Invest Like the Best with Patrick O'Shaughnessy - Thomas Tull - New Physics of Business - [Founder’s Field Guide, EP. 30]

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Starting point is 00:00:55 If you're looking for the best place to build web apps or API backends on robust infrastructure, infrastructure, DigitalOcean is the place for you. They provide a fully managed solution that handles your infrastructure, operating systems, databases, and other dependencies on their new app platform product. App platform makes it easy to build, deploy, and scale apps. Or if you prefer to manage your own infrastructure, DigitalOcean provides a suite of products that gives you full control. To learn more about DigitalOcean, get started for free at DO.co slash founders. That's DO.co slash founders. Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Founders Field Guide.

Starting point is 00:01:33 Founders Field Guide is a series of conversations with founders, CEOs, and operators building great businesses. I believe we are all builders in our own way, and this series is dedicated to stories and lessons from builders of all types. Founders Field Guide is part of the Colossus family of podcasts, and you can access all of our podcasts, including edited transcripts, show notes, and resources to keep learning at join colossus.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy asset management.

Starting point is 00:02:03 All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaunacy asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy asset management may maintain positions and the securities discussed in this podcast. My guest today is Thomas Toll, the founder of Tolco LLC, an investment holding company that invests in businesses with high growth. potential and helps them apply machine learning and data analytics. Thomas is also the founder and former CEO of Legendary Entertainment, the production company behind the Dark Night, Hangover, Inception, 300, and many more iconic movies, which he sold in 2016. In our discussion, we cover the movie industry's value chain, the recipe for trying to make a successful movie, how legendary pioneered

Starting point is 00:02:53 the use of data analytics to improve its odds, and Thomas's concept of the new physics of business and why it matters for what he's now building at Tolco. Please enjoy my conversation with Thomas Tol. So, Thomas, because you have led such an interesting career in and out of business, I thought an appropriate place to start before getting to your backstory would be with a big overarching question, which is, what is sort of your philosophy of business? What has united the various things that you've done in terms of how you attack an industry or a problem space and made something work?

Starting point is 00:03:29 Each situation is unique, but if I had to put my finger on a through line, I think it would be to find an interesting industry and to find a way to enhance the business model using technology usually or a slightly different model to get outsized returns. That's probably the through line. I'd say that in trying to align myself with people that are immensely talented. And when you put those two things together, it's worked fairly well. What was the first example of you doing that in your career, meaning a tech, I think, an industry that was around that people knew about, but doing it in a new way or applying a new business model to it? I don't do a ton of interviews, but one of the things that's been amusing to me is a while ago, somebody did some research. and saw that I owned a laundromat chain in my 20s. And it just seems like that shows up everywhere, Wikipedia or whatever.

Starting point is 00:04:35 That's probably the first example because at the time, I grew up in an economically challenged area and lived there for a little while in my 20s. And the problem that we had with the laundromat chain is that it was slammed on the weekends and during the week, nobody was in there. at the time, all you had with these slide coin-operated machines that you couldn't dynamically change the pricing. So after finding a manufacturer and iterating with them on computerizing it, you could have a variable dynamic pricing and entice people to come in during the week that had the time for lower prices and smooth things out. So I guess if I had to point to the first example of that would have to be that. I'd love to spend quite a bit of time on everything you learned founding and running legendary

Starting point is 00:05:25 entertainment, not just about the company, but about the ecosystem in which it operated. I think media in general and the application of analytics in media is one of the major through lines in the world of business today. I just think it's sort of affecting everything. And you had a front row seat running one of the more interesting companies in the space. What was the origin story of legendary? How did you first get introduced to the idea that you might want to be in the movie? business and what was that kind of early formative experience like? I became fascinating. I had zero experience, knew some people that worked in the industry,

Starting point is 00:06:00 and I became fascinated with a business model. And then back in 2003, 2004, when I started to look at this, it was a $30 billion industry at the time, and there was no institutional capital. For an industry that big, there's using an adjacent capital structure, and there wasn't any. So I thought it was fascinating that there was sort of this artificially large moat around the business because you had your major studios, you had the ecosystem of Hollywood with agents and so forth. And I thought that if I could develop a company that kept its overhead fairly low, so in other words, not massive headcount, used the distribution system, in this case, Warner Brothers on a global basis, own the intellectual property.

Starting point is 00:06:49 and then eventually make your own content and be responsible for IP creation on a global basis that you could build a valuable company. But the first thing that had to be done was to run models and take a look at the previous 10 years of studio performance to say, hey, even if you did a great job, is there any money to be made there? And once I convinced myself that, yes, there is, then sort of went out to the capital markets, put it together. That still remains, I think, the most difficult thing that I've ever done in my career is initially raised the capital for legendary because I was 32 years old. I had zero experience in the industry.

Starting point is 00:07:31 And I think the average meeting when I would go in and pitch somebody took about 12 minutes. And then they'd say there's a bottle of water on your way out, have a nice day. But it was really started just as being fascinated with the business model. and the opportunity in the size of the industry and being able to look at it and say, if we can do this slightly differently, could you build a valuable company out? I'd love to dig into that.

