.

Starting point is 00:38:25 We had the buyers. we were pretty good. Came to believe that there were two threats to what them was a pretty strong monopoly. One threat was we get hollowed out vertical by vertical by specialized marketplaces. Because one of the benefits of the horizontal marketplace is the consumer can go to anywhere they want and find what they're looking for. One of the negatives is it's really hard to tailor the experience to the unique attributes of that vertical. So we spent a lot of time trying to figure out, okay, how do I go partway, have enough tailoring that it's helpful to user experience, the horizontal platform remains coherent.

Starting point is 00:39:02 If you dropped into tickets, this doesn't work like collectibles. How do I buy this? I can't figure it out. There had to be that consistency of user experience. So we were worried about getting hollowed out one. Two was a completely orthogonal approach to the marketplace. I always say, you're not going to see the person catching you in the rear view mirror. You have to look in the side mirrors because they're going to come from an angle.

Starting point is 00:39:22 And my read on what happened to eBay was two things. One is eBay early on, I used to say, was everything you couldn't find in a mall. You could buy on eBay anything you could not find in a mall. And Amazon was everything you could find in a mall. What happened, one was Google became, okay, we're going to help you find anything in the world. And that became an alternative to buying on eBay. You could Google something and find sellers that would have it. And the sellers actually liked having a Google transaction more than an eBay.

Starting point is 00:39:52 eBay transaction because they own the user is they then have the ability to directly remarked to that user where on eBay we controlled that relationship. So even though eBay was cheaper on a transaction basis, Google was a preferred destination. And I was at an Intuit management conference where I spoke right before Cheryl Sandberg spoke. I hung around to hear Cheryl's story. And she goes, oh, we knew early on that our main competitor was eBay. And like I'm just saying they're like, holy cow, that was not what I'm. I expected to come out of her mouth.

Starting point is 00:40:24 I expected Yahoo or something. Some surge engine, no, it's eBay because of the commerce angle. So eBay had heard, I think, a lot by Google. And then we knew Amazon was going to launch a marketplace. Actually, my relationship with Josh Koppelman, our first round capital, started when he had started half.com. Josh, among other thing, he was great at getting publicity. So he bought out a town in Oregon that was called Halfway, Oregon, and gave him two computers and a couple thousand dollars, and they renamed themselves, half.com, Oregon, so brilliant. And then he registered the URL Ebazon, because Half was a hybrid between

Starting point is 00:41:00 eBay and Amazon. He did a really nice hack where all items were listed under a UPC code, which meant it looked like an Amazon. If you look at Amazon Marketplace and click to other sellers, that is what half is. And I've been told by sources that Amazon, in building marketplace, it called it the half killer. So eBay bought half, but then Amazon knocked it off. And so that then became a lot. And so that then became the other key competitor that we face. But you need something extraordinary like that to lose a network effect, which eBay clearly is done. So I actually read a story, interview with Jamie Ayanoini, the head of eBay now who worked on my team back in the day. And he's trying to get a much better vertical approach. I mean, he's now authenticating sneakers and trading cards

Starting point is 00:41:44 and things like that, trying to improve the vertical competitive this. Because, you know, For example, in shoes, Go, and Stockex done a heck of a job. They were at the top of our Marketplace 100 list that we recently put out. And that's just that's two players in one small vertical on eBay who built really big businesses. And Stubhub was another that built a really big business in competition with eBay. So it's a really traditional tradeoff on you might not be able to replicate the horizontal, but can you rip out verticals?

Starting point is 00:42:13 I'm curious what big categories you are surprised have not yet been market. or something. You've written about jobs marketplaces like rig up is a good example or you're an investor or A16s. He's an investor. What has not been solved? What should have a marketplace that doesn't yet and why? There are three industry, three segments I've been looking at since I've been at venture capitalist and still I'm not sure I've yet found the solve. And there are three the key remaining businesses on Craigslist. One is rentals. So I've got to play there, belong, which is doing a very nice business. But my kids still, use Craigslist as the primary way to find places to rent, and it's a terrible experience.

Starting point is 00:42:53 You know, half the things on there are already rented. There's no information. But Craigslist has a network effect, and that one hasn't ripped up. So one is rentals. Two is blue-collar jobs. There is no good site right now for blue-collar jobs. Again, it lives largely on Craigslist. If you run a restaurant, you're running Craigslist ads trying to find. And there's, again, terrible user experience, puts all the effort on the hiring manager. And then the third is the service or home services in some kind. Dumb tax making a good play, trying to flip from lead gen into a marketplace.

