Transcribe your podcast
[00:00:00]

This episode of Invest Like the Best is sponsored by Catalyst, Catalyst is the leading destination for public company data and analysis. I'd heard of Catalyst over the past few years and became more interested after meeting the founder and CEO last year to pick his brain about SAS businesses founded by a former buyside analyst who encountered friction in sourcing, building and updating models, Catalyst is now used by over three hundred institutions, including the largest money managers in North America and by a number of guests on the show with detailed company specific models on virtually every investible public equity, Canalis clients are able to react more quickly.

[00:00:34]

If you've been scrambling to keep up with a deluge of IPOs these days, Canalist has models on Doordash, Palantir, Airbnb and everything in between. Their pre-IPO models are built as soon as the sun hits and include all segments CPI's and non gap figures. If you're a professional equity investor and haven't talked to Canalist recently, you should give them a shout. Learn more and try Canalis for yourself at Canalis dot com forward slash Patrick. That's C and a list dotcom.

[00:01:00]

Patrick, stay tuned. At the end of the episode where I talked to Canalis Customer Fennimore Asset Management about how Canonist helps their firm better find and manage their investments. Hey, everyone, Patrick here to highlight a very unique sponsor, this week's episode is brought to you by the MIT Investment Management Company, also known as Temko, the endowment office of MIT, New and Small Investment Funds. Listen up. But TIMCO is looking to find investors starting funds today.

[00:01:26]

But Temko is partnership driven, long term focused and has an extensive history of backing investors early in their careers. These partners are key to delivering the outstanding investment returns required to support MIT's pursuit of world class education, cutting edge research and groundbreaking innovation.

[00:01:43]

But TIMCO is focused on finding and partnering with the best investors across the globe. No matter the market environment, no firm is too small, too young or too noninstitutional. If you or someone you know is currently in the process of starting a fund or recently launched, please email partner at MIT Tim Coorg again, that's partner at MIT EMCO or discover more on their website. Wartman Temko Drag.

[00:02:09]

Some of MIT's best partnerships have been initiated during challenging market environments, but Temko looks forward to hearing from you.

[00:02:19]

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.

[00:02:39]

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.

[00:03:05]

My guest today is Ron Parameswaran, founder of Octahedron Capital. Romme started Octahedron this year after more than five years as a partner at Multimeter Capital, where he led investments in Square by Dance and Duoduo and Udaan. In our conversation, we cover the potential for Internet scale businesses, explore the common characteristics of these businesses, and then go through a rapid fire round of the most important qualities for eight different business models. This conversation was a blast of energy and could have gone on for two more hours.

[00:03:32]

I hope to have Rahmon again and can't imagine what his conversations are like at the dinner table with his wife and former podcast guest Anne-Marie Horan. Please enjoy this awesome conversation with Ron Parameswaran. So I think we have to set the stage here with the broadest description of the opportunity that you see in front of us, as you can now call this the commercial Internet. Maybe you could just describe what that phrase means to you, why you think it represents the size of the opportunity that it does.

[00:04:02]

Thank you for having me on the podcast. So when I think about the Internet, I think about what is the sum totality of human knowledge, human creativity and human capability. It's very difficult to put a number on it, but here are a few items of doing it. If you think about the global GDP of eighty five trillion plus, I just think there's just so much opportunity still left for the Internet penetrating that entire global GDP. So that's what, 30 years.

[00:04:27]

Now it's a utility for all of us and it took us years to get here. But after 30 years in twenty twenty, I think we're at that beginning of that Eskom and it's happened now because of a few things that have happened over the last 20 or 30 years. Number one, we have ubiquitous high speed connectivity on mobile devices and future mobile devices. Now that's been a process at work and I was a part of it for years and now it's real.

[00:04:49]

If we cannot stream a high for gay video on your mobile phone, you're going to be really annoyed right now. But this wasn't the case even 15 years ago. No, what number two is you've now got cloud infrastructure and tools that drive cloud infrastructure that allow every single piece of global GDP to become a part of the mobile Internet. That's the second piece. And now with covid, which is this unfortunate situation we live in right now, corvids basically allowed people and talent to be globally discoverable and globally utilized.

[00:05:22]

So when you put infrastructure tools and people together, now we can see how, gosh, where the beginning of an esca and potentially a Cambrian explosion of companies that convert every single piece of consumer Internet and every single piece of the business Internet onto the overall flow of the Internet. Let's quantify that for a little bit. I think a few months ago you had John Coleson on your podcast and he said something wonderful with Disruptiveness. And since then he said tribes job is to increase the GDP of the Internet.

[00:05:53]

It was probably the most elegant way I've heard this describe in a long time. So we took over the last few months a chance to kind of quantify that. If you think about it, the total earnings today of Internet companies as a percentage of total earnings globally is between five and seven percent. This net income of Internet companies divided by total earnings globally. And that's number one. Number two is by any measure, the volume that is sent through the Internet is still in the mid single digits right now.

[00:06:19]

And number three is if you look at the market capitalization of Internet companies as a percentage of total global market cap, it's around 10 percent. So all of by any definition, we're so dependent on the Internet right now. And yet even today, less than 10 percent by almost any measure, it's still conducted by the Internet as a whole. But when you put together the explosion of people capability, explosion of tools and connectivity together, you have to believe or we definitely believe that over the next 20 or 30 years we go up that scale from a 10 percent penetration rate to 50, 60, 70 percent in the course of time.

[00:06:55]

So let's quantify this even further. So now let's talk about twenty nineteen as a base and let's talk about how I think about the Internet. So fundamentally, the Internet has two pieces to it. You've got the front end and what's the front? In the front end is marketplaces, e-commerce companies, On-Demand businesses and advertising and content solutions like the front and the apps that we use every day. Behind this, it's two pieces. The first piece being payments that really kind of lubricates the entire economy going forward.

[00:07:24]

And then what I call certain parts of software, not all software, but certain parts of software that drive the cloud infrastructure, which then drives the Internet forward. So let's talk about these pieces holistically. Take a couple of very small pieces out of this. So let's talk about the front end and let's talk about marketplaces and e-commerce companies in 2019. Globally, we spend around 60 trillion dollars on products and services as a civilization. Now, even if you assume, gosh, three to four percent, Kagle, over the next 20 years, by 2040, this is going to be closer to one hundred and twenty eight hundred twenty five trillion in volume totally spent by the world.

[00:08:01]

And if you take any definition of, for example, some online penetration goes a 30 to 35 percent across products and services, you end up with 40 to 45 trillion dollars connected to the Internet, only in e-commerce and some services. What is the net income margin of these broadband services? Let's assume products are five to six percent and services end up being two to three percent. Well, if you take four percent on forty five trillion of volume, you end up with one point five trillion of net income only on products and services around the world, assuming a 30 percent penetration by our estimates in twenty nineteen, that number was 30 to 50 billion.

[00:08:40]

So let's think about that. The next 20 years you have a five percent Kaga on. Overall growth, which is to be expected, you have a penetration curve going up, but you see the explosion of earnings going from 50 billion to one point five trillion to a 30 X over the next 20 years alone, just on e-commerce and just on services. That's number one. What would you prices at what would one point five trillion dollars of net income be valued at in 40 years?

[00:09:09]

I don't know what rates are going to be high, but let's assume it's 20 to 30 times earnings. You have 40 to 50 trillion dollars of equity value yet to be created from now just on products and services alone that you can take advertising, advertising typically Acento to one percent of total global GDP. So what's the global GDP right now? Eighty five trillion. It doubles in 20 years. Three percent. Kaga, you have one hundred and seventy trillion in GDP and assuming a one percent penetration, that's one point six trillion dollars of sort of just ad revenue.

[00:09:41]

Twenty five percent net income margins takes you to the five hundred billion dollar range in net income. What is the value of five hundred billion dollars and trillion, 12 trillion. I'm just not sure you can see how just on the basis of advertising, which I think is conservative, if you assume a one percent asymptote of GDP and just on the basis of product and services, you end up with 50, 60 trillion dollars of equity value today. So today we cover around forty five stocks in the firm.

[00:10:08]

And I did this piece of analysis before we caught up. We calculated around 10 we cover 10 trillion dollars worth market cap and assume that we missed a bunch of companies. That's probably 13 to 14 trillion dollars of market cap embedded today in twenty twenty. But in 2014, just on the basis of two pieces, advertising products and e-commerce, we just calculated forty five plus 10 to 15 to 60 trillion dollars. Just this piece alone is a six X from here.

[00:10:36]

Now what about payments? What about content? What about gaming? What about all the piece of software? You can very conservatively say there's a hundred trillion dollar plus opportunity still ahead of us. And just this morning, a friend of mine put this piece together on what changes in twenty twenty one. And my answer was nothing. We have more e-commerce penetration, more on demand penetration, and then more importantly, because now we have all these wonderful tools like podcasts and Twitter.

[00:11:05]

I'm fully convinced that the entirety of human creativity is now available up for grabs. That's what gets me so excited. We always want to find the next new thing. I think the next thing is staring us in the face right now.

