Comparing the Dotcom Crash to Today (with Tom Cowan from TDM) 01:13:27

Hello, Acquired listeners. We have got a great ACQ2 interview today with Tom Cowan, the co-founder of TDM Growth Partners. TDM is a team I got to meet when they asked me to interview Ed Catmull, co-founder of Pixar, last year at their annual event at the Sydney Opera House. They're very thoughtful investors, much like our friends at NZS Capital. Their strategy is a very concentrated portfolio investing across a small set of public and late-stage private companies. They're also a very

They're also really unique. They don't fundraise. Their LPs are the same families that started investing with them 18 years ago. And I should say, their track record is insanely impressive and consistent. They have 26% annualized return over that time period, and they've nearly 60x'd their original invested capital over those 18 years.

They write a memo about once a year, and I found the one that they just published to be totally fascinating. Tom and the team did a rigorous analysis of the 2021 tech bubble and subsequent burst and compared that against previous crashes like the dot-com bubble and 2008. Hope you enjoy the conversation.

We want to thank our longtime friend of the show, Vanta, the leading trust management platform. Vanta, of course, automates your security reviews and compliance efforts. So frameworks like SOC 2, ISO 27001, GDPR, and HIPAA compliance and monitoring, Vanta takes care of these otherwise incredibly time and resource draining efforts for your organization and makes them fast and simple.

Yep, Vanta is the perfect example of the quote that we talk about all the time here on Acquired. Jeff Bezos, his idea that a company should only focus on what actually makes your beer taste better, i.e. spend your time and resources only on what's actually going to move the needle for your product and your customers and outsource everything else that doesn't. Every company needs compliance and trust with their vendors and customers.

It plays a major role in enabling revenue because customers and partners demand it, but yet it adds zero flavor to your actual product. Vanta takes care of all of it for you. No more spreadsheets, no fragmented tools, no manual reviews to cobble together your security and compliance requirements. It is one single software pane of glass.

that connects to all of your services via APIs and eliminates countless hours of work for your organization. There are now AI capabilities to make this even more powerful, and they even integrate with over 300 external tools. Plus, they let customers build private integrations with their internal systems.

And perhaps most importantly, your security reviews are now real-time instead of static, so you can monitor and share with your customers and partners to give them added confidence. So whether you're a startup or a large enterprise, and your company is ready to automate compliance and streamline security reviews like

Like Vanta's 7,000 customers around the globe, and go back to making your beer taste better, head on over to vanta.com slash acquired and just tell them that Ben and David sent you. And thanks to friend of the show, Christina, Vanta's CEO, all acquired listeners get $1,000 of free credit. Vanta.com slash acquired. Tom, welcome to ACQ2. Super excited. Thanks for having me, Ben, David. I have to say I have listened to...

a lot of your podcasts over the years and have learned a lot. You just dropped this market memo, the TDM growth market memo for the year that I was totally fascinated by to kick off right in the crux of the memo.

When you look at all the companies in the stock market, when the market resets, the highest growth businesses tend to peak the earliest. And you illustrated this in November of 2021. And then, of course, they fall the deepest in a market reset. And I think everyone sort of can understand this intuitively. But what is less obvious is how each market reset is similar but unique.

in its own way. And I want to tee you up with what did you observe about this particular reset in the last couple of years where we could have learned from the past, but in what other areas is it unique? Let's dive in there just to set the scene and be clear and go back the last 20 odd years is in our mind, there's been three major resets. So there's the dot-com bust,

There's a global financial crisis, which no doubt during this podcast, I'll refer to it as the GFC, which is actually an Australian term that no one else seems to talk about. Oh, I didn't realize that's where it came from. Yeah, that's where it comes from. We all just started calling it that like in the last couple of years. That's exactly right. I only learned that recently. And then the final one is obviously this period we've just been through. Let's call it the COVID recovery of free money and crazy valuations.

Now, having said that, I think there's lots of corrections over the last 20 odd years. You had the terrorist attacks, you had the European debt crisis in 2011-12, you had the tech meltdown in 2016, and obviously the very short but very sharp COVID lockdown period. But for the purposes of our memo, we were really deep diving on those three major resetting events.

So what we did is we wanted to look at the proxy for the highest growth businesses and to assess how they performed over those periods. And so we used in the most recent period, we used the Bessemer Cloud Index.

which really is a good proxy for our investable universe and follows the fastest growing tech businesses. But unfortunately, that didn't exist in the two prior periods. And so we had to attempt to recreate that with our own indexes. This is so fun. I love that you went back. You created your own historical indexes.

We can dive into how we went about doing that, but we've had a crack at them. I would say they're comparable, but obviously not exactly the same. And for anyone who hasn't looked at the BVP or the Bessemer Venture Partners Cloud Index, we'll link to it in the show notes. It's a fantastic resource to view all the real-time data

multiples and market caps of all the sort of top cloud companies that are public and really understand what's going on in the market with that type of company. For anyone who's not familiar. Yeah, it is. It's a favorite of ours for sure.

So if I get back to that original question, I think when we look at those three periods, there's a number of similarities that I think are worth calling out. I mean, generally speaking, as you touch on the high growth businesses actually outperform in the bull market, then they fall dramatically faster.

following that event. And in the current drawdown, and particularly in the dot-com bust, shall we say, they fell further and faster than any of the other broader indexes.

When you sit back and think about that, it's probably not surprising. Typically, these businesses, yes, they're growing faster, but they're also trading high multiples, they're less mature, so their earnings profile looks a bit different. And often, their competitive advantage, considering their maturity profile, is less clear and exactly how that evolves over time. So I don't think that's a surprising piece.

It's obviously yet to be determined exactly how we come out of this particular period. I think we can say for the dot-com and the GFC that the growth businesses significantly outperformed following the bottom of those markets for the first year in particular, but then on a multi-year basis. So if we bring that together, when we look at all that data and the way we think about it, it's very advantageous.

to be investing in these high growth businesses through the cycle, but you've got to have the stomach for it. There is much higher volatility and you've got to be able to be emotionally stable, shall I call it, during those periods. And one final thing that I think is worth calling out, this one's worth writing down, valuations matters. We need to stick that on our wall, remember that, and for the next boom, look at that little post-it note that you've written next to your computer.

I think you had a note, I think perhaps in the memo, that it's very unlikely that when you're investing at north of 20x revenue multiples, that those are going to be good investments, regardless of how good the companies are underlying them. You might hear a bit of a rant and rave about that a bit later in this chat, but I'd love to dive in into a bit more detail on that. But it is extremely difficult to get good returns if you're paying 20 times revenue, that is for sure. And

A couple of our memos actually attack that exact problem. It's also worth calling out some of the differences. I think there's a lot of differences in terms of the reasons for these major resetting events.