Starting point is 00:07:58 You mentioned the fascination with the business model, maybe even one step back to begin. So everyone's going to be familiar with movies in general, and I'm sure we have watched a lot of the movies that you've created. We'll talk about some as fun examples. But talk us through the players around a movie. So let's pick one, Godzilla, versus Kong, which my son's excited to watch, which is coming out soon. Big movie. People watch it.

Starting point is 00:08:20 They buy it. They buy popcorn, et cetera. What are the major categories of players, studios, distributors, et cetera, that sit around a given movie? And when you came to the business, when you were starting legendary, what did the sort of profit pools look like back then? Like, who was making all the money? What did it feel like to you as you were fascinated with that early business model? I saw legendary in 2016, and I can get into sort of the reasons for that. I was worried that there were these massive changes coming, and that has 100% happened. COVID has certainly accelerated it, but these changes were coming. Changed the industry, I think, more in the last couple of years than maybe in the previous

Starting point is 00:09:02 combined history of the industry. So at the beginning, what you would do is sort of put a movie together and have the elements of the script, the talent attached, who is, you know. the director, who are the actors, et cetera. You run models based on those things. You take a comp set and say, okay, if the movie is budgeted here, it's got these stars, this director, in this genre, what are sort of the expected outcomes? And then you run regressions and see how big a risk you're taking. And the idea from the beginning of Legendary was a most of the time make movies aimed at sort of the fanboy,

Starting point is 00:09:45 fan girl, Comic-Con audience, superheroes, and things of that nature, and to build a brand that serviced those fans. That was idea number one. And number two was that there was a massive amount of growth going on internationally.

Starting point is 00:10:02 It capitalized on that, have big tent pole event branded movies that would appeal globally and then to be able to keep those films in your library. that would continue to cash flow for you for years in the future. The example of this was we were partners with Warner Brothers,

Starting point is 00:10:21 and they were amazing partners. At the time Warner Brothers, when I started, was run by Alan Horn, who is still somebody I look up to to this day. He's now running the studio at Disney. So understood very early what I was trying to do with Legendary. So when you put a movie together, the stakeholders are,

Starting point is 00:10:42 whoever has put the capital up. So in our case, it was generally speaking 50% from us, 50% from Warner Brothers. And then Warner Brothers would distribute worldwide. They would charge a fee for that. So that was sort of their hedge and certainly for them putting up the marketing money and so forth. And then back then, you'd have interested parties, generally speaking, if you worked with an A-list director, that director would have a piece of what's called gross participation. a big actor would have a big fee plus gross participation and you would then put a movie out the movie would do whatever it did globally in box office and roughly speaking in those days every dollar that you saw like oh it opened to 50 million dollars well you got a percentage of that and the exhibitor got a percentage of that but after we put it out then you'd have this cash cow called a DVD which was highly profitable Then it would go on to rental, blockbuster and so forth back in those days, HBO, pay TV, pay-per-view, then on to free TV. The ownership of these libraries was extraordinarily valuable and stable cash flow.

Starting point is 00:11:59 That's obviously all changed. But those are who the stakeholders were. And you'd kind of look at it and say, what kind of a risk am I taking here? if you had to characterize it, you make 10 movies. You probably have two or three that don't work, that you lose money on, sort of three through seven or eight, make their money back. And then hopefully, eight, nine, and ten are the dark night, 300, hangover, et cetera, that make massive amounts of money that kind of make up for everything else.

Starting point is 00:12:32 That's how the business worked when I started and remained that way. certainly changed, but as we got into 14, 15, 16, things changed quite a bit. As you think about just sort of such a fascinating industry that everyone can relate to, the nature of top line revenue and how it's changed, if you just say, like, we're at the end of a revenue cycle and a movie's 10 years old at this point or something. Let's say in 2005 or 2010, how much of $100 of total revenue was made in the theaters versus DVD versus all that downstream stuff. This is a question about intellectual property, you know, which we'll talk about in a minute here. And then how is that $100 pie changed or changing today? First of all,

Starting point is 00:13:15 it depends on the movie itself. I mean, if you have something that is an absolute joggernaut, like The Dark Night Was or Jurassic World, then you're making a meaningful percentage from box office. There are other films that sort of find their audience, maybe they don't do that well in the theatrical release, but find their audience in the secondary market. So there are certainly examples of that. And then if there are global tentfuls, you have merchandising, you have toy sales, you have things of that nature. Obviously, Disney does an amazing job of maximizing every nickel around their properties. And then I think where that has changed remarkably today is, you know, this is something that we talked about in 2015 in a board meeting that I was.

Starting point is 00:14:05 looking ahead and saying that not only is Netflix and did Reid do an amazing job of taking it from a mill, me back your DVD for rental and changed Netflix into what it is today, but when Netflix realized that, hey, we can make our own stuff like HBO found out with the Sopranos and others, that that is what's valuable. And that's how you grow your subscribers and was able to put itself in a position to make first class content. and make that drive viewership. Well, obviously, the way the public markets especially value that is different than its traditional media company.

