David Rosenthal: belief

Transcript context

…Especially for first time founders, if it works out of the gate, then you have no idea what to attribute the success to. It could be skill, it could be luck. Of course, it is some combination of it. But you have no idea of the percentage of that skill and the percentage of that luck. You say, that worked, I will just repeat the exact same process again, and surely I will create success again. That is almost assuredly not the case. I have several companies in my mind that thought that and definitely did not happen. Right. On the people that often sit on their boards or finance them, there's also a dissonance, which is that if you think of the VC community, the business model and VCs issue find really interesting things to invest in, then hopefully they go up in value, and then there's an exit which you profit from that increase in value, which is this wonderful engine if you think about what drives the US economy. It's just phenomenal. But in the early stages of how people think about value, there isn't yet this track record of persistence because people are often, for example, spending a lot to acquire customers. Profitability may not be evident yet in fundamental economics. They haven't really asserted themselves. The only thing left is how the top line is doing. Are you growing crazy? When you hear VCs sometimes complain that people waited too long to IPO, what that message really means is that all of a sudden, people's perception of the company changed from the top line to the bottom line, and they missed the window. What that says is that, that investor community is focused on top line growth as it should be because it's the best marker available, but it doesn't tell you much about power. It's hard to do. The third thing, which of course you would expect from us, is that actually understanding power tells you some interesting stuff about transforming. So three things—it's important, it's hard to get right, and power matters. Something else just finally occurred to me. I've never thought about it before, but if you are analytical and can figure out and quantify a company's power, then you can assign it a more accurate multiple of profit than anyone else can. Because if you can observe, oh, a company has a 24% operating margin many, many years in a row, you can decide, okay, fine, I know what the operating margin is going to be in the future, and I can figure out how I want to value this company. But if it's a new company, and it just settled into some steady state of profitability, and you understand the power dynamics, you can be better than other investors at predicting the net present value of all the future cash flows of that company, rather than a very brute force way of doing it of just slapping the same multiple on that everybody else does. Ben, not only is it going to supplant me in writing Seven Powers, but it's going to take over Strategy Capital.…

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