Everything in Capital Markets is Downstream of Algorithms

Guest 0:00 You can, you know, form billions of dollars of capital around simply setting a new idea. Every once in a while, someone basically crystallizes a notion right at the right time in the right way that sort of becomes the foundational viewpoint or opinion on a certain era. Everyone is a little panicked. They don't know what's going on, and someone just needs to sort of set the story and set the narrative, and it doesn't even have to be right, but there's just this sort of confidence of, like, "This is happening. Follow me." Capital just follows the billion-dollar PDF around the field.

Patrick O'Shaughnessy 0:32 [laughs] So we're gonna have the chance to talk about, uh, as we do on a daily basis, you and I, fifty-seven different ideas, but I'm always interested to begin with you a couple questions about investing. I sit near you. We share an office, so I get to hear a lot of these stories every day, and I think it would be really fun for you to turn your observations from all those God knows how many hundreds of conversations with founders of these companies and with the capital that has backed them in the past to sort of share what you've learned from that frontier over the last eighteen months, framed as advice for founders and advice for capital. Because I, I just don't know very many investors that are looking at situations like you are with such a high rep count. So what have you learned in the first eighteen months of doing this?

Guest 1:30 I've learned a lot. You really realize in, let's say, long-term private markets that the great filter, so to speak, for funds is their storytelling ability fundamentally because, you know, their product, which is, like, realized cash returns, take a decade. And so the thing that you're selling in the interim, whether it's through, you know, a quarterly update or your event or just your one-on-one conversations with your LPs or whatever, is really just narrative. A particular situation that's very interesting that, that we've seen a lot of is twofold. One is that the business is kind of old but has started to do well recently. That's an interesting scenario because it's one of these instances where merely because the company, the story again, the narrative of the company is that it's seven years old, let's say the company has really started to inflect. Uh, maybe it's 'cause of AI or maybe it's 'cause of something else, but they are six or seven years into their life. It's very difficult for those companies to get funding because the story is, "Well, okay, fine, you grew two hundred percent last year, but, you know, you're only on... In absolute terms, you're only at eight million of revenue, and you're seven years in." Whereas I think literally if you just change the name and told a different story and just, you know, are sort of arbitrarily started the clock two years ago, um, you, you... that company would actually be, like, really hot. And so, like, that's an interesting situation. The fix, I think, is just to be more flexible on narrative and story. A sort of a derivative of that problem is just the amount of businesses where they're in a spot where it's kinda working, things are starting to go well, but they're faced with three choices, which is basically they're not gonna raise a significant up round. And so really they're staring down a bridge round, uh, strategic like M&A acqui-hire or cutting to profitability, and those are just really hard situations. If you're in that situation, I think, um, that's where you really wanna get creative with the cap table, and if you have some cash, buy back your investors, convert everyone to common. Really start to spend more time on the cap table because otherwise, like, I've been shocked at sort of how hostile insider bridge rounds really are. I think this is, like, an under-discussed part of venture.

Patrick O'Shaughnessy 3:34 How so?

Guest 3:35 Just they have, like, you know, 3X liquidation preferences or warrants or ratchets or other things. Um, there, there's sort of this, like, interesting idea that if you're extractive to the downside, everyone sort of boos you, but if you're extractive to the upside where you say, you know, "I want the right to invest at the same price in two years from now," um, they're both, like, similarly extractive, but because one is, like, an optimistic extractive, everyone loves that one.

Patrick O'Shaughnessy 4:00 So what advice would you give to founders in thinking about their cap table from the start?

Guest 4:05 We're obviously in a highly volatile, highly uncertain period right now. No one knows if it's the death of software. I think it's, you know, certainly the most unprecedented and uncertain time since at least, like, the transition to the internet. And so I think what you want in that time is the, is a lot of optionality and the ability to be nimble and the ability to really be able to do what is right for the business and not be constrained by the cap table. And so, you know, maybe your business needs to become a service, a services business. Maybe you need to acquire other companies. Maybe you need to run profitably for a while. You know, maybe you need to change your whole business model. Maybe, like, you know, if per-seat pricing, uh, goes away, you need to pivot to usage. Maybe you need to fire a bunch of your customers. And so I think, like, you know, i- in volatile times, it's always useful to have optionality. And so I think, like, I guess the general piece of advice is just unless you're certain that you wanna just, like, try this one thing and it's gonna be huge or zero, you should think about optionality, which usually means raising less, raising from investors with a wider mandate, um, not getting stuck in all these weird problems where, like, you need to continue to raise more money and if you don't, it's bad for employees, it's bad for recruiting, uh, people's options get underwater, they start to leave. Like, all those things sort of reduce optionality. It's funny 'cause in general I think, like, commitment is a much better strategy than optionality, but I think in high- highly volatile times where it's hard to tell the future, you basically just want to control for being able to, like, be super nimble, turn on a dime, do what you want, not be constrained by, like, "Well, we're set up. Our capital is set up in such a way that we can really only do this one thing," which is also true for investors, by the way. They're same problem.

Patrick O'Shaughnessy 5:40 Go- going back to the investors and the construction of an effective narrative for building an investing firm p- before you've delivered the ten-year investment returns or whatever, you have this great idea called The Billion

Patrick O'Shaughnessy 5:50 Dollar PDF. Can you describe what you mean by that and what the interesting components of a billion dollar PDF tend to be?

Guest 5:55 This is sort of an idea that you and I came up with in a joking way that, like, kinda turned out to be true, I think, the more we thought about it, which is every once in a while, someone basically crystallizes a notion right at the right time in the right way That sort of becomes the foundational viewpoint or opinion on uncertain era. And I think it's just this idea of everyone's a little bit uncertain, everyone is a little panicked, they don't know what's going on, and someone just needs to sort of set the story and set the narrative. And it doesn't even have to be right, but there's just this sort of confidence of like, "This is what's going on, this is happening, follow me," almost. When those come together, they just set a new narrative that everyone can kind of rest on for, for a period, really until the, the next PDF comes along. And, um, and the billion dollar PDF thing is this idea that really, like, you can, you know, form billions of dollars of capital, uh, in one way or another around simply setting a new idea. And then, you know, maybe you can think of capital as like, uh, 10-year-olds playing soccer, you know? They all sort of just follow the ball around.

Patrick O'Shaughnessy 6:55 [laughs]

Guest 6:56 And they're just... The capital just follows the billion dollar PDF around the field.

Patrick O'Shaughnessy 6:59 [laughs] It's probably a good excuse to talk about... I don't know how long we'll talk about this topic, probably a long time. This joint notion of posting, which I- I guess is a, you know, a billion dollar PDF is just like the ultimate form of that or something. And-

Guest 7:13 Oh

Patrick O'Shaughnessy 7:13 ... the furnace that is the timeline of pr- predominantly X, uh, that's, that's where I get my timeline. Um, there's other places as well. But it seems like these notions have really taken over people's desires and attention. Meaning, like, everyone wants to ultimately have a spot on that timeline. It's a strange phenomenon. I'd love you to just riff on... Uh, there's like five or six subcomponents of the timeline that I wanna ask you about. But maybe to start just how you're thinking about this strange modern phenomenon.

Guest 7:42 I think it's downstream of technological change, and I think the technological change is really the unifeed. So what people don't appreciate about X is that everyone gets served the same 500 tweets per day, and it's hundreds of millions of daily active users and, you know. Uh, the thing that people who don't post don't realize is just how many... You know, whatever the, the poster to lurker ratio on these things is enormous. And so it's really hard to feel the impact unless you're actually, like, getting onto the feed and seeing all the people that you didn't know were reading X all day, uh, commenting on your thing. I'm always surprised, like, when I post a, a, a good tweet and, you know, whoever texts me about it, that I literally had no i- you know, so it could be someone I know well, and I had no idea that they read Twitter all day, but everyone reads Twitter all day. And so the unifeed, I think, is sort of the technological catalyst for this phenomenon. It is X, by the way. Like, I, I... It, it's interesting how X is sort of like... It's sort of the Lindy social network. Like, it's, it's just gonna... It probably is never gonna reach the scale of the others, but it just fills this, like, vital role, and it's interesting to me how it's like, you know, however long in, um, probably almost 20 years now, uh, and it's still sort of more important than ever, sort of just, just, like, source of truth almost for the whole world. And what that means is everyone is reading the same thing. It's the, it's the global newspaper, right? And so in the same way that, you know, people would talk about the latest article in the journal 30 years ago, now it's the latest tweet or the latest essay on, on, on X. And so I think what that creates is that all the sort of most important people in the world, at least when it comes to capital markets and politics and, um, I'm sure some other journalism-