Starting point is 00:14:44 So you're bringing a knife to a gunfight in terms of, hey, we're a media company making movies and television versus someone that has a technical aspect or subscriber base that is valued on a much different basis. And I think what was interesting to observe is I've been friends with Reed and with Ted Sarandos Netflix for a long time is when they first put out House of Cards, they were being ridiculed. I mean, at least in the rooms I was in in L.A., how stupid is that? They're going to put out the entire series all at once. And then when people watch it, then they're done. How dumb is that? You have to stretch this out over a 13 or 26-week period, and I guess they found out pretty quick

Starting point is 00:15:29 that it wasn't dumb. The other thing that was interesting is where the Hollywood, ecosystem had felt like it had a monopoly on the talent because of the symbiotic relationship between the agencies and Hollywood, all the scripts, all the stars, all the directors, and went there not only first, but only. And now, as you look at it, some of the most interesting things that are being made are certainly at Amazon, Apple, Netflix, Disney Plus, etc. So it's completely changed Hollywood forever. I have no idea what's going to happen when the world goes back to some version of normalcy, and people have the opportunity to go to the theater. I'm not sure it's going away. I don't think any of us know that. I certainly think the idea of putting a theatrical release out

Starting point is 00:16:24 and only counting on that globally is going to be a stretch. So I certainly hope that big epic movies things like Avatar, things like the Marvel movies or Steven Spielberg movies or Chris Nolan movies, you still want to see them on a big screen potentially, but I think it's a harder and harder business model to make work. What did you learn across this whole period about the concept of intellectual property writ large? That's an important theme here across everything you've talked about from building legendary, basically producing all of our favorite movies that aren't Disney's or sort of products of yours, that big temple fan boy, fan girl concept. Talk to me about intellectual property IP. What lessons you learned early and throughout the legendary experience

Starting point is 00:17:12 that you carry with you now? Certainly the first is talent is not funging. There are a handful of people in that industry that consistently are just incredible at their craft. I had a front row seat and had the privilege of making five movies with Chris Nolan, for example. He's just incredible. one of those singular talents. And if you can sort of park yourself next to that, that's a good thing. There's so much content being produced now that the handful of writers, directors, actors that are truly exceptional, just like any other field. There are folks that are absolutely on a meritocracy at the top of what they do,

Starting point is 00:17:55 and their services are in higher demand perhaps than ever. So I think that the things that I learned is that there's no substitute for talent and that on the intellectual property side, being able to start with a great story, a great script, a lot of times if it's something that has global appeal, one of the things that we did at legendary was this whole monster verse, which King Kong versus Godzilla is now is sort of what we built to. I'm excited to see it myself. But I loved Godzilla when I was a kid. So I wanted to make a Godzilla movie, but just like Marvel had done with its Avengers

Starting point is 00:18:38 and having a place that you're building to, that's very different than just doing one-off movies. So that was something that we sought to do is to have a Godzilla movie and a King Kong movie, then Godzilla 2, and then finally have them fight. again, it has fundamentally shifted so much. I'm really interested to see over the next three to five years what the industry is going to look like. What do you think makes Chris Nolan so exceptional? I know those movies are a lot of my favorite movies personally of all time. Also, all so different and creative and fairly unique. What is so singular about his talent? I'd say it's the confluence of raw intellect. He's very smart. He is a born storyteller, but he's able to tell story with just a twist, things that are not

Starting point is 00:19:29 obvious, not on the nose. And then his style is so visually different. And I think that when Batman begins in Dark Night, then Inception and all of his movies, Interstellar came out, and especially when Dark Night came out, it's not digital, it's not disposable. His stunts, many of them were practical, and that stood out. His visual style is really eye-catching and is different, and that's something that I think when you combine all of those things, it was also an incredible writer. He writes most of this stuff. And I also think that a lot of times in Hollywood, a script will go through so many rewrites with six different writers that it's harder to have a singular vision and a story that's comprehensive because, oh, it's not good enough.

Starting point is 00:20:20 Let's get another writer to come in here and rewrite this thing and clean it up. And by the time you're done, the original story that got you excited is now lost a little bit. And with Chris, it's his vision from start to finish. So I think raw talent combined with those things make him one of the greatest filmmakers of all time. I'd love to talk about the data and analytic. theme of everything that you've done, starting with Legendary. I think you were sort of the pioneer of applying Quant to the movie business. And I'd love to hear that story. You already mentioned it

Starting point is 00:20:58 with the laundromat, maybe as the prime original example, like just using technology to enhance an existing business model. What did that look like in the early days of Legendary and how did that evolve? What got me interested was just, even though the marketing department did a remarkable job, cut great trailers and so forth. We spent an enormous amount of money to open these films up. And especially as the windows got shorter, you would have to spend a ton of money. And then 90 days later, remind everybody to go buy the DVD or the digital version of the film. You were getting hit with these massive marketing bills that made it harder and harder to make money. The phrase that kept running through my mind is to find people who, you know,

Starting point is 00:21:43 who are persuadable. The example that I always use is that if you're making the dark night, if there's a 15-year-old wearing a Batman t-shirt and reading all the comics he or she, great, you don't need to spend any money on that person because they're going to go see the dark night. And then on the other hand, I would always say that if I gave my mother two free tickets and $20, she's not going. There's no reason to bombard her with ads. we would sort of blanket the earth with all of these television commercials or billboards and things, or I don't want to pick on it, but newspaper display ads. I didn't, who was watching the dark night and looking it up in the newspaper to go find the Times.

