Every company has a story. Learn the playbooks that built the world’s greatest companies — and how you can apply them as a founder, operator, or investor.
Wed, 03 Nov 2021 01:25
Of our 65+ sources for the TSMC episode, one stood above the rest: a wonderful Knowledge Project episode with Brinton Johns and Jon Bathgate of NZS Capital laying out the state of the semiconductor market. When coincidentally we met Brinton a week later, we knew fate was telling us we had to dig deeper. It turns out NZS has a lot more to teach Acquired than just about semis! Here we dive into their fascinating philosophy of "complexity investing", which was born out of their interactions with the world-famous Santa Fe Institute (of W. Brian Arthur and Increasing Returns fame!)... and of course we also throw in some semiconductor shop-talk for good measure. :)
If you love Acquired and want more, join our LP Community for access to over 50 LP-only episodes, monthly Zoom calls, and live access for big events like emergency pods and book club discussions with authors. We can't wait to see you there. Join here at: https://acquired.fm/lp/
Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.
Okay, excitement, fun, brevity. I love it. For brevity is the soul of wit. Who got the truth? Is it you, is it you, is it you? Who got the truth now? Is it you, is it you, is it you? Sit me down, say it straight. No, the story on the way, got the truth. Welcome to this special episode of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert and I'm the co-founder and managing director of Seattle based Pioneer Square Labs and our venture fund, PSL Ventures. And I'm David Rosenthal and I'm an angel investor based in San Francisco. And we are your hosts. In our TSMC episode, one of the 65 sources that we used was an episode of the Knowledge Project with Brinton Johns and John Bathgate. Brinton and John are public equities investors at a hedge fund called NZS Capital and they spend a lot of their time researching some ice. It was packed so full of great content that I actually watched it twice to make sure that I understood everything. It was so good. It was awesome. And then in a wild coincidence, the very next week, even before we shipped the TSMC episode, David and I were at Capital Camp, great event organized by Patrick O'Shaughnessy and Brent B. Shore. And we ran into Brinton in person and I was like, I recognize that guy. What do I recognize him from? It was like the spider-man. Yeah. Very, very much so. So after like, nerding out the whole rest of the event on TSMC, geopolitics, semis, we decided to have Brinton and John on acquired. And on this episode, we actually didn't even get into semiconductors for the first hour. Since it was so fascinating to hear about their investment principles at NZS. And I've said this many times on the show, but yet again, new frameworks that have totally changed the way that I think about the world. It's frameworks all the way down, Ben. It is. Well, for our presenting sponsorship on this special episode, we have the Softbank Latin America fund. As many of you know, from other specials this year, Softbank Latin is deploying huge amounts of capital into the burgeoning Latin America startup ecosystem. And they just announced they have another three billion to invest in addition to their initial five billion. We are talking today with the CEO of one of their portfolio companies, Joao Menin, CEO of Banco Inter, which is now a publicly traded digital bank based in Brazil. Joao, welcome to acquired. You have taken a publicly traded traditional bank and wholesale transformed it first into a digital bank and now into one of Brazil and Latin America's leading super apps. And the bank, it was a traditional bank when you stepped in as CEO. Yes, that's a very good question. The bank went and was founded back in 1994. We like to say that we are everything, but I start up. We're not a start up. And I also like to say that we are not a think tech. We changed the course of the business when I stepped in because from 1994 until 2014, 2015, we're just a local commercial bank. We didn't have retail, just wholesale. We're very focused in one big city in Brazil, that's a better zone to where we're still at. We had quite today. We decided to really try to launch a retail banking and units from scratch. And I realized that in order to have a chance to succeed, we need to do something different in Brazil. We have five big banks that control maybe 85% of the market. And in order to compete with them, they still have like 25,000 plus bank banks. We need to take a different approach. And that's what we do. We decided to look, let's launch a 100% digital free and full service check-in account within these smartphones. And let's try to get as many clients as possible. And if you'll fast forward to 2021, it really happened. We actually just achieved 14 million clients yesterday. So after that, we also decided, look, why not to put some non-banking products as well. The first one we launched was our marketplace, and they'll have many other non-financial products. And then I would say that we transformed ourselves into a super app here in Brazil. That's amazing. Do you look to folks in China like Maytwan and like Grab and Southeast Asia as inspiration or was this a vision that came homegrown in Brazil? I would say that we don't have these guys as a benchmark for us, but we started to say, look, what else can we add? So let's add investments. Okay, now what else? Let's add insurance. And what else? Let's add shopping. What else? Let's add a tax. And so we start just to keep evolving the business. But I mean, we're really trying to see what else can we put in order to help our clients? And we like to say that everything ends up with banking, which stands for payment and credit. Everything you do in your life. So if you want to travel, if you want to give a call to your girlfriend, whatever, it's always about banking. And our thanks to the Softbank Latin America Fund to Joe out and Bunko Inter. If you want to get in touch with Softbank, you can do so at LatinAmericaFund.com or if you want to learn about Inter, there are ways to do that in the show notes too. Now as always, this is not investment advice. We almost certainly hold stocks that we talk about on this episode. So do your own research, make your own decisions, but love the frameworks that we dive into with Printing and John. So without further ado, onto our conversation. All right. Well, listeners, we want to introduce you to NCS capital, their investing philosophy, and partially because we think they're a fascinating firm similar to Honam of Alto's or Hamilton Helmer of Strategy Capital. But also the deeper David and I have dove down the rabbit hole the last week of reading all the papers they've published. We feel like we've gotten a lot smarter. And so we basically just want to expose the world to more and more of that. So Printing and John, welcome. Thanks for having us. Well, first, let's start with complexity theory, which is a concept that your whole firm is based on and you've published a 47 page paper on that is just a full of fun little graphics, but B, I think probably has five to eight kind of mind blowing concepts in them. And the first one is you come right out and admit that you don't know the future. What's going on with that? You would be bad marketers as VCs. Everybody claims to know the future. No, I mean, look, the whole investing philosophy comes out of a lot of pain, right? So we are investors for a long time. We are wrong a lot. Like all investors are wrong a lot on a consistent basis. And we are just looking for a better way to think about things. Somebody suggested this book to me called The Origin of Wealth by Eric Binehawker and sort of serendipitously around the same time someone suggested complexity by Mitch Waldrup to Brad. And we both read those books and Origin of Wealth was a slog. I think it took me six months to really get through it. And then swap books and started thinking about sort of a different philosophy. I'd heard a little bit about complexity theory and the Santa Fe Institute, which I want to get into. I think Bill Gurley talks about this fairly frequently and Michael Madison and that's how I kind of originally got turned onto it. But tell us a little bit more about what is it? It's not at all about investing. It's about the world. That's right. Yeah. In fact, I think it was Bill Gurley that recommended complexity to Brad. Complex adaptive systems are all around us, right? That's what governs the world. That's how the world works. We don't know how the future is going to unfold because these systems is interacting together and it creates what's called emergent behavior. And emergent behavior makes predicting useless in most cases. And we can have guidelines and heuristics and those are all helpful. But as far as exact outcomes and what's going to happen in the future, those are a lot more difficult. Santa Fe Institute started with a group of scientists from the Los Alamos National Labs and they came together and they were mostly physicists and they started talking to economists. It was sort of hard sciences and soft sciences. And the physicists were like, hey, economist guys, you guys seem really smart. But you know, your theories, they don't work. Like all your math doesn't work. So what's up with that? Like, you know, with our math. It's extremely precise. In fact, you know, when the math is off just a little bit, Einstein's like, oh, your math is off, the Pluto should really be here and it comes up with a theory of relativity, right? We literally made the atomic bomb like it works. Yeah, it works. And so they started coming together around this idea of complexity. What is complexity? How do we define complexity? Where does it set? And because we are living in this complex adaptive system, how do we think about the future? How do we think about life? How do we think about going forward? And for us, this sparked an interest in biological systems and we found this sort of biology vein much more interesting than the traditional economics vein and much more applicable to investing than the traditional economics vein. Well, it's so cool. And am I right that you all actually went to this head of institute and took courses there? Like, how deep did you go in this? We did. Like a lot of rabbit holes. We go down very deep. We quickly became members of the Santa Fe Institute. They call it the action group. It's this group of non-scientists that are allowed to sit in, not a lot of the science. And so then we took this complexity course over a weekend, Brad and I did at Stanford. And that was just a ton of fun. Actually, John and Joe, the two other investors on our teams, they took a longer course. They actually had to do real work. Brad and I didn't have to do homework. But we just learned so much. And I remember sitting outside of this cafe in Palo Alto with Brad and we'd just sort of been at this course with Deborah Moore, this lady that teaches at Stanford, who studies ants. And I thought, man, this concept of resilience is really fascinating. You know, it's really more about resilience than it is about predicting the future and it's about adaptability. Biology doesn't really care that much about the future. They care about adapting to this wide range of futures. My bees don't really care if it's going to snow tomorrow. They can adapt to snow. They've learned how to do that over millions of years. And what if we looked at companies like that? And so then, of course, we kept reading, we kept writing. This was probably 2011, 2012. And in 2013, we published this long paper that you reference, which is super geeky, but it's got a lot of pictures because that's the way we think. You've got the back to the future delorean in there. It's got the delorean. Like what work could you want, right? We're really hoping for a delorean for the office. That's our dream, office furniture. On the note of ants, this is probably the first and best example of an extreme version of resilience in an organization. Can you share the insight you had there? Yeah. So, we attended this class by Deborah Gordon. And she has been studying this group of ants for 30 years in the Mexico. They obsess over this group of ants, right? And they know what every ant is doing at all times. And what they found was really fascinating. They found that about half the ants in the colony weren't doing anything. They were just sort of sitting around. And then they had half the ants doing these defined jobs. And that's very counter-tuitive. We think of ants as sort of the ultimate productivity machines. But it turns out ants aren't optimized around productivity. They're optimized around longevity. They're optimized around resilience, around living as long as possible. Let's say it that way. So that was really insightful for us. We thought, man, all these companies are optimized around productivity. And Wall Street only makes it worse because we're obsessed over quarterly earnings. And so, what if companies were really optimized around this long-term thinking? Of course, we see that with lots of companies. Most of them tend to be run by founders because founders have a lot of skin in the game. And they think long-term. But there are CEOs that think that way also. We know that the average tenure of a CEO and S&P 500 is less than five years. So they're not optimized like ants are. They're trying to get a lot of return really quickly. But companies that take this long-term view are so much more interesting. When I read that in your paper, the thing that hit me over the head, I was like, oh, this is Warren and Charlie's laziness bordering on Slaw. That's exactly it. The goal is not productivity. The goal is long-term steady returns and resilience. I think Warren and Charlie grok this very early. And there's a lot of science behind that math, but they don't need that. They're so good with folks he wisdom. So then the thing that hit me, of course, I'm like, well, a company's not going to have half their employees sitting around doing nothing. But just as a fun thought experiment, what if a company only was growing at half the growth rate of a high-growth company? But it's a marathon on a sprint. They could do that over 40, 50 years instead of thinking in these five and 10-year time horizons. Do you have any good anecdotes on, I know you have this firm belief that hyper-growth is bad and actually slow, very long-term compounding growth is the real holy grail? Yeah. I think what we're generally looking for is we kind of use Groupon as an example, whether that's fair or unfair. We're not looking for the next company