A handful of innovators drive public-market gains

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 9:31

   That leads you to the air of omission and not making the bet and therefore the difficulty of market sizing. In your view, is this only, does that only apply up to a certain size or, you know, and you look at some of the rounds that now happen at huge valuations in companies that would otherwise, you know, be a large IPO, like let's say somebody's raising 10 billion at a hundred billion or something like that.

2. 9:52

   Does the power loss still apply up there? Like, how do you think about that type of round or do you see venture capital sort of turning into private equity at some level at the higher end of things? Yeah. So I think there's two questions kind of embedded in there. One is, why aren't these companies public? Right. That's one question. Yes. And then the second question is, like, even whether they're public or not, like, can they actually.

3. 10:12

   Is it still the lose one, win 20 type of dynamic? Yeah. So I think there's a bunch of ways to look at that. So, like, the smartest public investors I've met with basically have the view that the public market actually works just like the private market with respect to this dispersion of returns. The extreme case I'll make sometimes is it may be that there's no such thing as a stock. It may be that there's only an option or a bond, right?

4. 10:31

   And the reason is because there's fundamentally two ways to run a company. One is to try to shoot the moon. One is to try to build for the future. And then the other way is to try to harvest the legacy, right? And if you're shooting for the moon, the big risk of that is, you know, you might fail, right? It might not work. But if it works, you have this telescoping effect in the public market just as much as you have in the private market.

5. 10:50

   And historically, the returns in the public market have been driven by a very small number of the big winners in exactly the same way they've been driven by that in the private market. In fact, you see that playing out right now in the S&P 500. So one of the things I've been saying for years now is the S&P 500 is no longer the S&P 500. It's like the S&P 492 and the S&P 8. So there's like 492 companies in the S&P that have no desire at all, right, just like watching their behavior to like really charge hard at the future.

6. 11:15

   Like they don't want to do it. They won't do it. They're not doing it. And then eight are betting everything. Eight are all in, right? And then I always say, you know, who are the eight? And everybody always knows who the eight are. It's completely obvious who the eight are because they're the ones that are building all the new things. And then again, if you disaggregate like public market returns over the last 10 years, you see this just dramatic explosion of value among the eight and you see a relatively modest growth of the 492.

7. 11:41

   too. So even the S&P 500 is like having a portfolio of like bonds and options. Yeah. And it's like it's like incredibly barbelled. And so I just I think and then people people get cynical on this and they say, well, you know, if not for the eight, you know, the stock market. You're like, yeah, but that's the whole point. That's the whole point. Right. If you have a healthy functioning capitalist economy, the whole point.

8. 12:00

   And if some number of these things are going to go non-linear. This is like when someone says, ah, they're not a very good investor, but they invested in, name that $100 billion company. So they got lucky. Well, you're like, okay, yeah. That's the point. That's the job. That's the desired outcome. That's the thing. You know, any of us who, you know, this is kind of a classic joke, like joke adventure, like, isn't there just a way to invest in the good companies and not the bad companies?

9. 12:20

   It's like, yeah, like, okay, for 60 years, we've been trying to figure that out. Here's a fun fact in finding the analysis. over the last 60 years, every one of the really great venture firms through that period missed most of the great companies while they were investing. The best firms in the world, whether it's Kleiner Perkins in the 90s or Bestmark in the 2000s or Sequoia in the 2010s or whatever, they just flat out missed most of the winners in each cohort. And on one hand, you're just kind of like, wow, can't you do better than that? But you've had these super geniuses for a very long time trying to do better than that. And we could have a whole separate conversation about why this is so difficult.

10. 12:53

    The thing you said about companies building, you know, the whole stack, roll-ups are super popular. Should I, is it fair to take from what you said that you're bullish on that strategy or not necessarily?