Starting point is 00:43:25 I respect Marco a lot as an operator, but I don't think the definitive marketplace has yet been built there. And so those three segments are three that our team will meet all day long with entrepreneurs looking because someone's going to crack it. It's a question of when. What do you think are keys to if the unit being considered

Starting point is 00:43:43 in the marketplace is a job? What are the key aspects of the business, the product? What is unique about if it's job-specific as the marketplace that matters? We've got one job marketplace, but it's not blue-collar. It's health care. Incredible Health is a marketplace for currently hiring nurses. It's a good example of LinkedIn does not work for nurses. I mean, because what's important in nurses is all your licensing and your qualifications and your experience, and it's a set of very unique attributes that, again,

Starting point is 00:44:13 LinkedIn as a horizontal platform can't do. So Incredible Health is a vertical play, trying to do health care well, healthcare hiring well, and rip it out. I mean, blue collar is the same kind of thing. LinkedIn does not do it well. Indeed, and the job boards are not particularly great. There should be a marketplace approach onto it. And so lots of people are aiming at it. And hopefully someone catches fire soon. When you think about the companies that have or are or did work, you've got this great concept of layers of growth, sort of like a layer cake, in terms of how the businesses start to evolve and how you plant seeds early on for chapters of growth that may be some distant point in the future. Talk to me about this concept of layers of

Starting point is 00:44:53 growth inside a business and why you're interested in it. I quickly became convinced early on at eBay that the key way to grow these businesses was product enhancements, giving users additional use cases, functionality, take away friction, do whatever you can. Auctions was a very good business on eBay. When I took over eBay, it was 100% auctions. On eBay, com. One of the reasons made divisionalize was to go global, keep the focus on eBay.com. And so how we grew eBay early on is the first one and most controversial at the time was we introduced a fixed price format that we sat into an auction format. And many in the community were convinced we're going to kill the golden goose by trying to intermingle auction, which are great for, or are you

Starting point is 00:45:37 looking for price discovery versus the same item might be listed for a fixed price somewhere else. They worried the magic was going to go away. So we figured out, okay, how can we make the two coexist? There were different audiences that preferred the different formats. There are different types of goods that trended towards the different formats. And so that accelerated growth pretty dramatically when we got fixed price rate. We layered on stores. Another big one was we layered on payments.

Starting point is 00:46:01 When I arrived at eBay, you'd win an auction. And then the buyer and the seller would negotiate shipping rates because if you don't know where you're shipping to, you can't preset rates. you go back and forth. Oh, I live in Northern California. Oh, you want it in two days or nine days. I'll take nine days. You know, and so, okay, shipping is five dollars then. The way you paid is you went to either the bank or the post office, got a money order and mailed it to the seller. The seller waits till they get the money order and then would go to the post office and ship it back. Weeks would elapse. I mean, the two weeks was kind of a standard and a whole bunch of friction. Imagine buying a $10. trading card and needing to go to the bank and get this. And then go to the post office because you have to mail it. There's a book about the founding of PayPal that I just finished reading. It was really fun because it took me through all the play-by-play at the time. eBay had bought a company called Bill Point when I was joining the company.

Starting point is 00:46:58 And early on, I was supposed to be running it. Meg said, oh, yes, you're running services and that's a service. And so the then had managed to circumvent my layer and continue to report directly to Bay, which in retrospect, for the best thing that ever happened in my career because Bill Point became absolute roadkill to PayPal. The PayPal guys did a phenomenal job, and the eBay people did not.

Starting point is 00:47:19 Layering in electronic payments and the ability to pay in, you know, two minutes, took the transaction from hellishly hard to pretty darn easy. And that then we built a payment business on top of eBay after we bought PayPal, but much more, it helped accelerate the eBay marketplace because it took huge amounts of friction away.

