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Patrick, that's a test. You are CEO, Patrick.

Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open ended exploration of markets, ideas, methods, stories and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date. An investor field guide, dotcom.

Patrick O'Shaughnessy is the CEO of O'Shannassy Asset Management, all opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shannassy asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shannassy Asset Management may maintain positions in the securities discussed in this podcast.

I guess this week is onu. Hurry, Hurry. Onu is a partner at Y Combinator Continuity Fund, where she focuses on growth investing. Before we see, Onu was an investment partner at Andreessen Horowitz, where she worked with the portfolio companies, Airbnb, Insta Cart Medium and Udacity. In this conversation, we discuss growth stage businesses and their business models, how her background as an engineer impacts her investing style. The most interesting international markets for tech startups and how much opportunity there still is for investing in tech and e-commerce startups.

This conversation left me thinking about how much digital transformation there still is in front of us and excited for the opportunities ahead. Please enjoy this great conversation with Arehart.

So, Andrew, thank you so much for doing this with me, I thought an interesting place to begin would be with your framework for how you think about growth stage businesses through their business model rather than through their industry and why that lens is appropriate for investing.

First of all, thank you so much for having me, Patrick. I'm a huge fan of the podcast, specifically on business models. I, in fact, gave a presentation in Visi for the Visi Bache a couple of years ago, and we focused primarily on business models because when you break down tech startups, even by industry, certain business models really overlap. So let's start with what they are. So, for example, if you're looking at marketplaces, whether you're a B2B marketplace or a consumer marketplace at the highest level, you have gross merchandise volume, the dollar value of the transaction that's flowing through, you have a take rate that translates to net revenue and you have a bunch of costs associated with servicing that revenue, especially on variable costs.

And then you deduct that to get the contribution margin and then you have a bigger margin.

So the reason we focus on business models by function versus industry is that as tech is pervasive across industries and software is eating the world, you do see that whether it's a B2B or B2C, if your business model is marketplace, your metrics are similar. If your business model is advertising like LinkedIn has an advertising angle, but it's arguably on the B2B side where Facebook is on the consumer side of advertising. But advertising is a business model. You monetize in a similar way.

When we broke it down, I think there are about nine to 10 business models that really are the most common across tech businesses at growth stage investing, especially at this stage. We invest in B, the B or the C, we're sort of testing on, OK, if you have product market fit, which is C, you have if you're a consumer business, you hopefully have like a million plus users or at least a few hundred thousands. But what truly is your business model at scale?

What's going to drive your revenue? What are all the costs associated with the revenue and what is the scale efficiency or the leverage that you're going to get as you scale? And is that underlying business model solid? So that's what we are looking for in a business model.

You mentioned something before we hit record that I found totally fascinating, especially at the stage that you're starting to look at companies at this sort of B or C kind of growth stage, which I take to mean they've got a product that's working. There's less product risk than you might take. Earlier on, you mentioned one area specifically, which is food delivery and door dash, where I know you've been involved, but you've made a point which is interesting, which is the consensus is all of these markets are winner take all or most and that there's effectively a pie to go in.

And if you race to scale, which most growth companies are trying to do, you can have this outsized outcome. And I think you have a slightly different perspective on this winner take all or most idea. And I'd love you to explore that for us. Yeah.

So especially in Internet e-commerce businesses. And I think there was this very strong, prevalent trend that most businesses would be winner take most. So let's talk about food delivery in particular. So if you looked at food delivery a decade ago, in the most narrow sense, you think of it as how many people are ordering for delivery today and is that transitioning online? That may have been a small market, maybe 10, 15 billion. But if you look at the takeout market, it was a 70 billion dollar market.

Most of the takeout market was literally someone placing an order on the phone. Either you go pick up and that was the takeout market.

And then there was this whole restaurant market, which is like hundreds of billions of dollars with majority of restaurants not doing any delivery. So during the crisis, the very fascinating company is the 2012 Visi Company.

And one of the things that's very interesting being inside, Bisi, is we have this unique prevue into knowing what the company and the founders insights were from day one, because they have to apply. If you literally read this application from 2012, you know, they were actually called Palo Alto delivery dotcom. I think they still own the domain. If you actually type the domain, it takes it to code. And that's because also founders were from Stanford and their insight was, hey, I cannot order any food from any restaurant in Palo Alto.

No one delivers. Well, there was so much talk about GrubHub but GrubHub and Seamless. Even after their merger, more than 60 percent of the business came from two cities, Chicago and New York. They literally built this delivery business in Palo Alto because they were students at Stanford and they wanted the restaurants in Palo Alto to deliver food to them. And the order and their insight was two things. They said most people are going to choose cities because they think that's what people eat out.

But actually, customers in suburban areas really want delivery and access to delivery, but no one's doing it. So that was first insight, which was start with the suburbs, because maybe that attention will be better because there's not many people focusing on the suburbs. The second thing related, they found out, was a lot of the delivery drivers that were driving to restaurants in the suburbs. In how much work, because the delivery volume is low, are very few restaurants did it, and so they realized that he could record those delivery drivers and increase their average people because we could give them more deliveries or more others, we'll be able to retain and acquire drivers at a better rate than overcut.

And those two insights alone is really what helped us differentiate and scale.

So in 2016, I remember this very vividly because that's when Uber launched the Uber, such a big ride sharing business. And I think most investors thought that food deliveries, zero sum game and Uber is going to be the market leader in the US. Fast forward four years today, undoubtedly as the market leader and there's still room for two or three players. And so what was different? One, the insight they had, they started from the suburbs, the autobody was in suburbs are higher.

It's actually they are way more cost efficient to acquire that driver like 10 times better than what have I champion company does in terms of acquisition of driver. And you see that in their retention cohorts do. And then the other thing they focused on was Muchin strategy. I think from very early on Tony's insight was selection is the most important. 70 percent of customers are really standards for selection. They not only acquired a wide variety of merchandise, but also provided them with workflow integration tools in terms of when you get orders, how to queue up everybody, the ones that you get Drash with as other tools are through phone calls.