Starting point is 00:22:26 So I had a big moment. Eric Schmidt at the time was the CEO of Google and is a longtime friend. I called Eric and ended up sitting down with him and drawing up what I wanted to build. which was a analytics platform to find people that were persuadable. And as per usual, Eric had some great insight and advice. We ended up buying a boutique analytics shop in Boston. And I was fortunate enough to meet a guy named Matt Maralda. He was an absolutely brilliant data scientist.

Starting point is 00:22:58 So he led the team for us at Legendary. And the first movie we ever used it live on was Godzilla. And I think there were a lot of skeptics who said, I think you have a hit movie on your hand, but you're cutting the advertising budget meaningfully. And we said, we're going to stick to our convictions and tracking, I think, had us opening at $50 million, and we opened at 94. And it was the ability to find people using analytics online and to cause an action. So not just, hey, are you aware of this?

Starting point is 00:23:32 But I want you to buy a ticket and to speak to them in a way that it was pretty, targeted and in the early days somewhat tweaked for them. It had a pretty big impact on the company. We then used it in the television division and then ended up licensing it to other studios. And it had a meaningful impact, which that experience certainly had a big impact on my point of view on using technology and thinking about applying it in spaces and places that might not have had a lot of innovation or maybe non-obvious, and that certainly led to my thinking and my formation of Tolco, my holding company. What would you describe as sort of like the competitive frontiers, the places where differentiation or skill matters most in the kind of movie world

Starting point is 00:24:26 when you were at the sale, I'll call like the peak of your powers? What was it that you were better at that mattered to outcomes relative to, say, other studios? Look, the first thing is it's all hard and there is 100% luck involved because when you run film through a camera, there are all kinds of things that you have no control of. What kind of chemistry is the cast going to have? You never know that until they all show up and they're doing their thing. What is going on at the country at the time that you released the film? I remember it was not our film, but Warner Brothers put out. American sniper, I believe in February, which previously had sort of been not fertile ground for

Starting point is 00:25:14 releasing movies. And the country, whatever, the patriotism of the film celebrating U.S. Special Forces and Navy Seals, the job that Bradley Cooper did, certainly Clint Eastwood, whatever it was at that time, turned it into a massive hit. So it's hard to have your finger on the zeitgeist, especially when you are making the film probably two years before it comes out. It's tough to predict for that. So I would just say that putting yourself in a position to be successful in two big buckets. The first is hire the best and align yourself with the best and try to make the best content movies and television that you can. And the second thing is to put yourself in a position financially to be successful by being as dissonable.

Starting point is 00:26:04 as you can be for the type of film that it is. So if you do those two things, hopefully it puts you in a better position. The interesting thing about it is that when I started, everybody would say to me in the press and everything that he's a tech and finance guy. What's he doing here? And after I sold the company and went back into tech and finance, then it was like, well, you're a movie guy. Is there anything on the technology side that you think is interesting, since you've straddled this media, tech finance, these various worlds, anything nascent that other than virtual reality, which you mentioned, that you're watching carefully and just interested in?

Starting point is 00:26:44 There's a couple of things that interest me. The first is, as a consumer, one of the things that I'd love to build or have someone with a time to build, it's an ocean of choices. So you go on and you're trying to find a program and you figure out, like, well, wait a minute, I have to have this app in order to get this program, wait a minute, is it on this service or do I have to go over here and the passwords and just to me it's becoming a little bit of a tangled mess to navigate. I would love as someone built an overarching, hey, you just tell me what you want to watch,

Starting point is 00:27:23 we'll organize it for you and you're going to pay one price and you can access the things you want to access. You can park hop, so to speak. There's just so many passwords and so many different things that I think it's becoming harder and harder to navigate. Maybe if you're 23, it isn't, but that's something that I hope somebody would build. The other side of it that's interesting on the production side is, again, the computing power is getting so good that you're able to shoot some things and construct them digitally in a way that is starting to look more and more believable. And that will open up storytelling in a way that I think will be very, very interesting. As we kind of wind down the discussion of movies, I'll sort of ante you up with my answer to the

Starting point is 00:28:07 question. So there's been three movies. You've made two of them that I've ever left a theater just like feeling like completely mind blown. The first was the Matrix, I think in 1999. The second two were inception and dark night. I could like literally remember the theaters that I was in such cool cinematic experiences. Looking back on your career, what movies stand out, individual movies stand out for you as the most awe-inspiring or mind-blowing in terms of the experience of the viewer? I would say the handful for me were certainly the 300, just because that was early days for legendary. It came out in 2007 and something we believed deeply in. I think almost every other studio in Hollywood passed on it. Young filmmaker at the time named Zach Snyder, and it came out and at the time was the biggest R-rated opening ever,

Starting point is 00:28:55 I believe. That really helped the company to put itself on the map. And so that was certainly a big experience. The Dark Night, just because to this day, I think it's a perfect movie. I say that as a fan. I mean, Chris just delivered an amazing movie, and Heath Ledger, to me, delivered one of the best performances by an actor in history. And then without question, the movie 42. That was a privilege to make.

