Ben Gilbert: evaluation

Transcript context

…Yeah. As our volumes went up, we negotiated those rates down much lower. Also, as we got bigger because of network effects, some of the transactions we had zero cost because you could just leave it in your Toss account. That Toss is the Venmo of Korea. If you leave it in the account and you do a money transfer within the network, it's zero cost. But if you transfer it back to a bank, then it costs us whatever, we negotiate with the bank. That is an example of a deal that really did cost us a lot of money, but again, this is a good example. In places like the U.S. and China, you would just raise a ton of money. It's like, hey, this is a great product-market fit. Go for it. But there, we were trying to slow down the growth because we were going to drive ourselves out of business. We were this little venture fund. We can't keep funding this burn rate, so we actually did things like, oh, why don't we charge you a transaction fee? After the first free 5 or 10 transactions, we would charge you. By charging people, we will slow down the growth. We did that. Of course, that helped subsidize the burn. It didn't slow down the growth that much actually, but at least we got some money. You have to do clever things. There's a saying, "Creativity loves constraints." We try to constraint our companies in a way that forces them to think creatively about the product and about the business model so that you don't burn crazy amounts of money. Again, I have no problem stepping on the gas when I see something obviously good, but we try to do it within the balance of some reasonable constraints. The number one rule for us is we have to be able to control our own destiny. It's not just to protect Altos' ROI. We're trying to protect the founders because these founders start their companies and this is their life’s mission. Let's say we pick the right founder. This is their life's mission. The last thing I want to see happen is their life's mission blow up, and it will blow up if you keep running out of money. I want to see founders in control, not the investors. If the founder keeps running out of money, guess what? The founder is no longer in control. Some big investor comes in, they're calling all the shots, and before you know it, the founder could be gone. Now, I'm staring at a bunch of execs that I don't know, I don't have a relationship with, and I'm not sure what to do with that. I like having relationships with the company and I want to know who I'm working with. We're trying to protect the founders. We want them to be under control. If they're burning too much money, they're going to lose control over their own companies, so we want to protect them and we want to protect our capital efficiency. We care about price per share appreciation. You could have these valuations keep going up, but you have so much dilution. Your price per share is not going up at the same rate. Price per share appreciation matters. Ironically, yes. Valuation is actually not the thing to watch, which of course, you're never going to see the price per share in a TechCrunch article, but it is funny how people just anchor directly on that valuation. On this note, Ho, I want to take us in a little bit of investment fundamentals direction. It's too easy to say, well, there are two types of investing: value investing and growth investing. It's obviously some spectrum. I think you have—at least from the outside—mastered the art of identifying where and when to be on which places in that spectrum. Earlier, you mentioned something like, with Roblox, with our early investments, we paid something like 5X revenues on a valuation basis. I assume (and I haven't looked at the numbers) that it's much higher than that now. I also assume that at some point, when you were investing in those multi-billion-dollar valuation rounds that it was higher than 5X then too. When are you comfortable and how do you make decisions in fast-growing tech companies around what investment multiples makes sense? That's a great question. We use these rough metrics—whether it's 5X or 10X—when we don't know the business. But once we know the business and we know what the potential is, then we know, hey, we could be monetizing more but we chose not to for a whole variety of reasons. We have to factor that into the valuation equation. Until you really get to know the business, you really don't know how to value it, so we have to use these dumb metrics. Then, once we really get to know the business, we feel like we are in a better position to evaluate than anybody else. I like to say, we're different from every other early-stage VC because we never run out of money and we never run out of time. Thanks to our LPs, we could just keep investing across multiple funds. We're also very different from any other later-stage investor because that's where most of our dollars go these days, to the later stage. But we're different because we don't chase somebody else's unicorn. We are going very deep into these companies. I like to say I'm a very slow learner, so it takes me many years to get to know you and your business before I could even qualify myself to make that kind of a judgment call. Buffett likes to talk about his circle of competence. Our circle of competence is quite narrow. They're our own companies. We look at other people's companies, try to learn of course, but we're going to town studying our own businesses, trying to figure out which of those businesses have potential and trying to understand how it works. When a company starts to work, that's a rare thing as you know. We're all in the venture business. It's hard to find something that actually works, so when something is working, that should just tell you maybe you should be paying more attention. Something is going on. Try to understand what is going on. There are many explanations behind something that's working. It could be the market. It could be a competitive dynamic. It could be that the people are really special. It could be that you have some secret sauce. Maybe you got lucky. Whatever it is, try to unpack it, try to understand the components of it, and then try to understand how this machinery works. As you understand the machinery, you start to understand what the potential is and how to value it. There's no easy formula, but that's one way to think about it. This interesting comment about value versus growth. I give a lot of credit to Jack McDonald who taught investing for 50 years. He's no longer with us, but that's the same class that the IGSB guys teach at. We go back every year to teach that class. Buffett used to come every year. He always told us, hey, value and growth are the same things as far as he was concerned. It's like two sides of the same coin, that's what Buffett says. The way McDonald talked about it is, isn't growth just a component of value? Of course it is. The higher the growth, the higher the valuation potentially.…

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