How do we help you with accounting? How do we help you with invoice processing? So that stickiness of the integration workflow plus the core merchant focus really help them speak on selection and the approach from surburban and then to cities, really help them tip. So fast forward today. I don't think there is any doubt that there's room for two or three players, but I think having that insight that it really helped.

So you can see that there's room for multiple market players. It doesn't mean you can have 10, but because there's still something called scale effects that you get and you have a fixed operating cost base to support significant scale, but there's definitely room for at least two to four per month.

Can you say a bit more about maybe this stick with the Doordarshan example I'm always interested in when there's sort of a marketplace like dynamic, you're effectively connecting supply and demand, how you decide as you build out the business who to focus on. I find that, of course, customers matter here and of course, the restaurants matter here. Any insights from watching a lot of marketplaces and maybe even Doordarshan specifically about how they choose to prioritize their different stakeholders?

I did this piece of work well at recent Horowitz on network effects, and I remember I learned this from Chris Dixon. He always said, in a marketplace, you've got to figure out which is the hot site. And at different points of your company's evolution, one side is easy and another side might be hard, but it changes. The side might actually change. So the simplest way to explain this, the way I've thought about it, is I lived in New York for five years before coming to the Bay Area.

And if you look at New York bars, the dating scene was incredibly hard in New York and some of the bars used to incentivize women at Happy Heart that used to be like discounts for women to come to the bar. And that's because they said it was really easy to get the men into the bar, but it was really hard to get the women into the bar. So at different points of your marketplace evolution, you need to figure out which side is hard and do you need to subsidize.

So let's look at Airbnb. You have the host and the guest.

Initially, the guests were actually easier to get because when they targeted events. So their famous story is the Rhode Island Design Conference, or there was a design conference going on in San Francisco and all the hotels were sold out. So, of course, it's on Craigslist.

I'm looking for a place to say, but it was really daunting for a host to put up their home for the rent. So at that time, the subsidy was on the host site. In fact, they were incurring acquisition cost only on the host site. They were acquiring demand completely organically. They spent zero dollars for a long time to acquire domain. And then at some point it switches when you're hosed. If you have a significant number of homes in a certain city that's making a good revenue stream out of the business, you may have locked in supply and now maybe the harder side for the next layer of scale.

So what I mean by that is, say, if you're going from one million to four million customers, maybe your demand side becomes harder, then you've got to start offering subsidies on the demand side.

But at every stage of the marketplace, you have to always ask yourself, which is the hardest site today as you've explored the growth stage, specifically, what are the key elements of diligence that happen for those companies that didn't happen or maybe were less important at, say, the series or seed earlier on in the business's life?

I think the highest level three criteria is pretty much the same, which is number one team number to market opportunity for that business. And No. Rhee is performance to date, and this is what I think investors investor would say early signs of product market fit because the company has been around for maybe 15 to 24 months. Was this by the time we are investing, the company is usually three to four years old. And so we call it growth investors performance today, which is how have you really executed in the last four years, bought from a top line as well as from a cost perspective.

So let me touch on each number one team team. The investor would probably say how strong what is the founder market unique insight that you have? I use the analogy of the Visi application on the early stage. It's literally they have nothing then usually never launched. I mean, more than 60 percent of our companies having launched on the early stage. But what we are looking for is what unique insight US founders have about problem solving and why you think that's a big opportunity.

So that's what we are really trying to gather from the team. And second, the speed with which they move from the time they had an idea, how fast have they been executing? Did they actually do an MVP in two months or is digging them six months to do an MVP invite? So that's what you're looking at, the CDC in growth.

What we are looking for from team is clarity of thought. And I'll give an example for clarity of thought, your ability to learn and scale. And third is you have grit and determination. So clarity of thought beyond the CEO evaluation is roughly like two hundred four hundred million dollars.

And so at that point, it's not necessarily the investors looking for a 10x, but they really want to know. What is your clarity of thought on whether this company is at least a three dollars billion, over five billion or ten billion dollar company? I usually refer to the BRICS founders for this example. So the BRICS founders went through Visi in winter seventeen and second or third week into the batch. They have this idea of BRICS, which is corporate credit card for startups, but they took an accounting class in Stanford.

They were actually Stanford freshman. And I asked them, why are you doing this accounting class? And we can. Pedro, this was their second company, believe it or not, like their build strike for Brazil and sold it when there were like 19.

And they said, well, we just want to really build a case for why will be a billion dollar company at least. And we want to build a model that thoroughly reflects market share, how many customers we need to get, whether there's appetite for so many customers, what's the unit economics? So we just wanted to take the accounting class to really make sure that whatever case we built was relevant. And so I said, OK, but what's the point in there?

Like, well, the stakes are high. We're going to quit Stanford if we're going to build this. And so we just want to know, is this what is this a big company? Is that a big company to be built here? And that clarity of thought is rare. It honestly comes once in a decade to this day, maybe. Of course, they've deviated from plans and they've far exceeded plans in more cases. But like that product roadmap, even though they were starting with corporate culture for startups and all the suite of products that thought that they would build is still pretty much spot on.

That's right. That's something they are looking forward. Do you have the clarity of thought on how big this business can get? The second example is your ability to learn and scale. So here your first phase of the CEO is your do it yourself CEO, which is you probably have a team of five to ten people. It's all about getting to product market fit. It's all about tweaking the product, really figuring out a thousand customers that love you.

Can you get that to ten thousand and so on. But the moment you start hitting thirty people, you now have to become the company builder and chief. Most CIOs are the median age of CEOs like twenty seven point twenty nine. So for most of them, they've not managed more than twenty or twenty five people. And for some of them it's the first job. So they don't have people management skills. Their ability to learn and skill as a leader is something I think we see we have an unfair advantage that because we've known them for four years and fair.