But one of the key things that we followed our sort of deep dive is that the period from peak to trough is very different. So the dot-com bus went for about two and a half years. The GFC was 18 months. And currently in this sort of, let's call it the COVID recovery resetting event, we're 18 months in. Having said that, plenty of water to go under the bridge. So exactly how that plays out is yet to be determined. Yeah.

Yeah, so we're recording this on June 8th of 2023. And so you're pegging it basically to, you know, mid-December of 2021 is where the drawdown began. November was the peak, but close enough. I feel like I'll never forget this in retrospect, but it was when all the CEOs did big stock sales. I think Elon did the big stock sale. Satya, I think, sold...

Who else? Did Jassy and Bezos sell? A bunch of people sold. There was certainly plenty of craziness going on in 21. I think for those that had lived through some cycles before, it was pretty clear that the market had overstepped where it should be.

So what were some of the differences then this time? So you mentioned we're 18 months in, we don't know where it's going to go yet. Other previous corrections had kind of been over by now. I'm not going to ask you the hard question of like, have we hit the bottom and are we in the recovery now? Because I think that's a little bit of a fool's errand to talk about. Maybe illustrate the differences a bit more. Yeah, I think probably the key difference that's worth pointing out

is that in this particular period, the broader indexes have only fallen from peak to trough so far, I am going to say so far, between 25% and 36%, which is when you compare to the previous two periods...

The broader indexes, so think S&P 500 and NASDAQ, fell 50% plus. I'd certainly call that one out. And so when we look at this particular period, we're quite confined to those high-growth businesses. And so we go back to that Bessemer index, and it's fallen 65% peak to trough. So well in excess of those broader indexes. As I said, it feels quite confined to the high-growth businesses at this particular point. It's funny. Yeah.

People have commented in the past that, well, the dot-com bubble was the end of the world just for tech. It didn't contaminate the broader stock market. But 2008 hit the whole market, but not tech as heavy. And I think what you're saying here is really interesting. The broader markets have fallen 25% to 36%, but tech has gotten nailed, or high-growth tech anyway. So this particular drawdown, at least in magnitude of drawdown, looks a lot more like...

like the dot-com burst, than it does like 2008. Yeah, I agree with that. There's no doubt about that. And interestingly, and once again, it is too early to call, but so far as we're moving from the trough, which was November 22, is that those broader indexes have also recovered faster. And if you dig even a little bit deeper, if you look at the FANG in particular, the largest index,

of those technology businesses, they're actually not that far from their peak. So there are lots of nuances going on at the moment. I just think it's too early to call exactly where we're going to end up. I got to take us off script for a moment here and say, so with Meta, Google, Apple, Amazon, and Microsoft,

Do you think of those as high growth tech businesses where you lump them in with this sort of SAS index? No, they're not in the BESMA index. And I think if you certainly look at their growth rates at the moment, they certainly wouldn't meet the high growth criteria. So they're obviously are a large proportion of the NASDAQ. So we'll put them in the NASDAQ bucket rather than the high growth bucket.

Which I think is an important distinction and one that is missed in people talking about tech and the recovery. It's like, well, you got to be a little bit more specific. Are we talking about five of the largest companies in the world that are incredibly diversified and at this point kind of slow growing? Or are we talking about high growth SaaS? Spot on. We say that all the time. You've really got to deep dive into what you're talking about. And I think this current period is a great example of that.

Okay, so following up on this, I want to dive into the methodology you use. So can you share the synthetically created indexes for .com and GFC that you sort of use for this analysis?

Yeah, no, happy to. So as I mentioned before, the favorite was the Bessemer and it didn't exist. So we did have to recreate it. And if you look at the Bessemer index today, Adobe existed back in 2000 and only Adobe and Salesforce existed back in 2008. So that's why we had to recreate it. So we then went about the process for how are we going to compare these periods? We then...

basically took a screen and we said, okay, what is the criteria of the Bessemer Index? What does that look like? And how do we attempt to recreate it? And so our screen was reasonably simple. It was looking at software and technology businesses. Revenue had to be more than $50 million, US only, and market caps of between $100 million and $100 billion.

And what that created was two indexes for those periods that actually looked very, very similar to the BESMA index. So all three indexes end up with about 75 to 95 businesses in them. All three indexes end up with revenue or median revenue, should I say, of between $600 million to $700 million.

And all were fast growing. So if we look at the BESMA index, it was growing in 2022 at about 30%. You go back to the synthetically created index for the dot-com period, it was growing about 24%. And for the GFC, that index we created was growing about 17%.

That's super interesting because I naively think back to the dot-com companies of like, oh, those weren't real companies. They didn't have real – but like, no. Well, there was a lot of that. We can get into that. There was a lot of that. There was a lot of that. Those are not showing up in this screen because they're not doing 50 million. They're not showing up. The silly, silly stuff, which I'd love to –

dive into a bit later, that doesn't show up in this screen. And remind me, were you exclusively screening for tech companies or when you screen by these financial metrics, do they just sort of skew tech? No, we specifically screen tech, try to replicate the Bessemer Cloud. It was just the easiest way to go about it.

How do you define that? Because I think there's been a lot of debate over the years of what's a tech business and what's not. We're using, in this instance, the CAPIQ definition of software and technology. So it does include, when you think about the 2000 period, it does include technology hardware.

roll forward 20 odd years, that's not part of the BESMA index. So there are some nuances, and that's why we say it's not a perfect comparison, but I think there's enough there to draw some meaningful conclusions. I do think it's worth pointing out just quickly, all three of these indexes are equal weighted indexes. They're not indexes based on market cap.

So when you think about the NASDAQ, it's weighted by size. So the largest companies have the biggest impact on that index. This is an equal weighted index across all three of these. I know that's in the technicalities, but I just think it's worth calling out quickly. No, it's helpful. And it's helpful to understand, well, why aren't you just using the NASDAQ? One, the NASDAQ is too broad of a bucket for the specific thing

thing you're looking at, which is software companies. But two, the weighting of the index matters a lot, especially when you're trying to look at what is the index's growth rate and what is the index's margin profile. I want to reiterate something you just said. The dot-com index that you created grew at 24%, but BVP Cloud Index in 2022 was growing at 30%. So these companies, and for comparison, I think you said 17% for 2008. So-

These companies in the run up to 2022, while the market sure was frothy, the companies themselves by a top line perspective were actually growing faster, materially faster than the dot com era. Yep. When you look at that and we would certainly say the current group of companies are.

the highest quality, fastest growing, most disruptive companies that we think can grow into very large businesses. And there's certainly a very sizable bucket of those when you compare it back through the previous two periods. And I think that comes out in the growth rate.