[00:11:18]

I love the framing of this as early days. I know your previous career was as an engineer, even working on something like the three and four technology for mobile phones. But this idea that from the 90s through to today, we've basically gotten ourselves to the point that we can start to now transfer offline commerce. I'm just going to call it commerce, generally speaking, GDP onto the Internet. And I'd love to transition now, had you lay out that opportunity in such an interesting way into some very specific examples of how this begins to manifest.

[00:11:46]

So I think of something like a Wal-Mart where, of course, they have got large e-commerce business, a much larger offline commerce business, but obviously transitioning one direction. How do you as an investor look for opportunities either from new companies or existing companies that are going to most capitalize on this trend, assuming that everything you said to open is correct?

[00:12:09]

How do you frame who might capture, share profit pool, free cash flow share in this or call it massive Internet transition over the next 30 years?

[00:12:18]

So I have a bit of a bias and my bias is towards working with newer, younger companies that are on the side of disruption was companies that can reinvent themselves. So that's a bias embedded in my assumptions. Let's talk about that first. So the beauty about creative disruption in tech is anybody who started something and build something better be very, very paranoid because somebody is right behind them going to disrupt them. That's number one. So I'd say that our general framing to think about almost any company starts with team.

[00:12:46]

So that's usually an old framework. We use Team TAM growth, intensity of growth, culture and unit economics. So those are the four things that I think are whether you invest in payments or software or Internet. It's the same thing in my framework. The one variable that I have dropped completely is the panic because I've historically gotten them completely wrong. I've always underestimated 10. And if you believe what I said we think is going to happen on the Internet, there is just infinite potential in almost every single vertical ahead of us.

[00:13:18]

So let's talk about new companies. Generally speaking, we don't invest early on in the life cycle of companies, especially in Internet, because I find people who invest. They are. It's almost like black magic. I just couldn't do it. I look for companies that have created real tangible business models. And for me, the one thing that I look at is the unit economics of the business model in the Internet. There's been so much noise and confusion over the last few years that all these companies burn so much money and burning all these.

[00:13:45]

Capital and Gaza has no business being built here, and this will all come to an end one day, I cannot disagree more with that view because anybody who's investing in a company, obviously there are some lazy theses out there. But the reality is that the only thing we focus on is, is the company able to make money on a per unit basis, whether it's a unit or whether it's a hyper local area. You look at DOD overall, it's the company we own.

[00:14:09]

Yes, they burned a lot of money for a long time, but as long as they were making money on a street level, you knew that this model is translatable to the entire country. So that brings me to the second point. To the first point is unit economics. We tend to focus on unit economics and break it down 10 ways to Sunday by geography, by demographic, by subscription model, et cetera, et cetera. And we absolutely want to see real free cash flow on a per unit basis in almost every scenario.

[00:14:36]

That's number one, because once you find that, then you come to the second point, which is the growth mentality. We as a firm do not invest in companies growing 20 percent for a long time. We want to see you expanding and capturing asset market share as possible, because even in a oligopoly or a duopoly to the larger company goes a majority of the operating profit dollars in that particular vertical. That's number one. The growth mentality is so hard to capture the way I test it out as I want to see the management team primarily looking for high end grade growth marketers having a culture of frugality.

[00:15:11]

I love companies that are very, very frugal in the way they operate. They penny-pinching for the most part, and I think the best companies in the world tend to penny pinch of the Internet. Look at the classic is a book and dotcom extremely frugal business. Look at Dorda, extremely frugal business. Look at Biden's, look at Amazon, frugal businesses, even Facebook, despite the fact they have all these books and pay people well, they are a relatively frugal business that everyone is incentivized to be very frugal with their time and spend their time at the highest productivity, applications, frugality and growth mentality almost go hand in hand for me.

[00:15:44]

In many of the cases I've seen, you try to not spend too much and try to get the most out of what little resources you have. So the growth mentality is so important. And then finally you come to the team. And again, I want to only work with people who are honest, high integrity, and who we can basically sleep well at night knowing that they will take care of our capital. I spent a lot of time testing out, doing back channel references on the CEO, CFO, just a quality of people they hire.

[00:16:12]

I just want to make sure that, listen, we are hopefully going to be the journey for 10 years with you. And for me, integrity and trust is probably the most important thing was the frameworks I use for almost everything in the earlier stages, especially in the private markets. The same thing is true for the public markets as well. We generally try to find similar principles and similar philosophies. So now the question was about what are the companies making the change?

[00:16:36]

Finally, after 20 years, again, we're seeing old school companies finally figure out the e-commerce model. For example, e-commerce is one of the oldest parts of the Internet. You had travel and then e-commerce and I would argue travel as a part of e-commerce. But if you look at twenty years, there was a time I still remember where Target used Amazon to run the website. We've been doing a lot of soul searching on companies like, hey, what are omnichannel businesses going to do in the future?

[00:17:01]

And now with a number of tools available, you finally enable both SMB as well as large corporations kind of evolve themselves into Internet forward businesses within that companies that we don't like, our companies who are just not willing to evolve and are willing to die. You can broadly divide this group into brands and retailers. If you look at the retailers, obviously Costco obviously Mart and obviously Target, obviously Williams-Sonoma, four big companies come to my mind. That said, even with these companies, I would rather invest in the picks and shovels and the distribution layer.

[00:17:33]

I am a big fan of owning Instagram stock than owning Walmart stock or Target stock.

[00:17:39]

If you even know the retailers for a second, even bigger affinity for brands. We as a firm started doing work on Nike and Lululemon because I think brands that have this pole position and customer love historically highly distributed but also earned very high margins because Nike owns high margin. So as for the quality of product, while now if they transition to an e-commerce business, they expand the TAM for themselves, they reduce their store footprint, which gets them more efficient, and they create more software in their ecosystem, which increases their margins.

[00:18:10]

For me, if you look at existing companies transitioning onto the new world, I have a preference for the infrastructure providers such as Outdoor, such as in Stuttgart, such as a rap in Latin America within the retailers and brands. I have a preference for brands. And again, if you looked at Nike's reports from a few days ago, boy, was wasn't an impressive, incredible numbers.

[00:18:30]

Yeah, I love this concept of brands transitioning into the Internet, but it brings up the question you mentioned scale earlier and the preference for very high growth in companies that you're looking at. I think Internet scale is an interesting phrase and. Cept one of the most powerful ways to have a great business is to get to scale faster than others, talk about your views on scale, achieving it. What does it mean for you to say a business has scale?

[00:18:56]

And how is that different for an Internet business versus a non Internet business?

[00:19:01]

It's difficult for me to comment on Internet business because it's just not part of my circle of competence. So let me talk about how I think about Internet scale. So first of all, from a qualitative perspective, I tend to love companies that have a product that is not sold, that is pulled off the shelf. And this is applicable to software companies, payments companies and Internet companies. If you have a product that's pulled off the shelf by a consumers, whether it's a bit of a viral loop, whether it's customer love, you start seeing the beginnings of Internet like behavior.

[00:19:30]

What does that really mean? It means that you don't have to put a bunch of marketing into growing your business, which also means that most of the efforts in the company, especially in the early stages, happened from a product driven perspective. Product driven, customer obsessed firms generally tend to have the initial potential of becoming Internet scale business. Let's start there. Number two, I want to see companies that reduce friction for consumers and businesses. I think there's an old saying that distribution trumps product innovation all day long.

[00:20:02]

For me, it's about I look for companies where they reduce the friction for whatever the business or the consumer wants to achieve. Let's take the case of twilly as a company. I love Twilla as a business. It's a software company. But any API model, what does it do? It allows developers to expand the total amount of things they can do. It makes their life easier when you reduce friction for developers or reduce friction for subs by allowing them to put up a website and three clicks like Shopify.

[00:20:28]

When you have Tick-Tock, which allows a creator to create a professional video within 15 minutes, all you have Instagram that allows everyone to look and feel like a professional photographer. That reduces friction when you can click like yesterday. I just got this Mike you asked me to buy for this podcast on Insta Kaavya Best Buy one click Balfe ten dollars as a tip for convenience to bring a mike and a webcam. To me that reduces friction. I love companies.

[00:20:53]

In fact, the only thing we look for, primarily for product placement. Does it reduce friction to achieve human needs? The number one you have is people pulling the product of the shelf. Number two, as I said, reduce friction. Then number three, of course, is listen, other smart marketing channels at once. You find that product market fit, other smart marketing channels you can use in order to scale your business. And it's the team being very smart about using this channel.

[00:21:19]

So obviously, many years ago, people used to have entire businesses built on Google CMHC, classic examples, booking dotcom. They were selling hotels online, but they built the best SEO engine in the world. Nobody could beat them of that stuff. In fact, the heart of that business is the steam engine. It just so happens they sell hotels. But I bet if you put that on selling cars or selling food, they do a bang up job anyway.