Patrick O'Shaughnessy 9:18 Entrepreneurship

Guest 9:19 ... entrepreneurship-

Patrick O'Shaughnessy 9:20 Technology

Guest 9:21 ... they're reading their daily paper every morning. And, uh, these things really form opinion, and they price securities, and they dictate where capital flows, and they certainly write policy. And so there's this idea that another great filter perhaps is that, like, whether, uh, y- your institution will only survive if it's timeline native. And what that means is that it is reactive to and reflexive to the timeline. Reactive meaning that it, you know, is constantly monitoring the timeline and s- and r- and, and reflexive in that its actions then affect the timeline, which it, it then sort of reads and reacts to. And you can think of, you know, the White House is obviously like this, uh, venture capital is like this. Um, certainly public equities are like this. There's this idea of, like, what is the story? And what's interesting... It's funny, like, one of the things I get emails about the most is, uh, a comment I made somewhere about how, like, posting is the last great meritocracy. I get emails about that 'cause people are like, "That really clicked in my head, and I started posting, and posting changes your life if you're good at it." That's still true today, maybe more true than ever. And it is sort of a meritocracy in a weird way. Now, there's the algorithms and AI and all this stuff. But, like, it's still, you know... I- in some ways it's a lot more meritocratic than it used to be. Like everything, it's been lottery-ified, and so, like, you know, in the old times you had to, like, sort of grind away and build this huge following, and then by virtue of having a big following, you could post a really inane, uh, tweet, and it would be very popular. But that doesn't happen anymore. Now, you just... You can, you can literally be, like, a new account and just write a good post, and then the algorithm selects you, and it'll display you in front of 500 million people. It's sort of this, like, weird thing where you have the global newspaper that everyone reads, that everyone finds highly influential. There's also this, like, this sort of, um, meta thing where it's like the newspaper if you could see all the influential people reacting to the articles in the newspaper, and then by virtue of reacting to it, making the thing more important. And anyone can post to it. People are still very much underestimating how much policy gets dictated from the timeline, how much, uh, venture rounds are done on the timeline, how much businesses are built on the timeline. And I think increasingly

Guest 11:31 everything will just become sort of timeline native. I think TPBN is a great example of this. Um, and certainly, right? Like, you know, i- in this... In, in... When we're recording this, every other day someone wr- writes some sort of, you know, pornographic fanfic about AI, and it moves the public markets dramatically. And so I, I, I think, again, it sort of comes back to this billion dollar PDF idea of when there's uncertainty, people are just looking for what is the story? What is the most compelling story? And the way that it works on the timeline is it's not, you know, um- It's not this well-considered book that comes out that everyone talks about for a year. It's sort of, what is the thing that sounds smart, feels good, is... It, it has to be entertaining. Maybe, maybe that's another change is, like, a good post has to be very entertaining, 'cause people are on the timeline to be entertained. Like, they, they can lie to themselves and say they're on it for other reasons, but it's just to be entertained, and that's obviously what the algorithms are selecting for. And so there's this idea that, like, the most entertaining novel, somewhat interesting, somewhat correct thing is going to set the actions and the consensus for everyone on a day-to-day basis, um, and this translates into their actions

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13:46 Is this all just jet fuel, fuel on the fire for the notion of power law in general? Like one of the things I've noticed in our show is it used to be that they all, the variance was quite low. The, the very best-

Guest 13:59 Yeah

Patrick O'Shaughnessy 13:59 ... one did a bit better, but not a crazy amount better than the worst one in terms of performance, and that has completely changed, and now there seems to be this threshold we were just talking about this morning, that if you breach the containment, if you breach this threshold, it l- it literally feels like you have taken over the world's brain-

Guest 14:19 [chuckles]

Patrick O'Shaughnessy 14:20 ... and just shoved everyone's eyes at your thing for a short period of time.

Guest 14:24 Yeah.

Patrick O'Shaughnessy 14:24 And the impact of those handful of things, Matt, are, are so much bigger than the all the rest of them combined. And so what you're playing for is really to be just one of these breakout things. And like that's probably... Is that the right way to think about the timeline? Is like that actually is all that matters is that you get one of those, so you should be, you should be living at the edge of the distribution as much as possible in, in, in what you're posting about, writing about?

Guest 14:49 I mean, I don't know. E- everything's, everything's just downstream of technological change. So the reason, you know, your podcast followed a normal distribution was because it was the technology delivering it was an RSS feed, and now it's an algorithm, uh, and it's clips and, and, and I mean, even the method, right? Like I'm sure some obscene amount of your viewers are watching on, watching or listening on YouTube, um, which is new. And no one... You know, y- even if you subscribe to a podcast on YouTube, they're not gonna show you every single episode in chronological order. So I think this stuff is all just new, just downstream of technology. I don't think it's like something has changed in the content or in the listeners. It's just how it's delivered. Um, and you know, i- in that sense, maybe one world where the podcast world sort of lags behind the YouTube world is that the podcast world is still sort of highly naive to, um, serving content to the algorithm. Like, you know, if you get deep into the like Twitter group chats, especially now that they've posted the algorithm, like there are all these like very specific things that you can do around replies and likes and lengths and all these like ultimately numbers that the algo is selecting for. And, um, you know, I, I would say like streamers and people on YouTube and stuff certainly understand that and, and podcasts. I think maybe the reason it feels a little bit random is because podcasts still like really aren't into the meat of understanding that like we are recording this video for a LLM to review and decide what it wants to show people, and then people will decide if they like it or not. But like that first filter we don't really think about, but that is the case.

Patrick O'Shaughnessy 16:24 Does that stress you out? Does that feel like deeply dystopian?

Guest 16:27 I hear a lot of lamentation over the death of books. People don't read anymore. And it's so interesting to me because I, I, I just... You know, I've read a lot of books. I like books. Um, I've spent a good portion of my life reading books. But it doesn't... I don't know. I- it doesn't really bother me that people... I, I don't see the big crisis that everyone laments about with books. I mean, the attention span thing maybe is, is true. Like it's certainly way harder for me to read a book just on a pure like focus. But I feel like the sum total of the interviews that I listen to and the things that I read and all this stuff are great, and like I, I don't think I don't have an appetite for books just because they're harder to read. I think I'm like feeling nourished from the other sources. And it's interesting, right? 'Cause like, you know, i- if you think about, uh, like, like porn, it's like more obviously bad because like people don't have sex and they watch porn, and it's like fairly straightforward that sex is better than porn, and it's like that seems like an obvious thing. But like the people will hold that up right next to books, and I don't know. Like to me, the book thing feels a little bit like a swan song for, you know, a technology that, um, you know, there will still be a place for, uh, but like it was the best way we had of delivering information, and now there's new ways and they're, they're, they're more compelling and more interesting. You know, you have to caveat that, of course, with like I'm very sensitive to language and, you know, the terms that we use, like terminally online, brain rot. Like we, we recognize like these are terms of death and, and, and, and, and rotting and, and like destruction and, uh, very negative nihilistic terms. And so, you know, you do have to balance that with like we didn't call it like Uh, w-w-we didn't pick neutral or positive terms for these activities. Um, and I don't think ever- anyone ever, like, would, you know, self-conceive of reading a lot of books as being this like very negative thing. So, uh, the, the counterargument would be that, no, actually, we have this deep sense that, that it is bad. Um, and I think maybe like everything, it's ju- it's just less forgiving. So, if you're highly disciplined and motivated, um, the way that you can use new media is better than ever. But if you're not, then it's just gonna be worse than ever.

Patrick O'Shaughnessy 18:36 You mentioned the White House as, um, certainly this is the first White House that feels completely timeline native and reactive.

Guest 18:42 Yes. I think it's the first modern administration, for better or for worse.

Patrick O'Shaughnessy 18:46 Yeah. What else does that mean? What else does modern mean in that context other than timeline native?

Guest 18:49 It's just highly reactive and reflexive to the timeline. Um, I think it's hyper-aware. You know, maybe in the same way that past administrations would be sort of addicted to polling, I think it looks more at the timeline than, than polling, which is all about understanding the wants and desires of the, the median, the average person. But the timeline is actually, it sort of shifts back to a more Republican model, which is that you're caring about whatever it is, a few hundred thousand people who are influential. And, um, you know, uh, uh, Ben Sasse, the, uh, the, um, the, the former senator, uh, has this great notion that Washington is now mostly people who wanna be, uh, like TikTok and YouTube stars, is like mostly what congressmen and, and senators want to be. And, uh, he condemns it, which is true from ve- some very simple sense, which is you would hope that, like, congressmen and senators are primarily interested in governance, um-

Patrick O'Shaughnessy 19:44 [laughs]

Guest 19:45 ... but they're not. But on the other hand, like, I think maybe a shift of this that I'm only just putting together now is, like, governan- or maybe gov- uh, polling drives governance, whereas if you're really only polling the timeline, you can sort of think about it as this is why, you know, we have... The people who do well in politics now are just optimized for content. They're basically content creators because the polling is the timeline. And that's interesting, again, because who is on the timeline? Uh, I mean, the readers is probably more of an, like, uh, uh, an accurate sample of the, the median people in the country. But the posters who are dictating what the timeline thinks of something is a really, really small group. Um, and it's, so it's

Guest 20:28 almost this like, you know, if the, uh, if the original sort of vision for who voted was, um, you know, white male landowners, maybe the vision or the, the version of people who matter for policy now are, are just the good posters, which is like, I don't know if that's a good or bad thing, but it's, it's a certainly a very different group that I don't think correlates super tightly to any particular demographic trait necessarily.

Patrick O'Shaughnessy 20:53 You're friends with many or most of the great posters. What makes a great poster?

Guest 20:57 You know, I think it's not that dissimilar to writing, and so I do think that, like, being a little bit tortured, having a bit of a, like, messed up personal life, just in general. Yeah, I... You can think of the idea of like-

Patrick O'Shaughnessy 21:09 It's like comics or something. [laughs]

Guest 21:11 Yeah, and maybe posting is a little bit like a, a writer mixed with a comedian or something like that. Certainly has the comedic element of you need to sort of have a riff that resonates, and it's sort of this like instant hit. It's phrased in an interesting way. They, there, there's sort of like a blend of like comedy, poetry, and writing.