And listeners, if you do want to read the whole memo, we'll link to it in the show notes. And it actually might be a nice sort of illustrated guide since there's a lot of tables and stuff as Tom is talking here, if you want to click that link. But Tom, I want to ask you, aside from growth rate where companies in 2022 were growing meaningfully faster than the previous other drawdowns or the previous other peaks before the drawdowns,

What is one other characteristic that was super different about this time when you look at the financial statements of companies versus the previous eras? When you look across the indexes, a major call out is at the gross margin line. And that really goes to the point I was trying to make before around there is some technology hardware businesses in that dot com business.

index. So gross margin from Memra is around 40%, or I think 41% back in the dot-com index. When you compare that to the Bessemer index, the gross margin's at 76%.

Interestingly, though, the earnings, if you then flow that down to EBITDA, it's actually the reverse. So back in 2000, the median EBITDA margin was 14%, where in the BESMA index back in 22, it was 6%. And that really probably goes to the growth at all costs mentality that we've had in the last couple of years.

Yeah. And if I had to speculate a little bit too, one thing to point out is, oh my God, that is a stark difference. 41% gross margin in 2000 versus 76 in 2022. Like with the advent of cloud computing, we have real SaaS companies with real gross margin profiles that let you get tremendous operating leverage on your fixed costs when you are at scale. But many of these companies were still subscale. And that's why you see down at the profitability line on EBITDA that like

These companies in 2022 weren't actually generating any cash because they

engineers are so expensive, all the fixed costs of sort of building your go-to-market machine were so expensive that like anybody who was subscale, sure, you might be set up for great operating leverage, but you're currently experiencing the negative side of operating leverage, which is if you don't have massive scale, then your fixed costs are killing you. Spot on. You've nailed that point. I would also say though, obviously back in 2000,

This recurring software business that we now know as SaaS didn't exist. When you look at those technology businesses, they weren't recurring revenue. And obviously on the software side, it was perpetual license. So this makes me think a little bit, you know, the growth at all costs, as you said, Tom, to maybe not excuse, but re-put into context, even though it was just a couple of years ago, you know, what these management teams and boards were doing. This comparison,

really does call out to me too. Like it wasn't totally irrational. Like you have these amazing businesses and if you have a 80 plus percent gross margin business and with a lot of headroom in your TAM, you

growth at all costs. Look, like things got excessive, of course, right? But you can see the temptation of like, of course, I want to reinvest all my profits in growing because this business is amazing. And so I want to land grab and capture it because when I turn on profitability, my God, there's going to be a gusher of cash flow on the other end in a way that didn't exist with the old business models. So I think that's true. And I think it's also true.

We are in that period where there's mass disruption. I definitely understand the temptation. We would argue and have argued on many of our, if not all our boards, that growth at all costs is not a healthy thing to grow a business. We can see the temptation but believe that to build a business on a 10 to 20 year view

You've really got to be making decisions and building a business that is profitable. And there's really a cultural piece there that I think people don't necessarily understand. And you're starting to see that unwind now and some of the consequences of that.

You mentioned on some of the boards you're on. I want to come back to some of the takeaways from your memo, but maybe this is a good time to say, what is TDM and how do you operate and what types of boards are you on? I've become sort of a student of your firm, reading a lot of your reports and getting to know folks at TDM. And I think you do things quite differently.

So, I'm very fortunate to be able to call two of my best friends, my business partners. We grew up together. We fell in love with investing in our teenage years, and in particular, with Buffett and Peter Lynch and this concept of owning a business and backing great people and owning that business for a very long time. And as we grew up and went through university together, we were studying the investment industry and really looking around, trying to understand who did what and why.

And we couldn't find anyone who really followed that simple philosophy. We really wanted to understand why not. And if you roll forward, when we set up TDM, we felt in order to do things differently, we had to be set up very differently. And we wanted to be able to be long-term business owners and really help those businesses over long term. So

In terms of that, if we go back, we started about 18 years ago, and we've hand-selected 20 families that we wanted as clients. And that was a really important decision. It was obviously the slow road, but it really set us up to allow us to do what we wanted to do.

So the capital pool is just those 20 families? Correct. And my understanding is you don't fundraise as a firm? That's correct. That's correct. So we haven't taken on new clients for a very long time. And that in part goes to our structure in that we don't have a fund life. So we have an evergreen pool of capital with no mandate restrictions. That allows us to achieve or allows us to invest in those businesses for a very long time.

It also reduces the number of business activities that have to occur within your franchise. So you can sort of focus on the core thing without fire drills coming up where you need to do something for fundraising purposes. Yeah, I think it simplifies our business model. It really allows us to focus on what we want to focus on, which is investing. And the other sort of restriction we've put into our business, it's self-imposed restriction is

is that we only invest in 10 to 15 businesses. We want to be super focused, highly concentrated,

eat, live and breathe those businesses so we can know those businesses better than anyone else. The punch card approach. 100%. We actually talked about the other day of getting everyone a punch card just to remind themselves. Just to remind themselves it is the punch card. I'm imagining you have a giant one like on the wall in the entryway to the firm of like with the punches that you put in. That's actually a good idea. Yeah.

We've actually only invested in 60-odd businesses in 18 years, just to put the punch card mentality in perspective, which is very different from most growth firms, either public or

or private. I mean, that's an average of three a year. Yeah. And that's across both publics and privates. Yep. That's public and privates. Part of that, this is probably maybe a little bit too deep, but part of that is about 15 to 20 of those businesses have actually been taken over, I'm going to say without our consent, i.e. we didn't own enough of the business to influence the outcome.

Obviously, in that situation, we're forced to go and find new investments. So it's not always up to us, so to speak.

You're trying to paint it negatively that you invested in businesses that got acquired, so you had to go reinvest the proceeds elsewhere. Funny you should say that. We actually have this discussion with our clients a lot. We do see it as a negative. We want to own businesses for 10 and 20 years. So there's been a number of instances where we've invested in a business, we've followed it for many years, we finally invest, and then six to 12 months after we invest, it gets taken over.

In fact, I remember one of our investments back in 2010. It was a company called Risk Metrics. We'd literally been following the company for three years. We'd been meeting them every quarter, and we finally got to a price where we were happy to invest. We invested $1.

The company was taken over by MSCI. I can't remember exactly. Let's call it a 70% premium. And we sent off an email to the CEO saying, we'd like to talk to you. When we caught up the next day, he was expecting a pat on the back and how exciting. Thanks very much for the 70% return. And we're like, what are you doing? Why are you selling? Yeah.

Yeah, I think that's a different perspective. The way we think about it, we're trying to make four, five, ten times the money ideally over a long period of time. Is this decision written in stone? What can we do here? Can we reverse this? Correct. So he still tells that story. I think we're the only investor to be upset at him. This conversation implies a sense of scale.