Starting point is 00:29:24 I had the opportunity and still am very close to Rachel Robinson to this day. and just to be able to tell Jackie Robinson's story and to be able to bring it, hopefully, to the world's attention for a bit. That was something I'll never forget, and it was incredibly meaningful to me. Can you say a bit more about that last one? Seems like it's made a huge impact on you. What about that experience is so important for you? I'd say everything about that, which was I had two people in a two-week span talked to me about it. It was Joe Morgan, who on Fortunately, we lost this past year. I'm on the National Baseball Hall of Fame Board with Joe,

Starting point is 00:30:06 and he just said to me over dinner one night, how can Hollywood have never, for 20 years, everybody's been telling us they're going to make the Jackie Robinson movie, and that's an important story, and I want to introduce you to Rachel. And then Ken Griffey Jr., who's an old friend, we were together in L.A., and he said to me, you know, I did a Little League,

Starting point is 00:30:29 event a couple weeks ago. And at the end, I asked the kids, who knew who Jackie Robinson was? And he said, like, three kids raised their hands, and that can't happen. Joe introduced me to Mrs. Robinson. I don't get nervous very often, but I was nervous to meet a living icon. And I promised her we'd make the movie and make it quickly. Brian Helglin was my first and only phone call, wrote and directed the movie, did an amazing job. And then just along the way, getting to hear Rachel's stories and getting through her and through her family, getting to know not only the Jackie Robinson the public knows about, but what an amazing man. And just trying to wrap my head around what it would have been like in 1947 to have all

Starting point is 00:31:20 that pressure on you and not be able to speak out no matter how many horrible things are done to you, have your family threatened and go out there and do your job every day. And then just as a, he was a second baseman and shortstop, and they put him at first base in the major leagues. He won rookie of the year. Baseball may have been his, quote, worst sport. You know, at UCLA, he played football, he ran track. He was an amazing athlete and such an eloquent, strong man.

Starting point is 00:31:52 And just somebody whose story I've always been fascinated by. And just after that movie came out, just the number of folks that have come up to me or talk to me and said, we watched it with our family. So it was just an amazing experience and something that I treasure. And then we also lost Chad Bozeman, who was like family to me. I miss very, very dearly. And getting to know Chad and watching him go from playing this icon to become the Black Panther and just, one of those force of nature talents. So there are just a lot of things about that movie that make it incredibly special to me.

Starting point is 00:32:33 Those are two incredible people. If you could, having spent so much time with them or immersed sort of in their lives, if you could imbue everyone out there with some aspect of what made Jackie and Chad's special, what would they be in each case? What would you try to copy from them and implant in others? quiet dignity, the ability to go about your business. I think when Chad got really sick and still did Ma Rainey and to go through what he was going through and not to tell the public or not even to tell anybody outside of his immediate circle and just

Starting point is 00:33:13 to go to work every day and not want to talk about it and just say it is what it is. it is hard to both fathom and articulate what that type of strength is. And I think when you think about Jackie Robinson quietly going about his business, regardless of the obstacles and the hatred and everything. So I would say it's quiet dignity, the grit, the ability to go about your business under incredible challenges is just something I'm in awe of both of them. I love that answer because in many ways. ways were in the age of the opposite, sort of flashy, cheap signaling. It sounds like your answer is

Starting point is 00:33:55 basically the opposite of that, done steadily over time. I think that's right. I'd love to turn now to, I love this term you used yesterday, what you call the new physics of business. Maybe before we get to those new physics, you could describe what you're trying to build at Tolco, the holding company. After the experience of applying analytics to the movie and television business, one of the things that I thought about was how could we take technologies, artificial intelligence, data science, and point them at companies that didn't traditionally have a lot of innovation and potentially would not have the access to talent to sort of build those capabilities and get those outcomes. So the idea with Tolco was to create a holding company that also had maximum flexibility on capital structure. So not a vintage year in terms of the fund, not in a fundraising mode where your management fees, things of that nature.

Starting point is 00:34:59 For the most case, we either own the entire company or a majority in almost every case. and we supply not only the capital, but we had Tolco Labs, which a bunch of folks with backgrounds and artificial intelligence, data science, machinery, etc., to be able to work with the management teams of each of the companies and hopefully get a much bigger result because you're able to bring those capabilities on top of just the capital. So hopefully it's the general business wherewithal of the Tolco management team, coupled with being able to provide access to some pretty great technical talent and then certainly the patient capital. That was sort of the thesis.

Starting point is 00:35:46 And we look at industries and then try to find companies within those industries that interest us that not only have Class A management teams, but management teams that embrace being able to use technology to either change or trajectory or build it that way from the beginning. Before we get to some of the specific examples of the implementation, I think there's so much white space in modernizing or updating the business model with technology of proven industries and use cases. So I want to get into some examples. But this concept of new physics of businesses is so fascinating, maybe starting with velocity. Can you describe what you mean by this? We talked yesterday. I just said that to me, there is this new physics.