to hit X revenue, RenRade in the shortest period of time or whatever it is. We're really looking for this durable, resilient growth. I think the way you framed it then that if a company does have employees that aren't driving the, I guess, level of growth that you'd be seeing in a hyper-growth firm, that's okay as long as it's hyper-durible. You could look at, I mean, look at Dan or her or kind of like some of the classic iconic growth companies that have compounded for decades. That's generally where you see the compounding. It says, obviously, you compounded 10 to 12% a year or in the teens, but you can do it for 10, 20, 30, 40 years. You can just get tremendous value creation. I guess some companies in the portfolio we admire that do that would be someone like Texas Instruments where they have a really decentralized culture and they actually push responsibility and decision making down into the deeper parts of the organization. The CEO is not really a manager. He's a capital allocator. He almost has to think more like an investor and a portfolio manager than an operator. I think that's what we really look for is companies that can provide this durable growth. Again, it's very buffet-like. We're hopefully finding companies where you can just set it and forget it. We're going to put up moderate to healthy growth for 10, 20, 30 years and in our framework which we can talk about around resilience and optionality. That's what we're looking for in the resilient bucket of portfolios, these companies that can really compound it at a healthy rate for a very long time. Yeah. You guys have these two concepts and then one kind of super concept that combines both of them of resilience and optionality that you look for in investing. Neither of those are terms that most investors are familiar with. Can you define what you mean by both of them and maybe give a few examples of companies? Sure. On the resilient, half of the portfolio, we kind of say you know what when you see it, which I think is kind of an unsatisfying answer. But John, while we're looking for our companies that are further along kind of in their S-curve and their growth trajectory, and so this would be a company we own in the head of the portfolio to be someone like a Microsoft or a TSMC where we're not looking for value stocks or kind of like cheap companies. We're looking for companies that are healthy growers that we think can derbally grow for the next 20 or 30 years. And our turnover in this half of our portfolio is around 10%. So this is the hopefully said it and forget it, part of the portfolio. And so if you characteristics we tend to see in that part of the portfolio are mission criticality and switching costs, which I know you guys cover well, then some of the deep times you've done, I mean just scale like TSMC we can talk about in more details just like a classic scale company where we talk about power laws in our investing framework and pockets of industries where one company can take 90 to 95% of the profits into giving an industry and TSMC is a great example of that. And then you exactly the way you guys laid it out so well on your episode on TSMC is you really get the flywheel going right where the more scale you have the more you can be invest, the more you can impact your customers and it just becomes this beautiful compounding machine. The last bucket we probably would see in the Brazilian proverb portfolio is just network effects based competitive advantages where you see companies that really hit their inflection point and again, especially in digital markets, you'll tend to see a handful of companies or potentially one or two companies take most of the economics in a given market like digital advertising or smartphones or there are so many markets where there is one or two players that have 80 to 95% of the profits and so we tend to see those in the Brazilian part of the portfolio. Well, and one thing I think was really counterintuitive about how you guys think is you're actually not looking for moats. The companies you just described and I think a lot of investors think about like, oh, wow, well, they've got really deep moats and so of course you want those as your long-term compounding holds. You guys have a little different perspective on this, right? Yeah, we've a little bit of different take and so I don't want to offend anyone who uses the term moats. I think it's a great term and it's a great part of anyone's kind of investing toolkit. I guess one of the things that we're careful about is looking for companies where part of their moat is inserting themselves into the value chain or into their customers' share of wallet basically where they put themselves in a position to extract as much economics as possible. And so I think that can be viewed as especially in kind of a more of like an industrial-age view of how competitive advantage has evolved is is that something that we try to avoid? We're not trying to look for a company where they feel like they have customer lock in and then all of a sudden they can raise price three to five percent for the next 10 years. Part of our framework and the reason we name the firm and ZS Capital is we're looking for non-zero sumness. So looking for when we now come for all constituencies across kind of the value chain that includes the companies, employees and their customers and also kind of society in the environment at large. And so we're just careful looking for companies where all of a sudden if I have this moat then I can screw my customers over the next 10 years, right? I think that's what we're careful about. I noticed I don't think you guys hold Apple, right? But you do some of the other large tech companies and this feels like a perfect example to me like, oh Apple, like incredible moats. They're getting pretty good at value capture over there. Yeah. Yes, that's a very nice playweight putting it. You obviously see it with Spotify and the EU and Epic here in the US and being in the news flow constantly. I just think when you get to a point where you're taking so much economics for your business which already has the largest market cap in the world that your key partners on your platform are taking you to court or taking you up to various regulatory bodies or writing white papers on how you're screwing your customers. That's just what we're trying to avoid. And who knows it might work out perfectly for Apple over the next 10 years. It makes you less resilient. Yes, exactly. Is that the idea that if there's consumer surplus money left on the table for consumers where they're not getting every dollar extracted that they could by the company that that company is more resilient over time, even if they're not making every profit dollar and growing as quickly as they could today? I agree with that. I mean, if you really have a management team that's thinking really long term, I don't know why you wouldn't give up a little bit of extra economics for your key partners, whether that's suppliers or developers on your platform or your customers to really solidify your trajectory over the next 10 to 20 years versus I don't want to pick on Apple too much, but like what's the gross profit impact if they cut their app store, take rate from 30% to 15% across the board? What is that like 5% of gross profits? It's meaningless to them and it would create so much value. There's obviously not going to be effects of that. But anyway, I think that's what we're looking for as companies that are paying it forward. Like again, back to the TSMC example because you guys covered it so well. TSMC has low-warp gross margins than most of their customers. And so at any point, they could probably take their margins from 50% to 60%. And say, hey, I basically have an op-le in this market. But the way Morris Chang architected the culture there is on long-term value creation and really creating a platform for their customers to create massive, amazing businesses. And so I think that's the way we think about them. Yeah. And just for listeners to put some numbers behind this concept, which I think is just great from this NZS white paper, 15% growth over 10 years would deliver more than a 300% return. Not bad. At 15% growth over 15 years would almost double the 10 year return. If we could populate our top 20 positions with these types of resilient companies, we'd only trim and add around periods of volatility. All the real absolute dollar value of compounding shows up in the out years. So you just want to make sure that you're still compounding in the out years. That's right. And it's sort of where we take issue with Porter. This is of course Michael Porter competitive strategy. Porter's five forces. Thank you. Yes. And so the cynical view of Porter, a lot of people have interpreted, hey, build a motor around your business and then stick it to your customers on price, right? I'm not saying that's what he said. I'm just saying that's the way it's interpreted. And that's a terrible way to build a business because eventually someone will undercut that and offer actually a better value prop to the customers. And because all of this value or the out years, it's just really not a value maximizing way to run the business either. So we think this concept of creating more value than you take is really important. And Porter agrees he actually revised his thinking and in 2019, read a paper in an institutional investor called where ESG fails, where he talked about this concept of shared value. And that's not him trying to say that purely because it's good for the world to care about all your constituencies, not just your shareholders, but also your customers and partners. He's literally making an economic argument for shareholders that that's the long term value, maximizing thing to do, right? I think that's right. And he was a consultant for Intel back when our processors were starting to come out and actually dominate the mobile space and they came out with this sort of dumbed down processor. The Adam? Yeah, exactly. But even before that, they came out with a cheaper version of it. But in reality, that's not what they should have done. They should have actually embraced a totally different business model like ARMDAQ, where they were just selling IP and enabling a whole ecosystem instead of trying to take all the profits for themselves. Okay, so that's the resilience side of NCS thinking and the portfolio. Then you also marry that with something very different. Tell us a little bit about optionality and how you think about that. Yeah, really, we're thinking about the future. We're just thinking about how broad and safe is the prediction we're making. So we can make these very broad, safe predictions like we think electronics are going to push deeper into the world, right? I think in nine out of 10 copies of the multiverse, that's happening. But there are other predictions like we think EVs are going to dominate the world and Tesla is going to be the power law winner inside of EVs. That may only happen in two out of 10 copies of the multiverse. You know, it's certainly not 10 out of 10. So these predictions are much narrower and the range of outcomes is much broader. And so that doesn't mean we can't invest there because it's incredibly asymmetric if we end up being in that copy of the multiverse. But if we're not, and it's a zero, it also doesn't torpedo the portfolio. So I feel like actually you guys could give the master class here since you're such great venture capital investors. But that's really what we're trying to expose ourselves to and these earlier stage public equity companies. And so how do you actually then apply both of these very different principles inside the same portfolio? Are you picking some stocks because you're maximizing for resilience? And you say that look, this is a great compounding slow growth, but durable company. And then there's other companies that you're investing in because you say, oh my gosh, if this thing's right, it's going to be really right. Like venture capital asymmetric upside right. Or is it blended in some of the same companies? You're right. It tends to be these two portfolios in one. So we concentrate resilience. That's about 15 names and then just over half the portfolio. And then we distribute optionality. So that's about 40 names. Also just under half the portfolio, max position size one and a half. And in the middle, this between one and a half, two and a half, one and a half, three, we don't own anything. And that's percent of the portfolio. Thank you very much. Percent of the portfolio. I say this stuff so much sometimes I don't complete the sentences. And then sometimes we find these very resilient companies that are actually layering on optionality to the business. So they have both. They have this resilient base, but then they have optionality on top of that. And you call those companies root mose? Yeah. We're such gigs. It's so bad. So resilience with out of the money optionality, it's just a shortcut on the team that we use. And those are the companies that you bump up to seven, eight percent of the portfolio, right? Yeah. What are some examples of those? Well, I mean, sort of there's a couple, right? The classic example would be Amazon in 97 when they went public, you know, I think around a billion dollar valuation. Nobody could have foreseen AWS, right? That wasn't anybody's DCF. Oh, yeah, they're going to also create infrastructure that everybody in the world is going to use create businesses. They sound so silly, right? But another one that we had in the portfolio years back was eBay. I don't know if you guys remember the marketplace business was struggling. They brought in a new CEO, John Dono, they had PayPal. And really you weren't paying for India PayPal. If the marketplace business would recover, that more than cover the cost of entry. Of course, marketplace did recover. PayPal ended up being great. John Dono, who's an amazing leader. And that was a classic root mose talk. So in that situation, you've got a fairly resilient business or the hope is that the marketplace is a resilient business and then PayPal is the out of the money option that you sort of have that's being valued at zero, but clearly it's a very valuable business. That's exactly right. Well, I think it's cool about this. Yeah, right. This makes a lot of sense and investing. This also makes a lot of sense in how you should run your company. Yeah. And that the best CEOs think this way as it, how do I create resiliency in? My core business, but then what are the options that I'm investing in for the future on top of it? To my mind, there's no better example than Amazon of just this is the whole operating