What's your sense of scale? When you talk about having an influential position in companies, what are the positions that you're taking? So the positions can range from a couple of percent

to our largest position today in terms of ownership of companies, about 40%. We've always been a minority shareholder and regardless of whether that is a few percent or 40% of a business, we always behave the same way. We're there to support management, we're there to back management and we're there to do whatever they would like us to do to help them get better, but we're certainly not there to tell them what to do. So

Our position size in terms of ownership really doesn't change our behavior. And how early do you think you can determine that a business is one you'd like to be a part of? Early in terms of size of business or early in terms of relationship? Ooh, actually both questions. In terms of size...

We do invest across all industries. So we're not just software businesses. We see ourselves as growth investors. In terms of where we spend our time, we do invest across consumer software and healthcare in particular being the three largest markets that we think can be disrupted.

So it is different by area if we just focus on software. I'd say generally speaking 50 to 100 million of revenue. We're certainly not in that product market fit stage. So I'd call this later stage growth investors.

For consumer, that's probably $200 or $250 million of revenue. Just to put it in perspective, it does change with industries. In terms of relationship, the longer the better is probably the simple view because you really get to understand people over time. And the longer the relationship, the better. Often in certainly public markets and private, we've known people and followed people and watched people for many years prior to investing. That's our ideal setup.

But at the same time, if we love a business and we do feel aligned with that management team, it can be months. So it does change, but I'd say ideally longer the better.

Yeah. It's funny. Your time scales are not at all like a venture capitalist who often needs to make a decision in days, maybe weeks, definitely not months, except in this market. Sometimes you can let it go months now of diligence. It's more like a limited partner, to be honest. It's that year plus relationship of making a very slow but very large commitment. Yeah, ideally. I have to say we did not on the private side.

because we do invest in public and private. On the private side, we did not enjoy 2021 or 22. The idea of quick deals is not, in our view, the right thing, either actually for the company or for the investor. We actually see these things as a marriage. So

Every founder that we ever speak to, we say the same thing. We do say this is a marriage. Let's get to know each other rather than rushing and trying to do a deal in weeks. We always thought that was crazy. VCs have been saying that for decades, but the context is different, right? It's like, oh, let's not rush. Let's take a few weeks. I'm actually really curious on the public side of the, I won't say courtship process. That's not really what you're doing here, but the relationship building process of

The proposition here of, you know, if you become investors, you're going to have...

a large stake in a public company. You might be, probably are in many cases, the largest shareholder with a very, very, very almost infinitely long-term horizon relative to other public shareholders. Are CEOs even aware that something like this exists out there? How do you go about talking to them? I'd say normally very surprised on a few fronts in terms of how we approach it.

One is the time horizon. So, you know, we really upfront when I say we want to be owners of this business for the next five to 10 years, ideally even longer. When we're having our conversations, we want to talk with that timeframe in mind. We actually don't care about next quarter. And, you know, you sort of see this pressure release and they're so relieved that there's someone out there that actually doesn't want to talk about next quarter. Yeah.

I think the other thing that often comes up in that conversation is that we want to talk about people and culture and our views around ultimately when you are investing in a business five, 10, 20 years, the people you're backing is so important. The culture of the organization is so important and we would argue the most important. It's the longevity and our focus on people and culture that really catches CEOs off guard.

Just kind of mechanically for a public company too, you're taking a huge portion of their float off the market. For certain size companies, that's definitely the case because we can own 10 or 20% of a public company. That's definitely a consideration, but we can also just be a few percent of a much larger business. So some of our businesses are

$20, $30, $40 billion in market cap. So obviously in that situation, we're a smaller proportion and that's not really a topic that comes up. It's more, we love to have long-term owners. We'd love to have someone who doesn't want to talk about next quarter and we'd love to spend time with you so you can understand the business better. So three questions for you that are all sort of related to ground some of what we're talking about for listeners who are sort of wondering what's going on.

One, are you willing to give us sort of an asset center management size so people can understand the scale at which you're operating? Two, what was that 18 years ago to try to understand how that's changed over time? And frankly, the incredible performance you guys have been able to get. And three, are you okay talking about some of the businesses that you're involved with today? Sure. So maybe the first one today, we have about $2 billion of funds, but we have not raised a lot of money. So we actually started...

with a few million dollars or to be specific, a million dollars back 18 years ago. You know, we were 26 years of age. We had no track record and so we were just happy to take a small amount of money and go do what we love and see how we went. So we started with a very small amount of money. We've raised, I don't have the exact number, but it's probably in the order of about $100 million in terms of the capital we've raised from our families. And as I said today, we managed about $2 billion today.

So some examples of companies we invest in, some you will know and some you won't know. So maybe an example of a company we invest in historically that you would know, we actually pitched

Slack at Soan a couple of years ago prior to the Salesforce. The Soan Conference, of course. Yeah. Oh, sorry, the Soan Conference. There's an Australian version. So that was the Australian version. So that's an example of a company in the tens of billions of dollars of size. So another one that you most likely would have heard of is a late stage private company called Coltramp.

It's an engagement software tool that is continuing to build out its platform and is super successful. It's an Australian founded business, but now a global business.

And then there are a number of companies that you would most likely not know what I'm talking about. And so maybe a couple of examples there. I'm on the board of a company called Rocked. It's Australian founded, but now New York based. That business is in marketing software, is super successful, rough numbers, does north of 300 million US of revenue, growing super fast.

And in Australia and consumer, another one you probably wouldn't have heard of is one of Australia's largest QSR businesses, Guzman Gomez. That's a quick serve restaurant? It is. It is super successful, growing super fast and disrupting the fast food industry here in Australia. It is growing businesses across a ton of different sectors. I'm chuckling over here because lots of listeners will recognize CultureAmp if they've listened to any of the acquired back catalog recently. We're obviously big fans over here too.

I want to ask you a question, which is why do you write these memos? That's a great question. Especially if you're not bringing on new LPs. Let's go back a few steps. We really don't like thinking about anything but our company. So I would say we spend 99% of our time just thinking about our 10 to 15 companies.

That other 1% is thinking about more macro items. But there are periods of extreme volatility. Early in setting up TDM, we obviously had the GFC hit us. And so at that point in time, we really wanted to get clarity of thought around how we're thinking about deploying capital in these extremely volatile markets.

We found it super helpful and it was super helpful for us to get clarity of thought and then it was super helpful sharing amongst ourselves in terms of internally and then what we found it was super helpful in sharing our thoughts with our clients to make sure they're aligned with our approach and ideally get as excited about deploying capital in those volatile times as we are.