Patrick O'Shaughnessy 21:29 Do you think we're at, you've used this funny phrase before, uh, that we're at peak guy? [laughs] What does that mean?

Guest 21:34 I think we are at peak guy. It, it's hard to say where to start this. There's a pagan understanding of God as being like in and around you everywhere. Everything is animated. Everything is controlled and dictated by the gods. And then in the Renaissance, you could say that God lives above the clouds, but there's like a guy up there that you can talk to. And then when we discover what's past the clouds, we go, "Okay, well, there's no guy up there," and then we discover space. And so basically you have to just keep going, "Well, okay, like maybe He's beyond space," and, uh, maybe we don't know that it's a guy anymore, uh, or like a, a distinct person or something, uh, that you could address and talk to. But it's this con- conceptual thing. God just sort of like moves farther and farther away and becomes more and more conceptual. But the idea is that, like, ever since we've sort of become an atheist society, we've been looking for things to sort of look up to and worship. It's sort of trite now to say that, like, everyone has to worship or whatever. I think maybe, like, the more precise thing would be that, um, the, the, there's always a role for a priest in society, and we've been looking for new priests, and I think we tried scientists as priests. It's sort of the scientific pro- project has fallen apart a little bit. Um, this is widely discussed. We looked to physics as hopefully gonna provide us meaning. It hasn't. Physics has largely stalled since the war. And so I think we've moved beyond science as, as a source of meaning. And so I think, like, the, there's this billionaire class that we've sort of looked to as the new sources of meaning. Like, like, on its surface, it doesn't make a lot of sense that we would spend so much time caring about what billionaires think about whatever physics or theology or health or topics unrelated to accruing a billion dollars. But the reason we do, I think, is this is our new priestly class, which is we've said, "Okay, you know, the, the values that are important in our society are being successful at business, and to be successful at business, you generally have to be smart and hardworking." And so these are the people that have ascended to the highest realm of piety in our value system, and so we're gonna listen to them. We were willing to, like, take scientific and medical advice from, I would say, people who are either in the billionaire class or are adjacent to the billionaire class, which is the poaster class, which is like the, the new class, I think. And so the, the peak guy thing is like this idea that I think we've had enough of the billionaire. There's basically been a lot of billionaire worship. Part of it is that they've gotten way less scarce. I think billionaires, at least like sort of state of mind billionaires, have probably grown 100X in the last 20 years, probably more. We sort of look to them to provide us th- these answers, and, um, it has not been satisfying. And so, you know, I think this notion that, like, I wanna catch every podcast with this billionaire, and I'm gonna study his routines and habits and care about what he thinks about these things, has come to its, like, full saturation. I think there's also this, like, secondary idea, which is that money, I think we've just seen, is not as powerful as we Maybe, maybe it once was, or we, or we think it is, insofar as, um, you know, certainly our political landscape, we have not seen, uh, the donor class be nearly as successful as they maybe used to be, or we thought they were. If you're a billionaire, you're sort of quite limited on the things that you can do vis-a-vis like an African warlord, or even, you know, uh, certainly a robber baron, right? And so maybe there's the- these sort of like three forces of inflation is sort of driving down what it means to be a billionaire at all. And then the evolution of like power structures in society are also limiting. Like Andrew Carnegie could take up arms against his workers, but like now if you, if you like post the wrong thing as a, as like a billionaire-

Patrick O'Shaughnessy 25:00 Right

Guest 25:00 ... you have to resign.

Patrick O'Shaughnessy 25:01 [laughs]

Guest 25:01 And, and so, so the, y- like, uh, th- there's this sense that this whole class has just become less important. And then I also think like, like just the media and podcasts, it's just saturated. There's just... You, you, you get it. You, you understand this thing. Um, but we, but we don't wanna take life advice. We don't wanna hear about what's happening from, from the billionaire class, um, anymore. And so I, I would say that like that whole set just feels very saturated. It feels unlikely that there's a marginal billionaire that I'm gonna learn something very interesting from on a podcast, and I don't think that was the case like six years ago. And so then the logical question is like what is the next class as we sort of flail around looking for our next set of priests? And I look, I think it, I think it's the poster, and, uh, and I think you can see this because I think the billionaire class is a little bit deferential to the poster. And so like one very clear way is the science class sort of inherited the priests, the priesthood after the actual priests. And then you can always look which class is subservient to the next to see who's next. And like the science class becomes subservient to the billionaire class. This is certainly the, the Epstein lesson, right? Which is all the scientists are clamoring around this sort of money and glamour. And that now I think the billionaire class has become subservient to the posting class. And so, so I, I think you can sort of see who society collectively chooses to be like, "All right. This is the guy I wanna listen to for two hours and, you know, base my life on."

Patrick O'Shaughnessy 26:20 Subservient to the poster class evidenced how? Why do you say they're subservient to the posters?

Guest 26:26 I was at this thing a while ago, and it was a bunch of billionaire investors, and they were all fighting over who could sit next to Tyler Cowen because he's the most interesting person there.

Patrick O'Shaughnessy 26:37 Yeah. Every room has a boss.

Guest 26:38 Every room has a boss.

Patrick O'Shaughnessy 26:39 You don't know who it is. [laughs]

Guest 26:40 Yeah, exactly. And I think, um, I think there's, there's very much something to that. It's sort of that simple. And, uh, there's sort of this line of subservience.

Patrick O'Shaughnessy 26:49 There's also this interesting point about it's just scarcity, like always, and the billionaire inflation thing is the seed of their demise, that if there's so many billionaires, if, you know, Grant Cardone is a billionaire and so is Elon Musk or something [laughs] , it just makes it so stupid. And so we either need a new class at the top, and it's not deco or centibillionaire. Like that doesn't... Who cares? It's, it's like something else that distinguishes... We need to like reclassify the top 100 or something [laughs] , robber barons. But yeah, it, it, it just seems like there's too many of them, so no one c- so I don't care anymore. And it's, it seems much easier to get a billion dollars than it does to gain the real estate in people's minds or on the timeline that like the top couple of posters can do.

Guest 27:35 If I could just have it by decree, it would be who is a liquid inflation adjusted billionaire? I think that number is probably hasn't changed a whole lot. But again, I think if... I, I always find it so useful to take this sort of like retrospective, uh, historic frame. Net worth is like this new idea. It's like a really new idea. If you read like Pride and Prejudice, Mr. Darcy, like wh- you know, they're talking about how wealthy all the men are. Mr. Darcy is discussed as getting £10,000 a year from his estate. That's his wealth. It's his cash flow. And it's funny, like no one... It's... There, there's not like a scene-

Patrick O'Shaughnessy 28:05 No one did a DCF for Mr. Darcy. [laughs]

Guest 28:06 Yeah. There's, there's not, there's not like a scene in Pride and Prejudice where they're like, "Does he have a lot of margin loan against his estate?" And there's also not this idea of, well, okay, his estate's worth, you know, whatever, 200,000, because he would never sell his estate. It's like, why would you... Y- it, it, it's not viewed as his assets. So it's just like wholly conceptual just points on a leaderboard, like truly, 'cause you can't spend it. I really think it's kinda crass to say, but billionaire is like a state of mind. Between like private markets and, uh, net worth as a concept-

Patrick O'Shaughnessy 28:35 Yeah

Guest 28:36 ... uh, and then inflation, billionaire is now sort of like something you can just be dubbed. I think you'll come to see billionaire as sort of this like sort of political label that's only tangentially related. I mean, you see this on the timeline a lot, which is people get referred to as billionaire who are, you know, not rich at all, but they sort of have these traits and associations. And so I think this term... Similar to millionaire, right? Like m- millionaire-

Patrick O'Shaughnessy 29:03 No one says that anymore.

Guest 29:04 Yeah. And it used to be, um... It used to sort of carry the same weight as billionaire, but now millionaire is sort of just this like... It's a, it's... Yeah, it's a, it's both irrelevant, but it also like... What it... When you say someone's a millionaire, you're sort of just saying they're like a, you know, whatever, upper middle class, well-to-do person with a house.

Patrick O'Shaughnessy 29:23 Yeah.

Guest 29:24 But it doesn't matter if they have $5 million or $800,000. It's like this looser class thing as maybe the currency gets devalued both in terms of in, in the literal sense, and also in the sort of what you can do with it sense. I mean, time is fixed, right? And so then the new scarcity is just like attention you can draw on the, on the screen.

Patrick O'Shaughnessy 29:42 If you think about the most interesting posters today, I'm not asking you to endorse them one way or the other, but just the people that you think are the most interesting-

Guest 29:50 Yeah

Patrick O'Shaughnessy 29:51 ... who, who comes to mind?

Guest 29:52 The distinction to draw is there are, um, there are the, the people that I wanna get tweet notifications for because I actually think each one of their posts is really good, and that's like a vanishingly small number. And then there are good posters who have really made something of themselves because of their prolificness. I mean, the, the, the, the other sort of problem with posting is like it still does reward prolificness, which I am still sternly against. I always think Twitter should be dictated by followers divided by posts, but that's not how it works. It just rewards pro- prolificness. I think there's this idea that like the most important media property won't be watched, the most important author isn't read, the most important philosopher is not understood, the, the most important stock has no fundamentals.