philosophy of the company, right? So we love this concept because we think it's true in the universe. And so therefore the narrow slice of investing that we're using it for, we're pretty sure is also true. But it works really for everything. I mean, it works for parenting. Parents don't know what we're doing. Like I have four kids. I have no idea what I'm doing. So I'm just trying new things all the time. Well, that didn't work. Well, so there's the optionality of all, too. And then sometimes your optionality becomes resilient. And that's what you're hoping for. But you just try a lot of new things. So I don't know. For us, it's a life philosophy. Fantasy football is another area where I can apply resilience and optionality very well. Actually, if you can't get out of your head once you start kind of practicing this, which is so funny. All right. I'm going to take us in a totally different direction. I want to talk about the difference between normal distributions and parallel distributions. And listeners of the show who are in venture capital or in startups and have tried to raise venture capital or successfully raise venture capital will know, you know, they get this answer from VCs all the time that our portfolio construction is really a power law. We fully expect a third of the portfolio to go to zero, a third to return capital. And really only like one or two companies at the sort of head of the curve are going to be this hopefully 10, 50, 100 X that sort of gets us a great return regardless of what else, you know, happens in the portfolio. You guys interestingly are sort of applying that thinking at much later stage companies. Hopefully ones that aren't going to zero, you know, the way that a frail $10 million valuation startup could. How does that work? And what was the insight that made you realize, hey, the world is not normally distributed actually in certain scenarios. It's very power lot distributed. Right. Well, once you accept the fact that all of life is governed by complex adaptive systems and the markets are also governed by complex adaptive systems, which means a merge of behavior you can't predict the future, you focus on adaptability. Then of course those complex adaptive systems tend to be governed by power loss. So it's sort of a natural follow on. But the insight here is all risk models are based on these Gaussian, these normal distributions, right. But in fact, the world doesn't work that way. And so there's a really fascinating economist named O.A. Peters who's done a lot of work here and said, wait a second. Your risk models are sort of like airbags that go off at stop signs, but not when you get in a crash, right? This has always been my beef, you know, what I was in business school with economics as applied to like business and investing in the real world is you studied this stuff and you're like, wait a minute, I actually work in the industry. And this is not how it works. Right. Exactly. And being venture capital investors, you see this all the time with public companies. It's also true. There are a few big power lot winners. We see them in the markets today. They're driving the entire market, right? This is our reality. There's a great study that you guys referenced in the paper that I'm wondering if you could just talk a little bit more about it. The toy example of a coin flip, a coin flipping contest where let's say you win $50 or whatever it, when you lose, you lose 40. That sounds like investing to me. Like there's an expected return of 10%. What actually happens when you run that contest? Wait, real quick before you answer is that that is it? $50, lose 40 or is it 50%? Oh, it's percent. Okay. Yep. So if it's $100, then yeah, you're right, David. It's 52% down 40%. Got it. Okay. Yeah. The concept, it gets to the heart of modern portfolio theory and expected utility theory and the flaws of that. So back to the multiverse. The way this works is if you had a hundred people flipping coins and they did it for enough time, you would actually see a nice study positive return. And that looks like on average, the experience of the participant is winning, but that's not really true. What you get is a lot of people going bankrupt and a few massive winners, sort of the Buffets and the Soros is the investing world, right? So the average is not average. And in one portfolio theory, you're taking an ensemble of all these, but that doesn't really make sense because I don't really care about your outcome, David, or Ben, your outcome. I care about my outcome. And I only get to live in this one universe. I don't get to live in yours. You know, I don't get to live in the multiverse. So my outcome on average is that of loss. It's that of bankruptcy. So when the time average does not equal the ensemble average, that is called a non-ergodic system. And you guys can put it in the show notes, Olai Peters works on this. It's super geeky, but really fascinating. It's so cool. Well, this is so counterintuitive. If you would think if you presented that game to me, I would be like, oh, for sure, I want to play that game. The odds are stacked in my favor. But most people who play that game will lose, and then a few will win really, really, really big. That just blew my mind reading that. Yeah, the distribution set is not normally distributed. It's parallel distributed. So that changes everything. And that's why all these wrist models are like earbags that go off at stop signs, right? It's because it turns out the world doesn't work that way. So, you know, we hear on a regular basis, oh, this was a three-centred deviation event, you know, which if you understand the math, that three-centred deviation events you expect, oh, wow, I'm so lucky to have seen one of these in my lifetime. But we see them a lot according to the media. And so they're sort of ridiculous. 99.73% of all events should fall within three-centred deviations is the way the math works. Meanwhile, I mean, I've been in this business for 13 years and already been through two recessions that are way outside of three-centred deviations. Britain has as well. And so it is just kind of a funny kind of common sense thing that when you're practicing this stuff, the normal distribution doesn't really make that much sense. Britain mentioned I took this course at the Santa Fe Institute. It was actually around this time. It's just like, this year, and like, I mean, just power laws are just like so cool. It's amazing. I mean, one of the examples we use in the white paper is if you plot like earthquakes by frequency and intensity, that just like in nature, naturally forms a power law, which actually makes a lot of sense. You're going to get, you know, one or two or three heavy magnitude earthquakes a year and then on a lot of small ones. But also if you plot the frequency of every word in the book, Moby Dick, that actually also forms a power loss. The as mentioned, 15,000 times. And then the next word is AND. And that's like 7,000 times. And then there's like this super long tail of words that are only, you know, used, you know, a handful of times. It's again, it's one of these things. Once you see it, and it's amazing for studying companies, obviously, like we mentioned, especially in kind of digital markets, because, you know, the world is going towards more markets where a winner can take all and, you know, becomes much more of a power law dynamic. And so that's why we just always have our kind of intense up for these power law dynamics. That's honestly a big part of when we're looking for optionality, that's what we think about it. It's like, is this a company that is relatively earlier stage in public markets that has the opportunity to power a law, you know, a large market, which is why, of course, you're making 40 diversified optionality bets here, because it's funny to think about this, but the statement of, let's go back to the stop sign example. Yeah, the vast majority of the time, the fact that these airbags don't work is totally not an issue, but it's a massive issue, the moment that you need them the most. Very similarly, all of the gigantic, outsized economic value is created from the 3, 4, 5, 6, 7, sigma events in the world. And so it's kind of ludicrous to be like, well, the vast majority of the time, this investment philosophy is very sound. And you're like, yeah, but we're not really trying to index on how many days out of the year it's sound. We're trying to index on how much value can get created at the end of the portfolio, 50 years from now. And that's going to be driven by the outliers. So we have to be prepared and fully optimize around the outliers, not close our eyes to the few days that they might exist. That's such a good point. I'm really glad you brought it up because what we're really playing for in the functionality half the portfolio is a symmetry. And really it's not about batting average. Like it's okay for only right 30% of the time, which is not intuitive at all for public markets, investors, I think I think everyone wants to be right 55% of the time 60, whatever it doesn't have to be that high to have good long term returns. But we're playing for slugging percentage where even only one out of three work, but those are multi baggers and can really create a lot of value over a long period of time. And that's like the beauty and that half the portfolio. And we've seen it. We've been doing this for years now. And it is amazing how you see these companies emerges as value creators and generate a lot of value for the portfolio at a relatively small starting position sizes. It gets back to this whole idea of you don't know what's going to happen. If you set everything up with the idea that you don't know, I think in a lot of ways, most venture capitalists crack this idea and set up their portfolios in this way. I think lots of people, myself included in the past, didn't fully understand this. You say the paper, I think you use nicer language than this, but I'll use my own language. This is my quote that conviction, this idea of conviction that so many people in venture talk about an entrepreneur's like, I've conviction, I'm convicted, which convicted means you're convicted for crime. But anyway, I have conviction that in this company, I'm going to lead this investment. Conviction is kind of stupid. Conviction is saying, I think my view of the future is going to be right. And really what you want is optionality. You need people to have conviction because otherwise there would be no entrepreneurs, that example of the coin flipping contest. That is exactly the dynamics of becoming an entrepreneur. The expected value is positive. And yet the vast majority of people who start down that path go bankrupt. And then a few people win really, really, really big. And when you're constructing a portfolio, what you actually want is a lot of those bets. You guys have 30, 40 optionality names in your portfolio. As a venture fund, you want 30, 40 quote-unquote names in your portfolio. Venture portfolios with 5 or 10 are very non-resilient. Yeah, that's right. I mean, we use conviction as a synonym for overconfidence. I think that's what really is the right way to think about it. Conviction for us means, hey, I've done a ton of work. So I've got a lot of sunk costs, which means I've got bias. And I think that my view of the future is better than yours. That is literally what you're saying. Would you say that? Yeah, right. So who knows? Right? What we're trying to do with the tail of the portfolio, and I think what you guys are trying to do in venture capital investing, is maximize the probability that we get lucky. I just ripped that off for Balbuson. It's very good at calling it what it is. And we're just trying to maximize the probability that we get lucky. I also think, I mean, just changing your mind is the hardest thing to do. It doesn't matter when you're wrong. And I think if you kind of stand in a row and say, this is my highest conviction idea, it just makes it that much harder to Britain's point. I'm just introducing bias into the equation. And so I also think if you kind of invert it, I think it's fine to have an optionality position that you actually don't have that high conviction on. Like, to put an example on Tesla, I don't think that we have super high conviction that Tesla is going to power a lot of the EV market, but is there some probability where they do that? And it's worth, you know, multiples of what it is today. Sure. That's the way that we kind of think about conviction. Again, I don't want to piss anyone off. It uses the word conviction, similar to modes. Like it's fine. Everyone has their own process and we're not trying to like push what we do on anyone else. This is just what has worked for us over time. And so what I think we're very careful about is just introducing bias into our process. And luckily we all, I have run on our team, know each other well and can call each other out, but I do want to be a little careful. Well, I have two points to make that this cultural one I think is the second, but let me start first with, at the end of the day, this is a Buffett concept. This idea that it's better to be approximately right than exactly wrong. That's another way to describe this optionality phenomenon here where it doesn't sound nearly as strong to stand up in front of an investment partnership and say, I have very little conviction in this, but it could totally work. And if it does, it'll be really big. That's about the best I can tell you right now. That does not get everyone around the table excited, but in a very Buffett sense, if it works, it's going to be so freaking successful that this is a great price to own it at. And like, do I know if this is the right price to own it at? At all. How many versions of the multiverse do we have railroads, like all of them, right? And they're important. And where can we, how can we recreate that? We can't. It's been possible. And so I think you're right, Buffett and Munger save us so easily, so naturally, and we're just saying it a much more complicated way. That's the second point. I'm curious about it. What are some guardrails that you have in the internal culture to reward nonconviction, to reward like, yeah, I don't know, but it could work. If it does, it could be really big. And here's why it could be really big. Well, the funny thing is the way we view team, so we think investing is inherently a team sport. It's a terrible solo sport for the most part. And the way we view team is our role is calling out bias in each other. Now these are uncomfortable conversations because nobody likes to get the bias called out, but we all know that bias is really easy to identify in