Starting point is 00:36:31 of business, and I think ignoring that is like trying to ignore gravity. You might ignore it, but its effects are profound and will hit you regardless of your beliefs. So to me, what some of those things mean is just the ability to adapt and understand the velocity of not only change, but things that can happen to you. And instead of saying, look, we know that we need to eventually morph our business. We can see the wheels turning and where this is going to be in three to five years. Forget that. This is something that happened tomorrow. A competitor makes an announcement. A breakthrough technology happens. Everybody on the internet decides to jump to another platform. And all of a sudden, your entire business is different and changed. And you're either kind of

Starting point is 00:37:23 standing on the railroad tracks wondering when you're going to hit by a train or you understand that You have to be nimble. What does it mean most tangibly for the operating cadence or strategy of how to run a business? In a world of velocity, we'll come back to digital fluency and some of these other ideas in a minute, but just thinking about velocity, it just seems like so obviously true that it's a two-sided coin. There's a lot more risk. There's also a lot more opportunity to move really fast in a good direction or a bad direction. What does that mean most to you about how businesses should be run relative to how they were run?

Starting point is 00:37:57 20, 30 years ago. I think the first thing is you have to measure twice, cut once, and really understand what you're trying to do in business and how you can tilt the table. And if you can't clearly articulate what your advantage is, I think you're going to have a tough time from the beginning. But on top of that, and this is what I think has changed, is you could be a quarter, a year, three years, five years into a business, have done everything right. You've got a great culture, you've got a great product. And then for reasons that have nothing to do with what you've done, that black swan thing hits, whether it's a black swan within your company, meaning something happens that vilifies the company all of a sudden. Well, how do you plan for that?

Starting point is 00:38:49 I just think running a company today, you have to have conviction, but at the same time, you have to have the elasticity and be able to stretch and move and grow in different directions and to be able to deal with things that come out of nowhere. And that goes back to the old adage of you're really betting on capable people and management teams. because if you think about how often now something happens, COVID, again, a social media, something happens that endangers your company. There's no manual on the shelf for this. So you have to have smart, capable people who are able to figure out in a pinch. What do we do? Because we don't have like the weekend to think about it. We've got to figure it out now. Seems like the prescription here might be that everyone needs to read anti-fragile again. And that's sort of the mindset that you're talking about.

Starting point is 00:39:42 Does it follow that the most important thing then is culture? It seems like that would be the playing field maybe to build a resilient or even anti-fragile organization. Culture is obviously always important, but do you think it's even more true in light of everything you just said? I do. I also have to say I think anti-fragile is a really interesting model and philosophy. And certainly in a vacuum is smart, thoughtful. those things. But yeah, I have a lot of friends in commercial real estate with long-term leases on Class A buildings and everything else. They thought they were in an anti-fragile business.

Starting point is 00:40:25 I've always kind of looked at the anti-fragile thing and said it's anti-fragile until it's not. With things that happen that you lack the imagination or the creativity to even come up with, I think that you certainly want to try your best to build businesses in that way, but I also think that there's usually not a substitute for aptitude, that at the end of the day, people that are smart and capable and thoughtful and can marry that sort of experience plus intellect, plus imagination, and then the ability to lead, the ability if you're running an organization to have banked enough credibility with your investors, with your employees, with your board, to be able to say,

Starting point is 00:41:17 okay, we're going to make a sharp left turn now and to have the credibility to carry that through. That's the sort of leadership that I think you're looking for. I'd love to turn now to how this has actually played out in real time at Tolco, starting with Tolco Labs. So this is now, again, a common theme across the things that you've built is having this respect for tech and data, but also a now deliberate centralized asset that can be deployed on behalf of portfolio companies. What does that look like? Walk us through Tolco Labs. Were the people that populated it? What are the key function in it? Like, if it was just a standalone business, just describe it for us. The thing that we tried to do and recruit for were actual practitioners. who had deployed artificial intelligence, worked on teams, and done things in the past that you could point to at places like Google, at places like 2 Sigma, at places like Amazon, et cetera, where it wasn't just, hey, we're not here to write white papers. We actually need to go in, have a real set of problems, build something, and effectuate the outcome. So you're going to be weighed and measured on that basis. And so that's how we recruited, and that's how we wanted to conduct ourselves.

Starting point is 00:42:35 So we also don't have a huge portfolio of companies because we're trying to do small number, highly concentrated and have efficacy. When you're looking through new businesses to potentially be part of the Toko family, what gets you most excited? Like what features of a business when you're exploring it for the first time makes you sit on the edge of your seat most? I would say it's a combination of a great management team, but a management team that is willing to actually use technology in a way that's not just sort of surface, but is part of

Starting point is 00:43:15 the DNA of the company. Because without that, you're just fighting an uphill battle constantly. The second thing I would say is the industry is big enough that if you're successful, does it matter? And then I think the third thing is a company that already has a good business, good business metrics, the right sort of thing that you look at and say, I think if we were able to do these things, it would enhance the returns and make one plus one equal 10. Those are the things that we kind of look at in combination so that it's management team that's not only great at what they do, but embraces this road. Size of industry is big enough to matter

Starting point is 00:43:59 and that there's a very clear way to tilt the table. If you can't articulate that, you can't just say, hey, we're going to go in and bang on some keyboards and make it more valuable. It's much more complicated than that. You have to be able to see that through. We've studied the insurance space for years before we finally did a transaction. Are there non-obvious things that that you look for when you think about quality of the management team? I would say it's a couple of things. What sort of domain expertise do they have in the business they're in? Plain old-fashioned intellect.