Starting point is 00:47:40 Each of those product improvements, accelerated growth. The book makes the point. Early on, eBay was kicking Amazon's butt. Early on, it tells you only the paranoid survive. It's probably the long-term lesson from Andy Grove. At that point, it was the product innovation that was fueling the growth in the energy. It also is interesting to think about the fact

Starting point is 00:47:58 that people were willing to do all that crap to buy something shows you how much real innovation there was. There wasn't an alternative. The person who made the eBay investment was Bob. Cagle, if memory serves me right from Michigan, that I do know, and he collected duck decoys from a artist named Oscar Peterson. And the only reason I remember that because of the pianist, and when Pierre went in with his auction web website, which also had Area 41 and Ebola on related pages on the same site, Bob's looking at black and white, types in Oscar Peterson. He's used to

Starting point is 00:48:37 to driving all over Michigan trying to unearth a duck decoy and all of a sudden five pop up on eBay. That was the Eureka moment where he said, oh, my God, I don't have to drive around Michigan all summer. I'm willing to drive to the bank. Yeah. So, you know, kudos to him. And by the way, eBay never used Bob's check. They always had the money in the bank. It was just security money.

Starting point is 00:48:58 It's one of the best venture investments of all time. It's amazing to think about that initial innovation. And I guess that's what you really would be hunting for as an investor. But then it sounds like the layers of growth playbook that you've laid out is really just respecting that friction and convenience preference for the user that you do have. Just constantly be trying to get ahead of that. And you'll probably do well. And that's the paranoia. You'll do really well.

Starting point is 00:49:19 Also, the use cases, eBay, when Jeff Scholl wrote the original business plan, it was all about collectibles. They anticipated building a business on collectibles and antiques. That definitely was the early 10 polls. But then other people started using eBay for other reasons. It was great for overstock merchandise. So you could get new inbox merchandise at a steal because it didn't sell in the stores and they're trying to move the excess inventory. Hard to find things. Things where the hot Christmas present, every year something blew up on eBay.

Starting point is 00:49:49 I need the new PlayStation console. We would sell 80% of the units that Microsoft produced would sell on eBay during a Christmas season. So all these new use cases came up and then enabling them, making the discoverable, creating the awareness. that was also a massive growth vector. And Airbnb's done a little bit of this with their experience business. It's a new layer. It sits adjacent to trips. Most trips, you want to do something when you get there.

Starting point is 00:50:17 That's another example of the company is saying, okay, adjacent opportunity, same transaction. Can we grow this business? I don't think we've mentioned the business, which I believe was your first IPO exit, which is Pinterest. I bring it up. I remember Sarah Tavill Ventura talking to me about the feeling around of product market fit at Pinterest and trying to figure out just like a lot of pushing, pulling one step back, two steps forward, you know, all this movement. What did you learn about and from Pinterest as a

Starting point is 00:50:44 unique business model? In contrast to eBay, where the joke is, you know, the second employee's job was opening up checks. It just sort of worked instantly. Pinterest was different. So what do you take away from that experience? I had the luxury of avoiding those three years when Ben was walking through the desert. I give Jeremy and Bessemer big kudos for investing early and finding that. But the big one is there's all the revisionist stories on, oh, it just worked and things like that, on a ton of them. They had to flail for product market fit. Pinterest was clearly one of those. Airbnb was clearly one of those. The Airbnb booked Chronicles, all the weird things they did, including a cereal box, selling cereal boxes of Republican and Democratic Convention to make money called Obama O's and

Starting point is 00:51:27 Captain McCain's. And they're not collectibles, but they literally sold real cereal. boxes as a revenue source. It is that creativity that trying different things, Ben tried different communities, early influencers actually ended up being an important part of there before they were called influencers. I give these entrepreneurs just unbelievable credit for wandering through the desert drilling holes and looking for water. Sometimes they find it and then Pinterest would be a great example that bends persistence and he tried 49 different things to 50th work. If you think about the transition to building Andresen the business. So obviously we've talked a ton about your very clear focus on consumer marketplaces and one key business model, which happens to benefit from network

Starting point is 00:52:14 affects what it works. So it turns out okay and very defensible. Indreason, the business is very different. And when I had Mark on, we talked about this HP 2.0 concept. You're one of the first partners there. I know you've also had a hand as a player coach and also thinking about building the business itself. Talk me through your angle on all of this of what is unique and interesting about Andresen Horowitz, the business, and how it's doing things differently than the traditional, you know, very partnership-driven venture model. Mark may have mentioned this. A lot of the influence was actually Michael Lovitz, who built CAA from nothing into the most powerful man in Hollywood kind of thing. What he did is he went into an industry that was largely a loose