other people and really difficult to identify in yourself. And so by opening yourself up to having being called out, then your probabilities go up as an investor. So it feels unnatural to us at this point to say, I have super huge conviction that this microcaps doc is going to rule the world one day, right? It's like, that would feel really odd. Everybody would be like, are you okay? You feeling all right? I think the way we've also set it up with our framework is we just inherently expect failure. I think more than other public markets investors might like if we put something in the optionality of the portfolio, and by the way, that half the portfolio turns over a lot more quickly than the resilient part of the portfolio, which makes sense. Like we are going to be wrong a lot. And luckily, there's smaller positions. And so you're not going to torpedo the portfolio as long as the most important thing to do is just admit you're wrong and move on. And so I think building that into the culture where, you know, it's okay to be wrong and move on and fail quickly versus like string ourselves along on a three year journey on a tough position. And so that's one cultural way that we've architected the way the team works together. That has really helped. It basically gives yourself a license to take some risk that maybe you otherwise wouldn't take if you were sitting on a different team or within a different organization. And do you try and document, here's the reasons why I'm making this optionality bet so you know you can decide to rotate it out of the portfolio if those reasons are no longer true. Yes. Everything's written down and actually Brad, which is an investor on the team, is amazing at pulling this stuff back up and saying, you said blah, blah, blah. He must be really popular out there. Oh yeah, it's great. So we love Brad, he's just very good at remembering and then pulling the source data and saying, hey, look, you've drifted. Do you guys point to you? It's not, is there operating margin exactly 22% this year or like as a revenue executive that's running with auto basically are we approximately right on the thesis, right? It's not like we feel like we can predict the future, but you can certainly have checkpoints along the way. We call this usually with any stock, they're like there's usually three or four things that really move the stock. It's we call those key leverage points on any position. So you can generally check in on those and make sure that we're on track. Well, one of my big questions or things that didn't quite make sense to me in reading your paper. Can you talk about what you do with your optionality part of the portfolio as things evolve in it and how you start an optionality position. There are two copies of the multiverse where this works and then X amount of time passes and you start to have more of a view of which copies, you know, two out of 10 and now you know, maybe it's like two out of five or two out of three are like, you know, as it evolves, what do you do? Exactly. There's like kind of two scenarios that you can really see this happening. A good example is being in Peloton before the pandemic, you know, in the stock, obviously when Paraball, like there were huge beneficiaries of work from home, but it's also just a really dynamic company, you know, that's really in its life cycle building a brand new platform. And so with a company like that, you know, I think it's still early days to call that business resilient for many reasons, both just like the context of the company of where going through a digestion after the 2020 kind of a record year for them, an author chart year, I should say. So for a position like that, we'll just trim it and, you know, we have this cap of how big in the portfolio we allow optionality positions to get. It's generally pretty clear like how much of this is something that's a really durable inflection in the business. And sometimes I guess it is both like I think Peloton is definitely a different company in this version of the universe versus the non-COVID version of the metaverse, right? But I think we can't cross it over. Well, this is so different that you trim it. You know, the canonical VC wisdom is ride your winners as long as possible. You know, the things that are working are likely to continue to work. So don't sell. But that's not the approach you guys take. Yeah, it's a really good question. And we talk about a lot because you're certainly in some cases leaving money on the table. I think if we're not letting our compounders really express themselves over time. And so there are stocks we will let them, we'll own them earlier in their life cycle and let them cross over in the resilient head of the portfolio. And so we'll do that a few times a year. And I think it does kind of force us to average up if the company, you know, and actually buy more stock potentially at multiples higher than our initial purchase. Oh, it's so hard to do. It's so hard to do. But I think it's actually, I thought about this a lot. This is actually kind of part of our process where we're kind of forced to do it, which is really helpful. Because otherwise it's hard to just look at the stock and buy more. But we're saying we're making this explicit decision that we're going to take this from 150 basis point position to 250 basis points. And so we're going to add capital because this business has structurally changed and actually belongs in the resilient part of the portfolio. And so there are companies where we've done that where there are honestly just more mature or they're becoming like more of a platform. You can actually see like the network effect starting to hit. And honestly, some of that is evaluation conversational. So that there are plenty of platform like companies we might want to own in the resilient part of the portfolio, but in the current market environment, they're trading at valuations that we would not consider resilient. And so that's another reason we would own them as optional positions. But it's a really good question. I think what we try to do is not make sure that an optional position ends up in the head of the portfolio because that's something we've just learned. The hard way that if you have a stock that can have a 50% to 70% drawdown, and it's the starting point is a 5% position. Not only does it crush your performance, but then you're also probably hamster on where you've got a stock that's still a relatively big position. And you don't really want to add to it. And then you just kind of have to take your licking. And so that's something that we've learned through experience. Yeah. Well, I'm wondering if even just thinking about this past two year COVID cycle, you've kind of seen this happen. The stocks that were huge, multiverse winners in the beginning, the Pelotons, the Zoom, Cedo and the like, I'm thinking Zoom. Zoom went from, I don't know, what, $70, $80 a share to $600 a share, and then back down to, you know, that I think it's at like, $280 right now. So you've kind of seen this happen, right? The optionality played out. That was correct. But then returns pulled back. We're always looking at like, what's happening to the range of outcomes? Is it widening? Is it getting broader? Is it prediction becoming safer? Or is it remaining narrow? And so with a company like Zoom, it looks a lot to us like a feature. So now the question is, can it become a product and eventually maybe a platform? Can it develop an ecosystem around it? We don't know. But to take your example, let's say in the middle of the pandemic, it was sort of a cool feature. It was better than everything else out in the market. It still is. And then this big ecosystem came around it and it became a full blown platform. Well, then the range of outcomes would narrow and the prediction would get safer, right? And so then that would warrant that becoming a bigger portion of the portfolio. Valuation is a key piece. And this is the piece that we get every day as public investors and valuations, expensive valuations, forced predictions. I have to believe a lot more at 10 times sales than I do at 10 times earnings. So we're seeing, okay, what is the prediction of the company and what is prediction the market is forcing us into? And are we comfortable with that? So we are at an unprecedented investment climate where everything on a, you know, whatever basis you want to revenue multiples, earnings multiples, unprecedented highs. Any asset you could invest in be it stocks or farms or crypto is forcing you to make predictions. And what I've heard this whole podcast so far is you actively avoid trying to make predictions. So how do you respond in an environment where there's very little resilience in your ability to invest without making a prediction and have a margin of safety there? You just inserted yourself into the weekly on ZS meeting, investment meeting, that I think with that question. This is most of our dialogue. That's great. Just downless in any time. Yeah, part of this is interest rates, right? We've never had negative interest rates and then stimulus. And so those effects on all assets which are unprecedented. We think about this a lot. We don't know the answer exactly. But you know, this could get us into our top of, some of the connectors because there's a few building blocks of the information age. And we are in an epic shift. We're still early days from the industrial age to the information age and semiconductors of the new oxygen in this environment. And so we look at some of these companies. We think the valuations are actually quite reasonable and we choose to sort of bring the portfolio more towards resilience. And these are one of the ways we do what we do at multiple ways. Yeah. Like you used the railroad example, they're 10 out of 10 copies of the multiverse in the future going forward where railroads are important. Right. They're probably also 10 out of 10 copies of the multiverse where semiconductors are important. Exactly. Well, this is an amazing way to transition to semiconductors. I mean, I was looking for the right hook and, you know, Brent and I think you bring it up. I was prepared to make some joke like, wait, you guys know something about semiconductors? I think TSMC is like a top three position for you guys. I think your other top positions, Amazon, Microsoft. They use a lot of semiconductors. And I think Salesforce is probably up there too. And TI is one of your top positions, right? Yes, that's right. Maybe even before getting into some of the nerdy or semiconductor topics, let's stick with an investment one. What semiconductor companies do you own right now in the name of resilience and which in the name of optionality? Let's start with the two different versions of semiconductors, right? So there's a lot of semiconductor makers that are on the digital space, on the leading edge, they're making three nanometers and odd and these are the high compute functions. And there's other semiconductor makers that aren't really dependent on that leading edge. They're more dependent on having the breadth of a catalog that would be like a Texas insurance that has 100,000 parts or a microchub. And so in our top positions, we're more heavily weighted towards the catalog name. These names that the lifetime of a part is 30 or 40 years. And the margins are high. The growth is pretty good. Clear Enzias and the business are definitely creating more value than they take. And they're very hard to replicate, not because what they're doing. So technically hard, it's hard, but it's because the breadth of what they have would take you decades to recreate. I've always kind of hoped that Buffett would buy a catalog semiconductor business. I just feel like those are like just classic Buffett businesses where they're probably not going to look honestly that different in 20 years and they do now they'll have higher margins and be bigger and they'll be selling into cool electronics that we don't even know about, but they're also still selling into like water meters and coffee makers and just everything in your household or in a factory or anywhere you look, it just has these cheap but high margin chips in them. So and I guess to interquest you a little bit just on the semiconductor impact on the portfolio, we have about a third of the portfolio in semis and that goes across the whole value chain like Tipperettens Point. We invest in kind of like the catalog analog microcontroller companies. We'll invest in a digital company like Nvidia that's actually in the optionality tale of the portfolio right now. Because for valuation and context reasons we're big investors in semiconductor capital equipment and those actually are head of the portfolio. We do those as resilient TCCs, resilient position and then kind of the broader ecosystem like Kaden's to the systems which you guys brought up on the TCC episode that's kind of the key, one of the two key kind of cat software platforms for designing a chip is also position. And so there are kind of more less household name type positions we own as optional positions like a company like Cree which is early in Silicon carbide which is an alternative technology to silicon that's used in electric vehicles including the Tesla Model 3. And so that's a classic example where there is some version of the metaverse where it's a massive platform and Silicon carbide the market goes from being a $1 billion market to a $30 billion market. But you know I don't know if there's a 50% chance of happening or 20 or that kind of thing. It's like a little bit of a walk around the portfolio in terms of semis. That Silicon carbide thing is the first time I'm sort of hearing of it. Is that changing the substrate of the wafer? That's exactly right. Instead of using a silicon like a bulk silicon wafer, he used a silicon carbide wafer which is actually the wafer itself is much more expensive and it's very hard. It's one of these classics semiconductor processes where there's some black magic that goes into it. And honestly most of the people that know how to do this are all in like the research triangle in North Carolina. Cree is the one company that has two thirds of the market for the substrate itself. Then they will sell the chips. They're the ASMR of Silicon carbide. So potentially then that's a classic option now they write we honestly don't know but there's a chance where you do this stuff isn't that hard to do and they have a two-year leagant on their competitors or it's incredibly hard to do and they do become one of these companies where they're doing something that no one else in the world can do. So that is kind of classic optionality for us but it makes