The company fair, the CEO, Max Roach, is an example. If you look at his resume, tremendous background. He was the GM of caviare, launched square cash and Ferrus like a marketplace that connects makers and retailers. Of course, he really knows the business building, but he's never managed many people. And he got this feedback very early on in his company evolution that he openly admits his people were terrified of him. He realized that he wouldn't be able to successfully build a company if he doesn't improve on that lens.

And so he went and hired an executive. He constantly sought feedback from everyone around the table from his own leadership team.

He's a phenomenal leader and scaling really well as a leader. People often look to Patrick and Johnson otherwise a company and saying they were one of the best founders that have built one of the best teams in the valley. And honestly, the entire company is great. I think first, the next flight in the caliber of people that they're going to built. That's the second thing we're testing. And the third is grit and determination, which is almost a given, but so hard to test.

But once you're in existence for at least. There's surely been at least two or three near-death experiences in your company and how you survived that Dawidoff has gone to hell and back and I would never bet against Tony. I'd say the same about wrapping the Latin American company, which is a stickup. I mean, odds were against them. They don't even have a strong venture capital market and let them in the hills. They are building a capital intensive company.

But my God, they're grit and determination is unparalleled. And so you don't want to bet against those founders. So those are really the three things that we are looking at from a team perspective, which is more proof points and a different lens from what a venture investor looks at. When you look at a growth stage company.

You mentioned LatAm and it makes me think of non US markets for these kinds of global technology companies. What other markets do you think are the most interesting, maybe from a geographic standpoint?

Right now, the world is increasingly becoming global. I mean, Visi started a decade ago and pretty much all the startups, the US based today, out of the two thousand five hundred plus startups we've funded, twenty seven percent of them have headquartered outside the US. More recently, in our batches, at least 40 percent of our startups that are international. So I think if you play this a decade out, I think at least 50 percent of Visi startups are going to be headquartered outside the US.

Innovation is just happening everywhere is specificly markets I'm excited about. Of course, there's a lot being written about China. China is probably further ahead than other markets, but emerging markets, I'd say very bullish on India, Indonesia and Latin America. What's going on in these three? India? I think the GDP per capita has always been really low, like in the order of twenty two thousand five hundred dollars, which is why the willingness to pay was not as high.

And so you didn't see as many, 30, 50 billion dollar companies coming out of India. But that's going to change this decade. Twenty, twenty to twenty thirty. The GDP per capita is expected to go at least to five thousand five hundred dollars, which is what China had more than a decade before. And that's what really propelled a lot more multi Unicon companies that were built in the region. And India has the talent. I mean, if you measure the number of computer science grads, India produces as many or more than the United States, it's soon supposed to surpass that.

Therefore, I do think it has the talent and it has the venture capital ecosystem. The GDP per capita is the one evolution we need, but it's happening this decade. So I'm very bullish there. Indonesia GDP per capita has already really high. The population is far lower, but you're seeing a lot more Southeast Asian founders', even finance us from other regions moving to Indonesia to build businesses. And there is a huge investor ecosystem like some of our companies then that which is a basic company, which is the trade for Indonesia, is really pioneering payments in Indonesia.

And you see a lot more new businesses starting in Indonesia, especially in the fintech space. So that's another reason.

Third is Latin America.

What's fascinating about Latin America, I learned something from AP actually having working closely with Rabea. Latin America has six hundred and fifty million people, 70 percent Internet penetration, GDP per capita, same as China, nine thousand seven hundred dollars. In fact, countries like Chile, Argentina was closer to 12 to fifteen thousand dollars and two hundred cities with high people density. What's the e-commerce penetration? Four percent. And the e-commerce penetration of China is twenty two percent.

And maybe because of it it's probably higher. But three quarters, twenty two percent and recovered in LatAm was four percent. So you just do the math. And I just think Latin America is going to be huge. It's geographic proximity to North America is going to help at the investor base and talent. It's really hard to build a company in India and find that upscale experience. But Latin can at least kept the people from the US to move to Alabama.

I do think LatAm is going to see a huge wave of multi-billion dollar businesses and probably a region that doesn't get as much attention as India or other parts of Southeast Asia.

What are both the reasons behind that and the risks associated with that sort of early investing? I mean, four percent is tiny. It seems like it'd be hard to not squint your eyes and look forward, say twenty years. It'd be impossible to imagine that digital and Internet and e-commerce is way more penetrated in Latin America on that sort of timeline. So the opportunity seems obvious. What's the catch like? What are the risks and the difficulties and the reason it's gone slower?

Look, it is fragmented across multiple countries, right? It's not one country. And so the regulatory environment is actually quite complex for a young startup starting out of one country. So, for example, if you look at the case of ropy, they work with hundreds of thousands of delivery drivers and postal shoppers, but they have to navigate the Columbia landscape in the Brazil landscape in Mexico.

And the president in nine countries and Argentina and Chile, the complexity really starts increasing. Second complexity even in company building, like they have probably more than two thousand employees. But the. Spread across the keys, there was this whole mantra started in San Francisco, keep most of your employees in San Francisco and you can also find all the other skilled workers. That's simply not true there. And then you're also navigating the different time zones. But all of those are changing and also investor interest.

Before I was very little so that we went through what I mean, we're talking about as though it's an established company. It's four years old. So it went through like the summer of twenty sixteen. I was actually at Andreessen Horowitz at the time and we wrote the first C check in vaping. And it was fascinating because Andreessen Horowitz at the time did not do any investments outside the US and literally our first investment was rapid. And I think that's because we could see through the vision of the founders eyes how big that opportunity was.

And we were already investors and instict at the time. People knew a lot about Jerash. And there was this company that's building essentially the instigators, Jordache, of Latin America. So I think that there's more investor interest now, given there's a lot more startups in the ecosystem and ropy has sort of paved the way for generating that amount of investor interest. The second thing, people are realizing that in spite of that regulatory complexity and challenges, the market is very attractive.