Starting point is 00:44:37 As I mentioned earlier, the leadership qualities, can you need an organization, not just have the title, be able to feel when you walk in the room in your organization that people truly look at you as a leader? I think that's very, very important. I like the attribute of folks that have conviction, but are intellectually curious and willing to learn things and to truly have an honest conversation and debate and then hopefully emerge from that room with a united point of view. And then I think part of it is that grit and determination because there's going to be a moment where something is really hard, maybe even looks insurmountable. By the way, Ben Horowitz, who wrote a book called The Hard Thing About Hard Things, one of the best business books I've ever read.

Starting point is 00:45:29 And that's one of the things he talks about is there's always a way, but you have to have the resolve and the grit to not let paralysis find its way into your system. You have to be a creative thinker, dynamic, and do you have that grit and resiliency that when other reasonable people quit, that you keep going and find a way. I think it's really hard to measure that until that moment is upon you, but you at least want to see signs that that capability is there. Having such a unique history in business, but also a unique perch today with the holding company structure, a lot of flexibility, a lot of experience, I'd love to talk a bit about

Starting point is 00:46:13 what has you most excited about the world and just writ large and what has you most worried. Maybe we'll start with worried so we can end on a high note. What trends are happening that you're watching that you think could become damaging or bad in the years to come in light of this incredible sea change in technology business, the world, COVID, etc? I'll start by saying that I am an optimist because you can't come from where I came from and not have a sense of last half full optimism. But at the same time, in my adult life, I have never seen so many systemic challenges. that are real and tangible. Obviously, we're living through COVID. And I kind of thought that there was this moment after 9-11 where Republicans, Democrats, everybody came together on the steps and had that moment of being united. And I thought, geez, COVID hopefully has the

Starting point is 00:47:09 same thing. And we clearly have not seen that happen. But when you take a step back, when you think about the challenges of climate change, which are real, and I think, unfortunately, are accelerating. I think for some reason in our country, math and science have allowed the United States to take the global leadership. There's many factors, but I would argue that technology and science is certainly on that list. I look at the challenges that we're going to have in the workforce is sort of the technological world continues to progress. And there are some people that would challenge whether it's good news or bad news, you're going to have a lot of displaced workers. And I think there has to be sophisticated, honest conversation about what the implications of that are

Starting point is 00:48:00 going to be. I think it's hard to ask a 60-year-old truck driver to learn how to be a program. I just think that there's a little bit of wishful thinking around some of the solutions that I've at least heard, and I know that's going to be an issue. I think China is certainly an issue. And I think that the United States both needs to be a good global citizen and at the same time, be very clear about what we think changes need to happen and where China needs to be held accountable. So I think that's going to be a very big challenge. We're not in a great place on that. And certainly, as I think about the implications with China on artificial intelligence, quantum computing, et cetera, these are zero. zero-sum games. And if we lose that race, I think the implications of being in second place

Starting point is 00:48:58 are profound and will impact not only our global standing, but eventually our way of life. And then lastly, I just think about the resiliency. Again, there's that word in the United States and what made the U.S. a very unique place. And I just hope that we learn that, that civil discourse is a part of what makes this work. And if we get to a place where we can only shout at each other and you're inherently evil person, if you have a different point of view than I do, I think we're in a lot of trouble.

Starting point is 00:49:36 And I also hope that there are some absolutely necessary and long-overdue social changes that are taking place that are important. and if forgiveness is also part of our society. I'm an optimist, but I think there are challenges ahead. And I think, again, the second and third order of effects of COVID, when we emerge from this, have yet to be imagined your experience. So I just think that we really have to get through this and understand that we're going to have hard choices, hard conversations,

Starting point is 00:50:11 and everybody needs to do their part with that. Those are tough things. Let's close with your optimism. So you get to see so many interesting new businesses, existing businesses, cultural trends, etc. Part of the media landscape for so long. What has you most excited? What possibility, fresh possibility, is most animating to you today?

Starting point is 00:50:34 I would say as much as everybody likes to be sort of harsh on the young generation and work ethic and they don't get it, they're entitled, I have to tell you, I have the print. privilege of either lecturing at or being around some of the finest schools in our country, and the aptitude capabilities of this next generation in their 20s just blows me away. If you think about some of these young folks that, again, are coming through COVID, are not only digitally fluent, but are thinking about things in a completely different way, I think that gives me tremendous optimism about the future and also never bet against the United States. We've talked a lot about business lessons that you've learned across your career.

Starting point is 00:51:23 Are there any other lessons beyond business that you're most proud to have learned that you'd be willing to share with those listening? At the end of the day, and maybe this is partially coming through COVID and some of the isolationism that comes from that, is that how precious time is. No one out there listening is going to say, oh, wow, I never thought of that because it's kind of cliche. But there are so many parts of life where you're doing a deal and you're running to the next thing. When you are staring at your life, what are the moments in people that matter the most

Starting point is 00:52:00 and how do you truly put things in the right place so that we're all still working hard and everything? And the same thing, like everybody, I'm sure I lost some people that are very close to me over this past year. I try, if there are people that are important to me, I try to make sure that I tell them that. Because, you know, you run through your life and especially in the digital age, we don't think about the expiration date, but there certainly is one. So I just think that spending your time in a way that is meaningful to you and spending with people that is meaningful and letting them know that. Those are little things or, I guess, big philosophical things that I've learned.