electric vehicles and charging and also renewable energy and really high voltage applications much more efficient. And so it's like really one of these companies where their core competency has just like all the sudden the market really needs what they can offer. And so the market is growing extremely quickly. You're seeing a lot of activity around from other companies trying to get into the market as well. All right listeners you know what time it is. We've been joking all season that modern treasury is the worldwide leader in payment operations. I want to borrow a little bit from the ESPN sports theme you know on like college selection day when all the athletes get their hats out. I've got boom modern treasury hat here for people watching on the video version. So great we are so pumped for our friends over there they just announced a $80 million series C at a $2 billion valuation led by existing investors, altimeter capital and benchmark capital. Modern treasury is the best and then an iron now small investors as well which we're so excited about. So for customers like gusto pipe class pass marketa anybody who manages complex payment flows which is basically every company out there these days. Modern treasury automates the full cycle of money movement from payments to approvals to reports to reconciliations all the things that your finance teams did manually by hand in the past. Now it is all done in software with APIs for modern treasury they are just the best. You're invoicing people to get money if you're sending money and if this isn't straightforward in any way. If there's any complexity or multiple people that need to collaborate on this modern treasuries for you. We actually used the product ourselves for the first time this season and acquired is just mind blowing how much better this was than the old you know build that common invoicing and reconciliation so much better. And for those of you who are wondering is it working this a cool idea but here's a pretty crazy stat in 2021 they had 20 x volume growth to two billion dollars a month in payment volume which is accelerating from 10 x growth already in 2020 so just an unbelievable company. And as we've been saying all season if you haven't checked it out yet the only thing that the modern treasury team is more nerdy about than payment operations is of course acquired. We had such a blast a few months ago interviewing the whole company which is now about two or three x bigger than it was then on the LP show they have made that LP episode available to everybody to listen to you can go check it out at modern treasury dot com slash acquired or click the link in the show notes. Let's do a little sidebar if you guys a game that I just thought of that I think this could be a really cool case study if you're willing to talk about it about the NZS process. So you mentioned John that you own cadence as a resilient position in the portfolio having just done our TSMC episode and deep dive on the whole semi industry infrastructure you mentioned they also have a competitor synopsis and the two of them it's like a do uply in the EDA space. How did you decide to own cadence and I'm assuming not synopsis or do you hold both. We've talked a lot about both of them over the years we've owned cadence for nine or ten years back to our days at our previous employer. I think on cadence it's a few things I mean it's actually kind of a cool story just kind of like how we even kind of got into the idea of investing in an EDA is part of our kind of process for finding new ideas and just kind of being up to speed on what's going on the industries we follow is going to like industry trade shows instead of investor conferences like we don't generally go to a lot of like big investor conferences and so in early last decade I used to go to all these chip conferences and like every presentation it was like someone from TSMC and someone from arm and then someone from either cadence or synopsis and at the time cadence and synopsis review disease sleepy crappy companies and we love to use some sea we love arms like let's do some work on cadence you know and then we the more work we did I mean both companies are amazing like they deserve a lot of credit I think what steered us towards cadence one is the management team so lip uten at the time was the CEO he's actually moving into the executive chair role this year he just was like one of the iconic leaders in the sebi industry over the last 11 years he was actually a VC previous to being the CEO of cadence and he was just on the board and had to come in and basically turn around the company but he was just so focused on the culture of the company and he told us what we wanted to hear you know which health but in terms of turning around the culture and really taking a company that was in very difficult position in the financial crisis and really like re architecting the product positioning of the company and he's so customer centric that was how we can first got involved with cadence we do think they're taking market share especially in digital markets like where they would be selling to an Intel or an Apple or an Nvidia we think they're the sharegainer but both companies it's like an extremely high quality do opally and so I think you've been fine either way and do you end up doing one-on-one meetings with the CEO at the level of capital that you're deploying yes this was back to our previous firm where we were there was more than a hundred billion dollars of the you to deploy and technology was a decent chunk of that so like a cadence is a great example we were actually their biggest shareholder for multiple years and so at that point we had really strong dialogue with them and I honestly would just bump into the CEO and airports in a conference yes because everyone some years are that big of a universe everyone's kind of going to the same things you know and he's very tall he's very tall too so it's easy to spot yeah yeah you're not going to miss him and he's honestly just like such a good person too like we would talk about life and kids and a lot more than just our investment in their company and so it's actually something we think about a lot as NCS is a younger company with you know less AUM behind us and we have a lot of relationships from you know being in the industry for a long time but it's an open question of how often do you really need to talk to but do I need to talk to the CEO of a company four times a year probably not or six times a year ten times a year like the way we're investing especially with the resilient company realistically maybe a check in every year or two or if there's something obviously that's really critical to thesis we can check in but that was kind of the way we grew up investing is a lot of management interfacing I'm always curious with public market investors like how do you think about that and it sounds like you do find it very useful to have conversations with management versus all the information's out there you know I would imagine on the one hand like well of course I want to know like I could glean so much more information and like subtle signals from talking to somebody in person on the other hand I kind of think well I really care about what you do now what you say and I can just see what you do in your filings how do y'all think about that this is changed a lot over the past decade because of course seeing management team talk is easier than it's ever been right it's publicly available there are sometimes when it's helpful there's sometimes when it's harmful you know it probably nets out to be net helpful but I'm just thinking of one interaction that we had with Rich Templeton the CEO of Texan Spence and early February 2009 right it's terrible time everybody's unhappy it's really rough and Rich walks in the room big smile on his face how's it going boys you know a recession is a terrible thing to waste and you're like what's going on I love it and so he clearly had a different mentality of hey this is where we make all of our returns of the next decade we're going to go buy equipment for pennies on the dollar we're going to sort of systematically lower our capex to sales ratio and we're going to go get customers and sign them up because we're running our fabs full out still and other people aren't and he's just one of these amazing leaders you know we when he took the company over they have 40% of the business geared towards wireless and Nokia was a massive customer the largest customer and he blooded that down to zero so clearly this embodiment of a company that's built around adaptability instead of these point predictions and so people like that are helpful to interface with but honestly we probably could get everything we need at this point without meeting with them as well. David and I were explaining our research process to some friends the other day and you know one of the things that I think that is chronically under viewed on YouTube is presentations by executives at industry conferences and that's a thing that we've relied on really heavily everyone goes and watches Elon Musk give his talk at the recode conference about 358 people watch the YouTube video of Gwen shot well presenting at an aerospace industry event. There's a lot of really interesting information about the company probably more so than the big shiny public facing stuff. That's exactly right it maces me I don't remember the last time I watched the computer history interview is between Chen Sen and Morse Chang. Oh so good. It was under a 3000 view something like that I was like how does that have 3 million views. You're like am I watching the wrong feed or how could there not be more views of this you know it's like the next no sense there should be a million views it's so funny we send stuff like that around all the time I couldn't agree more pretty now we're sending some stuff back and forth earlier this week it's mostly free to and from industry trade organizations and it's a huge resource and you also you do get a little bit of a different flavor if you see a management team at a investor conference or if there's even on a road show and coming through town but you're the fifth investor they've seen that day it's like you kind of are getting the company line right versus hearing what they're really pitching to their broader stakeholders at an industry conference is such a good resource. Yeah when we're doing an episode just us two three three plus hour deep dive on a company we almost never talk to people actually at the company maybe we should but we get all the insights we need from obscure YouTube videos books presentations you know white papers to Britain's point there's so much material out on these companies and stuff by management teams these days and we do it in our you know basements. I think you guys are on to something with this acquired thing we'll see okay so I'm going to take us into the more technical side of semis now Britain you sent an email when we were batting around topics and you said well what if we start by talking about the UFO crash that happened in Roswell in 1947 where we got the first semiconductor technology and then began to reverse engineer at Bell Labs winky face was the first tech transfer that's exactly right we know exactly when semiconductor scheme to plan it or it was July seven 1947. And then you needed a backstory you know when they were they took the UFO over to area 51 they're like how do we like get this in the world without it people knowing you know of course interwilliam chocolate fresh from the war doing research on radar submarine warfare and he's already got top secret clearance we're like okay where could this come out of Bell Labs chocolate oh yeah that's it that's the backstory we'll give it to Bell Labs that's the whole backstory and semiconductors I think we're done there you go. Was shockley I actually don't know the history I know he was like super involved in World War II right he was yeah there's this great book by the way called the idea factory it's the history of Bell Labs so if anyone's interested in the history of the semiconductor you should definitely check it out not only the semias but information theory from Cloud China which came around the same time also from Bell Labs right also from Bell Labs yeah it's so yeah in the 40s he took a leap Vapsons from Bell Labs and did work actually with the Secretary of War on radar and submarine warfare okay and so just to keep pushing on this the reason that this is a a plausible story that we got these from UFOs is because the magic behind how a semiconductor works is so mind blowing and unfathomable that you could just sort of experiment your way to finding this right that's sort of what you're going for here yeah I think that's right it really was this this is overuse but quantum leap they had back in tubes that's what the switches were made out of right it was one of the few places where there was still pure science being done about labs and they said when you the switch that doesn't break because we've sent a lot of people out in the middle of nowhere to replace these vacuum tubes this could go on very long but there was some key insights around doping Germany you're on the acquired podcast so it's a favorite indulge yourself right there's these few key insights and it wasn't just shockley it was two other guys pertain and Bardeen as well and so the three of them together came up with these insights and just right after the war some of it was during but most of it was just after and they figured out oh you can dope this substrate germanium with different sort of in type and p type is what they're called and when you run a current through it it changes so it actually does the switching in solid state and this idea of solid state switching which of course came about because of the transistor and then later on was made to integrate circuit by kill via ti is what sort of enabled the foundation for all modern electronic devices over the last decade ever at the Wikipedia pages for semiconductor for transistor for I remember the first time trying to look up like how does a flash drive work like I've got this cool USB drive and I put it my computer and I read the whole Wikipedia page and afterwards I was sort of just blinking like yeah I still don't understand this actually was not helpful and it is one of these things where most of the time especially having like a computer science education I feel like I can connect every building block to the next layer of abstraction building block on top of it where eventually at some point after a few years of studying computers you're like wow cool I pretty much get how we