Starting point is 00:52:54 conglomeration of individual partners who had their own book of business and their own relationships and just turn it on its head and build out a set of expertise that benefited the talent so that the talent's relationship was more with the firm than it was within individuals. And another talent firm, William Morris, you walk in, you'd have the relationship with Jimmy, and you know Jimmy for 20 years. You walk into the conference room at CAA, there'd be a dozen people in there. It's domestic distribution, international distribution, publishing, music, and there was the experts in each one. So Mark and Ben kind of applied that logic early on and said, okay, we're entrepreneurs, what do we lack? We lack some guidance and definitely

Starting point is 00:53:36 lack networks. When Zuckerberg came out here, he had no network. He had to ask Sean for introductions to meet interesting people and things like that. The biggest innovations when I joined were, one, they had old operating people like me as the early founders, and then two is they build out, they systematically build out networks that help the founders. And that model works well. It's created a lot of value to the entrepreneurs. And the good news is the entrepreneurs talk. The prominent entrepreneurs say, this model does work. You check it out. I think that's been good. The other thing that I think has emerged over time, and I give Ben a lot of credit on this, is Ben wrote out a firm culture early on, and we've really integrated it into the day-to-day operations of the firm in a pretty meaningful way. And the culture has things like we do first-class business in a first-class way. We play to win. We're stronger in our diversity.

Starting point is 00:54:28 we respect the entrepreneurial process. And we live those values. And as a result, you typically get a very consistent user experience at Andrews-Nhorowitz where anyone will help. Sorry, not important one is we went as a team. Anyone at the firm will help any entrepreneur at any time. We all have our individual superpowers. Andrew's great at growth. Alex is smart as shit. Knows fintech better than anyone else in the world. Ben is great on management. I'm pretty good on marketplaces. And so, So we win as a team. You get the firm. I think that people feel that energy and that commitment to the entrepreneurial process, helping people be successful is value one that's emerged over time. Value two is we're former operators. So we try a lot of things. Some work, some don't. But it's

Starting point is 00:55:15 always moving. And you're getting a firm. And we're making the firm better every year. We're seeking to exploit our advantage. So I think we're now a little over 350 employees at Andreessen, was that's probably more than our 10 biggest competitors in the U.S. combined. We're making that investment out of partner fees, which other firms would take as direct income. We have an alignment of interest between our LPs, our companies, and us. We all do well if our companies do well. That investment is designed to help our companies perform and maximize their potential in support of what the entrepreneurs are doing.

Starting point is 00:55:52 And it's been a pretty good model. There's a really interesting aspect of scaling the business, which is having to find recruit and win and then keep talented general partner investors. That's an exercise kind of like finding founders. I'm sure with different things you're looking for. What have you learned about that process? And I'm interested in all aspects of it, not just identifying them, but also successfully recruiting them. What are the lessons there? It's really hard, and it's the core of the business.

Starting point is 00:56:16 Each of our fun families knock on wood so far are working. That means that the people who are running them, the partners who are running them effectively. We did have a not perfect hit cracker early on as we were trying to figure it out. It turns out the old operator has a couple issues with it. One is it's a young person's business. And that really comes through, particularly in networks. I have a very good network in Silicon Valley. I'm very typical and that I'm still investing at my age.

Starting point is 00:56:41 But my network is of my peers and they're not starting businesses anymore. You know, just Scott Cook it into it is not going to put on the shoes again and kick it up again. You want people who are immersed. in the network and are the up-and-comers coming. So they really relaxed, long operating experience thing. The other reason we relaxed it is it leads you right into white males because the only people had opportunities 20 years ago to run businesses were largely white males. So we wanted to get better diversity in the partnership and relaxing that requirement also help with that. We got young people who are in the flow, in the networks and can be more diverse. There wasn't an archaic

Starting point is 00:57:19 rule before. That is the key to the business is finding great investors who fit with the culture and the big one there is teamwork. We over me, we have not would manage to keep that as a core value in the firm. And if we can continue to scale that, it's really positive for the future. So much of the entire conversation is networks, networks of people, network effects, cultivating networks, et cetera, being in the flow. You mentioned earlier, you know, maybe skew introverted or whatever. But one of the things that in preparing for the conversation, I heard a lot from founders and other investors was that you're very good at convening people, the morning basketball game is something that I'm really interested in. Maybe tell that story just as an example of the power

Starting point is 00:57:58 of convening and what you've learned about doing that well. That's a little personal passion project. I play basketball forever. I'm pretty weird. I'm still playing at my age. My game is not improving these days. About 20 years ago, I took over organizing a game on the Stanford, played twice a week on the Stanford campus. Gave me an opportunity to play, but it also gave me an opportunity to build a community of people. The number one rule is no assholes. The number two rule is. We don't want to get hurt. I was responsible for 20 years for keeping the game alive, bringing in new blood, keeping the quality really high.