And it's not just from startups looking over. I mean, for Uber in ridesharing, Brazil and Mexico are some of the most important markets outside the developed markets.

So and there's a lot of money, right? The GDP per capita is really high. It's not that the order values are low. So if you look at Rafi's autobody, that's something that's counterintuitive. It's close to 20 dollars.

And that's not the case in China or India. India is like far less than twenty dollars, maybe five. And us is the food delivery players blended will be around thirty, thirty five.

So twenty is not that far from thirty or that in fact. But the difference is the cost of delivery. The cost of delivery is less than 10 percent of the value in LatAm, whether it's in the US, 50 percent of your gross goes on delivery. It's unfortunate, but the socioeconomic status difference in LatAm structurally helps support these companies because you have higher revenues. At the same time, your cost of delivery can be less than a dollar per hour and the minimum wage.

But it is also a lot less than the US.

One of the things that was really interesting to see in companies that you've been involved with is boom supersonic. I bring it up because I don't even know if hardware is the right term. Physical technology, maybe it's such an interesting looking company.

How do you assess a company like that relative to a more traditional sort of software heavy technology portfolio, given the, I would assume, extreme capital intensity and extremely long lead times? What's different about that company and why do you find it interesting often?

Advisee I often say it goes back to the prior insight that I shared with you, which is I don't think any of that investor has that, which is we have this unique insight into how the founders are scaling and how big their vision our mission is. And Blache is that kind of a fondren? So I think Blak, even if you talk to him five years ago, he was absolutely laser focused on building a supersonic jet. And if you look at his background, nothing screams of that.

He worked at Amazon and then was a Groupon. And then Bactrim, how do you think of an Amazon Groupon person building a supersonic jet? But then when you spent time with them, you see how much time he has spent outside of his core work learning about planes. And that's where he just pops up and he knows to fly and he knows about all the jets and he can tell you what the nuances of the jets are. What's the difference?

His whole mission was, look, it's easy for me to build a software company. Everybody can. And there's lots of people starting, but people are not doing the hard things. And why is it that aviation has seen no innovation in, like, decades, not just one day, getting two or three decades? I mean, we already have the Concorde for crying out loud, and we didn't have any they shut it down. And then even though there has been advancement in manufacturing, investment in laser technology, advancement in supersonic, no one's investing in it the way.

From an investment perspective, we really look at these what we call the high tech bets is quite simple. We actually use the mental models, which is you look at science risk engineering, risk market slash commercialization risk funding risk. That's you break them down into four buckets. So the science risk for Boone was very low.

The supersonic jet was already built. And so that is proven science. It flew what most people don't realize. The reason they had to shut down Concorde was it was not economically viable, the way they built it and the cost per seat and the number of people in the plane didn't really support the cost to operate the fleet.

That inside that blaggard from day one was very powerful. Science was we were like, it's OK, we get it. You can build a better jet with a new technology and maybe even a better Mach speed over time. But it's largely proven. And there was a plane that launched engineering risk because the back we are taking, which is you have all this advancement, but the advancement really matters of. The speed and pace with which you execute and the less errors you can make.

So one of the biggest milestones is that actually the assembly of the jet itself. So it's like, OK, you run all these software simulations to figure out, is this how I need to design the part? What should be the specs of the part?

But until you actually put it together, you don't know if those things work. And like, OK, if how fast can you iterate on the simulation and can you do the course correction so that your manufacturing is not delayed significantly and that engineering risk, we were willing to take a back on the Buntine because that's the core strength, that's blak strength. The strength is in software and is the ability to attract really strong software folks to help build that. So that's the engineering, this market of commercialization risk.

Like I remember when he was going through the batch, one of our partners told them, go prove to me, I know you are not going to build this, but go prove to me that you can get Richard Branson excited about this. And he did it. He didn't know Richard Branson at all. And he just went hunted him down, pitched boom.

And Richard was one of the first angel investors. And boom, over the course of two years, he had more than a dozen, two dozen contracts from commercial airlines. I mean, Japan Airlines is an investor in boom, but they all have contracts in place where they have an option to buy the first and jets when they so we're like, OK, he's proven market and commercial risk and funding risk.

So when you look at funding risk for heart securities different, we are not assuming that this is venture capital that's going to fund them forever and see them through. But if you actually spend a lot of time in aerospace, you realize that the pools of capital that they can tap into are plenty. So you can start off with venture funds, maybe. But then there are lots of suppliers that actually finance this program. So, for example, for engine program, it's a known thing.

They're like GE and others who manufacture engines actually can finance up to five hundred million dollar engine program for any model that you're working on.

And then you also have these huge raw materials suppliers who finance the manufacturing of the plane. And so when we did the math, we said, OK, even if they needed, they probably need a billion dollars to build the overture, which they call the commercial jet.

OK, what are the different pools of capital that they can tap into? When we did all the risk assessment, it was literally market risk because no, if this thing flies, there will be enough appetite from airlines and consumers. Imagine if you could fly to around the world trip in a day. You don't need vaccines. You could fit more people in the plane and make it economical. And then there is funding risk as medium. But that depends on execution.

There's lots of pools of capital and engineering. Risk is high, so engineering risk and funding risk also falls on the founder. And that's what a conviction on the team comes. So that's what their mental model on how we decided to leave.

And I know your background originally was in engineering, working for Qualcomm. That's where you studied. We're talking about that before we hit record.

I would love to hear how that background plays into your style as an investor. Typically, engineers are unsatisfied until they understand deeply how something works. I would just be curious to know if that translates over and if so, what are some anecdotes or examples of how that happens?

You asked me a decade ago, I don't think I've ever even thought of being an investor, not that I was ever fascinated by it, but just didn't know much about it. At Qualcomm, I was tasked with deploying our 3G handsets with their radio telephony and video streaming solution that was pre iPhone. So there was nothing called an app ecosystem at the time. All over Europe. Over my first two years, people really knew me as an awesome debugger.