go from physics to like operating a operating system on a monitor I understand all the building blocks in between but somehow the really is something right around this layer where like I never quite can jump from the physics to like how it actually works and then how it manifests in information and bits on a computer I think I just need to go read a few more books but it is one of these things where when you sent the alien joke I was like you know you're right that I've just taken it at face value that this works but I don't really understand how it works. Yeah I told my daughter that this morning it's just like wait a second dad that's really the way it happened right. Parenting. Okay well getting tactically here so on our episode I think we did a little bit of a high gloss shine on the story and the current state of the market especially with TSMC and Samsung we basically equivocated them and said they're basically doing the same stuff TSMC's one to two years ahead obviously Samsung has the whole consumer electronics division as well okay that's TSMC and Samsung and that was probably too simplistic so one thing I was hoping from you guys today is helping us better understand who's good at what between those two companies. Yeah well Samsung is an amazing company probably not super well understood maybe like TSMC and people know them for consumer electronics and phones obviously but they have 50% of the market share in DRAM and about a third of the market share in that so of course as we do compute we need more memory we need a lot more DRAM which is the fast memory on your phone or device or whatever the queue stuff up it's like a funnel right feel like the funnel got solid state or it's up sitting there and NAND flash moves into DRAM then actually goes on the chip with S-RAM which is really fast funnel and then it goes into logic to get processed. So Samsung is very good at making memory and like I said they have over half of the market share in DRAM which is incredible there's really only three major companies in the world of the big DRAM two-RAM Korean once micron in the US and then in flash they're big they also have a decent foundry business it's about 17% of the total of foundry pie so not as big but DRAM and NAND are easier to make than logic. And are these branded Samsung products or are they manufacturing them as a contract manufacturer? The DRAM and NAND is all branded Samsung but of course everybody uses Samsung so it would be next to impossible for Apple to get all the memory they need without having a massive relationship with Samsung so they're frenemies. So the four or eight gigabytes of memory in your iPhone that's coming from Samsung. That's coming from Samsung yeah exactly. And so these are easier to make they have fewer steps but still they're very hard so DRAM takes around 400 steps and over a month in the fab working 24-7 to make and NAND has a little bit fewer steps than that but actually NAND is getting more difficult because they're stacking it into 3D so as you get more layers it's actually getting more complex but logic is still the hardest stuff to make these system on chips at TSMC makes and of course it's just imagine making one thing over and over versus making a menu of what if you had to be a restaurant that made every kind of food on the planet right it'd be really hard to be good at all this food so that's what TSMC is doing so that's some of the different Samsung is also doing logic but they have a different business model right they compete with their customers so it's harder for their customers to trust them whereas TSMC doesn't have that conflict. What do you think makes for a more resilient company playing at multiple spots in the value chain such that you compete with your customers and have optionality or being super pure play so that you have no strategy conflicts. I mean I think it depends I mean if you're talking about something in semi-conductors and let me like Intel's the classic example of this where they're more vertically integrated I mean the hard thing about doing that is you have to fight battles on multiple fronts Intel has to fight TSMC on process technology which in itself is one of the hardest things you know any technology companies had to do over the last 20 years and that's why Intel has been surpassed by TSMC right but they also have to fight AMD in their core kind of like chip design market where AMD enabled by TSMC is innovating faster than they have in the last 20 years and like really delighting customers and taking share from Intel kind of real time or you know Nvidia where they're trying to just basically marginalize the CPU would make the CPU less relevant so Intel's less relevant so I think that's the hard thing about being vertically integrated in semis versus being more of a second horizontal pure play is the needs of Moore's law are just so difficult it's hard enough to just do one of these things well and doing multiple of them well makes it harder so I generally I think Britain's point on just like the business model difference between Samsung and TSMC is so spot on because I mean TSMC is like the neutral party they will never ever compete with their customers and if you think about the amount of trust that the company has to put in TSMC because they're betting their entire company on TSMC's ability to make this chip for them and to have capacity for them when they need it just like the amount of trust and this has kind of been more you know Chang's hallmarks and see found a TSMC that that's just something that Samsung can't quite offer because they just have a different business model and they're not willing to not that they're not willing they just don't have the capacity to build kind of a massive foundry they can't change right like that I can shut down two thirds of the company yes exactly how do you all think about especially since TSMC such a large position in the portfolio yeah how do you think about the geopolitical risk because we did this whole big long episode and the conclusion I think we came to was this company's amazing there's like no fault we can find in this except that you know China might want to like you know take over the land that they sit on except this enormous yeah company ending risk yeah you even on TSMC's last earnings calls when asked them like what they thought about Taiwan's sovereignty and I'm just like what a world we live in that like that's an open question that an analyst can ask about an earnings call like what do you think about China invading your country so Britain are not like geopolitical experts at all I think we spent a lot of time thinking about just the importance of TSMC to the world and I do think TSMC is top five most important technology platforms to the world like I think TSMC is more important than Apple like if Apple disappeared off the face of the earth I actually think it would be painful for everyone that you know loves I message in FaceTime but like it really would not be as big of a deal versus if for some reason China moved to see his Taiwan or however you know it went into play and all of some TSMC's tabs were shut down then the Western world would be set back at least five years if not 10 is in terms of like technology progress and by the way technology progress is driving most of GDP right now and so you do read about what's happening with the auto sector and shortages it's like you've seen nothing if you think shortages kind of from the way the auto guys manage their inventory and kind of just like the classic post recession semiconductor shortages you always get you go from there to you know what would happen if TSMC if Taiwan sovereignty wasn't questioned and TSMC that stopped making wait for us for some period of time I just think the impact on the global economy would be extremely painful and that brings you to the logical conclusion of you know hopefully the US and the West would move to protect TSMC at all costs or at least get the people out of there we were I guess that I shouldn't joke about it but it wouldn't be totally dissimilar to what's happening in Afghanistan where I think you would just airlift as many TSMC folks out of there as possible in this short period of time but then you have no fabs there to produce I mean TSMC fabs a quarter of the digital chips made in the world right now and so it would be a lag of multiple years between you know you get those people out and when you actually start making wait for us again so it's a very complex topic. I think another way to think about this is just an ecosystem perspective so like TSMC as a company is very valuable but it's not super valuable without ASML and AMAT and KLA right so when you think about the ecosystem of semiconductors and ASML of course is not valuable at all without TSMC and Samsung there are this handful of companies called 15 fish maybe more that if you think of them as one super company which is kind of what they are it's like a super organism right kind of like my bees are super organism it's like a ecosystem you mean like a complex adept system it's like a complex it yeah so predicting the future is really hard so anyway yeah if you think of it as a super organism this is probably the most important super organism on the planet if it's not it's certainly one of the top most important so could you recreate that elsewhere in the world you absolutely could if you had access to the rest of these pieces which in the west we do it would just take to John's point a long time and that's why people are sort of saying maybe we should take some risk out of this place and and you know ASML calls this semiconductor sovereignty we're building this fab of course in Arizona this five nanometer TSMC fab but it wouldn't be a stretch to think that they will be built again in Europe this happened before but of course when technology reaches a fairly stable state you want to optimize around efficiency so you get these horizontal type models right I remember when Apple bought PAS semiconductor I was on record going this is the stupidest thing ever Qualcomm makes these really good semiconductorers Broadcom makes them like TI makes a great application processor and this is the origin of you deciding that you don't know the future and so you should yeah what I said was the dumbest thing ever that's for sure but when technology changes I just didn't have a concept for the smartphone so technology was about to change quite a bit and in that change you really want to be vertically integrated because you're not pushing efficiency you're pushing sort of product technical ability you know we see this with Tesla as well vertically integrated so you know can you imagine forward having an AID like that's just kind of funny right well they could have something then they would call it an AID right to see that happening yeah all right MKBHD just did this awesome thousand mile road trip with a Tesla a Ford Machi Mustang and a gas car and it was just amazing like like the Mustang like it's a good car it's really good but we couldn't complete the road trip because we went to a charge you know it directed us to this charger the charger was broken then we went to another charger well that was like you know it charged a rate of like a mile every five minutes or whatever so then we like got stranded and me know the Tesla is like yeah we were half an hour shorter on the trip than the gas car nice to the charging networks it told us which all to go to you to all this stuff so I guess like the full circle question or answer your question on like how we even incorporate the geopolitical risk on TSMC is I mean I guess it'll never be our like a 10% position for that reason as there is always this risk but also I think it's important I mean the mile like kind of cheeky answer that's probably not fair as if if there is enough conflict between China and Taiwan that TSMC that they're like kind of you know business sovereignty or is under concern or people are worried about them being nationalized by China or something the whole US market is going down it's not just TSMC I mean I think they would be kind of like the epicenter but it's not like this is going to happen isolation and so at that point and who knows if there could be you know more of a more world world three type global conflict coming from that and so I kind of say like at that point the performance of our TSMC common stock is probably not my biggest concern that day you know okay so let's say TSMC is a resilience position let's say there is a black swan event which the fact that we're all forecasting it and so is everyone else means it probably isn't that black swan if there's sovereignty gets challenged so the point of optionality positions is to benefit from these black swan events do you guys have any ideas on if the whole US market went down in this situation what could you hold that would hedge it the obvious had to be like defense stocks but we probably wouldn't own them because of I just don't think those are very high in ZS businesses but honestly that would be the one pocket of the market that probably would fair okay but we're not in the interrupt you know I was just going to say if you get to rebuild all these facts somewhere you're going to need a lot of equipment and so you're leaving 20 years of equipment in the ground somewhere and you've got to recreate that that would probably be pretty defensive against that outcome there's also like his owning China tech companies I mean this is question like if all this is really going down like I don't think China my ADRs are probably going to stop yeah they haven't stopped working all right do you have any China tech position you know tens or others are we don't we've own China tech for a long time but we put this portfolio together at the end of 2019 it just looked sketchy to us honestly I don't know for lack of a better word and so we we own zero China tech we just thought we don't have to be there there's other places that are very interesting and it's a question ownership we're not really sure who owns these companies and through the ADR structure and the VI structure we know we don't know them so we just set out yeah make sense well I want to come back to some more technical questions another thing that I think we kind of glazed over in our TSMC episode is the current state of Moore's law from a literal perspective but then probably more interesting the current state of the spirit of Moore's law and I was wondering maybe John let's go to you could you give us a little bit of a download on like does Moore's law still work at least spiritually yeah I'm glad the way you framed it that way because it is kind of like a religious