[00:21:43]

Then everyone pivoted to using Facebook as a next driver of growth. Now, Facebook obviously tops out after a while, which is why we saw all these DTC businesses get to ten, twenty million dollars of volume and then it became unaffordable to scale and Facebook. But Facebook has the biggest reach and the most targeting variables out there. So it is an absolute beast for growing a business. But then I look for very interesting other channels like fake Dauda, for example.

[00:22:08]

I find it very impressive that they use square cash app as a way to grow the business. Companies that constantly find the next interesting hack to grow that business also tells me that there's some Internet scale potential in that business. So you have the growth mentality, the vitality of consumer adoption and then reducing friction. Typically, those three or four factors really tells me that, hey, there is an Internet scale business to be built here. Now, what a scale really mean.

[00:22:35]

The hard part is when you do these three things, what effectively happens is unit economics look really good. And then if you have a unit economics working product, then you can for growth marketing on it to scale it without losing money. And it's hard to see into that scale because reality is a few years ago when I was sitting with one of my old colleagues, we were talking about trillion dollar businesses and it was so difficult to imagine a trillion dollar business even three or four years ago.

[00:23:01]

And now we consistently talk about trillion dollar businesses the way I think it in its CAYLUS, there was an article in The Wall Street Journal today about Amazon killing Shopify and killing Wayfair and copying everybody. And it doesn't matter. Amazon will be a three four trillion dollar business in the next decade. It's reasonably obvious. But hey, Shopify will also be a five hundred billion dollar business. Wayfair will also be a fifty to one hundred billion dollar business. These are niches.

[00:23:26]

You call them niches, but that's Internet field and you can build. The best focused furniture company in the world is a controversial company called Kabana. Kabana is an incredible business model. It is the best product out there. They have some of the best growth marketing teams in the world, in my opinion. And they focus completely on. In the consumer and reducing friction, because we all know that going to a used car dealership is a terrible experience with Kabana, they can build one hundred billion dollar business on the back of just selling cars and financing them alone.

[00:23:56]

So when I talk about Internet scale, these are 50, 100 billion dollar businesses focused on one thing and doing it so well. And frankly, one thing in the Western markets, forget about the international part of the world that are more consumers outside the U.S. and in the US. But you can build 50, 100, 200, 300 billion dollar business focused on one niche in one part of the world that's into that scale.

[00:24:19]

Can we use Kabana as an excuse to describe we'll call it the Kabana model, the service via the Internet of a specific use case buying a used car on the Internet? What that playbook looks like, because it strikes me from everything you've said, that one of the most interesting opportunities is taking this playbook and applying it to every kind of simple, niche, mundane transaction you could think of that currently doesn't take place online to build a huge business. And I know Kabana is an interesting one because it's controversial in the equity markets, vocal and vocal shorts.

[00:24:48]

Walk us through Kabana and most importantly, the Kabana playbook and why you think it might be interesting.

[00:24:53]

Let's take the case of Kabana. It's a super interesting company. Kabana sells used cars on the used car dealership model is a terrible business model for the dealer, and it's a one of the worst experiences for a consumer. Why is it bad for the dealer? Because it's not a scalable business model. Most dealers either end up franchising across multiple locations, but then they have the cost of their people, the business model of selling you on warranties and guarantees and other sales tactics that do not make it a happy experience.

[00:25:21]

And I'm pretty sure dealers work at sub five percent operating profit margins. By no definition is that a good business model to start with. The innovation in the mid 1990s out of Circuit City was fun. CarMax, let's build a superstore for used cars. And CarMax is a wonderful company, by the way. It's a wonderful company because they were able to integrate, I think, one point six percent of the overall market share, 600000 sales, car sales.

[00:25:45]

And then a couple of years ago, it took them, gosh, 30 years to do it, 30 years to get to sell 600000 cars. What is the problem? CarMax, three parts to the car selling business. You've got to acquire cars. You've got to refurbish cars. You've got to sell cars. It's very simple. If you think about what Kabana did, they had a company called Drivetime that was a part of the historical part of the business.

[00:26:07]

It gave them some capability to acquire cars at scale. Then what they did is they ended up building refurbishment centers, centralized refurbishment center, which reminds me of Amazon fulfillment centers. By doing that, they got real scale economics because a portion of every CarMax location is spent on refurbishing cars. Now, what have you centralized it? They've got some real scale economics, but the real genius, I think, is on the front end for what they did.

[00:26:32]

So if you've used a car on a sidewalk for use on Kabana and frankly, it's a delightful experience, it's delightful because you can actually pick the car by the car and again, you find the process and get financing all in ten minutes or less. I've never seen a smoother transaction process of buying a car. And part of what we do is whenever we own a stock, we actually go through the product experience quite a bit. And then we also go and do the fulfillment centers, checks and the salespeople and a lot of scuttlebutt work to get conviction on an idea.

[00:27:03]

But the point I wanted to make with the Kabana experience was it took ten minutes to buy a car and I've never seen ten minutes to buy anything, especially for twenty five thousand dollar transaction. The beauty is how they executed against every single market. The other thing I haven't talked about, about Internet businesses and one thing I insist every single company going public does is please show us your cohorts cohort analysis, the one superpower that you shouldn't make investors guess on because you want to be able to drive layer by layer, build up on a three to five year basis.

[00:27:34]

What car? Wanna go to market? I'd like Vroom, for example, is they took a city and they said we're going to have a playbook driven by radio advertising. Who would have thought radio advertising would be a suitable go to market for Internet business? But it worked really well, I think instead of a Nashville first. And their entire point was, let's go to Nashville and let's sell the first hundred cars and then two hundred cars and five hundred cars and let's acquire customers on the back of radio commercials because people spend time in cars on the radio.

[00:28:05]

It's pretty simple way of thinking. But then that entire point was the playbook was extremely local. So you start with one city and got the penetration. Come and get to one percentage point of all the cars sold to the market that go to market was phenomenal because once people were hooked onto the product and they tried the product and bought the car in 10 minutes, the car got delivered to you with a seven day return policy within 48 hours. Very recently I saw my car on Kabana and this is what happened.

[00:28:36]

I sold a car. I got four quotes. I got four from Kameido and three competitors. One competitor gave me a price. A thousand dollar. More than Carano, so I went down the process of selling my car, the first lady, to send me an email said, OK, here's a FedEx label. Please ship one key back to us and then we will call you in a week as to when we can pick the car up and then do 10 different things.

[00:29:00]

Well, I was terrible. Kabana was fami thousand dollars less. So I go there literally within two minutes of filling the application up. I get a automated link to set up a time to pick up my car within 48 hours. What do you think I did? Listen, I'm fortunate enough to give up a thousand dollars. Many people are not. But it is the obsession on reducing friction that people just don't get about kabana. And none of the competitors come close to it every day.

[00:29:28]

They increase operations just a little better and a little better. They just put based upon them and everybody else behind them. Hamilton Helmar talks about his seven power. But just process. You've got to be in the works. You've got to do it with just a little bit every single day better before you know it, the compounding effects. But you're so far ahead of the competition, nobody can touch you anymore. So we can argue about the unit economics and oh, by the way, the numbers are bad, et cetera, et cetera.

[00:29:53]

But from a Internet consumer perspective, Kabana is probably one of the most delightful experiences I've had outside of Amazon. Knowing the financials for a second, talking about valuation, which is a very different argument altogether. Kabana shows me every single data point that tells me this is an infinite scale business.

[00:30:11]

How do you think about the frequency of use for an Internet scale business as a variable for evaluating it? Caravana strikes me as something that you've done it four times. I bet not a lot of people have done it four times. That seems like a lot of times to purchase a car. Does frequency matter to you? I want to go to bike dance next and could say like a consumer on bike dance on Tic-Tac is looking at God knows how many videos a day like the frequency is insanely high.

[00:30:33]

We'll go to the total other end of the spectrum.

[00:30:35]

How do you think about something like that as you evaluate a business, the frequency of use, all things being equal, how much is that better than the margins and high frequency? Low frequency? But again, we're talking about converting the entire global GDP into the Internet. So not everything is high frequency light. If you have a business model that have high margins and high frequency, we'll be able to get a trillion dollar business and Karmanos would have built fifty billion dollars.

[00:30:59]

That's the only difference. The equity scale is going to be bigger. Hey, if you find me the next that, please tell me about this. I tell you. But if you ignore that for a second, the frequency matters. But again, even if a company doesn't have a high frequency use cases, you can insert frequency in the mix. So one thing I've been telling the Kabana team for a few years is you should build a community around Carano once you have a car.

[00:31:22]

I should have a subscription product, but I'd be, I don't know, X amount of dollars per month. But yeah, but I get all my checks done instead of buying a maintenance package and being able to buy Ranford or whatever or buying an extended warranty, just maintain the vehicle better for me. Let me pay you X amount of dollars per month. I can get my oil checked in your network, just general check ups etc. etc. and build a loyalty program around it.

[00:31:49]

Because again, if you build a loyalty program, one in itself, that creates stickiness too, because again, we've taken care of, you know, bundle and insurance. Everyone has to buy insurance. I still don't understand why insurance is not bundled into my car. I buy a car, bundle my cheap insurance, but in many ways, even in a non high frequency purchase channel, to engender loyalty and engender frequency, all things equal. I love frequency.