That's really what's my title, even though my official title was senior software engineer. But there was a joke in the company that if there was a bug anywhere in any part of the world like deploy, because it's going to go find out what's the root cause. And that's just because I know I actually thrive and no one knows the answer to a problem and it just keeps me up and not that is just something that I've always liked and it's somewhat nerdy.

They used to send me to Italy a lot at the time when we were deploying 3G all over with all the operators. And there was this bug at one of the cell phones during transition. And I had to keep driving with my form factors to replicate the bug and then debug it and then fix the code. It was often done in a time pressure setting. So fast forward, I often say that process of finding good cause is really what excites me about a diligence process.

And so when I was a big business school, I actually spent five years in the private equity practice. The private equity practice was doing due diligence for several private equity firms across several industries. My first case was in mortgages and it was late to figure out a mortgage book and whether this be needs to acquire that, too. I also looked at evaluating a diamond mine or one of the private equity funds. And so I knew nothing about diamond mining, for example.

And I was like, OK, how do you replicate this process? OK, we need to figure out whether we need to buy this mine. We just understand how the price of diamond evolves and what's the role this diamond mine will play in the supply scale and evolution because that influences to build this up like the. Of diamonds, I mean, it's so hard you realize that it's such an opaque industry, it's an oligopoly between De Beers and Altrusa, but there's this long deal of diamond mines, maybe like thousands of them, and you have to estimate their supply production capabilities.

And the only way to do that is like we were doing, constables want to even had somebody from DCG Africa like to visit the mines and talk to some of the workers that really understand what the supply production is. And we had to come up with this probabilistic. So the way I used the diligence killer, the debugging skill, if you will, was literally in private equity side. It was that diligence lucas' process because private equity funds were all about downside risk protection.

It's like, OK, I know what I can do with this line, but tell me what my downside risk is. And so we really are not to the extent possible, like what's the true curve and what's the true impact from a downside that you will see is a firm. And then fast forward to Andriessen Horowitz, which is such a different nature of investing. I feel like you can be a great tech investor only if you are an optimist, not if you are a pessimist.

One of the reasons why I feel like private equity worlds and venture worlds never overlapped for a reason. When I was at Harvard, I was hired for the diligence skill set, by the way, so they loved my diligence experience and the fact that I could go deep on any sector pretty much and figure out how to sort of build an investment case around it. But two months into my job, Marc Andreessen told me this. He said, your bias is going to be to say no because you use your process on private equity to figure out downside risk.

He said, here's my challenge to you. You use the same process to figure out the upside potential. And the reason is, he said, look, as venture investors, you will lose money, but you lose only one extra money. If you turn down a 10x investment, you lost an opportunity in a company that could potentially return the fund, and that's Grandslam. And he was like, you have got to reduce the number of Grandslam slam we have.

It's a very simple insight in hindsight that just changed my way of thinking.

So now and it was like when I worked with my team, I always tell them, look, don't spend 30 percent, 60 percent of your time writing the Burkett's spend 70 percent of your time telling me what's your 20 percent upside probability case? Because that's what most investors are not going to get the example. I use your strike. I mean, unbelievable funding, Dean. What they've accomplished is stellar, like Patrick and John have done a phenomenal job of building the team and a payments processing business, which if you look at it, you can say easily as a case it as being less like, what's your motive?

You don't have any network effects. You're just acquiring all these companies one by one.

But if you talk to Patrick and John, you will see their crystal clear clarity of thought on product roadmaps, the suite of products they plan. So when it came to upside potential, I remember this very vividly. Three or four years ago, a lot of investors underwrote striped, maybe a twenty billion dollar company because they could see it as a core payments processing company.

But if you looked at their product roadmaps and even believed that, let's say two of their products worked with a five percent tax rate, what would that do to their upside case? Like what happens if I did things right? You could start seeing them being a fifteen hundred billion dollar company. And I think as growth investors, that should be your secret sauce. It's very easy to model a base case in a downside case, but where you're going to get wrong is the upside case and you turn down investments because you estimated the upside very low.

That's fascinating.

One of the descriptions I've seen in one of your various bios was this interest in network effects, which we've talked about and also in where you called growth programs. So I think that piggybacks off that last question quite cleanly, which is in the upside case, obviously, there's going to be tremendous growth. And what I've learned, certainly watching tons of companies and building one is that growth is a very careful, painstaking process. It can be incredibly expensive. It can be very difficult, but properly thought through and set up.

If a company gets the right flywheel going, it could be super powerful. Say a bit about everything you've learned watching these companies and the different kinds of growth strategies they've employed.

I think this is something that honestly, I think is really good at. So people often say, why are you so focused on growth? But for startup growth is really an indicator of everything that's going on, especially in the early stages. Is there demand for your product? Growth is the only way to signal that, but it's important to make sure that this is organic growth, not pain. So that's the most important difference. We have stats there like, oh, if you got an early start up like this, you'll be going to be growth at least 10 percent.

And that's because it's going to start compounding a lot. And compounding is such a great factor. But if you're able to do that organically, that means you've built something that people really want. So at the early stages, it's really organic growth. But even at the growth stage we are looking for, hey, is more than 50 percent of your growth really organic? And often you'll see that the difference between the startups that really scale very well and the ones that struggle to scale is.

That organic growth, so I'll give you the example of your Monzo Lonzo's a Challenger bank in the U.K. Tom Blomfield, the founder of Monzo, literally just built this for his himself.

He'll say that, hey, I just wanted something to be the operating center for my finances. Why is it that I have all my money in a bank account? I have stocks, maybe in a credit card. I then use Venmo and then I use Mint and I have all these articles in today's world. My bank should be smart than my bank should be able to do anything I want. And that's literally what the best way to describe Monzo offenses like the Venmo placement, but also does a lot of other things.

They have four and a half million customers. It still shocks people, shocks people that it's completely productivity growth. They have close to eight percent of the UK market and it's completely productivity growth. And their numbers, which they publicly report is greater than 70. Name one bank that has is greater than 70. It's a bank, one of the best global product engagement metrics. And so we often say when you're looking at growth, that's what I am looking for.