Patrick O'Shaughnessy 30:33 [laughs]

Guest 30:33 Like everything... I think like in a world of fiat currency- Everything sort of becomes this, like, weird fiat thing. Certainly, it's true about philosophers, authors. Like, does anyone really read the books these authors write? I don't think so. I think a small amount of tastemakers read the books, and then other people look at books as idols, and if they're, like, sort of blessed by the right people, then there's sort of this, like, memetic, um, celebration of the thing. And even podcasts, like you said, right? Like, clips do a lot better than the podcast episode. Like, I, I, I think, I pride myself, like, I can tell if a podcast or a blog essay or a book or something is good or not without having read it just by, like, sort of triangulating it. Like, I, I know which one of your episodes do well without listening to them because I can

Guest 31:19 sort of, like, feel from the reception. And, and, like, to some extent, that is the thing. Like, you can imagine a world where there's a few clips from a podcast, but no one ever listens to the podcast, but, like, I don't actually think that would diminish the value of the property.

Patrick O'Shaughnessy 31:32 It's like everything is being, um, processed and packaged for, uh, catching attention, but taking the least amount of that person's time. [chuckles]

Guest 31:42 Yeah.

Patrick O'Shaughnessy 31:43 I heard this interesting story about a publication that has X millions of followers or whatever, readers, however they describe it, and the person behind it told me, like, something like 95% of the readers are people that scroll through, like, the quote highlights on Instagram or something. And whatever, they're still a reader, and [laughs] it's just fascinating. It, it's, to me, it's all quite depressing that we're all... the world of posters and content has reoriented around this, this monolithic timeline, and they're all just feeding it what it wants. But that's the game you sort of have to play. And I'm curious, I know you went, I don't know, six months or something completely off of it, like you just, you just disappeared. What was that like? And is that a, a path that you would encourage people to give a try, opting out?

Guest 32:27 I think my takeaway from that would simply be that one should not fool themselves that they are looking for anything other than entertainment in all the media that they consume, because it is produced to be entertaining, it's selected to be entertaining, it's edited to be entertaining. The job to be done of what is on the screen is to entertain you. And so I think that is the big lesson, which is like, look, like, I'm not gonna tell people how much entertainment they should have in their life, but that is what it is fundamentally. Rolex or Nike can convince you that their thing is an investment or an asset versus a liability, and so then you'll spend way more money on it. Podcasts and posts and essays can convince you that what you're reading is useful for you and, like, productive and, and, and anything other than watching TV all day. Whether I want to spend an hour a day on the timeline or eight hours a day on the timeline is just about, like, how much do I want to be entertained? And, you know, any- anything else that I would say about it I think is, is, is fairly, fairly milk toast in the sense that, like, yeah, it doesn't-- you don't really miss anything, uh, if you're, like, a relative-- if you're not [laughs] a complete hermit. Like, you hear about what's important and it gets filtered through you. Probably the most, like, enlightened way to, uh, consume this media is to not read it yourself and just sort of get the filtered takes from people around you at dinners and lunches and stuff, and you just sort of let them, you know, first of all expose themselves to the radiation and then, like, kinda come back and tell you what's, what's interesting or not on there.

Patrick O'Shaughnessy 33:57 Our friend Jesse thinks about it this way, who, he refuses any algorithm in his life, and we were like, "Well, how do you know it's including news?" Which is just an algorithm. It's like, how do you know what's going on? He said, "Well, people tell you." [laughs]

Guest 34:08 Yeah. That would be my takeaway. The freedom versus impact question-

Patrick O'Shaughnessy 34:14 Do you believe that tradeoff's real?

Guest 34:15 I think it's real. One of the questions I'm interested in is there seems to be... I'm, I'm always interested in this in, in various classes of, classes of guys, archetypes, genres, whatever, and, um, there seems to have been this type of person that's largely gone extinct, which is... And again, I, I, unfortunately, I think this is probably all just explained away by technology, which is sort of a boring, but maybe accurate explanation. But, like, the Theodore Roosevelts or the Andrew Carnegies of the world who are able to, uh, spend a lot of their time in leisure, a lot of time away from their business. And, um, you know, what's so interesting, like, for Car- Carnegie, for example, is, you know, he, he, he's arg- arguably still the richest person or very close to the richest person, uh, that's ever lived. But I'm fascinated by this idea of, like, is that necessarily true? Like, does the idea that you have to be working, you know, 22 hours a day to get these sort of world-changing outcomes, is that necessarily true? Like, I, I, I think it's interesting of, like, a L- I think Larry Ellison is, like, the contemporary figure who sort of bucks this trend and, you know, he, he, he claims to have started Oracle very much with the intention of being able to disappear for two weeks to sail or whatever and still by all accounts sort of like drops in and drops out, and can you still be a player and not be, like, jacked in 24/7? It's unfathomable that the President of the United States could be off the grid for a month. But is that true in business? I don't know. Is, is, is a lot of hard work performative? Maybe. I- in the case of Carnegie, it's interesting because he was self-conscious his whole life about joining this sort of society, maybe at the posters of his day. Like, he, he, he knew that for him money wasn't gonna be enough and he wanted to be accepted into society and be well-read and be a man of letters and, and do writing and stuff, and, you know, in that sense, like, there's nothing new under the sun. You know, the... I, I, I firmly believe this to be true that, like, the, the, the end state, uh, is just posting. Like, the amount of billionaires and founders

Guest 36:14 who turn to Twitter after they accrue their wealth or start a podcast or start a-

Patrick O'Shaughnessy 36:18 Or buy a media business

Guest 36:19 ... start a, yeah, start a YouTube channel.

Patrick O'Shaughnessy 36:20 Start a film company. [laughs]

Guest 36:22 Yeah. It's just like, it, it sort of is the end state, and I think, um, you know, the one way that you could look at that is just that, uh, once you accrue, uh, wealth, you want to accrue fame. The other way of looking at it would be that, a- again, like, wealth is less valuable and you actually realize that the scarce asset is attention and influence and so, you know, you're almost hedging against the sort of, you know, rapidly devaluing- Uh, nature of your money and then trying to switch to what is actually scarce.

Patrick O'Shaughnessy 36:49 I, I find it very interesting that call it the seven or eight people that you and I are n-know that we're most interested in are not posters. They're sort of some interesting opposite and, um, like they've resisted the temptation or something like that, and that, that makes me wonder if it's almost like a trap. Um, but it's such an interesting concept that hard work is performative is the, is the phrase you used. It actually makes me wonder, the hard work being performative thing, how you're thinking about this AI and job displacement question, which you and I have talked about, a bunch about, I'm, I'm super personally interested in. It seems to be the, like, the issue around which people are rallying for the anti-AI fears is that it's gonna destroy jobs in a way that prior technology changes didn't because it's, it's so ubiquitous, it's intelligence, and it's moving so fast that even if you compare it to prior tech changes which all displaced jobs or changed jobs or whatever, it happened more slowly, and that's why this one's so scary. But it, it gets at questions about what is work really in the modern sense, especially white collar work. I'm curious what you think is gonna-- how you're thinking about, like, AI and, and job displacement.

Guest 38:01 The short to medium term prognosis is, is hard to speculate on, um, and could very well be bad. Uh, you know, a friend of mine told me that, um, you know, he, he, he has kids in college and he has a ten-year-old, and he's very worried about the kids in college, but not the ten-year-old, and I think that is directionally correct. Um, so from, you know, maybe from the ten-year-old's perspective, look, I think it's great. I think first of all, anything that can be automated should be automated. I think it's really hard to argue against that, uh, when you, when you really, really think about it. Um, and so, you know, the, the, the, the notion to me that, uh, I might, I might be in the last years of my life where I ever have to sit down in front of a computer and like do things with it is like tremendously liberating. I don't really understand this idea of, like, we're at peak jobs or we're gonna run out of jobs. To me, it's like very obvious that every, certainly every white collar job is like totally fake and made up in the sense that, like, these are not contingent for largely, you know, obviously there's exceptions to this, but they are not contingent for shelter and food and, uh, medicine and other necessities. Like, I'm not talking about those. But most jobs do not touch those, or if they do, they touch it in a very, very derivative way. Um, and so, you know, most jobs like, like you know, w-what is your job as an allocator? It's like, well, because capital is inherently inflationary, you have to-- you can't just leave it alone. Like, this is one of, like, the great sort of, um, I don't know, uh, maybe evils of money is that, like, once you get it, you can't just leave it alone 'cause then it goes away.

Patrick O'Shaughnessy 39:48 [laughs]

Guest 39:48 And so you have to do something with it, and this, like, creates this entire whole thing. And so, like, my job is, like, when you have money and you don't want it to go away, you have to give it to someone, and so you, you give it to a bunch of people, and then I take it and I put it into things that are productive, and then hopefully you don't lose your money, you get more money. And like, is this useful? Is this good? Yeah. Sure. But, like, it's not real, and it's, like, fun and useful, but not in a direct way. Um, and to me, there's, like, unlimited amounts of jobs that you can create in those sorts of scenarios. We're gonna have unlimited wants and desires and, and, and our economy is solely driven by our, like, unquenchable desire to consume things. And so we're gonna come up with new things to, to consume. And now again, in the short term and medium term, that might be volatile and there might be a lot of job loss, et cetera, and, you know, that's not good and, uh, you know, there could be a lot of despair. But in, in, in the long run, like, we're just gonna invent new things to do. Like, we've already solved all of our problems, um, you know. Uh, and, and so it-- to me, like, the worry about, oh, we're not gonna have more jobs, um, it just doesn't really resonate 'cause I feel like we just make up stuff for us to do, and that's sort of the whole point of it. Um, and that's good. Like, you know, it's better than being, uh, being idle. Uh, and, and maybe, maybe more people should be idle. Um, uh, but I think, like, there's all sorts of ways that this, like, shows through the cracks, right? Which is, like, um, you know, the, the, the work from home thing I think is, like, a, a, a strong indication of, well, actually, like, most people don't have forty hours of work to be done. Like, they, they maybe have forty hours of, like, meetings to sit in or they have forty hours that they have to be, uh, on standby. But, you know, I think the reason work from home, I think wouldn't be that important if you-- Like, let's imagine a version where you work on a factory line and you can set up the, a microcosm of the factory in your backyard, but you still gotta be on the line ten hours a day. Um, yeah, I guess work from home, like, maybe you can g-have lunch at home and your commute, you don't have a commute anymore, and that's-- but it's not like this huge improvement. The people, the reason people are so attached to work from home is 'cause they actually have, like, two or three hours of work to do per day. And so work from home Fridays is like a s- is a soft launch of the four hour, four-day work week. And I think this is all fine. Like, to me, the fact that we can continue paying people to work from home or do four days a week or whatever is just a sign that, like, actually we need less time, less labor time out of people than we used to, and we're still able to be just as productive.