So that's where it started. Roll forward, COVID, same thing. You know, really didn't know what was going on, to be frank. It wasn't something that we'd seen before. So we started writing these memos again for exactly the same purpose. It was just this time we released them publicly. Helpful. It's sort of alignment between all the different stakeholders you have, but also just clarifying your thinking.

basically. They're really the two key reasons why we like to put pen to paper. It's really in the periods of extreme volatility. We started talking about this particular memo. What have the other ones recently been about? Yeah, interesting you should ask. So we wrote one back in February 21. At the time, we put forward an argument that

really the valuations were crazy and therefore as a result the expectations for growth were unrealistic. And so we set about going through the day to explain why we thought that.

And the way we did that one was similarly, we looked at the Bessemer index and we looked at the group of companies and took the median company. What did that company look like? At the time, the median Bessemer company had $500 million of revenue. It was trading about 15 times revenue at the time. We said to ourselves, well, as an investor, we want a 20% return. So what does that company need to achieve for us to achieve that 20% return?

And effectively, you can go through all the details in the memo in terms of how we went about that. But effectively, what we said is that company has to grow at 30% a year for 10 years to achieve that return. And so the power of compounding really plays out. You've got to take revenue from $500 million to $7.5 billion.

There's some very large numbers when you really think about that. And then you look around and say, well, who else has achieved that? Well, the base rate is extremely low. In fact, there's only two companies, two software companies that have achieved that. That's Microsoft and Salesforce. I should note there are three others that are there or thereabouts. In fact, I'd say ServiceNow will most likely achieve that this year in their 10th year. And Workday and Palo Alto Networks

are there or thereabouts, but probably won't achieve it in their 10th year, which is also this year. But if we were to be generous, there are five companies. So the base rate is very low. So if you're investing at 15x revenue in a high growth technology company, you got to believe that this is a, you know, two to five times in a decade, like a very, very special company.

Yeah, that's what the math says. So it's tough going. And when we think about that period, I think companies were growing at very fast rates of that period and very easy to extrapolate sort of near term revenue growth, the business growing 50, 60, 70 percent. And you start extrapolating that.

But you've got to then look at what that looks like over 10 years and you get some very large numbers. Because in the near term, you're not bumping into the total addressable market. You're not bumping into capital getting more expensive, therefore marketing getting more expensive, therefore a need for slower growth because you have less marketing dollars. There's all sorts of natural forces of business physics that constrain when you actually are looking at a 10-year horizon. Yeah.

There is no doubt about that. And I think it's easily forgotten when you are in that, let's call it bullish or more frothy market, very easily forgotten.

Okay, so this begs the question, what do you do? Do you just sit on your hands and not invest? And like, is that okay, the way you're set up? So we actually talk about in the memo, in terms of the way we see our role from a portfolio management perspective, these are the times where we need to think about it. Do we want to be offensive or do we want to be defensive? And Howard Marks talks about this quite a bit. We argue at the time, it's time to be defensive.

Things were a little out of hand. Those growth rates or the growth expectations were unrealistic. So how did we behave? The way we solve that is hold lots of cash. We've set ourselves up, as I mentioned, with no mandate restrictions. So we can very easily have 20, 30, 40, 50% cash in those times where it's really hard to find opportunities at the right price. If you're comfortable sharing, who else does that besides Berkshire? In terms of holding cash? Yes.

I mean, holding gigantic near majority positions of your portfolio in cash for extended periods of time and that being completely okay. The important point there is, and sort of goes back to the context of why we set up TDM the way we did, our view, like Buffett's view, is you need that flexibility. And so most fund managers, certainly on the listed front, most fund managers have constraints.

They can only have a maximum of 10% cash or 90% invested. And on the private side, same thing. They've raised a fund with a timeframe. There's a fund life. And so there's pressure to invest in a certain period of time. We don't have that pressure. That really goes to the heart of actually why we set ourselves up the way we have.

This is sort of the natural effect of the phenomena that's been studied in tons of academic research about how individual investors always outperform institutional investors. You've sort of brought the flexibility of the individual investor to an institution. 100%. Forgive me for doing the commercial here. I figured, why not? Don't know what else to say. Okay, so this is the...

2021 memo we're talking about where everything's trading at these crazy valuations. And so illustrating how hard it is to get a return worthy of the hurdle rate that you're sort of targeting on capital. So you're holding all this cash. What did you write in 2022 in the winter to springtime as markets were starting to fall apart? That's a great question. So we did write another memo because markets were starting to fall apart. And at that point in time, we actually wrote one in February 22.

And the BESMA index at that point in time had fallen 36% and 40% of the NASDAQ index had fallen more than 50%. So you'd certainly started to see, I'd say in this high growth area is a major correction.

And we came out and said basically that multiples had returned to normal or long-term averages and that it's now time to be selective and start moving to a more offensive position. Now, I should say, obviously, we're a little bit early in that call, no doubt about it. Things got worse. The best room index kept falling and then for the moment,

the low back in November 22 where it had fallen 65%. And then obviously macro continued to get worse. Inflation remained high. Interest rates kept rising. So that uncertainty effectively meant that things continued to get worse.

What is your psychological disposition at that moment in history where you get excited about buying opportunities starting as early as February? It's only down 30-something percent. It would get down to 65%. How does May, June, July, August feel for you as an investor? Well, this really goes to a really important part that we strongly believe in, which is you're not going to pick the bottom. We'd love to say you're going to pick the bottom in terms of where that market ends, but

but it doesn't work that way. We remain really focused on, have we found great businesses? Do we love management? And is it trading at attractive prices where we expect to get our returns? And as long as that's the case, we slowly and methodically start deploying capital. So we don't deploy it all at once. We, over many months, start to deploy that capital. And so

We were deploying capital back in May, June, July. We're also deploying capital back in November last year. And so obviously we got some prices better than others, but overall we're delighted with what we've been able to purchase in terms of business quality and the price we were able to achieve. Yeah. Dollar cost averaging is a heck of a thing to manage your disposition. One of our learnings, particularly in the GFC, was it allows us to manage our emotional stability.

It's hard when your share prices are going down 5% a day. Well, that's the way it feels. It's hard. And so the way we like to manage through that is methodically and slowly deploying capital, knowing that maybe tomorrow we get a better price. Or maybe we don't, but it's okay if we start deploying capital.

I've been doing a lot less public market investing over the past year. David's become Mr. Index Fund. I've become Mr. Index Fund. Well, one of the reasons is just the emotional aspect of it. I was a full-time professional venture capitalist for a decade, and now I'm a

Part-time professional venture capitalist for another, you know, five, so call it 15 years. My mindset is just, you know, in the private markets, there is no dollar cost averaging. I think that was one of my big lessons from the past couple of years in the public markets of like,

I didn't really take that approach because it just wasn't how I thought as an investor. It's like, oh, great. Do you have conviction? Do you want to buy? You buy or sell. Yes, that's a discipline that I certainly could have used a lot more of. I think the other thing, the difference is you can't see the share price every day. And so, yes, you only get to deploy capital once at a particular point in time as a private investor.