I'm looking for as an investor, which is show me productivity growth, because that's the best kind of growth. And if you can show that, then there's nothing that stops you. Even if you end up spending big marketing towards the end, like it's going to benefit your organic growth a lot because people are already talking about, you know, word of mouth or a mechanism of organic growth. So in this case, a lot of people talk about Monzo.

They have a very strong community. They also have the Venmo feature, which is payments, and that for an average Monzo user, has sixteen friends on the Monzo app. And so there's lots of ways and product where you can drive productivity growth. Another example of that would be fair fare as a B2B marketplace that connects makers with retailers. It's very counterintuitive to think how do they have any sort of organic growth? Because we are talking about think of brands, all birds of glossier or the long tail of swell water bottle, all these brands that are trying to sell their products into local independent retail so that their products that are available at local retail as well.

How does Fehr drive growth? Very simple. They have something called the fair elevate product.

What they did is they essentially build order management system for these brands because no one caters to these small brands. So they went to the brands and said, hey, let me help you build an automated system where you can receive orders and invoice retailers. And by the way, I know that retailers are doing bulk ordering because they're not just buying one more bottle. Right? They're buying water bottles for the store. They're like, we'll help you offer the retailer free 30 day returns.

If they're ordering for the first time or not, 60 day financing, we can help them with the working capital for 60 days, depending on you have to be a good performing retailer. And brands loved it. Each brand, on average, is bringing five retailers to their fair, doesn't spend anything on retailers to acquire them. That's a great vital look. If you can find either productivity growth or some form of a two sided network with a reference mechanism, that's gold that really helps you set up for scale.

And so that's what we are looking for when we are diligent.

That distribution advantage you mentioned earlier, kind of price range typically that a growth stage company will raise equity at. I feel like a really discussed item in the venture world is valuation. Obviously, the entry price is a huge determinant of the outcome and there's no company that can't be ruined by a high enough price. I'm curious how you think through that and whether or not now this starts to bleed into your old private equity roots where you're underwriting a specific kind of range of outcomes, or if it remains at the growth stage or of a clearing price, that's just a reflection of supply and demand for the company shares.

This was something I struggled with a lot when I first came to the Valley because I'm such an analytically driven and nerd engineer and you come and suddenly feel like the whole science behind valuation is art. The other stage was rough, but I think look at the earliest. But now that I've spent close to six years, I think I have a good understanding for how valuation methodology is done. So at the earliest stages, it's really art. It's not science.

I think it comes down to if you're raising a series A typically the lead investor is taking about twenty to twenty five percent ownership. So if you say I'm raising ten million, it's ten divided by point. That's your valuation. It's as simple as that.

And the way you come up with that range of one twenty percent ownership or twenty five or sometimes sixteen, depends on how strong of a product market fit you have is also a function of supply and demand. As I said, maybe how competitive the deal is and how it's getting mucked up and also the potential for that company. Like I think at the end of the day AC DC is still investing because they're hoping for a 10x.

But if it's a Grandslam, it's going to return more than the fund.

Well, it's OK if you owned only 15 percent of the stock and even got diluted to say it's going to return more than the fine, I think is a. ANWR, that's sort of your mental model, and Crosby's also a little more art. So while the ownership is not twenty five percent, people are looking for 10 percent, maybe seven to 10 percent. Really hard. Consumer companies like Uber are not actually probably would have been some 10 percent ownership for the city's investor.

But if it's B2B, it's usually at least 10 percent. That's the city's M.B is literally what's the amount reraising divided by the ownership percentage for the big ones.

CDC on words, it's different. I don't think it's ownership driven. It's more I think it's a growth investor.

It's very important to focus on dollar data because you're not playing for 10x as now. But if you do believe you're investing like a three billion valuation and you think this company can be 30 billion or even 20 billion or even 15 billion, so it's about OK, if I'm putting one hundred million or three billion and it's going to be at 15 billion, you're going to make five hundred million dollars a little less than that because you'll have dilution. But it's about the dollar scale of return.

So then you got to compare to your growth fund, which is like, OK, how big is my growth fund? And is this a meaningful check size? I like to use this analogy that I actually learned from the DST team, which I think they do a phenomenal job with the growth stage. Are you betting the house? Because if you're not getting the house, you're probably not don't have that conviction. If you're willing to write a 50 hundred million dollar check and say, let's say it's 10 percent or 15 percent of your fund, depending on the size of the fund, you are going all in on that investment.

And you're saying that even if it's a five X look, I'm going to return five hundred million dollars and so the dollar return becomes very important. So how do you then look at valuation to the valuation is a mix in the growth stage. We actually build a full fledged model for a five year model. We use certain valuation comes, not current valuation comes. We actually look at if this company was to go public, what would be the median comps of five or 10 year median multiple.

And we look at different multiples. And what would this company really value that exit? And therefore, what's the enterprise we like now? And we usually come up with a threshold of this is the max we're willing to go just to see you understand that dollar rate on that.

But I don't think you ever turn down a company because this is the max valuation you want to go to, because then that's your conviction.

And this goes back to my upside case, which is like, hey, if you have a 10 percent probability that the upside is going to materialize, you're turning this company down because of some strict math on your base case and you really don't have conviction on the upside case. I think we use the valuation methodology to make sure we're not setting up the company for failure down the line. What's most important is you don't want them want to set of too high a price to prepare them for a down around because it affects the morale of the company.

It's not a public company. It really affects their hiring, all of that. And so you want to make sure you're pricing it somewhat appropriately and not to that effect. But the mental model is more what's the true exit valuation for this company? What's the range of outcomes? And so therefore, what's my enterprise and how does that meet the typical dollar returns that I'm expecting you mentioned earlier? A big part of this is obviously the overall opportunity for companies like this to become big businesses, not necessarily just the one that you're evaluating, but just the ability for the market to withhold and build some of these huge outcomes to deliver the returns.