[00:32:15]

But on the other hand, let's talk about food, which is the highest frequency business model I love doing. I love. Superguy I love Zomato. I love Rabea. The more frequency you have, the better. The challenge, of course, in those models are because the elites are so small. The average voter is so small at this point at least the worry always is, man, the consumer surplus. The more the consumer has to be on top of the cost of food, for example, maybe too much to bear to engender high frequency over time, high frequency also kind of in e-commerce cuts.

[00:32:48]

The wrong the happy middle is somewhere in the middle where that's why Amazon is such a wonderful business model, which is why I'm very excited about Jordache is talking about adding new verticals and multi verticality with their food business, which is also why we invested in Rafie, because that have a multi vertical business starting in the beginning. Frequency is absolutely preferable, but if you don't have it, it doesn't matter. You can create loyalty around it and programs around it that keeps you sticky on the platform.

[00:33:17]

I mean, this is what book in the book dot com is wonderful because one, if you want to go to Europe and book a hotel, well, you've got no choice but to do a book in dot com. But number two is the guaranteed cancellation with no pricing. So you don't feel like you've got to call Expedia customer support to get your hotel reimbursement. And then they had the genius and but a loyalty has been a marketing technique from the beginning.

[00:33:39]

It also did a really good job, for example, with a fintech platform, that Uber car, that Uber. Collect so many points and look at it engenders loyalty to the Uber ite and the Uber platform, many, many ways of creating loyalty and stickiness, even if the frequency is not a hybrid.

[00:33:55]

Let's go to the highest frequency end of the spectrum with bike dance. You're one of the early investors by dance, I think privately many years ago. Talk about that business and we can skip the obvious aspects of it.

[00:34:06]

And I think at this point is familiar with Tick-Tock. They probably use a little bit. They understand the beauty of the data accumulation and the algorithm and talk about reducing friction, like you're seeing your first video inside of a few seconds of downloading that app. So they've been incredible at reducing friction. As you think about that business, what is most interesting to you about it today and what, if anything, about how it's been run or grown itself, do you think is portable away from the business and potentially applicable to other Internet scale businesses?

[00:34:35]

So to be clear, when we invested in my dad's gosh four years ago, they did not have to talk. There was no tick tock by dance is not an application business or people don't understand about by dances right now. Everyone thinks of it as big consumer phenomenon in the US and in China. But it wasn't always the case and it's important to understand what underlies the business. First of all, a company at its core has the best machine learning and the best personalization algorithms in the world, period.

[00:35:05]

One of the best almost to the point of in the West End what we would call a creepy. But it works really well. I see this with respect. It fell creepy's that we were doing the testing of the old tortilla application across five or six different phones sitting in our office in Menlo Park. I distinctly remember one of my colleagues telling me, man, why the investing in this piece of crap is you're showing me pictures of skimpy women, scantily clad women.

[00:35:28]

What are you talking about? Like, I'm seeing sports. And it turns out that that guy clicked on a couple of pictures because it was right there because to entice you and then the machine went off on a complete tangent of its own and just kept showing him picture after picture. And he's like, this is a really crappy product experience. A couple of clicks took him down the wrong rabbit. But that is what really struck us as, my God, it's the most intelligent algorithm that is so powerful here.

[00:35:53]

The machine. Just adjust to your requests very, very, very quickly. That's number one. Number two, people don't understand the infrastructure and the depth of hardware and software being built inside the organization. This company is one of the biggest buyers of Invidia in the world. If you talk to the management team a few years ago, the company they would really idolize is Google. And what is special about Google? Google basically built some of the most incredible Internet infrastructure for its own because the technology at the time was not enough to satisfy the volume of search queries being conducted on Google.

[00:36:27]

You've heard all the stories about it. At its core, it is a software and machine learning driven enterprise. So then the question is how do they create applications? What's going to be interesting and buy goes public next year. And if you look at this company over the next four or five years, as people will not quite know what to make of it, we in the Western world look at Facebook as if you've got four big applications. You got WhatsApp, Messenger, the Big Blue App and Instagram.

[00:36:52]

Google has ten properties. Tencent has two properties. Bipeds will look like one or two properties and a bunch of cats and dogs. And the reason why it looks like that is I don't even think unlike many companies that we're used to in the US, where you got a big visionary leader who has a view on this is the way the world looks like. Jiang Zemin is what I call he's an amazing leader, but he's one of the most flexible minds I've met in my life.

[00:37:19]

What I mean by that is the company is the constant edge of experimentation. Any point in time, there are probably dozens, if not hundreds of experiments being run on what will work. A couple of years ago when I met them, we were mapping out where can we build from into advertising, because what we know is you've got these big platforms at scale. But the reality is, if you think about the totality of human knowledge, there are people who love Brazilian jujitsu movies in Brazil and in India and in Japan and in China.

[00:37:50]

We know people who love Volkswagens in Germany and in Argentina. If you actually look at the totality of human nature that are look alikes in every single part of the world, and Oeming was all about that, how do you unlock knowledge and interest groups? Which is why every single application abidance is based on removing friction is very easy to build a total piece of text, very easy to build. A tick tock video is very easy to do a bunch of other things.

[00:38:15]

So removing friction is important. The key point here is at any point in time, there are hundreds of applications being done. This is why they had a job application. At one point they had an application primarily for car enthusiasts because this is all the places in the world you see look alike audiences in different parts of the world. I cannot tell you with any confidence that I have a view on what the next big for, but that's going to look like.

[00:38:38]

But where we do know that consumers love to spend time is on education and gaming. Outside of entertainment, education, gaming, entertainment and knowledge for places we spend most of our time staring at our phones, knowledge, tick tock, Twitter, podcasts, entertainment, Netflix, education, very important, especially for school. But education could be a very important time that people spend money and time. And it comes to gaming. Gaming is just, again, part of entertainment.

[00:39:05]

So I think they are going to spend that time in education and gaming. But the reality is we don't know what's actually going to take off till it takes off. It's a culture of experimentation. Once they find that something works and clicks these guys just for growth marketing dollars on it and they are willing to spend. In fact, one of the big criticism picked up back in the day is they were spending money to acquire customers. And again, that goes against every framework and every piece of pattern recognition that we have is into the investors.

[00:39:33]

But their genius was to think about consumers as e-commerce entities. In e-commerce companies spend money, you acquire the customer. The customer spends money on the platform, an arbitrary story, and they have the same you. Well, let's apply the customer. But then we're so good that once we acquire the person they retain at 40, 50 percent, six months on and once they're in, they spend 70 to 80 minutes on the platform. And so they can be monetized at very, very high levels.

[00:40:01]

That is the interesting part about abidance nobody gets. It is this experimentation model, which in three years we don't know what they're going to create. But you kind of know that the culture and the company is based on building the next big thing. Once they find it, they know how to scale. If this company knows one thing well, it's how to scale independent products. And number three is, of course, the company always wanted to be a global company.

[00:40:23]

So one that got me very excited early on is mad for the first time. We may actually have a global Chinese company, which has not happened so far.

[00:40:31]

Now, unfortunately, some of their attempts in the US was thwarted for a few months. But again, it looks like next year things will be back on track. But it may be the first global Chinese company. I think that's the genius behind by Danz that I don't think most people quite understand, because even now what I read in the media is, oh, my God, it's so great. And the talk is just one piece of a huge empire that people don't really see.

[00:40:52]

I love that. It's ultimately like an engine company. You know, how with how to apply personalization and then scale a successful product. I think everyone's learned from technology companies history. We think back to us as kind of an experiment inside of Amazon. Obviously, in hindsight, it looks genius. But at the time I would have thought that most of Amazon's market cap today might be the result of something like that. It sounds like with bi dance, while tech stocks obviously globally popular, maybe most of its market value comes from one of these experiments.

[00:41:20]

And that's not necessarily because of that experiment.

[00:41:22]

It's rather the platform itself that enables that you have such an interesting one AWOL, because a lot of what Amazon's genius was, is they took pieces of OpEx for themselves and set it free in the world and then created that platform for everybody else. I see the same patterns and buy downs as well. So let's talk about this product. Imagine their PNL in twenty twenty one. When they hopefully go public, it'll have three line items. It'll have the advertising business, it'll have a value added services business and it'll have an enterprise business.

[00:41:50]

Let's talk with enterprises for a second.

[00:41:52]

So one of the challenges in China is there are no great homegrown solutions for software. We have Aslak and we just have a bunch of things we can use off the shelf. This morning I I'm sitting on drome research and I thought it was a wonderful product. But those products don't exist in China, which is also why I think the opportunity, the cloud in China for companies like Bhabha is so immense ahead of what abidance do. Well, buy them basically put together a bunch of products and they found it quite anemic and mediocre.