But you also don't turn around the next day and see that the price is down 10%. You don't build that muscle of really understanding that the prices do go up and down. But ultimately, the business value hasn't changed between yesterday and today. When we talk to our clients, we often say, you know, when you walk into your house, is there a big sign on the door that has a value? Yeah.

And are you thinking about that value every day? No, you're not. In terms of the businesses you're investing in, same thing. The value of a business does not change on a daily basis. It's purely a market mechanism. I think about kindergarten ventures, my angelist fund that I run with my friend Nat. I think about if somehow you had marked to market the kindergarten portfolio over the past 12 months, right?

it would have fluctuated wildly in value. And yet for, you know, certainly not all, but many of the businesses that we invested in, call it in a, you know, headier times, would have been marked down a lot. And now I look at them and like given their growth rate and how they're doing, I'm like, well, actually, like, you know, I'm really glad we didn't sell those businesses. There was no option to in the private markets. Illiquidity can be a feature to keep you from panicking.

Totally. Well, and because we do public and private, we get to see that. And what we certainly say to the team here, we want to behave in the public setting exactly the way we do in private. And so in our private businesses, all we're thinking about is how that business is performing. How can we help that business? We're not thinking about the value of that business every day. And

There's only one person in the office that has any idea really what's happening in the market on a given day and that's a wonderful trader, Anna. But everyone else does not have a screen in front of them. So that flashing green and red screen is not a good thing in our view. Yeah.

There's a few more insights from this 2023 memo that I want to ask you about. First is, how did you get the idea that it was time to write on this particular topic and compare to the GFC and dot-com bubble? It really started with, as we're going through this cycle, really trying to understand, well, what does this look like? And have we experienced something similar? And certainly as we were

or have been going through the last 18 months, we were certainly starting to think that this is more like the dot-com bust period rather than the GFC, where obviously everyone was doubting the financial system as we know it, and everything was impacted immediately and falling rapidly immediately. We just wanted to really go back in time and reflect on that and see what that looked like.

Yeah, and so that sort of supposition about it being more like the dot-com bubble, did that narrative play out? Yes, is the simple answer. But if I was to dive into that and maybe give some reflection, the dot-com bubble

boom was crazy. And we'd love to hop into some anecdotes there. I mentioned not real companies before. I really want to get there. But just quickly before I get there, this growth index that we created, it was up four times, four times in the two years prior to the bust. And the NASDAQ was up three times in the two year. That is some crazy sort of share price action. Like that's not one company, that's a whole basket of

companies. That's an index up 4x in two years. It's quite mind-blowing when you think about that, the bubble part. The bust was as good as the bubble. But you mentioned those not real companies. I use this story in one of the memos, but I can't help but tell it where it was actually the period where I started my career. I started in February 2000.

I was bright-eyed, bushy-tailed, thought I knew a little bit about valuations. And I walk into the office. I'm doing M&A at the time. And the first thing I get put on is a merger of two businesses. And I was super excited looking at these businesses,

And there's no revenue. And I'm like, I don't know what to do. How do you value a business with no revenue? So I got up to my manager at the time and said, I don't quite understand this. We've got two businesses combined, you know, billions of dollars of value and there's no revenue. How are we going to value it? And he turned around and said, well, what do you mean? This is easy. We're going to value it on the number of clicks.

Excuse me? The number of clicks. Yeah, the number of visitors to a website and how often they click on the website. And then we'll split the pie based on that. I'm like, this is crazy. Whoa. You hear stories like this, but this actually played out. 100%. So we used to do comps tables. Comps tables.

So not enterprise value to revenue or enterprise value to EBITDA or PE ratios. These were comps tables based on number of clicks. Enterprise value to number of clicks. No word of a lie. Wow. Wow. Yeah. I don't think we ever quite reached that in this most recent bubble. Walk me through that DCF. What is the multiple on clicks that you...

So it was pretty crazy. But the other thing you saw very often was you'd have IPOs and they'd come on 100, 200, 400% premiums.

As in a premium to the night before? To the, yeah, the IPO price. And so everyone wanted to be part of an IPO. It did not matter what that business did. And so everyone had prospectuses out and trying to work out how they get allocations. And there was one investment I made, it's a loose term investment, I'd call it speculation. I invested in the IPO of a company called Open Communications. It was an ASX listed business that all of a sudden

It was worth many billions of dollars. It went up 400%, 400% day one. It was sold four years later for $7 million. $7 million, and it was worth billions. $7 million, not billion. $7 million. Wow. It was an extraordinary period, and maybe moving to the U.S., when you do look at the larger, or when we looked at the larger companies in the U.S. at the same time, you had to look at the top 10 NASDAQ companies.

And they were on average trading at 27 times revenue. So these are the top 10 largest technology businesses on the NASDAQ. They were trading at 27 times revenue. And you had things like Microsoft that was trading 20 times revenue. It then had to grow revenue fourfold before and over a 15-year period to get its share price back to the 2000 period. So it was pretty crazy.

I'm going to ask a naive finance question, and this is something I've always wondered. So discount rates are heavily related to the current interest rates of the macro environment that you're in. You know, basically the Fed...

has a lot to do with the discount rate that you put into a model. I don't get the sense that that's what was happening in 1999. I think the DCFs you build were basically not discounting cash flows 10, 20, 30 years out, but we had real interest rates. So can you help me square that circle and understand why with high interest rates you wouldn't have a material discount rate? So interest rates back then were...

I think from memory around six-ish percent. I can't remember the exact number. That's higher than today. Yeah. Which is 6% higher than in 2020. I would love to be able to answer that question.

But I have no idea. It wasn't a period where anyone was sinking straight. It was Kool-Aid that people were drinking that just – I don't think there is an answer to that question. And again, like, yeah, we were all drinking Kool-Aid to a large extent too. But interest rates were zero. So you had this kind of forcing function of like this giant like whooshing sound of cash that needed to be deployed somewhere because interest rates were zero. Right.

It was literally cheap. No matter what anyone's opinions were, there was going to be a crap ton of cash from the interest rate. It's like you just didn't require anyone to be drinking Kool-Aid in order for capital to be free. At least in 99, it required Kool-Aid. I think that's a very important call out. There's a big difference there. But the explanation...

I'm not sure I can answer that. We'll leave that to the behavioral psychologists. All right. So let's finish up on dot com. So when you're looking at the data, what happened from peak to trough? So as I mentioned, peak to trough took about two and a half years. Interestingly, this synthetic index that we created for that period fell 65% during that time.