debate and people much more than me in the semi industry around like both sides of is like the true Gordon Moore Moore's law still holding up I think for the spirit of Moore's law we still have we visibility probably for the next 10 to 15 years and to be honest that's like the industry never has more than 10 to 15 years of visibility I think obviously the death of Moore's law has been pronounced for a very long time but I think that's one thing to keep in mind is there are a lot of things out there that's going to keep us driving down Moore's law and so one thing that you guys covered well in the TSMC episode is the implementation of EUV systems for May and Somal and they actually are allowing us to shrink the transistor kind of the fundamental building block due to dimensionally so to actually put more registers into a chip and so as smell as kind of on record saying they think that that EUV will last about 15 years in terms of they'll allow us to keep doubling the number of transistors on a chip every 18 months for 15 years or just it will be an effective way of getting any performance. Yeah I think it will be an effective way to drive performance and like drive shrink basically is the way the industry kind of frames it is you'll be shrinking the transistor to pack more performance into a chip but I think the broader point you hear from the industry a lot is this concept of of more than more which is kind of you know a cheeky pun but yeah there you go the semi guys they're real real real hoot. Exactly. So geeky. But so the broader point around you know where Moore's law is going now is it's not just about the transistor it's really about the package and so you're seeing a lot more innovation not just in like can we put like more transistors onto one gigantic chip to drive more performance you can actually split up you know chips into multiple chips called chiplets which AMD is doing and this is a big part of Intel's future strategy actually also and so having like you know one gigantic like GPU you would buy from Nvidia you can have four smaller chips and you can kind of like stitch them together to drive more performance and so that's another way that we're going to get a lot of benefit for Moore's law and then actually one thing I skipped over on the transistor side is we are moving to a new transistor architecture either a two nanometer or three nanometer depending on which company you're talking about to a gate all around architecture previously we were on thin set which has been around since I guess for the last seven or eight years I don't know the exact numbers maybe 10 there's a line of sight into from here more gate architectures different materials and then we get to like the mid 2030s will kind of see how it goes but it's just it is amazing I was actually a virtual chip design conference this week earlier in the week and there's so much focus not just I guess on this like packaging idea but even like if you abstract that one more layer from that it's about system level performance and if you look at what Nvidia or AMD and kind of like the leading digital companies are talking about it's can you make more processors and actually like stitch them together into a cluster with some sort of proprietary interconnects they're really thinking more like computing companies and just like chip companies now and so that's a big change but all of these transistor level innovation package level innovation and then system level innovation I think we've got pretty good line of sight into the spirit of Moore's law continuing at least through kind of the mid 2030s and so it seems like with the sort of creation of the system on a chip that at least let's just talk about the iPhone because it's the one I understand the best Apple became the aggregator rather than the old days of I'm going to go build my computer and I'm going to go buy a motherboard and I'm going to buy a GPU and I'm a slot it in the PCI slot and blah blah blah Apple basically says well we've designed this logic board and we've designed most of the chips the important chips and we've situated them together TSMC manufacturers it they do all the packaging so you have like the bare metal to bare metal packaging of these things so we don't need to run it through these buses that have low bandwidth to get information from one piece to another let's keep playing that out a little bit based on everything you know where in the value chain do you think the point of aggregation shifts to over time where who gets to own where do we put all this stuff together and I get to capture a lot of extra margin because I'm the one putting it all together I think that's interesting thing about the semiconductor ecosystem is actually there's a lot of people capturing margin and they're capturing really high margin so this is the sign of a healthy ecosystem right there's not one company that's making all the money throughout the whole chain we've seen margins come up and you know here's a good trivia question who has higher operating margins Texas estimates are Microsoft right because I ask it you know the answer is it's TI but you know it's not really appreciated how good these businesses are that's shocking right yeah especially because TI the core business is not the leading edge digital processors that TSMC is doing it's the commodity stuff right I think this was versus key insight you know you said okay we're doing all this leading edge stuff we're fapping at TSMC and what if we just trickle that business down to zero they try to sell it no one wanted to buy it and boring it's beautiful and so you know you look at TI's end markets two-thirds of which are industrial and auto and I guess it's a tech company you know they make chips but band it seems a lot like an industrial company too right yeah I think you can make the same point that you made on TI on Nvidia like the fabulous business model really it's like a software company it's like a video's got close to 70% Chris margins and like you know low 40s operating margins I did really with very little cyclicality because TSMC offloaded all that cyclicality right so it is just like one of the best business models besides I would say enterprise software the best business models in the world and so TSMC is the enabler of that but I think Britain's point of spot on you're gonna see kind of in this future world one of things that's kind of cool as it takes the whole ecosystem to really drive kind of the future of Moore's law like I used to be just about a sml needed better lithotools and like intel would use them and like shrink the transistors and we just kind of like brute force ourselves done Moore's law and now all this advanced packaging needs litho-advanced for me is some else but it also needs improvements from the other equipment guys like land research or applied materials or Tokyo electron because you need deposition and edge steps to build these advanced packaging and you know multi die packages for kind of the advanced packaging applications you also have all this off the shelf IP they're getting from companies like arm or from cadence or synopsis that I mean part of what Apple does to your point then is they're really just an aggregator like they buy you know IP blocks off the shelf a lot of what designing a chip is about is just is just buying a lot of individual IP blocks in in aggregating them and so the great thing about it is like since Moore's law is really freaking hard everyone in the ecosystem does really well and then I think TSMC sitting in the middle of it will obviously do very well because they're driving a lot of the innovation also and and obviously are the key partner for a lot of us real quick on them TSMC I think we glossed over this on the episode because we weren't deep enough to understand it my sense is that the open innovation platform that they've created is really important and it's kind of the what orchestrates all of what you're talking about here that really takes the village of the whole industry to push things forward now is that true like what is that and how central is TSMC's open innovation platform to all of this it's exactly what I was going to say I think it's really true and there is no get hub to the semiconductor IP ecosystem right the closest you get is kind of the TSMC open alliance and there's pockets of it elsewhere the EDA guys have a ton of IP as well and of course as you make these chips you need to emulate them to see if they actually work hopefully before you put them in the fab because that's really expensive so all of these things really play together and so when you think about how Intel was doing this for a long time as a closed system it was Intel's way Intel's process flow and TSMC said oh wait let's form an alliance with everyone because this is really going to take everyone to keep driving this forward and this open architecture for this open approach has really won over one thing that's always hard for me to understand is how hard it is to do each layer of the stack and by that I mean wow it seems like the ASMR guys create a pretty unbelievable machine and they have a lot of services associated with that machine like they're even in the TSMC factory helping to assemble and operate these things and then I sort of scratch him I had thinking well could a sml just kind of like become TSMC could they just operate their own equipment and then I dove down the other side of the slope and I was like well who makes the stuff that's important to the a sml machines and I was like what is this Trump company and then of course you go on the Trump website which let's just let the name lie for a moment here and they make this unbelievable laser and like they've got this crazy video on their website that shows off their laser and I'm pretty sure what they're showing me is actually the magic of the a sml UV machine and I'm like well shoot why can't the Trump company just do what a sml does and then also do what TSMC does if they are the only ones in the world who can make this unbelievable laser can you guys shed any light on is that ever going to happen could it ever like vertically integrate first of all the videos of the simulations of the laser in an EV system on the Trump website are like so freaking cool they're amazing yeah actually I hadn't seen them until recently and I've heard so many times that like 50,000 pulses a second drops of multi-ten the whole spiel from a sml which then by the way did a very good job on the on the TSMC episode I was doing my best John Bafgate impression I could tell you were excited to do it I think like multiple times you're like can I do the sml thing now anyway we a few things to think about one is there's so much innovation so the laser itself actually is 10 tons but an EV system is 180 tons so there's a lot of other equipment in there that's not just the laser and I actually I was trying to find this from a dollar value I didn't track it down but I'm sure that that number is out there a smls partnership with Zeiss the lens company is also really special and I guess Trump and Zeiss could try to partner to I don't think they have any ambitions to do this but they could try to partner together at a kind of circumvent a sml but like you know the lenses that Zeiss is coming up with are literally the most uniform lenses designed you know in history of the world and some of the metrics that they threw out on that are incredible and I think one of the things that's unique about a sml is you know they ship the first UV tool in 2010 to TSMC and UV didn't even really start high volume and this was after a decade of R&D already but then they didn't start high volume manufacturing on UV until 2019 so they had like almost a decade of learnings in TSMC's fabs and like how do you get these things to actually work how to get the you know the throughput to levels where the economics actually makes sense and so there's actually this really cool conference called SPIE every February where all of a smls customers come together it basically give feedback on UV and and kind of give the updates on on where they're at and so a sml lived through 10 of those with all the feedback not just from TSMC but from all the ecosystem partners right and so I just feel like the learning cycle that a smls been through there's just so much more innovation in addition to the laser than the lenses but it is I mean the lens is a really critical component I mean a sml actually bought a laser company in 2012 called Simer and I think they actually had like an internal laser bakeoff between Simer and Trump and I think Trump won for UV which is also kind of a funny you know trivia question wow fascinating okay so the answer is they all add a ton of value on top of the previous layer of the stack and like a lot of things in the tech ecosystem there's fractals on fractals right it's like you say okay what's the most important part of this a smelter right there's a fractal down and then like you know you keep going but it's really the ecosystem approach that makes sense no one can do all of this it's just way too hard it really does take a village all right listeners for our final sponsor we are here to tell you about fund rise and as we've been saying Ben and I collaborate not just on acquired but on a massive spreadsheet with basically like you know the intention of this was how do we recreate the infrastructure of a family office in excel for our personal investigation collaborate on it one thing that until fund rise we were unable to access in our personal investing was real estate we are so exposed to tech in just about everything we do and our primary real estate in San Francisco and Seattle is of course also pretty exposed to tech we had thought about looking at investment properties elsewhere in the country but the problem with that is not only do you need a huge chunk of capital up front but the time the effort all the overhead of managing properties yourself we didn't want to do that we looked at reats but with reats then you're paying too many fees and you have no control over the properties that you're investing in so enter fund rise fund rise is one of the only platforms that lets anyone not just accredited investors by fractional ownership in custom portfolios of private real estate assets this is the same thing that sophisticated institutions like endowments and foundations do and you get fine green control over what you're investing in it's not a totally blind pool just like a reat the company fund rise was started back in 2012 and fast forward to today they have over 150,000 active investors on the platform and over five billion dollars worth of real estate