Patrick O'Shaughnessy 42:17 Some of these jobs maybe are made up and actually people will be happier not ushering bits from one place to another on a screen or something. I'm curious how you think about searching for one's vocation.

Guest 42:32 It, it-

Patrick O'Shaughnessy 42:33 You texted me one time something that stuck in my head, which is that we all have some sort of moral duty to steward our gifts, and that if you think about, if you agree that that's true, curious for you to expound on that

42:48 But that, that then reframes success and failure in a cool way that maybe cuts through this, you know, priestly class thing of like looking to others to tell us what to do versus looking internally. Can you expand on that?

Guest 43:01 I think there's something, um, even just aesthetically bad about waste, and I think, uh, the, the, one of the worst things that you can waste is your gifts, your, um, skills, attributes, things that you're uniquely good at, things that you can do for others that you might be able to do that others can't. For me, one of the great challenges has been trying to understand how to best use those skills. First of all, figure out what they are, which is easier said than done.

Patrick O'Shaughnessy 43:30 Mm-hmm.

Guest 43:30 And then figure out

Guest 43:31 how you can use them. You know, there's kinda two modes, I guess. One is that you, uh, use them in a very pure and unadulterated way, and you don't try to integrate, um, your work with your-- how you use your gifts, and this would be sort of, you know, the person who has a day job in order to support their, their craft or something.

Patrick O'Shaughnessy 43:56 Yes.

Guest 43:56 And then the other perhaps more ambitious version is trying to integrate, uh, commerce, uh, and their work with their gifts. And, you know, I think, um, this gets into the, like, should you pursue your passion thing and, and I think it's really difficult. But you said something to me which is, like, the thing that you are spending most of your time on really ought to, like, spark and utilize your sort of genius and gift. And if you're not doing that, like, it's obviously not the thing that you should be spending most of your time on. And so I think, like, you know, th-there's proxies for this, like f- are you having... I think people who are having, are having a lot of fun at their job are like it's a very strong indicator that you've combined the two well.

Patrick O'Shaughnessy 44:37 What do you think the future of finance looks like? In the '80s, and the last era was built by those people from KKR and mostly doing leverage buyouts.

Guest 44:44 Yeah.

Patrick O'Shaughnessy 44:44 Whereas that's-- those firms are obviously really important and really big, but they were started a long time ago, and in many cases, they're still run by people that, that were the founder or close to the founder, getting up there in age. What do you think the next wave of finance look like?

Guest 45:01 The founder's incredibly important and sort of the, um, the founding act is incredibly po- important in, uh, in any business or country or organization really. Um, and so I, I do think that it's notable that, like, the current paradigm in which we live, the largest and most important finance firms come out of a culture of leverage buyout, which first of all, it's a, it's a debt driven idea. It's financial engineering. It's, um, it's extractive insofar as the primary goal is to make a thing more profitable, and I'm not trying to disparage leverage buyouts. I don't think they're, like, as evil as people say. But the idea is, like, kind of the core idea behind it is, like, using debt and financial engineering to make a lot of money in a way that the quality of the business itself is maybe ancillary to, to, to the, to the core trade. Um, and those are the founding, you know, uh, the f- what the founders and the founding acts of these large firms today are. And so, you know, now that the Apollos and Blackstones and KKRs of the world, um, you know, I think in a lot of cases, the leverage buyout is a very small part of what they do today, but I do think it's still, like, in the core culture. And one thing that, you know, we've pondered about before is, like, what, what does the next twenty or thirty years look like when the, those firm- the, the, the largest financial firms in the world, their founding action was seed investing. It's equity driven. It's power law. It's hugely optimistic. It's largely qualitative. Um, you know, what is it-- what, what would a Blackstone and Apollo look like if that was the core seed at the, at the start of the, you know, the inception of the firm? Um, and I don't have a great answer. I just think that it is, like, it's notable, you know? In the same way that sort of equity financing is a far newer idea than debt financing and, um, you know, equity financing is obviously a far more optimistic idea. It's, um, it's uncapped to the upside. And so there's all these sort of philosophical ideas around equity versus debt, and debt is far more ancient.

Patrick O'Shaughnessy 47:14 Mm-hmm.

Guest 47:14 And, and, and, you know, debt obviously has a very controversial past about whether it's morally good at all. And, um, and so I, you know, I, I do think, like, there's this idea of, like, what if the crux of finance is with these kind of wildly optimistic people versus people who might be more conservative, more concerned about the downside, more concerned about... Maybe one way of looking at it is the shift from the quantitative to qualitative.

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49:22 What other differences are interesting to you between East Coast and West Coast finance? The people doing it, the optimism versus not pessimism, but realism or dollar orientation.

Guest 49:32 There's truth to the caricature, which is East Coast is, um, extractive, pessimistic, uh, downside-oriented. Um, West Coast is naive, stupid, uh, unsophisticated. Uh, you know, I think, like, th-that is true to some obvious extent. Um, and I think they're merging now. Uh, and I think, look, it's no coincidence that, uh, that the West Coast is definitely eating the East Coast. Venture capital has created the biggest businesses in the world, and private equity has not. Um, and where private equity has, it's largely been through, uh, through sort of acquisition and, again, financial engineering. And so it's sort of inarguable that venture capital is this sort of much better force for the world. It's, you know, it-it's this tiny little asset class that has produced all the most important things in the world. Um, it's also this sort of, uh, civilizational technology, which is you're willing to give young people millions of dollars to try a very speculative idea with, like, basically no retribution or downside if, if it doesn't work. Um, so it's clearly this amazing force. I think there's been a very interesting, like, flip in, uh, in compensation between East and West. When I was growing up, my understanding was that, uh, you know, Wall Street is where you would get paid huge amounts of cash on a yearly basis. Um, you would have no enduring equity value, but you would get paid a lot of liquid cash on a fairly regular basis. And the West Coast was this idea where you would, you know, be rich on paper, you would have, um, equity that would be this, maybe be this enormous payoff in some distant future. Um, and I think what's sort of interesting is, I-- you could argue, uh, and I would argue, that those have started to flip now, whereas, like, Wall Street, because all these businesses have gone public, uh, you know, on Wall Street, you're comped on RSUs, and you're, you're thinking like a firm, and you're, you know, maybe it's l- you're, you-- uh, especially at the top, the top end of the firm, you're, you're, you're less worried about the carry in any one fund, and you're more worried about the stock price and performance of the firm as a whole. And, and then on, and, uh, interestingly, in Silicon Valley, it's almost moved towards a, uh, like, an annual cash basis. But given how these markets, you know, companies staying private creates these sort of mature secondary markets, um, and there's these, you know, uh, that sort of de facto yearly tender is becoming almost a, almost a parallel liquid marketplace. And so you're actually paid huge amounts of cash in Silicon Valley, and I think we've seen that with, with certainly with the AI stuff and even, you know, venture capital firms getting acquired and GPs leaving their firms and, and all that sort of stuff where it actually is becoming more money-driven, more liquid, more, more... Well, maybe not more money-driven, but certainly more liquid, more mercenary. And I think, like, I'm always interested in these structural shifts and how that starts to change things where, um, you know, uh, the Valley is a place where you're liquid and you're getting cash out yearly and you're jumping from firm to firm and, uh, and, and Wall Street is a place where you have a bunch of RSUs and, and, uh, and, and you're sort of, you know, thinking more about the long term and, and the enterprise value of the firm.

Patrick O'Shaughnessy 52:34 If you add all this up, where are you looking for opportunity? Like, you, you have such an interesting mandate because y-you, you can kinda... You could do a venture style growth equity deal. You could do a special situations private equity style deal. You've historically, across your career, invested in dozens of s- effectively software companies. Um, you've, I think, so far wisely avoided companies that could get railroaded by cloud code or something like this. And, but nonetheless, like, I think you're still curious about where there might be value in software. How are you approaching, just as a pure investor, how are you approaching this very strange, high vol, high uncertainty landscape?