Which is exactly what the Bessemer Index has fallen this time around in terms of peak to trough. Oh, wow. But obviously, 18 months. That took two and a half years, and this only took one and a half years so far. It depends where you think we are in the cycle. So it was actually about a year from peak to trough if the trough is in fact that 65%. We've obviously moved on six months and we're above the trough. So it's sort of

I'm a little bit nervous making any call exactly where the trough is, but I'm going to say so far, so far. So I want to ask you the same question about 2008, but first while we're in dot-com land, what did that recovery look like for your sort of constructed synthetic dot-com index? Yeah, so the recovery was much quicker for that index than the broader indexes. So one year after that trough point, the synthetic index was up 140%.

The NASDAQ was up 70% and the S&P 500 was up only 30%. So much faster rebound for the... Much faster, much faster in terms of the first 12 months. But I think the most important part is that our performance continued. And so that synthetic index was actually back to its peak in January 2004. It took the NASDAQ 15 years.

One five, 15 years to get back to its peak. Wow. Yeah, that's really like kind of counter to the historical narrative of like you think, oh, the dot-com crash happened and it took 15 years for Microsoft to get back to its share price. But you're saying if you take the highest growth index, it was actually only three or four years before it was back to its peak. Correct. So when you go to the situation where obviously the NASDAQ is market cap weighted, right?

The largest companies have a very large impact on that outcome. So people might be wondering, wait, so for some specific set of companies, it only took three to four years to get all the way back to January 2000 level valuations for these high growth tech companies. What were the companies? What were some of the standouts in that index that we would know today?

Actually, I have the list up in front of me. I have the appendix from the memo. It's pretty interesting to see what these companies are. So let's see, we've got Oracle. Apple is actually in here in the index. You know, we talk about Microsoft taking forever. Apple recovered. Apple is already 25 years old. Yeah. Western Digital. Intuit is in here. Adobe. Paychex. NetApp. Yeah, David, it's interesting. I guess I'm still...

Kind of in the place of if I was trying to apply that lesson of making sure I stay in the high growth companies through this period of time, trying to sort of equate it to what it is today. And maybe, Tom, is the Bessemer Cloud Index exhibiting some of these same signs of like the fastest to recover? It does look like history is repeating itself again. You've got the fast growing index or the BVP index is up around 35%.

which compares to the NASDAQ up 30% and the S&P 500, which is up only 20%. But I would say that there's still a long way to go. Exactly how this plays out is still uncertain and would still argue right now the best value is in that group of companies rather than the broader indexes. Yeah.

When you think about that fairly rapid recovery in the dot-com era, do you think that's because of perception of the companies, like that they were overbought and then oversold and then kind of overbought again in the recovery? Or do you think it's more about the intrinsic characteristics where those companies just kept growing fast even though the macro shifted?

So we would argue it's fundamentally driven. Ultimately, when we sit back and look at the data, it's a fundamentals win. And if we were to talk about the financial crisis period, the same thing plays out. So we think over that timeframe, when we reflect on it, the fundamentals are far superior. Business is growing faster and have much larger opportunities to grow into, and that ultimately wins it. Yeah.

I mean, I'm looking at some of the companies that are in the Bessemer index right now. And, you know, it's companies like Confluent, ZoomInfo, Twilio, Okta, GitLab. You know, again, you have whatever opinion you want on these companies, but a lot of people use their products. That's for sure.

It's interesting, Tom. I want to just call something out for the audience here. Most of the time when you see some hedge fund manager on CNBC and they're saying it's the best time ever for these companies and it's unlike any other time in history because so many people use technology companies and their intrinsic value is so strong, we're so excited about the future of technology. It's like, yeah, but...

But you kind of have to be because your entire business says you need to mostly be investing in these companies. And you've really built a reputation on doing that. And you can't really keep holding cash. But with you saying this, you don't have to be saying this. You are not necessarily talking your book to be saying, hey, we think these companies are really strong and we're excited to be investing right now because you could do anything.

I think also importantly, we're not looking for more clients. So I think those two things, we're just sharing our view. We're really sharing our perspective and hopefully over time, you know, that will prove out. But there's really no other reason for it.

Well, I think we've hit a lot of the comparison to 2008, but I know you have a particular example in 2008 that's sort of an interesting case study on all this. It's quite a painful one, I should say, Ben. It's one of those ones where...

I get a little bit of a shiver down the spine when I think about it, but it was a big miss from us. It really does speak to this particular issue. So the example is Salesforce. We did a bucket load of work on Salesforce from 2006 to 2008 and really tried to understand the business. The share price doubled over that period. The business was performing exceptionally well. Revenue was growing 50%. It was trading on a revenue multiple at the time, about 6.5%.

It peaked in July 2008. Obviously, Lehman went bust in September and the share price then fell 70%. That period was very quick and rapid. But for those investors that did have the courage, and unfortunately, we weren't one of them, for those investors that had the courage at that point, roll forward less than three years and the share price was up sevenfold. It's those types of moments that really...

And those mistakes that we reflect on that really impact the way we invest today and really are burnt into our memory, should I say. And as you reflect back on that, you made the decision not to invest. Was that a lack of conviction or was that, hey, we've identified something structural where we actually think this is a bad investment? We don't think this company will continue to compound capital.

What happens in those extremely volatile times is, or certainly what we do, we start looking internally at what we already own. And we start deploying capital in those businesses that we've really got to know over a long period of time that we're already invested in, rather than deploying capital into new ideas. Obviously, in hindsight, if we had our time again...

In that instance, it was a mistake. It would have been much better investing in Salesforce at the time. So I don't think it was a particular call in terms of Salesforce specifically. It was more a call, what businesses do we know better? What businesses do we understand really well? Let's focus on the existing portfolio. Well, we've talked a lot about buying and buying opportunities.

And I think that most people who talk about investing spend a lot of their time talking about buying. And what's just as important is selling. And in moments where businesses are trading that you own at 15x or 20x or north of 20x revenue, and there's heady times and free capital everywhere, how do you think about that? Do you start...

trimming down the positions? Or do you say, you know what, we just know that the market price is not the correct price, but we're just going to hold all the way through the peak and the trough and then ride it out for another 10 years?

So that's a great question. For us, as you may have gathered at the top of the show, valuation does matter and it's something that we really think about a lot. And it's really one of the few things, potentially the only thing that we actually have disagreed with Buffett over the years. I mean, he's obviously always said that when you own a great business, you should own it forever.

And, you know, the foundation of how we think is based on many of his principles, but that one we have disagreed with. And so we do believe that owning businesses at crazy prices is

is not the right thing to do. And so we are always looking at our expected returns from those brasses. We always point to one of his most famous investments as an example of that, which is Coca-Cola. For the first 10 years, he did exceptionally well. He compounded his capital at 25% a year, was making 10 times his money. But roll forward to year 30, he's only compounded his capital around 10%.