[00:42:18]

So what they did is they built their own product for internal productivity. It's called Laerke. It effectively is file sharing needs, collaboration meets on click video chats and video streaming meets email, meets a couple of other things. And they took that and they started using it internally. And everybody had to use is a wonderful game, if I could Zuman driven product for the Enterprise and these guys do consumer really well. And now they've taken that product out and basically said, OK, let's sell the rest of the world.

[00:42:49]

Starting in the UK, I think a couple of years ago, you can actually buy LARC, I think for eight dollars per person per month. I haven't used the product internally, but again, it tells you that they are looking at the great companies in America and saying, how can we be that it's a learning organization at its core. So I would be to something untoward happens. This is going to be one of the trillion dollar businesses the world to see.

[00:43:11]

I love the idea of process power driven by OpEx and then OpEx being used as the source of innovation to turn it inside out. It's such a cool idea.

[00:43:21]

I think it's almost evil genius. And this is what creates trillion dollar businesses. Once you get those things going, there is no limit to what you can grow. It's literally as far as the eye can see. Let's talk about global.

[00:43:33]

Everyone talks about the US technology companies you started to reference and we talked about by some of the international ones. Maybe we can begin in India. I think that part of your view of the next 30 years and this. Transformation into increased Internet GDP relative to global GDP is that a lot of it will happen away from America, American stuff. I've been a leader in this kind of space at the top. I don't know how many of the top 10 companies are in US technology companies.

[00:43:56]

So they got good market share in the Internet already. How do you see this playing out for other more unique geographies and places that have enormous markets like India, China and Latin America?

[00:44:07]

So let's talk about India first. Have been obviously I am of Indian origin, somewhat a little bit of a soft corner of that. But I also cut my teeth investing in the private companies in India. So this is where I actually learned investing in private companies. Now, let's level set this a little bit, acknowledging the negatives. India has always had a lot of opportunity, but has disappointed I for the most part, we haven't seen except for one maybe a MakeMyTrip on the US exchanges.

[00:44:33]

We haven't seen major Indian companies come to scale and become real long term public companies. We cannot invest. But this is not to say there's a lack of talent or a lack of opportunity in India. So let's talk about the waves of Indian entrepreneurship. We had the first wave in the late 1990s. There were a couple of good companies built a couple of private exits, but it kind of fizzled out. And then we had a bit of scarcity or a bit of a black hole in terms of innovation till we had the mid 2000s.

[00:45:00]

Again, we saw the rights of Flipkart and basically e-commerce in India. And again, those were good. Those created the first I would call billionaires in India on the back of technology investing when Flipkart sold to Walmart. Then after the great financial crisis where we kind of saw what I call wave after wave of supersmart entrepreneurs willing to build for India first, because the market obviously was very big. It's a very young market and it's upwardly mobile, which has all the right characteristics to go and to build big companies.

[00:45:31]

But through 2010 till 2020, it's been a bit of a slog. But at the end of 10 years, if you want a successful ecosystem, you need three things. You need talent, which is there are plenty. You need capital which was there but keeps going in and out because investors come in and go out because of the market. But then you need exits. First of all, what I say with talent is I've been investing in India for, gosh, close to nine years now.

[00:45:54]

I would be confident putting some of those entrepreneurs in front of any entrepreneur around the world and they would hold own that our smartphones, every part of the world.

[00:46:02]

And the beauty of the next 20, 30 years are all these geniuses will be discovered because capital will find them and the opportunity is going to be there in front of them, the quality of people and the quality of product, every single word, every single couple of years, just getting better and better and better. Why is that the case? Three covid. I think it's something as simple as innovation in airline ecosystems. Now you can fly San Francisco to Delhi and SFO and to Bangalore Direct in nineteen hours.

[00:46:33]

I remember coming to America twenty years ago. It was a chore to come to America, get on a plane from Mumbai and if somebody in Europe and then connect with America and then go to the theaters. Just now we have one stop direct flights between San Francisco and Bangalore. Generally speaking, our Delhi and I have seen over the last few years, almost every month, we would have Indian entrepreneurs come by the Bay Area, learn from the best here and move back.

[00:46:57]

So that's number one. And number two, though, is the democratization of knowledge. I mean, that we think about the service you're doing on this podcast. Ten years ago, the smartest people would not be teaching us everything. And now they are knowledge, thanks to the Internet, thanks to Twitter, thanks to the amount of information on blogs and the access to smart people has basic allowed everybody to create solutions when they didn't have a chance to do before.

[00:47:22]

Knowledge has been democratized. Now, when those two things happen, as people get richer, what happens? Ambitions get bigger and now the ambitions of Indian entrepreneurs are world class. I can put them in front of anybody and they want to build world class companies sitting in India. Why can they do it better than most? Because, again, all these entrepreneurs grew up in an era of frugality. Indians are extremely frugal people. If you can build a business and have the unit economics, look at India.

[00:47:49]

When you take it to a different part of the world, it becomes a walk in the park. Which is why I think over the next 20 years, a lot of SaaS companies are going to come out of India because you have this unfair advantage of low costs in India, but yet you sell to American consumers and American businesses are the lot in the Tice's altogether. It's now the emerging scale of companies and the number of IPOs to come out of India in the next one to five years.

[00:48:16]

And these are going to be billion dollar exits, three, four, five, ten billion dollar companies. This is why India is so exciting. I think we're on the cusp of kind of that hockey stick opportunity because you've now got a young and extremely entrepreneurial ecosystem that all wants to go and build wealth. That should remind us of America in the eighteen hundreds. And then the last piece, of course, is getting the exits going. India's always disappointed on exits.

[00:48:43]

I am. Hoping this time will be different, the data and the skill of these companies tells me it's different this time. Now we will see companies that I've invested in will likely go public next year. And that is very exciting. And these companies are doing 30, 40 billion dollars of volume already in payments, for example. I want to highlight two companies that me I'm excited about in India right now is Pine Labs and Sudan. They're both investments.

[00:49:07]

I made biolabs think of it as a square of India. In many ways they have this system. It goes to hundreds of thousands of SMEs and people accept credit cards. What Scooba done for them, obviously during a couple of months of covid volumes declined 70 percent. But if you see the resilience, how they came back strong and now they're above that levels. And frankly, now this is a huge bull function because every merchant in India is like, I've got to take digital transactions or else I don't have a business, number one.

[00:49:33]

Number two is I want credit so that Valaida business is on fire right now. When they go public, whenever they go public, they will be compared to an after B to affirm to a square and they have all the right characteristics to do so. So look at the quality. And people want access to growth markets. And India is absolutely one of the big growth markets of the world. And they have a business model that works really well. The other company you would talk about is Odone.

[00:49:59]

This is the beauty of international investing in Internet because human nature is the same. Whether you live in America, Western Europe or India or China, you're the same person. You want to eat food, you want to buy your groceries, you want to get stuff from a shop. It's the same thing. This is different than software, but it's a very unique system that works in one part of the world, maybe not in a different part of the world.

[00:50:19]

So with Windows, though, when we invest in the IPO a couple of years ago outside of the game, if side, front, end, which is all valuable, everything else, the genius there was to go to the manufacturer and go to the source and go to the farm to buy produce wholesale so that you could reduce prices and you could collapse the six or seven layers of distribution via Internet scale distribution. That's into the scale. Again, you're increasing efficiency in these markets.

[00:50:45]

Once you saw that world, we're like, well, this should work in India because you've seen these case studies in India where Unilever has to put these special supply chains in place to basically be able to sell a satchel of shampoo for ten pennies in a Forteo town. It's a supply chain nightmare. Now, what if you collapse that if you collapse, that you went to the manufacturer or the wholesaler and directly sent stuff to the small store? Well, that should produce a very big company with lots of margin to be taken out of the system.

[00:51:17]

And then why is this small so important? Because, again, Indian consumers are frugal. They do not trust e-commerce companies, which is why no e-commerce company front end can really scale. They still trust the local store. If you think about the three part framework that helped Amazon scale, price, frequency, convenience, well, let's give price to the local store. Let's give them convenience unless we do infinite selection. Well, they you have a real business well done.

[00:51:43]

Went from zero to close to two and a half billion dollars in volume exiting this year in less than three years. That is hyperscale India. And again, they burn money. But again, if you look at them on a unit economic basis, contribution margin, positive, and guess what? The local stores love them and they've created the trust equation. But the local store and the manufacturer, once you build an infrastructure, nobody can touch you. Odone will be under the candidate that goes public in a few years, will be listed on the Nasdaq.

[00:52:14]

And the best part about India is Indian companies already realize that the real value equity creation happens in the US. What do they do from the get go? They are organized as Singapore entities and so are Singapore entities. They can go public on the U.S. exchanges and so that all of us around the world can take advantage of a country which I think has a next best fifty years ahead of it.

[00:52:37]

I love the idea that all of this is lining up in the preface that you gave of the reasons why maybe it hasn't happened so far and kind of what's changing. The key thing here, I think, is the comparability of Internet business in India to an Internet business in America or somewhere else because of the shared layer of needs and consumer needs.