That begs the question like how far into this technology deployment era are we? You mentioned the four percent penetration of e-commerce in Latin America, obviously super early China much further ahead in the US, somewhere in between and accelerated because of covid. What is your take on this critical, fundamental question of how far along we are in this transformation and how much more opportunity for digital transformation still exists?

I actually think there's way more opportunity ahead of us. Let me come with a few numbers of people that looked at this with total global market cap was eighty five trillion dollars. Internet economy enabled businesses with less than 10 percent, roughly eight trillion. Even if you assume a 10 percent Kagura and play this out, let's say in twenty forty five, I think I'd seen estimates that if you assume the global market cap is going to be around four hundred and fifty trillion, Internet economy should surely be at least 50 percent of that, even if less like 60 trillion dollar economy, guess what, from eight to 60 trillion.

I'm willing to bet all day long that we are still very, very means and even in the most developed markets.

Let me make it further specific and real for people. Let's look at the US economy recovered.

Our Internet penetration was up 20 percent in twenty nineteen. And I think April reports. Twenty seven percent law has been written about consumer e-commerce penetration. Not much has been said about B2B wholesale e-commerce penetration. B2B wholesale in the US is a 16 trillion dollar market. Less than eight percent of it is online, plus three percent.

Forty nine percent of B2B wholesale e-commerce transactions happen via phone facts and. There, which is one of the marketplaces that's working on it, is still just attacking a small sliver of retail, the retail market that they serve as a six hundred and seventy billion dollar market. You have so many verticals here. Think of aerospace, chemicals, industrials. You're just going to see an explosion of vertical players in B2B, wholesale commerce, B2C, consumer e-commerce itself is still up 30 percent.

So therefore, there's just the Internet economy is just still scratching the surface. We just have years to by and I think we're still in the early stages of the Internet economy.

I love the tiny untapped B2B wholesale. That's such an interesting example. Everyone always talks about e-commerce because it's, I guess, the most obvious for the average person. What other areas like that do you find especially interesting where digital and tech have maybe begun to make a difference, but are still in the early days, if any?

Yeah, I think second is fintech, obviously. Advisee we see a lot of financial services startups. I mean, we ourselves are funded thrip Breck's, Monzo, Lindop, to name a few and then grow recently. But I think that a few trends that are going on in fintech one, the payments landscape is exploding. If you believe the Internet economy is at least to me, you've got a lot more work to do on payments. And so they'll be more there, both on the consumer side.

But you also, as I mentioned, B2B is a big site started as a corporate startup, but that's just scratching the surface and they're well beyond startups. Now, they also launched Vikash last year. There are a whole suite of products that they're working on. So B2B hotel payments will also be a big area. The third area I'm saying is in digital and challenger banks. We saw China recently. I just think that if you were to build a bank from today, it just won't look like you apply a bank.

Like, as I said in your phone, your phone should be your bank. And it has to be really smart in helping you manage money. Like, why do I need 10 apps, make me really smart in managing my own money. And I think you're going to see a whole suite of subscription Challenger banks. They're also changing the business model, not just tech. They're saying, look, instead of me charging you fees for every single thing, let's just make it clear.

Here's a subscription model. Here's a set of services you get. And that really excites millennials. They don't want to be charged for every transaction and they don't even know what to expect because as you just say, hey, guess what you get for seven dollars a month. You what you get for fifteen dollars a month. So the changing business model, too. And then the third lens in the financial services I'm seeing more in it is, look, savings yields are at an all time low globally.

So you could have argued in all other recessions that each country came at a different lens was now it's just across the board. And so a lot of the users got flat footed. A lot of them are looking for other ways to invest. And that's why Robinhood is doing extremely well. But probably not is still there will undoubtedly be a large part of this small player in a large fight because of a do it yourself market. So we're seeing Robin Hood everywhere globally.

We're seeing Robin Hood for India. We made an investment in growth. We're seeing Robin Hood for Indonesia, Robin Hood flat. And you'll also see the extent of active asset managers. We're seeing a lot of startups attacking that space. I think in the next decade you're going to see at least three to five hundred billion dollar fintech companies, at least ten, I'm willing to bet, maybe ten. Fifty billion dollar companies and two dozen, ten billion dollar companies.

That's going to happen in FinTech. And then the third area, I'd say, which has been fascinating, is EdTech.

Historically, especially in the US at tech businesses have not been huge. Therefore, not a lot of investor appetite has gone behind that tech. But there are two things that are changing. So one thing from the lens of lambdas, I think there's a huge shortage of software developers just in the United States.

I mean, there are different stats like I think I reported recently that maybe there's a need for two hundred thousand developers. But I've seen Carderock say we need five hundred thousand developers in the US every year and we have less than fifty thousand computer science graduates, less than fifty thousand computer science graduates.

And historically, we've tried to fill it through immigration and other means. And given the geopolitical climate, immigration is a question mark right now. We don't know how it gets impacted, but the short story is there's a huge shortfall.

And if there's a shortfall that comes Lambrusco, they just threw online resources and a nine month intensive program are able to get to the stage of starting a journey as a software developer. And for many people, it's increasing the salary from fifteen to twenty five thousand a year to seventy five thousand a year. That's game changing.

That's one trend we're seeing out. School is another company that's done a phenomenal job, especially during covid with all these classes where public school, depending on stage city councils, you don't have enough budget to support teachers in certain areas. And here comes up school, they just have the marketplace, the best teachers. And if you've gotten over the inertia to take a class online, our school will play a role even post covid, because after you attend public school, if your child has deep interest in science, you can just sign up an old school class with three other students and pick the teacher that you want and they can go deeper.

So I think you're going to see in. Interesting times in Ed Tech as well. That's going to actually explode in the next 10 years and it'll be fascinating to see what are some interesting business models that come out of that.