And so those last two decades, from an opportunity cost perspective, were actually very costly. It's fascinating. You're sort of zooming in on, even though the blended IRR over the entire period was good, it could have been great if he just recognized that it was way overvalued by, what, year seven or year 10 or something like that. Yeah. Ultimately, for him, it's a mounted capital that he has to deploy. So I don't think it's a...

Fair comparison. We have $2 billion of funds. He has a much larger pool of capital and has for a long period of time had a much larger pool of capital. So he's trying to achieve something different. But for us, we are smaller. We are more nimble. We do believe that, unfortunately, at times we do need to sell our businesses.

Well, let's bring it all together. So you wrote this big memo. I felt like you were winking and nudging the whole time of like implying, hey, maybe here's what people should think or should do in this environment. If you're willing to make it a little bit more explicit, what should people think?

investors do at this moment in time and how should they think about the moment that we're in here in June of 2023? The way we think about it is as long as you have a five to 10 year time horizon, now's a wonderful time to invest. It's the tough times that is the best time to deploy capital. It's not the frothy times and the boom times, it's actually the tough times.

And that's really what ends up differentiating investors in Armand. We touched on before, but it's that emotional stability to where the volatility and really in these tough times focus on, can I buy some great businesses at a wonderful price and close my eyes and have that five to 10 year time horizon? We have no idea where this market is going on a six month view, on a 12 month view, on a two year view.

Our degree of confidence really comes in from a five to 10 year view. We will get through this. One thing I can say is we will get through it. These are the times where we really feel like we can set up our portfolio for the next five to 10 years.

There's another topic that you guys are obsessed with, which has always been a little curious to me. It's front and center on your website. You have a big annual event every year that is literally called this. And that topic is people and culture. I don't know, it feels a little touchy feely for public market investors to be so obsessed with this and use it as a North Star. And I'm curious where that conviction comes from for you.

Yeah, well, I think you know, Ben, or you've seen firsthand where you kindly interviewed Ed Catmull for us at our People and Culture Conference last year that we do care really deeply about this topic and that's something we're very passionate about. And I would agree with you, the vast majority of investors are

do think it's too touchy-feely. And I think that comes out when we meet our CEOs and we meet those CEOs for the first time. And often that first meeting can go for an hour or two and we're just talking about people and culture.

And the CEO turns around at the end of the meeting and says, I've never had a meeting like that or I've met hundreds of investors and no one's ever asked me about people and culture. So I think we're pretty confident that the vast majority of investors would definitely align with your thinking there. In terms of our key learnings, I think there's been a couple of key things or a couple of key reasons why we've really become quite passionate about this.

The first one is when we started going on boards, we actually really started to see this up close and personal. And so you get to see this team of people with a certain leader that maybe isn't fulfilling that leadership role correctly, and you replace that leader, and you put a great leader in, and that same team significantly improved their performance just based on that one change. I think the other thing is really as we've reflected on the mistakes, and we've made many over the years,

on those investments which haven't gone right. What mistake have we made? And nine out of ten times, it's been around the people.

That's certainly the areas that has brought this to light from our perspective. So I suppose, funny story, I was actually listening to one of your old episodes the other day and I almost fell off my chair when I heard, you know, Culture Am, there was a Culture Am ad, which is, as I mentioned before, one of our late stage growth portfolio companies.

It's one of those things where they've gone to the data that they collect, which is a lot of that's around the engagement scores of the companies and the software that they use collects that data. And what they've done is gone and looked back from 2017 to 23 and

for the 500 listed companies and what did those companies with high engagement scores, how did they perform? And for those that have listened to the back catalog, they would know that those companies outperformed by about 6.7%. And outperformed in share price. Like they literally, investors are more excited about- Like literally the stock performed better. Correct. We're actually also trying to think about how we can put some data around this and

Is there a way to actually prove this out from a data perspective? Hopefully, we might be able to share that in future months. But I suppose most of our learnings, while supported by the culture-ramp data, is really what we've seen up close and personal as we've sort of invested over the last 18 years or so. I mean, you can imagine this is probably hard, if not impossible, to do for regulatory reasons in public companies. But you could imagine an indiligence on...

private companies for VCs or for you all, crossover investors, wanting to see like, hey, I want to see your culture amp data as I'm trying to evaluate you as an investor. Yeah. It's actually one of our first questions. Interestingly, some companies have started to disclose it publicly. If you go to, as an example, Wise, which is a listed company in the UK, they're

But they actually have a full page in their annual report talking about their culture and data. So we love that. We love that additional disclosure. There are other ways that are probably worth mentioning in terms of how we look to diagnose this from a data perspective as a public company investor when they don't.

Ideally, they do disclose it, but if they don't disclose it, is glass door and blind. Obviously, it gives you some insight. You've got to be a little bit careful with it, but there is some ways of gathering data. I'd say probably the best way or the most value we get is actually spent to customers. So ex-employees, yes, but customers is a wonderful way, which I think surprises people, actually.

What do you think about businesses, because they totally exist, that are unbelievably profitable, but the whole ecosystem hates them. They feel locked in. It's not a great place to work. There's not strong people in culture. I'm always curious about these companies where they seem to be maximally value extractive over the ecosystem around them. And they have so much power that they just sort of endure and stay super profitable. Yeah.

So, well, they're not for us. That's probably the simple answer to that. We only have to invest in 10 to 15 businesses and we want to be proud of those businesses that we invest in. We want to be proud to own them. We want to be proud the way they behave. In simple terms, those businesses are not for us. In time, though, I would say...

Our view is that will unwind. And so they may have a very powerful position today that allows them to do that. It allows to treat their people in that way. But ultimately, we would argue over a long period of time, those businesses, regardless of their power, so to speak, will most likely be disrupted. It's hard to be durable when you're... Correct. Very hard to be durable if you treat your key asset, which pretty much in every single business is your people.

Well, I think this is a great place to leave it. We will put the link in the show notes if you're interested in checking out the full memo. And Tom, I'm curious for you, any other parting thoughts to leave folks with as we settle in here? Well, I think my parting thought is investing's hard. And I think when you live this every day, it's not easy. And I've said it a number of times, but

The thing that we focus on a lot and certainly would advise anyone we speak to around investing to focus on is that emotional stability front. You have to be able to wear the volatility to get wonderful returns over the long term. And from an investor's perspective, that's probably the key thing to think about as we think about these tough times. Well, Tom, that is a great, great place to leave it. Where can people find you or TDM on the internet?

So where can you find me? I'm not on Twitter. Good for your sanity. Indeed. The best place to find any of our content is on the TDM Growth website. TDM is on Twitter, so there's lots of great content there. Awesome. Well, thank you so much. Thank you so much. Loved having a chat. Thanks, Tom. Awesome. Listeners, we'll see you next time. We'll see you next time.