[00:52:55]

I know that you've broken down Internet businesses into a number of subcategories, some of which we've hit on, some of which we haven't. And I'd love to spend a few minutes on a few of these categories with a mind towards the models with which you approach them. So if you're looking at a payments business versus content subscription business or something, obviously you're going to be looking and caring about different things. And I'd love just because you've looked at all these things so deeply, Internet business specifically for you to give us a few of the lenses through which you view these different kinds of businesses.

[00:53:25]

So maybe we'll start at the top with everyone know Facebook and Google with advertising as you approach an advertising business where obviously those two companies have totally dominated. And I know Amazon is fast growing because of the attention that they demand. But when you think about the opportunity to be an advertiser on the Internet, what matters? What? You excited, what do you look for when looking through a business that might monetize that way? Only two things that matter in ad business.

[00:53:49]

One is scale of users and therefore time spent. So time spent, dupa day. That's the one thing that matters. And second, on the supply side, the quality of tools to onboard advertisers, because the first many advertisers are going to be small and medium businesses. You can't sell to big enterprises. So when the invested by dence, only one thing that mattered. Can you retain users? You get to some scale of one hundred million users.

[00:54:15]

How much time do they spend on the system? Same story with ROBLOX right now. ROBLOX not advertise on an advertising basis, but guess what, they could turn it on and it'll be incredibly bad. People spend two hours a day. For me, a purely ad model is scale of users time spent per day you buddy ideally and on the supply side the quality of tools available to very quickly onboard users.

[00:54:38]

I love this game. We're going to hit these categories. A couple of things that matter, right?

[00:54:43]

The two things, more than two thirds of the other cases. But I love this way of approaching it. OK, so those are the two things are better for advertising. What about for sort of the opposite end of the spectrum? So most ad businesses are getting you there and entertaining you, keeping there somehow, but not charging you to be there and then serving you ads. What about direct content subscription businesses? How do you think about what are the things that matter?

[00:55:03]

Looking at one of those, I'm assuming that I'm a Netflix, for example. Sure. On Spotify, it is the depth and quality of content. That's the only thing that matters if you have high quality content. The question then is, is it affordable? Is a cheap enough to use it every day or every month and be ten dollars and then assume that retention of users time spent again would be really important. So quality of content on Netflix is a wonderful model because of the true utility.

[00:55:29]

If you're putting the cart before you buy Disney Plus and Hulu, you're buying Netflix. So it's water in the tap again. I would say Netflix. It is affordability, quality of content and stickiness of users.

[00:55:41]

Let's jump to stick with consumer and jump to the two huge categories, e-commerce and marketplaces. And those are different things. Obviously, as you approach new businesses, e-commerce has been a hard place to build a lot of great businesses. Some of the very best businesses are e-commerce businesses, but tend to be huge scale winners. How do you approach e-commerce in marketplaces?

[00:56:01]

Sometimes e-commerce companies are marketplaces and vice versa about e-commerce as we our first party. So the first thing you want to see in an e-commerce business is do you get to positive contribution margins on a product sold? This is excluding all discount. Number two is I look very carefully for logistics. How long does it take for it to get to you? This is a world where I think people will pay for convenience and I don't see that trend changing anytime soon.

[00:56:33]

If you ignore the obvious case of, oh, you know what? It's too expensive to order a burrito because it costs seven bucks more on overeats, people will pay for convenience. And again, and that spectrum of, hey, can I get Amazon became a big deal because they went from one week shipping to two days shipping to one day shipping. The problem is, can they get to two other shipping, which is what the Russians got. That's for you.

[00:56:55]

If they don't cross that chasm, it may even be a problem for Amazon. For me, on the product side, it is about unit economics on actually selling the product and making money on every single unit to sell on the consumer side, the convenience factor of actually getting it within a period of time that doesn't annoy you. Number three, and this is what's really getting interesting in marketplaces is, man, US e-commerce is so boring. It is so boring.

[00:57:22]

Think about the offline world. You've got big box retailers, which is, by the way, very much an American phenomenon and doesn't happen most of the rest of the world. You've got the mall and they've got high street luxury fashion luxury is for a few rich people. So ignore that for a second. Amazon effectively is the big box retailer with infinite selection. What about the mall? I came to America for the first time. I learned the concept of mall walking.

[00:57:45]

I do not know how to not realize it, but mall walking is a thing people love going to a mall because it's a form of entertainment. So for me, I am looking for products that delight the customer, which is fine by the way, Etsy works. It's cute, interesting stuff made by artisans with love that consumers enjoy browsing and shopping. This is my Poche. Mark works. People love selling their stuff to other people and people love browsing stuff.

[00:58:12]

It's just a human need to connect with others. By Pendo, though, works wonderfully well in China, is a human need to make things fun to me by a few things to get back to e-commerce unit economics, convenience and then going forward, is there something that hooks the consumer that makes it really entertaining is something I look for. How about in marketplace?

[00:58:32]

Is anything special that's just reserved as a lens through which to view marketplace businesses where it's not first party build the product, it's rather connecting supply and demand. It's serving as the connective tissue.

[00:58:42]

Yeah, the thing is. Marketplaces ultimately, I think, have to devolve into some sort of full solution. We're all seduced into the world of a pure play marketplace will work forever. I think we have now learned over the last five or six years that that's not going to work, which is why GrubHub is facing a difficult scenario right now, a pure play marketplace. When somebody with a first party solution that provides price and convenience gets you faster, a pure play marketplace cannot survive.

[00:59:09]

So I actually think as e-commerce companies evolve, there's nothing called an e-commerce company anymore. There's only omnichannel businesses. Amazon has offline and offline businesses do e-commerce just the way you have a full stack solution for food and car pooling, et cetera, et cetera. I think a pure marketplace as a standalone basis may have issues going forward. Every CEO, every entrepreneur thinking of building up your marketplace, it'll work to hack your way into some growth. But you really want to put some clothes in it to make sure you either control the supply side so that nobody else can come in and take the supply away from you.

[00:59:43]

I love it.

[00:59:44]

Let's move to another type. We're just going to do all this because it's so darn fun. The next one is what you call on demand. This would just be something like Uber. Jordache should be another example where it's not a subscription necessarily. It may look like one functionally in terms of how much you use it, in terms of the revenue generated per user and the frequency of that revenue. But fundamentally, it's just you need something. You want it as quickly as possible.

[01:00:04]

Internet on demand. What distinct things matter here relative to some of the other categories that we've discussed?

[01:00:09]

I think it's supply side and local network effects. I love on demand businesses because one, the TAM is huge, too.

[01:00:16]

Once you crack it, that's your. Nobody can touch you because you either got into some level of dominance, either because of product excellence, process excellence and back into the business. That was with the fact that capital was a competitive mode and capital is no longer a competitive product. And process one on demand is a hand-to-hand street fight business on the ground, beat by street location by location, street fighter business. For me, product and process and supply exclusivity is what drives on demand companies, which is why daughter does so well, because they have the best process in the world to go and fight street by street.

[01:00:59]

And it's very hard for the traditional marketplace to change that DNA. In fact, I would argue the only company in the world I've seen that has changed the DNA to go from a capital like high margin business to be able to be street fighters is a company in India called Zomato under the company will go public in the next 12 to 24 months to close the loop on India. They have really impressed me in the way they've changed their DNA to be able to do kind of a high CapEx Heyburn operation on heavy business.

[01:01:27]

Look at Google, for example. Struggles to do shopping struggles cannot do it. In fact, Google's been selling phones for a long time, but I'm an Android user. But you do the unboxing. Nobody gets delighted opening up an Android device.

[01:01:40]

You get delighted. Opening an Apple device or even an Oculus device is delightful. Google just cannot do it. But guess what? Amazon pivoted to turning on advertising on the dime. So that's my point. Once you build that process muscle, that is your mode. I don't think anything touch you after that. It's too hard.

[01:01:56]

The next category is payments. And you've mentioned a few of these companies, very different style of business, square, PayPal stripe in the private markets, the payments category is very unique. Take us through the lenses that matter to you when looking at these businesses and and maybe say a bit, because I think just in terms of number of them, if you just look at like a covered universe, there are fewer of them, it seems. So any comments on just how many winners there can be in the space and whether there will be sort of one winner to rule them all, since there are relatively few of them to begin with?

[01:02:25]

When people talk about these winner take all markets? I don't have a view on this except for that. I look at what has happened in the past. People talk about, oh, my God, Amazon will rule e-commerce. That's just not true, because guess what? There are many large companies built in the offline world. So it was in consumers. So you have a Walmart, which, by the way, was the old version of Amazon, the Stubblebine.

[01:02:46]

But around a Walmart also came a TJ. Max also came. Williams-Sonoma also became a Target that I've too many of these companies. There's nothing called winner take all anymore after. It's in my mind. In fact, one of the biggest mistakes I made in my life, I think a lot of investors is be scared by what the big platforms will do now in sort of social and in search, you don't really have a winner take all market. But in e-commerce, I'm coming to the conclusion that's just not true anymore.