Guest 53:17 We've largely sat on the sidelines. Um, we're very fortunate to have such a, such a wide mandate in sort of what we can do and look at. Maybe the only consensus view is, like, the niche sort of apocalyptic vision at some of the core, the core zealots at the labs. Um, but outside of that, I think it's really sort of a jump ball. And so it's, it's hard to say. I think the one thing that maybe I could say in general is that markets lack a lot of nuance. I think, you know, SaaS is a business model. It's not, um... It's, it's literally just a business model of this idea that you pay usually per person, per month or per year for access to a tool

Guest 53:56 that helps you use your computer. Um, I think in that sense, SaaS is in a lot of trouble. Uh, but I don't think for a lot of these businesses that are, you know, being really sold off today out of fear that that is actually what is important to the business at all. It is actually interesting to me. I w- wrote a post recently about the idea that, like, um, a public manager being long, uh, the Mag Seven is, you know, uh, without taking a specific view on the trade, is probably, like, good capital allocation, 'cause sometimes you just gotta do the really obvious thing and just follow consensus, 'cause consensus is, you know, usually right. Um, and you know, one of the pushbacks that I got to that is, well, these things, you know, they're the biggest companies in the world, they're priced to perfection. But, like, I, I think it's underrated the fact that the fifty-two week variance on these things is, like, nearly a hundred percent for the biggest companies in the world, and so they're not priced well at all, and the market lacks extreme nuance. I think it goes back to what we were talking about, which is, you know, probably someone smarter than me could, could draw out a much clearer picture, but there's something to do with Paths of flows and the marginal price for security and what's informing the marginal price for security is, is-

Patrick O'Shaughnessy 55:05 Posts

Guest 55:05 ... the posts in the group chats that the random people are writing that the algorithm's chosen. I mean, in this way, I've actually never thought of it before, but like in this way, the algorithm, the AI, frankly, 'cause that's what my understanding is, that's what's driving, um, most of the algorithms, uh, now on Twitter and Fa- uh... YouTube and stuff, is pricing the market in some very real sense 'cause it's choosing the narrative that it wants to show to people, and then those people are pricing off that. And so, you know, I, I just think it, it's another lesson which is like markets are not efficient. There's no nuance. Um, so you know, uh, that would be the big thing that we're seeing today. I think, I think there's a lot of delusion either direction. The most honest thing for a lot of managers to do would be to sit it out, but they're structurally unable or unwilling to do that. And so you just sort of, you know, hope for the best and put capital out the door, and it's sort of a problem for tomorrow. Um, and so I think a lot of things are still getting priced irrationally in the private market in ways that are, um, totally unrelated to the quality of the business, but are more of a function of just the, the, the incentive structure of the funds.

Patrick O'Shaughnessy 56:07 You mentioned the SaaS is just a model, and there's all... There's good and there's bad. What do you think about this trend of super CapEx heavy, uh, token heavy, real world asset? Like, there's this new genre of company that seems to have emerged as really dominant. I was looking the other day. I was curious in our portfolio what percent was not pure bits, and it's like sixty something percent is, is not just software by mar- you know, ba- based on the market value of our investments. I was surprised by that. Like, it's a really high percentage, whereas VCs have mostly historically been like all software for the last ten or fifteen years. What do you make of this class of... This trend, this class of business, lower gross margins, you know, things like this?

Guest 56:49 One way that you can look at this, um, is, you know, we were really in the late innings in, let's call it twenty sixteen, twenty seventeen on, of, okay, returns in venture capital have been very high. And so, and now we've seen, whatever, twenty years of venture returns being very good. And so logically, capital is gonna flow into the asset class. The problem is that the venture market is largely constrained in that the amount of, uh, great businesses that are started is relatively fixed. Probably, I believe, downstream of, um, of how many great founders there are. I think there's just a finite amount. More and more capital flows into venture. There's basically a finite amount of companies, so you have to put more money into the same amount of companies. And, um, this was becoming a real problem, uh, uh, right before AI and COVID, which was that there's only so much money that you can cram into a B2B software business, and especially when annoyingly the companies are getting, um, cheaper and cheaper to start. And so, you know, functionally, [chuckles] what you saw and, and what you still see to some extent, but, but what you really saw was that all this capital was just flowing to landowners and to, uh, compensation packages, basically. Um, and so it was like this real problem, which is that like, you know, capital hates getting blocked. It's like water. It wants to find the most efficient path, and it was getting blocked because it wanted to flow into venture because there was backward-looking higher returns. But, like, it was just constrained. You can only cram so much money into these companies and, you know, it was, it was a lot of what inspired me to start my fund was seeing this problem, which was just that, like, the amount of money these companies are raising is unrelated to the amount of money they need. And then, you know, almost as if like, uh, you know, deus ex machina, uh, all of a sudden there was two great categories that could just soak up this capital. And, and I, and I really do believe in some sense that the, like, businesses and assets are sponges for capital and that the excess, if the... You know, in an era of, uh, back then we had negative interest rates and stuff, the capital has to go somewhere, and if it has nowhere to go, it will create somewhere for it to go. And I think that there's a very sort of, um, fortuitous, uh, arising of these high CapEx businesses of, of AI, the ultimate high CapEx project, and, uh, obviously all the hardware stuff. Um, and so I think in some sense, like you could say that the capital markets were desperately looking for a place to go to, to, to, to put the capital, and there was no place. And so these companies almost got created downstream of capital, which I think is a little bit different of the narrative than, than, than most people would, would look at. So that's sort of the philosophical view. The economic view, I think part of the reason SaaS is getting punished so much today in the market is because it was this idea of you're selling a copy of a string fundamentally. That's what a software product is, and the marginal copy of a string is very close to zero. And so, um, with zero marginal cost, the thing that you're selling, uh, should be highly profitable. The vision of that was that you will have high upfront costs, and then you will have, um, very high gross margins and hopefully one day very high net margins. Although the net margins seem to never sort of materialize until private equity gets their hands on things, um, and sort of forces [chuckles] the net margin out. That era is largely just a downstream coincidence of this like selling strings. And now I think, uh, we're in an era where we're selling compute. And selling compute, uh, you can't, you can't write the prompt once and then sell copies of the output. Um, you have to do the compute every single time, and so the marginal cost obviously is not zero. And I think this is like a fundamental huge change to the software business. And I think it means that this era of high gross margins being the norm is just gonna go away, and what's gonna make up for it, I think, is, um, lower gross margins, much thinner net margins, and just much more scale. And I think that's sort of what you're seeing, which is that the capital is flowing to the, the top end provider of the scale. I think, you know, it would've been unthinkable that we talk about companies in three to four trillion dollar market caps ten years ago. Part of... A big part of that is inflation, I believe. Um, but you know, uh, another part of that is just the scale dynamic, which I think it's uncontroversial to say we're gonna have ten trillion dollar companies and so on and so forth. So there's just gonna be... Because margins are gonna drop, you're just gonna... All the returns are gonna accrue to scale because obviously low margin, low scale is not a very good business. Um, and so there maybe it's a bit of a, it's a bit crudely a bit of a Walmart effect in software, which is that, uh, you know, I think the future looks like low gross margins- Razor-thin net margins, huge scale, and this is probably a problem for the sort of, um, you know, if the SaaS provider is the mom-and-pop shop, like Walmart's coming to town.

Patrick O'Shaughnessy 1:01:36 You have this funny view that, uh, the whole myth of how difficult it is to beat the market, so to sp- whatever, however you wanna define the market, uh, is wrong. I'm, I'm curious for you to expound on that. Like, that, that, that seems to be have become kind of post-Jack Bogle one of the deeply held truths of the market is that it's extraordinarily difficult to beat the market, so you shouldn't even try. You should just opt out of the, opt out of the battle. I think you have a very different view on this.

Guest 1:02:02 Yeah, I would take, I, uh, I would take two different kind of cuts at this. Um, one would be that I think Buffett and Munger were my kind of main teachers on investing. Buffett says that he, he wants his estate outside of Berkshire to be put in the S&P. That's his advice to the general public. And so I think people take that to say that Buffett's saying you can't beat the market. I don't think that's what he's saying. I think he is saying, for the average person, you shouldn't try and beat the market. Implicit in that statement is leaving out any sort of active investor. Maybe the anecdotal side would be Buffett saying, you know, "You should put all your money into the S&P. That's the most rational thing you should do." On the other side is the sort of empirical argument, which is, look, most professionals don't even beat the market after fees. Uh, and this is sort of this great... This is this one-two punch of, um, you know, the godfather of investing says, uh, "Don't try," and then the f- the seemingly the smartest people, the most, with the best incentives in the world can't do it. And then the other thing is I just think that, um, I think, I think for a professional money manager, uh, th- and this is sort of the paradox with the Buffett thing, is that for a professional money manager, it is really hard to beat the market because you have all these other factors, um, that the average person doesn't have, and this is sorta like the Peter Lynch argument. Uh, I increasingly think Peter Lynch was just, like, kind of a genius about this, um,

Guest 1:03:22 uh, which is that like, yeah, when you're a professional manager, uh, by and large, you have all these mandates, you're running a business, you have customers that you need to keep happy. And so I just think it's more difficult for the professional money manager to beat the market than, like, the average amateur. How many people do you know who, like, bought Bitcoin and, and, and did really well or bought T- they bought a Tesla, and then they bought the Tesla stock, or they bought a Apple computer, and they bought the Apple stock? And you can't run a hedge fund that way, but they've outperformed, um, you know, just doing that. And so I think there's a little bit of this, like, weird thing where in isolation, none of the advice is wrong, but, like, it's not as difficult as people think to, to, I think, outperform, um, or do better than the average. Uh, and, and there's this notion that gets caught up in all sorts of other things that I think sort of sullies that view.

Patrick O'Shaughnessy 1:04:09 I wanted to ask of th- a LPs perspective and, like, what, basically, like, what you would do if you were an LP, what you'd be looking for.