Starting point is 00:58:32 And it's turned out, I haven't heard of any other game in the Bay Area that rivals it. It's been featured in The Ringer and featured on this TV show Silicon Valley. It's kind of fun. But I get inbound E. I got two this week of people saying like, hey, I played at Arizona. I'm looking for a local one. Can I get into your game? We built a community and it's turned in.

Starting point is 00:58:52 The Ringer story caught it pretty well. Well, it's turned into a real community. I mean, people have each other's backs. There's a lot of mentoring going on. There's a huge age range. There are a couple people like me, Joe Lake of plays who lead on the Warriors, a couple others like that. But most of the game are former D-1 athletes who are pretty young,

Starting point is 00:59:13 I pretty mercifully recruit out of the Stanford football program. There's probably 10 people in the game running there. And they're early in their career. And what's great to see is people further along in their career, helping the earlier in the career, figure out, get the first job, grow. And so a whole lot of my mentoring comes out of that community where people I know and care for and respect are looking for the opportunities. The good news is we've broken the gender gap. We've got a number of women who play in the community and are great members and have the same discussions and conversations there. So for me, the main reason I play now is I don't want to leave that community behind.

Starting point is 00:59:52 I've been immersed in it for 20 years. It's a whole bunch of really good people that I really care about and respect. At some point, I'm going to have to hang up the shoes. I keep trying to delay that as long as I can. It's a long-lived story, 20-plus years of a community strengthening. And everyone wants that, right, I think. But oftentimes, like a business or something, there are things that are hard to do that are required for the strength of a community. looking back on you managing that, what were those things? Like, what was the hard things that

Starting point is 01:00:19 you had to do or things that were difficult or whatever that were nonetheless for the right decisions? You had to finesse people into the game because there's a famous adage among hoopsters that you really get someone's personality in the basketball court. Craig Robinson played basketball with Barack Obama to try to assess his character when he was dating Michelle. You figure out a pretext where, hey, we have an open space today. You want to run. And then you're basically assessing them both pilot level, but much more for No Asshole Rule. It's one of the runs where people play a team game. It's not run down and hoisted.

Starting point is 01:00:51 It's set picks, play defense. That's why the D-1 players like it, because it's real basketball, not jungle ball. That was challenge one. People stop playing, so you have to have new blood, and you do that well. The other is enforcing the moors. One former NFL player who has a pretty good temper scared the shit out of one of these six four 200 pound guys. And so I get the very fun conversation to go up to said hothead and say, dude, you can't do that. If you want to play, you got to dial that down. Guy always me by 85 pounds.

Starting point is 01:01:27 If you run businesses, you get pretty good at having the tough conversations. You know, there's an investment of time, an investment of the payoffs are huge. It's such a good group of folks. You've had a crazy, cool set of people that you've worked with. from Meg Whitman to Pierre to Mark and Ben to John Donahoe, crazy kind of murderers row of talented people. So I'm sure you've been on the receiving end of a lot of mentorship, and now you're talking about building it out, both on the receiving and the giving end of mentorship. What makes it valuable to you?