[01:03:08]

So back to payments. It's the same thing. It's very hard to dislodge Visa and MasterCard. I think those are the two best businesses in the world, period. You can't do anything about them. It's like Google and Facebook. You can't touch them, leave them aside. But almost every other case, there are multiple processors that are aggregators. And just the way that are usually three to 10 to 15 local MLS national ecosystems around payment processing, I think that won't be as many offline, but there'll be two or three or four.

[01:03:39]

The three companies I personally love are Adient. And square in the public markets, we own both those companies and the private markets obviously have stripe envy and one of my biggest mistakes is not investing in straight 92 billion dollars to go a billion dollars in market cap. So I guess I'm the doofus here, but, my God, they had built a machine that works. What do I look for? Primarily in the payments business. I actually look for what conversion gains are you able to create for a merchant payments, by the way?

[01:04:09]

It's a tax and a bane of the universe. Nobody wants to pay for payments. And the U.S. especially is very expensive. I mean, companies pay between one hundred and fifty and three hundred bps, which is ridiculous. It's very expensive. It's a tax on the entire system. So the only way to justify that tax is as payment schemes get more and more complicated across multiple kinds of payment schemes, are you able to, one, bring more people into the ecosystem?

[01:04:34]

So your sales increase square cash app is powerful because it brings a hundred million in the bank people in America making less than seventy five thousand dollars into the form of payments. And that's why it's so powerful. Tribe is powerful because arguably it has the best conversion ratios and the lowest kind of transactional loss ratios of any payments company in the world. And the same thing is true with Adaiah and Financial and China. It's a different beast altogether. That's an entire super app, which is just a complete different ecosystem.

[01:05:05]

So that's why I look for in payments companies. I mean, especially in America, that retreat is a read too far. Only way to justify that is can you increase conversion rates for the merchant and bring new customers to them, either via by now be laid out or some financing or whatever. You have to justify that two hundred, three hundred bits you are charging them. This is for the bigger merchants and for the smaller merchant. It's equally the smaller merchants are not that price sensitive.

[01:05:34]

But again, you are bringing new customers and allowing them to start a business, which is why Square is so powerful. I mean, when we invested in Square gosh, three or four years ago at 12 bucks a share, I mean, there was no cash app, but it was so brilliant to see how they had this piece of hardware that looked and felt like Apple that you go to almost every Walgreens. The test we did, I went to Walgreens all over San Francisco.

[01:05:56]

I know it's a wrong sample size. I get it.

[01:05:58]

But I asked them, how many days does it take for the square dongles to get stocked out? And they would say typically two days in two days it's gone. The process flying off the shelf square. Once you build this unfair piece of hardware distribution layer, well, you can put software on top of it and monetize that, which is what they did with payments. Those are the two things I look for. Can you add value to the merchant by increasing conversion rates, reduce transaction losses?

[01:06:22]

And if your omnichannel same story, can you actually reconcile your omni channel, your online and your offline trades kind of in the same ecosystem? And so which is why add in so far, because they have one of the best payment systems in the world, period.

[01:06:35]

I love it. What is the rake rate take rate outside of the US? Is it much lower than that one fifty to three hundred. And if there's a big difference, what drives that difference?

[01:06:44]

First of all, it's regulation and legislation that drives the difference. So in the UK, if I'm not mistaken, I've looked at this company called Monzo in the UK, which is a phenomenal kind of like NexGen, manage your finances, credit card for consumers, enough businesses. I think of when I met the CEO one day, they were talking about, hey, what do we do in the US? And everyone wants to be the US because I think the stock goes something like this for every order that they process in the UK, the equivalent order would make them six times more money because of the regulation in the UK and Europe.

[01:07:17]

More generally, the payment processing rates are far lower.

[01:07:20]

Also, by the way, unlike the US, debit is a bigger portion in Europe, generally speaking, and Germany is still the cash economy for the most unbelievable, the extreme case of India, where the rates are zero effectively then using up rails mandated by the government. It's frictionless cost of payments, maybe a few bits. If you look at and financial Alibaba, the intercompany transfer pricing between and and Alibaba is less than ten. Let's look at us here.

[01:07:47]

We're sitting here charging one hundred fifty for much of the rest of the world. There's a it's almost free. It's like water. I don't suspect things will change anytime soon in the US. So companies that either from abroad, like Abian, who are getting deals cut in the US, you should assume that they're effective unit economics go up over time. And companies that have established a dominant position because of the quality of product like passed in the US will keep doing very well.

[01:08:16]

And then for the SMB and everybody else, this square keeps just gaining market share. I love this.

[01:08:21]

I could do this all day with you. We're in the homestretch here, really getting to left with software. So I would say there's three kinds of software that are worth mentioning. One is consumer, one is enterprise, and the third is developer facing. And you mentioned Twilio earlier. It's a very popular category in private markets. There aren't as many developer tool public market companies, but I think that will change in the years to come. Let's briefly touch.

[01:08:42]

On the things that matter for these three categories to starting with consumer software, for consumer software, I'm talking about things like zoom and slack, I can look for the network effects associated with them. I remember a time when, gosh, before Stewart end up sending us company to Salesforce, Microsoft teams was going to dominate the business and Prush Slack. And I was like, this is actually impossible. They actually cannot do it. What they can do is bundle teams with all the corporate customers, but every forward looking consumer in the forward looking business and consumer in the world will be on slack.

[01:09:16]

So that was slack specifically. Zune actually, I think used the original Internet concept of reducing friction. Go back three years before. So remember how painful it was to download an app like bluejeans or Skype? It was so painful that people sent me a bluejeans link. I'm like, please, guys, let's not go to do you want one click? Start talking to somebody. It has to be like your natural behavior. So I think that both these companies but the consumer facing companies for the enterprise, I actually think consumer companies have a really good shot at cracking this.

[01:09:50]

Now they have to focus on it. Facebook has tried Facebook Workplace by Dantas Trimark. I look for entrepreneurs or companies that are bringing consumer facing behavior like Internet companies to the workforce. This reminds me of times back in the day where people would refuse to use a BlackBerry because they said we have one device, we want to use our Apple device, let the CIO change their security motion around me. I refuse to go to a different device as consumers are powerful at the end of it and employees are powerful at the end of it.

[01:10:18]

For consumer software, the exact same feature set that we think about on Internet companies applies to enterprise companies as well. How about an enterprise software? Anything distinct or different? Everyone talks about how the enterprise is really just going to become the same set of things that matter for consumer, because we're all so demanding now that everything we use be super low friction. Any additional thoughts on enterprise before we close with developer tools?

[01:10:40]

Yeah, I'd say for Enterprise and listen, I don't do enterprise software because generally I don't understand businesses that need large sales forces, big closing times. It's not part of what I call Internet style investing. So I would not be the right person to talk about it. I'll tell you, like, listen, what SLAPP acquired by Salesforce. I actually think part of the entire acquisition date is to bring that mindset into a hulking organization like Salesforce, which is getting long in the tooth at this point because the products are not exactly friendly.

[01:11:09]

A consumer facing, I think, Marc Benioff being the genius he is, he realizes that we can't go down the path of Oracle, but basically everyone hates instead. Why not transform the organization within what you think is very smart? Because that's why there's a Brett failure. And as to what Butterfield and the business going forward, look at the change in mentality happening in the business. We don't own Salesforce stock, but I would suspect there is more to the acquisition of Slack than just acquiring.

[01:11:36]

I think it's about changing the mentality of a big organization which was going down the path of being a little archaic.

[01:11:44]

Last one will do is developer tools. I don't want to talk about Tullio because everyone talks about Tullio. It's an amazing company. I've had Jeff on the podcast. He's amazing, but we kind of know like the story here is what's incredible is more and more stuff is being built. Talk about software and Internet enabled businesses. They all need developers. They all need some core primitives. Something like communications with Twilio grows with the use case itself. What else, though, beyond Twilio is interesting to you in this?

[01:12:09]

We'll call it infrastructure developer tools, space. And what matters to you when you're looking at one of these businesses, especially young ones?

[01:12:15]

I look for vitality again. I look for number of gets a number of developers using it, the amount of interaction on developer forums. So for me, I look at and mostly these developer groups have really happened to be open source companies. The Mongo DBS are super interesting. The optics are super interesting, providing single sign on for companies, anything that could allow a developer. Instead of integrating an SDK and doing a bunch of work, we do a simple API call and get your job done just the way you want to click and get food delivered in thirty minutes or less.

[01:12:50]

It looks and feels to me like an Internet company. Companies, I look at the outside again. I wouldn't call us as experts explicit developer tools just yet, but it looks and feels to me like these companies can create a fifty hundred one fifty billion dollar business. I mean, to have you in my mind will absolutely be a two hundred plus billion dollar business. But me, the few things are vital. That option engagement, usually freemium tools.

[01:13:15]

I also like Atlassian on Australia. I love Canada out in Australia as well. Amazing company. And guess what? We had to build a logo. I had two choices. I can either I'm a designer, I'm like, you know, it's cool. I was going to build it on Canada to make ten minutes on the logo and the beautiful me. I just became part of the town of Canada. I'm a designer in quotes, again, reducing friction, making life easy for developers and usually open source sold by a freemium model are four or five of those key.