Starting point is 00:52:44 Well, I'll certainly remember this conversation for maybe two words, adaptability and dignity, the ability to be in the game, be in the mix, and work extremely hard towards a goal, but be adaptable along the way and to do so with that quiet dignity that you talked about earlier. I think it's such a powerful and ultimately fun combination, life short, should be fun too, and the importance of relationships. you know my traditional closing question for everybody, which is to ask, what is the kindest thing that anyone's ever done for you? I have to say that there are so many different answers to this, but I'd have to say my uncle Jim, who helped my mom raise me when I was young and showed some

Starting point is 00:53:27 aptitude in sports. So rather than a single event, he was a blue collar guy who worked in a factory but had time for me, weekends, evenings, would always come over at our house when things broke, which was constant, and just reflecting back on everything that he did for me growing up consistently and without fanfare. I love the answers that are just family-oriented and with kids and stuff like that.

Starting point is 00:53:57 It's a great place to close. Thomas, thanks so much for your time. This has been great. Thank you, Patrick. This episode was brought to you by Vanta. In this five-part mini-series, I sit down with Vanta CEO Christina Cachopo to hear about the origins of Vanta, how Vanta is automating security, and when companies should look to partner with Vanta. In this week's episode, Christina and I discussed the use cases for why customers seek to work with Vanta and how Christina knew that Vanta had product market fit. As you think about the stack ranking that you've seen so far, just from your early success as a business working with lots of customers, how do you think you would stack rank the jobs to be done that they are.

Starting point is 00:54:34 hiring Vanta to do for them in some sort of order, not exact, but just sort of like an inventory of why you think you're being hired. I think that will help those listening, like if this is something relevant for their company, understand like the major reasons why a firm would typically approach Vanta. I think there's two big reasons why people hire Vanta and we look forward to serving them. The first one is helping their startup get more secure. Often when you're smaller, you're just starting out. A big piece of that is just determining what even that means. So having kind of a prescriptive guiding hand there. It's been helpful. And then once someone is more secure, helping them prove that to their buyer. So this is where some of the compliance certifications

Starting point is 00:55:12 and the sort of alphabet soup comes in and saying like, hey, you have this security. That's great. Let's help you use that to win more, like grow your business. Is there an angle here of like a moment of insight that you often see from customers when you're engaging with them, whether that's the CTO or some other engineer? Like, is there a, is there an aha moment that you often see? And If so, what is that? There is. And actually in the early days before when I was just starting to sell and didn't quite know what I was doing, I wouldn't demo on the first call and then got feedback that no one actually

Starting point is 00:55:44 believes the pitch. And then they saw the demo and then that I could actually see their lives light up. Anyway, so I learned to do the demo just as I explained what phanta was. But to that end, I think it was just seeing our main dashboard, which is basically just a list of all the things you need to do and a list of the things you're already doing. It's sort of that early design. Red, you haven't done, green you've done. and just that prioritized list really made it concrete.

Starting point is 00:56:07 Like, oh, I have to do these things. I can get my compliance certification quickly if I do. I'll approve my security posture. Game on. Let's go. Is there an early customer story? It could be the first customer or any you pick that stands out in memory as like the moment that you felt you were really on to something?

Starting point is 00:56:23 Yes, actually. So early early, before when we were still sort of running what's now Vanta out of spreadsheets because we were, we didn't want to build the wrong things. We did a lot of spreadsheet prototypes. And an early one was just writing down this list of controls, all the stuff that company needed to do, going and talking to their engineers, and then handing them back a spreadsheet of, here's what you told me you're doing and not doing. Did this for two companies early on to test, could we fill out the spreadsheet? Were the spreadsheet similar? All of that sort of testing.

Starting point is 00:56:53 Turned out, we did make spreadsheets. The companies were happy with them. They were pretty similar. That all felt good. What felt great was we got an email from an old colleague. that basically said, I don't know what happened and how you became a sock to consultant. Super weird life decision. But can you come and do this for my company?

Starting point is 00:57:14 Also, let me know if you want to get a drink and talk about life because this is weird. And that was sort of the moment when you're like, oh, our spreadsheet went viral. You know, our enterprise compliance spreadsheet? Like, there might be something here. I love it. Great early story. I love those things. I also love the spreadsheet product first.

Starting point is 00:57:28 Everyone says do that. Then no one actually does it. Yeah. Seems to be a smart way to build. You know, it is because it's so much. easier to add and change rows to a spreadsheet than it is code. If you enjoy this episode, check out join colossus.com. There you'll find every episode of this podcast complete with transcripts, show notes,

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Invest Like the Best with Patrick O'Shaughnessy - Thomas Tull - New Physics of Business - [Founder’s Field Guide, EP. 30]

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