Underwrite the team and milestones, not a distant market forecast

Transcript

From the transcript How I Invest publishes with the episode.

1. 9:20

   Interesting how you think about that underwrite, because I think it's maybe not dissimilar to how we think about it. You take your best judgment, your best judgment of how the company will grow in their market, how their opportunity is set. You try to get a few years out, maybe get three, four, five. Of course, you've got less and less probability of being correct as you get into out years. But you can't...

2. 9:49

   You kinda get this base view of where things might go. And I think that you say, well, look, if if it went like that, you know, are we satisfied with the starting point of that that return profile? Right? If it goes something like that. But then what I think you've... And I do feel that this is an opportunity set. I think it's also how people will get things wrong, but that that's okay too, is that you've got this potential for truly convex exceptional outcomes that you can't possibly predict.

3. 10:23

   That is how larger market may become, how much of a market a company could inhabit. And currently, it would just be crazy speculation that a market might shift. But cast your mind back not too far to say Uber. A very intelligent way of underwriting that company may have been, here's the taxi market, here's the black car market, here's how big they are, and here's how much market share they can take.

4. 10:51

   What none of us... I didn't underwrite Uber, but you didn't predict that you were actually... Once you made vehicles available in this manner, you were gonna grow that market massively. That reference point was irrelevant. And I think, you know, we maybe were seeing this with the Anthropic, with their new wet labs, with their ability to innovate in biotech with new molecules, be more predictive of what might be successful.

5. 11:18

   And we could end up with this really incredible outcome for that company out of a part of the business that nobody really thinks that much about today. I think we... We're always hopeful that we'll get one of those those outcomes. But the core underwrite has to be, you know, do we actually think if this company just delivers, do we think it... Are we gonna... You know, does it meet does it meet what a sensible return?

6. 11:45

   We were talking about before we started recording valuations Mhmm. How hard it is sometimes to invest in these companies because they always seem overvalued, the best companies. How did you go about thinking about the valuation of Anthropic at the time? How do you go about underwriting such a transformational company? I would be... Have to be completely honest that we didn't think about revenue or any metric of that kind, probably a little like you.

7. 12:15

   We we said, this is clearly a well funded, well supported, very capable business that given the scale of these businesses, this feels like a good next bet. So that... In in that case, it's not a good analog for our for our process around most companies. Right? That is... There's not a good good process in that regard. It was also one of the first companies in the space that we invested in. And so I would say that our our overall underwriting process was...

8. 12:53

   I would say that we benefited from being naive. Right? We benefited from being naive. When the company accrested a 100,000,000,000, you know, I was like, oh, I'm not sure, but this seems a little crazy, right? And and it took me a little while to sort of catch up in my own understanding from the 170 to the $3.80 to kind of go. Alright. We're seeing something completely different. I have to think about it differently.

9. 13:20

   Today, I don't underwrite quite that way. But what what I try to do and what we what we do understand, I think, quite well is that the current revenue and revenue projections are so imperfect both on the part of ourselves, other investors, and the company themselves, that that you you have to say, you know, what what is the circle of of probability around the next couple of years? What are the milestones?

10. 13:59

    What's the likelihood? What are the unlocks? What are the challenges we see if it's an enterprise company going after new logos? Scale of the the new contracts. What do we see the go to market team look like? There's a company we just recently underwrote. It was quite interesting. We knew the management really well, but we actually started using the the product within our within our firm. And the company had arranged for their head of sales and and one of their sales folks to get on the phone with us.

11. 14:28

    And they weren't... We said, look, this got nothing to do with us an investor. It's our CFO making the decision. But I was on the call And I was just so impressed with their sales process. I was like, well, these guys are killers. They're amazing. They're prosecuting this call extremely well. The way they followed up was exceptional. I was like, this is a fantastic team. Like, this gives me tremendous confidence in their ability to deliver in the enterprise space, which is where they're focused.

12. 14:57

    You're recently sitting down with what would I call a top 10 fund with one of the partners