Starting point is 01:01:54 Who does it well? What does great mean in mentorship relationships? What have you learned there? I'm passionate about it because I benefited enormously, and a friend gave me a practice that I've been trying to implement with modest success. There are three or four people who kept me from driving into a dip. I lost my father and my teens, my mother in my 20s, and there are people who took disproportionate interest in me and who were formative in my life. Ms. Mask at a high school, Rick Thatcher

Starting point is 01:02:19 at an insurance company Cigna. It was Kathy Quinn at Stanford Business School. I mean, these people just went out of their way to throw me on the right path in somebody when I was doing it. So at the time I miss now is completely pay it forward. I don't think I'd be where I am and have the opportunities I had if it wasn't for these people. And if I can be that person, for someone going forward. It's honoring what they did for me. I don't have much spare time. I put a lot of it into trying to help people that impress me who might not have the same obvious opportunity. And it's completely paid forward when they ask, how can I thank you? It's like do the same thing. Do it someone else. Yeah, just pay it forward. The satisfaction is high. The frustration is I haven't

Starting point is 01:03:01 figured out how to scale it. It is still one at a time. The good news is there's a lot of the people who I think I've positively touched, and that's great satisfaction. I still haven't cracked the code and how do you do it at scale? How do you have the bigger impact than doing it one at a time? And it's a one at a time thing. If you have any ideas, let me know. When you're doing this, what are you trying to accomplish for the person? Getting them started. That's it. My kids are 27. They had a great education. They both went to Stanford, and they come out and they have no idea what they want to do. How do you find it? And by the way, for me, it's a journey.

Starting point is 01:03:35 It took me 15 years to find Silicon Valley and technology. And I found my life's calling after a whole lot of looking. And so it's implausible that someone come out and figures it out on step one. The conversation always starts with, oh, I'm now out of school. And they tell me I have to get a job. What do I do? And then you're just working with them on, okay, you know, you're trying to figure out what their interests are. You're trying to figure out assets.

Starting point is 01:04:02 they have, what networks are they in? A lot of the people I work with are former Stanford athletes. Being an elite Stanford athlete means you pretty much couldn't get an internship because you have to work on your every summer. So you're starting out with these exploration conversations of, do you ever had a job? Not really. I've been pursuing academics and athletics at elite levels for years.

Starting point is 01:04:23 And so then had you help them figure out, okay, what do I like to do? Where's my skill? Where's my interest level? And then typically, if you can get in their first job, They can figure it out from there. They're launched and then they progressively optimize and things like that. If I can help them launch, very high satisfaction. I'm always interested in on-ramp since just yet another version of building or being an on-ramp is a powerful thing.

Starting point is 01:04:47 I'll be a reference or something when they're going for their second or third job, but all the effort is get them started, get them in the flow. Jeff, has been such a fun, cool conversation. Definitely you have one of the most interesting set of experiences of people that I've had on the show, almost perfectly split down the operator-investor sides of the equation, obviously all in one kind of business model, but nonetheless, totally fascinating set of lessons. I ask everybody the same traditional closing question. What is the kindest thing that anyone's ever done for you? And you've already listed the names of some of those people that have helped you along the way.

Starting point is 01:05:16 The people who saw something in me that made them one to strangers usually invest time and going. I mean, it's just remarkable. It was the parents of friends. It was my boss. It was the head of admissions. It's just all these people who I told the head of admissions I couldn't afford to go to Stanford Business School. I was on my own working two jobs. The insurance job during the week and the restaurant during the weekend and it was in Philadelphia and you're asking me to go California and take on like $70,000 in debt. I can't do it. She called me back the next day and goes, I couldn't sleep up nights. You have to come. We'll figure it out. You'll be out of debt in two years. That's like, I have to come. And she talked me into coming and it was a very good decision in retrospect for me at

Starting point is 01:06:00 time. It was remarkable generosity, and hopefully I can pay it back. One more question as a follow-up. You mentioned losing your parents both at a young age. What did you most learn from each of them, from your mom and from your dad? My dad was really smart. He was at Harvard at like 15 or something like that. I think they asked him to age a little bit before they let him come back. And my mom just had incredible level of ambition, frankly, for us kids. And that combination, I think, is I'm nowhere are smart as my dad or my brother. I was a pretty good student and learned pretty well. And then I think my mother gave me the drive. I know a couple very high performing execs who were essentially orphans by the time they were in their 20s. You get drive. If you're on your own and there's no

Starting point is 01:06:43 backstop, it's pretty good for providing motivation. Well, it was really wonderful, Jeff. I so appreciate the time. Can't wait to dive into some of these ideas and companies. Thanks for your time. I enjoyed it. Thank you. It's pleasure. Next, you'll hear my conversation with Canalist customer Giuseppe Coco of LK advisors. We talk about the good, the bad, and the ugly around proprietary models and how Giuseppe has made Canales 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.