Do you have any observations on the changing nature of the US technology investing ecosystem? And I don't just mean growth equity. I mean any observation around from seed all the way through the biggest public equity managers that has changed across your career in technology investing specifically like what would be the most notable difference from day one to today?

We often joke advisee that we have more investors than we have companies that actually true. Demeritt gets close to two thousand investors and for that we have only two hundred and fifty companies. It's a good product to have, but I do think you're seeing the number of investors increasing across every stage. Having said that, I think the misconception people have is there's money everywhere. And how are you going to differentiate?

I think at the growth stage, it's not true that there's that many investors. So if you ask our founders both, you see, when I spent time with founders, our founders a lot, they can name more than 10 investors who can ride a 100 million dollar plus check they get. And so it's the same usual suspects who could come up maybe with a list of 10 to 15, really scrape that list.

And and they don't even know them. But it's the same. Yeah. The crossover funds have started investing in startups, YAML, private equity funds have started investing in startups. But the thing is, unfortunately, most of them don't understand the pain of a startup. They don't. It's great when you get 14 downshifts, how do you win? The company is not going to look up and do the right every year. It just doesn't happen. I mean, Visi has so much data on this.

I mean, to be funded. Twenty five hundred companies, less than one percent of our companies have greater than a billion dollar valuations. We have maybe twenty to twenty five of them. And I can tell you, pretty much every single one of them has had at least one or two really hard years in their growth stage, really hard years. You often see that these investors that are newer to the growth stage are working with startups, cannot comprehend that because your full time job is really the focus of a public market investor.

Your full time job is really to manage your portfolio and your day to day investments and the volatility associated with that. And then you sometimes may be more afraid or chickened out by like, oh, the quarterly production didn't really fit with this, or the market landscape is changing. Or like the most common thing that I mentioned at the start of this session was you feel when a competitor or an incumbent especially launches something because you immediately think, oh, it's a Zero-Sum game.

So I think founders are usually very attentive to who they are working with and which partner they want to bring. And especially in this lens, they want someone who really understands startups. And I think you don't see a lot of stage investors who truly understand startups. And pattern recognition is a dangerous thing, because when you use pattern recognition, on one hand, you may say it helps you. But actually the zero sum game always comes to hurt you, because if you follow the software market and you followed Microsoft, you would think zero sum game is real.

But that didn't play out in the Internet. E-commerce, I mean, even China. Everyone thought Alibaba would be the only player we have. Alibaba, BMG, ATV. I mean, one, we have been Dodaro. I mean, look at the US market that's supporting China. I think there are far fewer investors on the growth stage that truly understand startups, even though that might be a few more players that are willing to invest money. So that's one of the ones that offer, which is probably different from what the people think.

Perception is outside.

Second difference, it's aspects. There's a lot of talk about aspects now. I think there have been aspects that have existed for years. It has happened in the past. But what's different about this time around is the underlying manager that's sponsoring the aspect. I paid attention when Redhawk when launched the is back in making malkia launch the espec. I mean, I work with both of them on two boards. I mean, Reid is on the board and Nikki's on three of the boards.

Actually, we share with me and they both are just phenomenal investors, incredible investor that a startup founder would love to have. And they truly understand the pains of scaling a startup. So if you use from that lens, you do see an aspect really play a role. And I do think that are certain technology companies that could benefit from an aspect. So this fintech companies are extremely in regulated spaces and they need a lot of regulatory capital and regulatory buffers, which I think people don't understand.

And aspects depending on the underlying sponsor could actually play a big difference for those companies. So I do think I can see the role of an aspect there. And then the other argument I've heard from, especially like Brad Altimeter is most founders don't know who you are, daven traders are. And I think that's fascinating because if you ask a founder, they always want to know who your investors are because they want to know who are the true partners in your journey, who are believers in your company.

They don't want someone who is just flipping after the one that could be potentially a promise that attracts. But I think the question remains to be seen. Can the next snowflake go on on a. And I think if that happens, there could be more aspects I have to turn now to my traditional closing question for everybody, which is to ask you for the kindest thing that anyone's ever done for you.

Well, there are a lot of people that have really helped me. But I think the kind of thing that comes to mind is Dr. Jeffrey Lead. He was my research adviser at Virginia Tech. I was doing my master's in wireless communications. This was in 2002, right after 9/11. And the funding that most state universities got from the government was completely slashed. Even private funding was at an all time low.

So I had come to the hope of getting a research fellowship. The university and the research group had no money to be able to fund me. I come from a Tier three town in India. My parents were very middle class and my dad had pretty much taken an entire loan against all his assets and could pay only for a year of my tuition comes summer and I was working at Virginia Tech to cover all my living expenses. But as an international student, you can work 20 hours and you have to work in campus.

You can work outside. So there's only so much I could do. And I remember very vividly, this was July and my dad basically said, look, this is it. This is the last straw. Finish whatever carrots you can. You're going to come back in August. And I was like, yeah, I get it. And so I went to my advisor and said, look, I really can't continue and I need to find a way to graduate.

So I should finish whatever credits again in the summer and maybe I could do remotely. Would you be open to doing remotely?

He asked me how much money do you need?

And I said, well, I haven't paid tuition this month. I need eight thousand two hundred dollars. He took a check, got a check and give it to me without any questions. And I think if I look back in life, if he hadn't done that, my life would have turned out very different.

I'm amazed by these little tiny things, obviously not tiny, significant things that people do constantly all over the place. That's a very unique one. I haven't heard one quite like that yet for doing more than two hundred of these. So I love the story. And thank you so much for a really interesting hour and a half. I learned so much love learning about the growth stage where I spent a lot less time and just really appreciate all your insight.

Great. Well, thank you, Patrick. If you enjoyed this episode, you can sign up for a new email newsletter sent out each week called Inside the Episode. Each week I condensed that week's episode to my favorite big ideas, quotations and more. I've been recommending books to members of this email us for years and will keep doing so. In this weekly email, you can sign up at Investor Field Guide dot com forward slash book club.