Guest 1:04:16 I get asked a lot, um, by LPs where they should put their money or, like, what managers are good, or should they invest in this fund. And, uh, one thing that struck me is, like, I, I think you have to take a somewhat cynical view of these things as... And, and maybe it's not actually cynical, just maybe the more realist view of these are businesses first and, and, you know, their product is returns, but, like, they're a business. And so you have to recognize what sort of customer you are. Like, the, you know, the question of, where should I put my 500 grand check? You probably shouldn't put it into, like, you know, marginal $5 billion growth fund, but I actually get asked that a lot. Like, should I put some, you know, $1 or $2 million into this fund? And the answer there is like, well, you know, it's probably gonna be a good fund, but, like, y- could you find something much better to do with that million dollars? Probably. Um, and it sounds obvious, but, like, in, in reality, i- it's, it's not. And I think what people don't understand is that basically, if you're a principal, let's say if you're a principal that can't write, like, sovereign or institution-sized checks, you're a totally different customer, and the businesses are not designed to serve you as a customer. Like, the growth fund is probably a great place if you have to park $100 million somewhere. It's probably a very, very good place, but it's not a good place to park, like, a 500 grand check. If your business is set up to service sovereigns and, and large endowments and stuff, you just like, y- your product is just so different from what you're gonna serve for someone smaller. And I... This gets into the, like, well, okay, if you have a small check, what do you do? And I think this is where the emerging manager stuff is really underrated, um, uh, and, and looking for, you know, looking, basically looking for places where the manager is actually most tightly aligned to returns, either because returns are critical to future funds, or that's actually how they're gonna make all their money.

Patrick O'Shaughnessy 1:06:07 Are there features of the m- emerging manager's situation that you find interesting or attractive one way or the other?

Guest 1:06:15 It's probably similar to how I look at everything, but I think, uh, you know, especially for an emerging manager, when you're truly just sort of underwriting the person, I think people still fail. They probably overweight the, uh, in my view, they, they overweight the investing thesis and track record and stuff and underweight just the, like, facts about the person, you know. I think you and I are both big believers in the idea of, like, how you do one thing is how you do everything. And so, um, I think the more that you can probe, you know, like, uh-i-I think, like, the personal financial situation of a manager is an incredibly underrated thing to ask about, right? Like, um, if you have a couple hundred million dollars in the bank account, in your bank account, and you're raising a $30 million, uh, fund, that's very different than someone who has a million dollars in the bank who's raising $100 million to go, you know, do a thing that they're trying to make, make the most money from. There's, like, two very different places to start from underwriting. One sort of, like, notion I have about this is whether, whether someone is looking up or looking down at something, and the idea is sort of like You know, you take the same... Again, take the same, let's say, two $50 million funds. One is from someone who has 500 grand in the bank, and one is from someone who has $500 million in the bank. Those are just, like, obviously gonna be treated very, very differently. For the latter, for, for the $500 million person, the $50 million fund is gonna be like this, like-

Patrick O'Shaughnessy 1:07:39 Play thing

Guest 1:07:39 ... play thing, yeah. And, and again, like, toy isn't meant to be pejorative. Like, the toy might very, might very well do better because it's held with a looser grip. It's less on the line. You're, you're gonna be less paralyzed by the sheer, like, quantities of dollars. I feel like that that is generally not, not super, super recognized. And, um, and you see it all the time, like in new ventures. If you're helming something that is, you know, let's say two or three zeros more than you have, there's just a sort of like monumental-ness to it that is a bit intimidating. And, and, you know, you can scale this all the way up. Be the, someone who's worth 100 million with a $10 billion fund. Like, it's just a big sort of scary thing. And I don't care who you are, when you're taking, when you're taking bets that are, you know, an order of magnitude larger than, uh, the, any amount of money you've ever had, there's just a psychological factor there versus when you're taking bets, um, that is, you know, uh, that, that are maybe sort of negligible to you. And I think this also gets back to the, like, part of the reason I think it's easier for people to outperform individuals is, like, it's easy to, you know, sort of take a flyer on a stock with a, you know, very marginal fraction of your net worth that you don't feel you need to explain and isn't, you're not gonna be judged on later than it is to do with maybe a, a dollar amount that's more money than you have, and it, you know, gonna affect your track record and you're gonna have to explain it, and all these other factors that are not related to, like, do you think this is a good investment or not?

Patrick O'Shaughnessy 1:09:03 Hmm. You and me are always so interested in the sort of what I would call the underbelly of finance, and you have this funny idea around, uh, the, the sort of feudal-like system that is emerging in the world of SPVs and the big private companies. Can you share that idea? [laughs]

Guest 1:09:15 There is this funny notion. I mean, it, it's sort of specific to the labs, but it, it's a, it's a broader, a broader thing as well, I suppose. We're sort of recreating the feudal system from fresh principles where there are the lords, um, Elon, uh, Zuckerberg, Dario, Sam, and they're sort of... They can sort of make landed gentry by giving out allocations because these allocations are sort of these, sort of like the best, uh, gener- uh, best example of generational wealth. You know, you sort of, you get this allocation in SpaceX or in Waymo or whatever and, uh, you get to charge huge fees on it, and it's sort of this, like, wholly synthetic product, which is someone gives you a sort of arbitrary number. Um, again, like they know you don't have the money, so they know you're gonna go fill it. And then you get to go out and basically say, "I've been given, like, a deed on, on, on... " Literally, like, the king has given me 500 acres on, on, on, in his country, and, you know, Elon has given me $100 million to allocate in SpaceX. Then you get to go out and charge fees and make a bunch of money from it, and there's this sort of this thing of, like, do you have allocation? And I guess I'm interested in it because it's sort of this, like, purely relational, wholly synthetic thing that I'm not sure has ever existed before or, or at least certainly not at the scale and magnitude, where, like, you can go due to your relationship, basically get this, like, landed estate and then take it to a sovereign or a foundation and they will pay you for that acc- Like, a pure sort of, um, paid-for access. But maybe where it's different is, like, you know, you could say that's just brokering, but the difference is obviously that, you know, brokering is sort of like a one-time transaction, but these allocations sort of, you know, they live on forever.

Patrick O'Shaughnessy 1:10:48 What's the most egregious fee setup you've seen in one of these?

Guest 1:10:51 No GP commit, 10% one-time upfront fee with some carry structure generally, where you're just, like, demanding basically that you get paid, like, life-changing amounts of money with zero risk, and then you also get a huge amount of upside. The other thing is, like, they often don't have, um... I've seen a few that have, don't have a term limit. I know there was, like, famously some, a lot of SpaceX ones. I think people were doing that 10 years ago. And, uh, I know there's certainly some, some that just have just collect the fee forever. But I mean, to capital's credit, you're very happy to be paying that 2% on the SpaceX thing that you did 15 years ago. Um, uh, and so it's sort of a win-win. It's not to say these are all bad. It's just, it's sort of funny 'cause it's not investing. It's not strictly brokering. It's this very, like, different thing that is, like, a wholly insider access game. Then of course all, there's, there's all the fraud and bad behavior that I think comes with all the bubble and stuff.

Patrick O'Shaughnessy 1:11:44 How do you think about your own productivity, for lack of a better word? We talked before about how content is really just entertainment, not learning. We shouldn't kid ourselves about that, so therefore it is largely unproductive, which is fine. It's entertainment. How do you think about, to the extent you care, about yourself personally being a lot more [laughs] productive with all this insane tool?

Guest 1:12:10 I certainly care about productivity. For me, by far the most generative thing is, are, are conversations, which I guess are downstream of relationships. And so I don't feel... I think part of the reason my book reading has gone down is [laughs] I'm friends with a lot of people who read a lot of books. Uh, and so I, I think, like, if I could only keep one thing, it would be conversations with people that I find interesting. And, um, but I also think, like, I'm uniquely tolerant of, uh, sort of distasteful and weird people. Like, I do think part of the reason... I get asked a fair amount, like, "What's your media diet?" And conversations are my answer, and I, it always feels like the answer sort of falls flat with people, and I think it's because they're not friends with, like, weirdos. Like, I, like, a lot of my friends I think are sort of, um, people would largely, like, find strange at best, distasteful at worst. If I can't predict what the person's gonna say after knowing them for a while-

Patrick O'Shaughnessy 1:13:06 You like them a lot

Guest 1:13:06 ... I like them a lot, and that's obviously, like, a very high-variance thing. Old books are good. I've read a lot of old books in my life, but I think YouTube remains underrated. Like, there's a lot of really obscure things on YouTube. YouTube sort of remains the Library of Alexandria of, of our time, maybe of ever. But yeah, YouTube doesn't feel generative. I think the only thing that's generative is Conversations. And, you know, so far in early twenty twenty-six, I would say chatbots can lull you into feeling generative, but if I actually look at, like, the actions that I've taken... Like, you can feel really productive after, like, a good two-hour session on a chatbot, but I actually don't think they're that, ultimately that generative.

Patrick O'Shaughnessy 1:13:45 If you think about great investing ideas, what is the right balance between simplicity and complexity? If you think of, both in the ones that you've done yourself, but also studied.