[01:13:42]

I'm looking for. Well, this has been so much fun, I've got two closing questions for you. Like I said, I could do this on every topic with you. Just love the energy and interest that you obviously bring to the conversation. The first is about investing the firm itself and what makes for a good investor. And I guess the way I raise the question is, when you're looking at hiring and mentoring somebody new to the investing space, which you were not that long ago, you were an engineer first as the first part of your career at Qualcomm.

[01:14:09]

The transition to being an investor is an interesting one. It's a very different discipline. What advice would you have for people out there? Because you've been hiring and training people to be successful early in one's career as an investor?

[01:14:22]

I've been hiring people through my engineering days from my investor days for a few years now. And I've I love mentoring young people. It's one of my personal passions in life is to find that diamond in the rough, like who doesn't even know how good she is. It makes me very excited because that's just the small part I can give back to this amazing community of potful people. What I come to, the conclusion is resumes are pretty much useless to me.

[01:14:44]

I look for what I call for uncoachable traits and this goes back to my original point of man. I would love to find that brilliant young investor hiding in South Africa that nobody knows about because I promise you, she is there. I guarantee you that we just don't know about her yet. I look for four uncoachable traits and all four are you have to have all four or else we can hire you. But the first thing I look for is a very deep, very deep love for learning.

[01:15:11]

You're learning because you love learning and you will do it for free. Being intellectually curious and love learning is a must have. And this business number two, incredible work ethic. Half of life in this business just turning up and busting ass. I can't teach you work ethic. You either have or you don't have it, but you can test for work ethic and people can showcase work ethic to you. The third one, I've come to the conclusion again, it's been told by smarter people than me before, but investing is an IQ business and not an IQ business.

[01:15:40]

You don't have to be really smart to be an investor. It's about mental flexibility. The way I've thought about this as I look for people who have showcased me, persistence and grit, the capacity to be beaten down, punched in the face and coming back stronger than ever is so important to me again. What I've noticed with resumes are when people have been very successful in life, they've never seen hardship. When they see that first hardship, they cave.

[01:16:05]

I don't want that. I want people who have seen hardship and he'll just come back with the heart of a champion. And then the fourth thing is something I really have thought deep and hard about, respect the results of culture in investing funds, general culture. And often I've come to the conclusion that I want to only hire givers and not takers. And I think it's a wonderful thing to be a giver because what happens is you then create your own platform of X around you.

[01:16:29]

And this is why Twitter and frankly, I think about what you do, like you are a giver because you're just giving knowledge for a bunch of smart people, giving in a world of investing where everyone is very short sighted. Oh, very sharp elbowed. The culture of the firm at this often is about find people who love giving and sharing, because what happens is tangibly you become smarter for the reason we put out our quarterly updates. And this is what we learned in the quarter, because guess what?

[01:16:55]

I get more feedback than what I put out of the book, because people tell me other things. They learn very selfishly. We get smarter. But number two, I think, is there is a strong view on karmic connections. You create so much karmic goodwill in the world for yourself. When you give that you never know when the next helping hand comes from. And I'll tell you, at least in my life, I would have called myself exceptionally smart and off the charts.

[01:17:16]

Impressive, but I have absolutely been helped by the kindness of strangers.

[01:17:22]

Well, you couldn't have set me up better for my traditional closing question, which is to ask you what the kindest thing that anyone's ever done for you is.

[01:17:28]

I love the way you ask this question every single time. And in fact, sometimes I just forward to the end of the phone, ignore the content. But I'll tell you, listen, so obviously starting a firm has been front and foremost to me. It's is my third baby right now.

[01:17:42]

After my kids, the kind of I'm going to point out is there's a gentleman called. He works at Greylock. His name is Oshin Chan. He's a very under the radar, but a brilliant, brilliant venture investor, one of the best in the world, by the way. And I met him serendipitously, I'd say 12 months ago. We had a quick discussion and I was sitting on starting a firm and literally on the spot. He committed his first cheque, like literally was my first money in when I knew him for forty five minutes.

[01:18:09]

I'm not sure what he saw in me, but he saw something. So especially with the context of building a firm in the early days where you're not quite sure whether there are so many reasons to fail when a kindness of a stranger comes in and ashim in this case and he's now become a dear friend, obviously committing a few million dollars to you in forty five minutes. I think that really from a company building perspective, the money is a token, but it gave me the confidence that I could go and raise capital, which is always the hard part about bootstrapping a fund.

[01:18:41]

And so I would say that. In the last 12 months, the most contemporary kind things somebody has done for me is what Ashim did and he literally helped me on my way starting a phone.

[01:18:50]

Well, I love the answer. Nobody listening is going to question your passion for what you do. And I think that you display those four same characteristics that you laid out. This has been so much fun. I was so excited to say that you're the first husband and wife appearance on the show. But then I realized that the Wolfs have you in on a beat, that you certainly rival them for passion and interest. It's been so much fun hosting you and her, and I really appreciate your time today.

[01:19:13]

I can't wait to do it again. I'm so grateful.

[01:19:15]

Patrick, thank you for all the good work you do. And I tell I'll tell you that this is my Must Listen podcast. I literally have not missed a single episode, but man, like the amount of karmic value you created. The world is commendable, man. So I really appreciate this.

[01:19:27]

Well, thank you so much for saying so. Like I said, I can't wait to do this once a quarter or something with you and share what we learned with the audience. Have a great day. Thanks for your time. Thank you, Patrick. Appreciate it.

[01:19:38]

This episode was brought to you by Catalyst in this four part miniseries, I sit down with Canalis Customer Fenimore Asset Management to discuss the firm's history and how Canalis helps their firm better find and manage their investments. In this week's episode, Fennimore portfolio manager Drew Wilson and I discussed the origins of the firm and how they came across Catalist. So, Drew, I think a neat place to begin would be to have you tell us the origins of Fennimore itself, what's the sort of general thesis?

[01:20:05]

Walk us through how you invest. Sure.

[01:20:07]

Patrick Fenimore Asset Management is an investment firm based in Cobleskill, New York. We were founded in 1970 for our origins are actually quite interesting. Our founder is Tom Putnam. His father, Bob, owned a textile mill here in Cobleskill. We're big fans of Warren Buffett and he's very well articulated the challenges. The textile industry in the 60s when increased competition and dwindling margins and higher capital requirements began to decimate the economics of that industry. So facing this prospect, Bob sold the company and Tom, who had moved away since then, moved back to, among other things, help manage the proceeds of the sale.

[01:20:47]

He was doing really well and word spread about how well he was doing. So he started managing money for family and friends and ultimately for institutions. In fact, in 1974, we took on our first institutional client, which we still have to this day. Their experiences. Business owners really helped shape the investment philosophy that we employ to this day.

[01:21:10]

We approach every investment as if we're buying a fractional part of a business rather than buying a stock certificate.

[01:21:17]

So we look for companies with high cash returns on capital, which are protected by identifiable and sustainable competitive advantages, and where opportunities to redeploy that capital at at attractive returns are plentiful. We manage a little over three and a half billion in three mutual funds and also in separately managed accounts.

[01:21:39]

I summarize our approach has concentrated quality value investing. We apply this in three different strategies and all caps strategy, a dividend growth strategy and a small cap strategy. This requires us to build and maintain extensive models not only on the businesses that we own, but on those in our inventory or those companies that we'd like to own at the right price in this can be really labor intensive. So before Catalist we would get all the data from either equity databases or SEC filings, press releases, sell side reports.

[01:22:14]

Even scraping the Internet would often have to hand enter this data into the model when we got it.

[01:22:21]

Knowing a lot of what I'll call quality value managers, I know how important deep work on the individual companies is. And so I'd love to hear sort of the before and after of when and how you found Catalyst and sort of how the work was being conducted before you started working with them and what they uniquely enabled. As you think about the prosecution of deep work on small to mid-cap names, you're exactly right, running concentrated portfolios.

[01:22:48]

Not only are we able to do deep work on individual companies, but it's imperative that we do so. It's one of our primary differentiators. We spend a lot of time learning the dynamics of the industries and the nature and intensivists of the existing competition. And importantly today, the potential for disruption in the industry and in how all of these affect the potential growth of the industry.

[01:23:14]

And then within the company, we dig deep into the revenue in the cost drivers and how management is able to deploy the assets to capture attractive returns and and how likely they'll be able to continue to do that. While much of this work is qualitative, the key to being value investors is having some sense of what the company is worth. So we can by a margin of safety. We've employed the same philosophy and approach since our founding in 1974, but our process is organic and we're always trying to improve it to make it more effective and more efficient.

[01:23:50]

One of the process improvements we were exploring a couple of years ago is outsourcing part of our model building to free up our time. It happened to be during that exploration. I got an email from Canalis that was introducing me to their services. So naturally I requested a demo and I've done a lot of demos in my life. Many of them are really impressive, but this one blew me away. Nearly every feature revealed was a wow moment.

[01:24:17]

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.