Starting point is 01:07:14 You've got a unique background in banking where I think you've spent, God knows how many 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, you know, we started out with investment banking, which is very much on the private side. And there, obviously, you have a lot more information.

Starting point is 01:07:34 And so you can go in a lot more detail. So you would look at the models that we were building for deals were frequently 20, 30, 40, 50 taps, 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. 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, right? 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

Starting point is 01:08:12 and always ask for incremental complexity. 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 in the merrier, 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?

Starting point is 01:08:40 And frequently that unfortunately just gets lost in the detail. On the good side, to be frank, I don't think there is actually much because we think of a solution like catalysts, which the first time I opened a 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.

Starting point is 01:09:13 If you think about those early days and what Canalyst does or when you first encountered it, what did you like about the service when you first encountered it? 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, we started out by the sort of models manually. My former boss asked me,

Starting point is 01:09:32 you know, to build out like models manually into this and do that. I mean, obviously like your world 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, 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.

Starting point is 01:09:54 So it's as simple as downloading 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 BISD, and I'm using today, it is the one that reduces friction the most. Giuseppe, I'm curious, where did you first hear of Canalist? Funny enough, I actually heard about Canalist on your podcast in an ad. And, you know, it was one of those evenings.

Starting point is 01:10:22 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? 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?

Starting point is 01:10:51 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. It was like, you know, hey, there's this amazing solution which I'm using as part of my process. He was like, oh, yeah, he's ex-fidelity. One of the Canadaist 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 with it when coming here.

Starting point is 01:11:14 Maybe just talk about your 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, that's just like preparation work at the moment.

Starting point is 01:11:36 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, 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, 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?

Starting point is 01:12:13 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. 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 pure. The model on the company, the idea, 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 thing, sort of, you know, what is the impact of fill in the blank?

Starting point is 01:12:47 Get X, Y, Z. So people hold it a very, very high regard. And people are very, I want to say, almost jealous of their model. 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-canalist type of times. It is extremely time-consuming and inefficient to maintain. The way it's normally 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.

Starting point is 01:13:21 If you want to have something added, right, you can just read out to the support team and product analysts and they were meant it to your satisfaction. So thereby using Canales, you don't need to worry about maintaining your single source of true. How would you compare how you use Canalyst 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. 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

Starting point is 01:14:09 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 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. guys from one to 10. And this is a process that we found very well working for us. And that without KANELIS, I mean, it would have been virtually impossible. Taking years or something. Yeah,

Starting point is 01:14:51 it would have taken multiple years, multiple years. What do you think is interesting about where you sit? You know, you're in London. 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, 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's companies.

Starting point is 01:15:21 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 initiating and launching on new models when we asked 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

Starting point is 01:15:45 companies here in Europe. And I think the roadmap is sort of, you know, to get to like 10,000 companies slash models, which is a pretty wide scope. What 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 it was like, what do you hope is on Canada's 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 concept of whisper what some people may even call right. It's like an sort of unformed expectation and it may vary. What would be amazing would be to have some sort of channelist user-weighted, anonymized average of what actually the users on the

Starting point is 01:16:33 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 Canvas platform, 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, like, run that even at large a scale through the entirety of their platform. and as that becomes basically more alive and more consumer-friendly as the website, you know, I think that could open up very exciting opportunities and use cases down the line.

Starting point is 01:17:12 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? 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.

Starting point is 01:17:39 I think the first part is that once, you know, when I remember when I opened my first 10 of this model, 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, 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 Canales is again I mentioned, right?

Starting point is 01:18:05 So you open a Candlest model, there are five tabs, and they have these 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 overrace. it 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.

Starting point is 01:18:42 I think the other thing that I found super helpful that initially wasn't as intuitive is their custom templates. So Canada says like standard templates or an LBO, a DCF, comms, all these usual things. We have our sort of proprietary process of how we look at things, how we value things, the scorecut that I've mentioned to you. So we invested, you know, a decent amount of time into building our own templates that correspond to our process that work exclusively like on the kind of platform.

Starting point is 01:19:11 Once we scale, we put in that, you know, it incrementally helps us understand and make sense of a business. And whilst we can, you know, continue to comply with, you know, how we do things and how we think about 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.

Starting point is 01:19:33 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 - Jeff Jordan - Building & Investing in Marketplaces - [Invest Like the Best, EP. 276]

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