Guest 1:13:57 I really do think people value complexity for the sake of complexity a lot. I think a lot of investors are in the, like, feel clever, look smart game more than the money game. And so, you know, personally, I think this has been a big area of, like, self-development for me, which is the clever thing is not always the thing that makes money, obviously. Um, and so I think, like, you either have to say, "I am looking for investment ideas that are so complex that no one is gonna do them," or it should actually be quite simple. I, I, I'm a bigger and bigger believer in the, in the simplicity, which is like you probably wanna be long Elon Musk, you know? Or like, like that level of idea, I actually think, like, the, the gift is being able to sell that idea. I think a lot of the investing media actually serves for the people who are really good to dress up those ideas in a way that makes them feel differentiated and smart enough to what is actually sort of just long Elon or long Bitcoin. I think of a guy that I know who exclusively does bankruptcies, and he makes a lot of money, but, like, that's very complex and very difficult, but, you know, it's a tremendous amount of work. It's grimy, it's difficult, it's, there's a lot of risk and, uh, uh, interpersonal stuff, and, and, like, that to me is, like, an example of getting paid for complexity. Whereas a good example of simplicity is, like, you should just buy, like, big companies when they're at their 200, 200-week moving average. And it, like, I love that idea 'cause it's just so simple. Um, but it's right. One story that I absolutely love, cutting through the mess and getting to, like, complete clarity on how to evaluate an investment, is from Richard Rainwater, which is, you know, um, he, the, there, there were these stories about him that he, you would basically come into his office with a yellow legal pad, uh, and you would write out your thesis on one page, and then you would tell him what percentage of your net worth you're gonna put in the deal, and based on your one-page thesis and the percentage of the net worth that was gonna put in, he would say yes or no. And I think that's genius. Like, I, I really, um, now people don't do that because, uh, that's really hard. It makes things way harder. First of all, it's hard to m- write a compelling thesis in a page. Much easier to do it in a 400-page slide deck. And second of all, no one wants to say, "Well, I'm only putting 3% of my net worth in this," you know? Uh, and to me, that's one of the most simple, clear examples of really cutting to, "Is this a good investment or not?" that I've ever heard.

Patrick O'Shaughnessy 1:16:26 One of the, I think, natural points of leverage now is the ability to hire extraordinarily well, which means two things: attract a- an amazing differentiated talent pool and then select from that group effectively.

Guest 1:16:40 Yeah.

Patrick O'Shaughnessy 1:16:41 That's something that you thought a ton about in building your business, and it seems like a skill that if you got good at it would be unbelievably valuable in this era specifically, where the returns to, like, outlier talent seem to be going up and up and up. What did you learn about the, the two stages of that process? Like, f- and, uh, I'm especially interested in attracting a unique pool of talent in the first place.

Guest 1:17:05 Maybe the most practical thing is, that I think is very low-hanging fruit, is just the, the job description. Um, I think job descriptions are one of these things where they are written for nobody to be, to be read by nobody, and they're sort of this, like, token document. Like, it, it, it's more about do- uh, uh, does the job description exist, uh, i- is more the question versus, like, what's written in the job description. And so I tried to write one that followed a very simple rule, which was A, uh, you know, I was gonna, obviously I was gonna post it on, on Twitter and LinkedIn, and so I think anything you post has to be a good standalone post. It, you know, it, the, um, it, it can't just, it, it can't be something that you... But it can't be something that you wouldn't share if you didn't know me. Um, uh, and so that's the first, and then the second, I think, was really that I think, I think what's so important in any sales pitch, which is what a job description should be, is, uh, to, disqualifying who you don't want. And the nice thing about a divisive statement is that, um, it, when it resonates, it deeply resonates with the person. And so I just try to think of, okay, like, what are all the traits that I would want someone

Guest 1:18:17 to have? And try and make them, again, to go back to the, like, uh, how you do one thing is how you do everything, that would make them the type of person that I was interested. Obviously, the skills and the experience was gonna be table stakes. I tried to write out, um, traits and ideas that would really be inspiring and for the right person be like, "Whoa," like, "this person really gets me, understands me," and would make people mad. One of the things that I posted, uh, the one that kind of was, was the funniest was, uh, or, or got the most reaction was, um, you're an ideological minority at a top 10 school. And what I love about that is that it's entirely open for interpretation. So, you know, um, uh, y- I, I would get people who would be, uh, many different things, right? Who would be angry that I only want a top 10 school. The nice thing about a top 10 school is it's a fully ambiguous statement. And so, you know, what, what I love about it is, um, ooh, I love about it that, I mean, A, there's, there's some schools that I think uncontroversially are top 10, and so I used to get those people. Uh, but you can also just sort of assert that your school is a top 10, and I had a few people from schools that I would n- not say were anywhere close just sort of assert that, and I thought that was great. I had people select out because they were sort of like You know, "Oh, I don't know if my school is... I'm not gonna apply." That's great, 'cause I don't want those people. And then ideological minority w- was really interesting. I had a certain idea in mind, but people gave me all kinds of answers about ideological because, you know, I didn't necessarily political. There was all kind of answers around, um, you know, how that person stood out at the, at their school. And so I think, like, those statements are great because they're, like, highly ambiguous. They can be, um... There's a bit of a inherent test of confidence. And, uh, and then, you know, I, I would even get a few posts that were like, "Hey, you know, I, I think this is bullshit. You should hire me. I didn't go to a top 10 school. You're an idiot."

Patrick O'Shaughnessy 1:20:13 [laughs]

Guest 1:20:13 And I love that person too, right? And so, like, I think the more you can do statements like that where they, like, get this sort of reaction is great. Uh, and you sort of like do all... Like, imagine what you would have to do in an interview to, like, get at all of those various traits. Um, and so yeah, statements like that I think are, are very much underutilized in these job descriptions.

Patrick O'Shaughnessy 1:20:33 It's a cool idea baking the interview into the job post itself. It seems to me like an underrated area of inquiry today that I know you're interested in is the cultural and intellectual traditions behind major movements, and I think that that has certainly been true in this wave of technology, and it's not something I see talked about, written about very much. And I'd love you to just riff on your interpretation of the key, uh, sets of beliefs behind the people and the institutions that are ushering in the biggest wave of technology change that we've probably ever seen.

Guest 1:21:11 I'm interested in mispricings in qualities and attributes, uh, about things and people and places. I don't know if this has always been true, but it's true today. I think there's some, uh, qualities and attributes that are, you know, widely recognized and priced efficiently, let's say, um, height, IQ, resume, et cetera. And then there's other traits and characteristics that, um, we have just decided collectively not to price. For Silicon Valley, people sort of underrate the philosophers and thinkers and, um, sort of like memetic ideas that underpin the whole thing. I think there is a real philosophy that some sort of like neo-Buddhist utilitarianism, uh, that underlies the, like, technological developments in Silicon Valley, and it's interesting because you see it. Like, Will McCaslin, uh, gets involved with SBF and FTX. There's these sort of thinkers like Nick Land, um, that are... Their sort of ideas percolate underneath the surface in the Valley and are influential in everyone, but are not necessarily named. I mean, now they have been. Um, you could say the same thing about Curtis Yarvin. I th- thought it was remarkable for years how you could sort of hear Curtis' ideas coming out of the mouth of, uh, mouths of the, the big tech leaders without being named. There's things like leverage research and all these intellectual characters that I think... You know, in the same way that I think, um, uh, people's religious beliefs are generally underrated by secular people in terms of how important that is as a guiding light, I think, uh, in the Valley, in the development of these technologies, these sorts of cultural and philosophical ideas are underrated. Like the, you know, like it or not, the models are highly utilitarian. They have this weird mix of religious ideas from, from Judaism, from Buddhism, um, and this sort of like utilitarian bent that turns into effective altruism. And, and, you know, people sort of think like, "Okay, like, you know, this is just culture or whatever," but it, it, these things matter, and it just feels to me that this whole cultural epicenter has been highly underrated in general in informing, um, why these things get built and what the worldviews inherent in them are and what the, uh, inherent worldviews are in the people who build them. It almost feels to me that, um, that was Wall Street in the '80s was sort of vain, uh, almost pagan. The strong and the beautiful are what's most important. There's a hedonistic aspect to it. There's an openness that it's a little bit nihilist because it's all just about getting money. It's not the same notion, and I think at the crux of that is that technology views itself as totally self-righteous, which is that, like, the thing that they are building, it's not nakedly sin driven or driven out of a greed or ambition. It's driven out of this, you know, a nominally altruistic idea of, "No, we're building this thing, this product that the whole world uses. It's, it's positive sum." Um, which is true on the surface, but I do think that it's almost, it, it's almost pathological to the point where there's no recognition of all the other factors. It's, it's almost sort of shadow-esque. Um, and there's none of this notion of like, well, if you work in finance, you sort of need to try, you need to translate the gains from finance into something worthy, into, into art, into architecture, into philanthropy, into just culture in general, or into the place that you live. None of that exists because I think tech views itself as, you know, the, the ultimate philanthropy is, is the business that you're building. I don't think Silicon Valley today has the same sort of reflexive need to justify or document or even launder sort of what they're doing through, you know, through going to book parties and, and, and arts and, and all, all this sort of stuff. Um, and I think it's like this interesting, this interesting difference, and I, I wish that more people would, um, try and document this stuff because it's all there. All the crazy, all the sex, drugs, and rock and roll is there in its own sort of like nerdy, autistic way. And the culture, again, I think culture is just like vastly underrated, and, and religious beliefs, whether literally religious or sort of pseudo-religious, but, but, but filling that void.

Patrick O'Shaughnessy 1:25:21 As always when we talk, I wish we had three more hours. Thanks for doing this for me again. Thanks for your time.

Guest 1:25:26 Thanks for having me.

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