investors can see and track all the individual properties in their portfolios including data like occupancy reports construction progress and market data trends truly it is the best of both worlds you get the fine green control of doing it yourself but without all the overhead and management fees of reat you can learn more and sign up at fund rise dot com or click the link in the show notes great well john I know you have a a sml story that you want to share so I'd love to hear it yeah I think this is a really cool story like how a sml came to be a sml and so strategic to the world is you know they'd won competitor which is Nikon in the lithography market and then like on gave up on the market kind of coming into the last decade and so I think TSMC and Samsung and Intel kind of looked around and realized like we're betting the future of more law on this one company a sml which at the time was like kind of a sleepy Dutch company that would have like a 20 billion dollar market cap like no one really knew who ASMR was in 2012 and so it was so unique is that Intel and TSMC and Samsung partnered and actually bought 25% of ASMR to inject capital into a sml to develop a UV systems and that started really like the iteration path of developing a UV to get a UV to where it needed to be for high volume manufacturing by the end of the decade and so it's just such a cool story of like the ecosystem coming together and everyone in the semi industry knew how important a sml was at the time but the world didn't really understand that and so getting a sml where they needed to be not a UV obviously is now enabling more's law for the next at least 10 years and is it right that they've all largely divested at this point they have yes yeah I mean they honestly should have just held on to it I mean it would be not immaterial so especially like Intel's enterprise value there's so many stories like that like you guys covered the arm origins like all these like major ecosystem players of all like had you know stakes from other companies at various times which is just kind of a funny way that the semi industry has worked I couldn't find in our research how much of TSMC does the Taiwanese government currently own because they started by owning 50% of it that's right I look for that too recently and I couldn't find it I want to say it's still in the 20s but I could just be making that number up I thought I actually was going to say 20 at the top of my head but maybe don't quote us on it because I don't know if that's true or not wild could you imagine if the US government owned 20% of Intel I know right or Apple or they owned a lot of Ford at one point that's true yeah it's sometimes people ask well why can't just another company buy TSMC well it's a national champion the government on to bunch of benefits is impossible right some things don't have a price at which they're a that's right for sale exactly I don't you have one other trivia question for us yeah what's we're talking about I couldn't be the point that fabulous chip companies are kind of the best bit small in the world I think one of things that's so cool about TSMC is if you just look at all the value they created like Nvidia is a you know half a trillion dollar company and then add up their next few biggest customers like Qualcomm and Broadcom and AMD that's like another half trillion and then I was trying to think of like their aggregate value creation and so I was trying to think about I mean Apple's obviously the biggest customer and so I think in an acquired episode about the top ten acquisitions of all time you guys assigned a value to P.A. Semi and how much of kind of like Apple's differentiation is driven by semiconductors and so if you guys know that's top your head that'd be my guess for kind of like Apple's contribution to the TSMC die creation for the world if that that fraction all makes sense oh man that was the most hand wavy part of that whole analysis I kind of feel like we ascribed half of Apple to next and then like 10% to P.A. Semi or something like kind of arbitrary we were literally carving up the Apple well here's the framework here's the reason it's hard it's because the notion of necessary but not sufficient is really hard to frame into a percentage Apple would be worth zero if they didn't acquire next but does that mean that next is responsible for 100% of the value of Apple absolutely not so what percentage do you assign it it's tricky yeah that'll make sense I actually don't know that the number you guys use I thought it was 25% up the top of my head which maybe that's a good rough number that you know Apple's contribution is you know another half trillion dollar to the TSMC value creation story but you get the broader point right it's just it's like trillions of dollars of market cap the TSMC is created for their partners which I think is just so cool yeah that's amazing I mean it truly you know meets the Bill Gates line of the definition of a platform that they've created way more value for their customers and their ecosystem than they've captured for themselves yeah which is so cool because obviously not like a traditional internet or e-commerce platform the way like most of us ask platform the way we think about platforms right it's just that's like a manufacturing platform which is so unique there's one point that you're getting at here that is part of the white paper and what we discussed earlier which is around sort of leaving money on the table for your customers and leaving money on the table for your partners and it reminds me a lot of when we did the alto-s episode with Hone-om and it's really this idea that if you as the management team or if you as an investor who deeply understands the company knows that in a way that other people outside the company can't underwrite then you can do a much more intelligent job valuing the company than anybody could with a brute force metrics such as industry average earnings multiple because if you actually understand well our earnings could be this if we wanted it to or our growth rate could be this if we wanted it to but you know we're making strategic tradeoffs to not do that then you actually have a unique ability to underwrite the company's value and thus actually more of a margin of safety or more of a willingness to pay up than anybody else and so it's interesting being deeply studied about these companies where you do know that they're sort of leaving something on the table for other participants that you can be more comfortable making an investment than other people can I think that's a really insightful point pen and the thing it gets to for me is duration of the asset duration of the growth so when you leave money on the table what you're doing is you're creating goodwill for your customers and you're buying the company duration which is oftentimes the way to maximize total value right so when I think about how I'm talking about roadblocks he was effectively saying we just really understood how big this ecosystem could become and we kept seeing the value accrue and then it moved beyond our original investment case and therefore we became more comfortable investing more money over time and what people get wrong oftentimes is this duration because duration if you can go 15% back to your earlier example it's extremely non-linear if you can keep that flat right all the value comes in the tail and so we need to start very good at thinking like that our brains don't work in that non-linear fashion but when you create more value than you take and if that's your driving factor and you want to take a lot of value it's a hard task because you have to all the times think oh wow we want to take a lot we need to create even more how do we do that and then of course that by duration and which is a feedback loop sort of the happy feedback loop if you want to think about it that way I think Morsefeng got this very early on and that's what created a TSMC into such a great company it's so good you know we touched on this a little earlier but that is to double underline one of the things about you all in your e-post that was kind of a not-how moment for me is flat growth versus hyper growth flat growth extended over time will beat short term hyper growth you mean the derivative of being flat right that a company grows at the same rate every year if you grow 20% a year for like 50 years like TSMC you will destroy you know every group on out there so what you need for that is a negative feedback loop right so the negative feedback loop for TSMC is I'm going to comment I'm going to take what used to be the special sauce of your business and you're going to trust me to do that that's extremely hard to do right no one wants to do that but then the more it happens eventually there's a game theory to it everybody has to do that eventually because it works so much better right so you're never going to get 100% growth as impossible but you might get 20 for 30 years which I think the number that you guys sent to your podcast was 17.7 for 30 years or something like that which is just incredible to me and when you say negative feedback loop you basically mean a governor on the growth like a natural force in that particular business that makes it so you can't have ludicrous uber style hypergrowth and it ends up being long term good for the company to have that growth governor or that negative feedback loop that's exactly what I mean so we think about a SML right they can ship everything they can make but they just can't make it anymore it's impossible right so there's a governor on the growth wow well that's a great place I think to leave especially the semis discussion in most of this episode that it's so counterintuitive but the way that you've sort of framed up why it is long term good for an investor to want slow methodical governed growth it's just very different than a lot of things we talk about on this show one of the things we think about sometimes is we're looking for companies that can double in five years and double again the five years after that and all that means is we're looking for companies that can grow 15% over a decade all else equal easier said than done easier said than done much easier said than done I will just say one thing about our days you know we get a lot of questions of well how do you do this at a small company versus a big company and part of it goes back to what we were talking about earlier it's easier to do research on these companies now than it's ever been but the second piece of it is yeah there's more details that we have to deal with at times but how much extra time would you have in your regular job if you only had two meetings a week and you never had to worry about office politics you know my guess for most books is it's about 20 hours right and so then how would you use that well we just use it for unstructured research time and the way we think about it is we can wander around not knowing what we're doing and waste 90% of that time and 10% might be really useful and 1% might be absolutely watershed and that's really all we're looking for but you can't ever just get to the 1% you have to wander around to find it and so that's how we really structure our days and Brendan that's why you run for like 24 plus hours straight and that's why I run and that's why I keep these it's all the same thing that's what your best investment ideas come from that's right I do think this idea of like linear time versus non-linear time is really interesting and some Britain I talk about a lot because like the linear time it's like it's probably very similar to you guys getting ready for you know your next episode it's like you're going down the rabbit hole on one topic and we do spend time doing that obviously but then we just have so much extra time to like just be out there trying to connect dots and so you never know when you're gonna have that aha moment or that insight but having you as much opportunity for that as possible is kind of how we've intentionally tried to structure our time. I love well we can spend another hour on how you structure your time I'm wow I was actually well wonder maybe maybe we can get a one or both of you if you'd be up for it to join our next LP call and I'll chat about it I'm sure folks would love to have you with questions and hear about how you spend your time. That'd be super fun we always learn from those questions so we'd love to do it. Awesome well Brinton John where can folks find you on the internet. You can go to nzscapital.com we do try to write a lot we put it all on the internet immediately it is everything that we use internally nothing's held back because we know when we put it out there we're going to get more value back so this is our way of trying to create more value than we take our partner Brad also writes a newsletter every week and so if you want to see how he spends his time you can sign up for the newsletter on nzscapital.com it's called sit all week it's just Brad's process sitting all week and what he thinks about and Brad is well he's like a microprocessor he's literally the smartest person I've ever met and the way his brain works is incredible and so if you'd like to sign up for that you can do that there as well. Great and on Twitter I think you both have Twitter handles. That's right the whole team is on Twitter nzscapital has a Twitter account on bjohns3.brad is at Brad's link and john is at jbathgate. Great we'll link to all those in the show notes. Thanks for having us guys. Thank you. All right listeners hope you enjoyed our conversation with Brinton and john if you found it to be frankly as eye opening as I did feel free to share it with a friend if you learned something new about complexity investing or their barbell strategy or resilience and optionality I'm sure you can think of someone that you'd want to share that with so feel free to do so if you are not already a member of the acquired slack come join us acquired.fm slash slack some of the best discussion you'll find on the internet about lots of things that you care about if you're not an LP you should become one it's a way to get closer to what David and I do here at acquired we have these awesome LP calls once every month or two we have been on a tear recently with great LP exclusive content we just dropped about a month ago now a great interview with Ronel the CEO of audios which is the largest crypto application web three application out there with over six million users and then just before this episode we dropped another sort of web three episode this time on web three marketplaces centered around brain trust with Adam from brain trust wow that would that was was blast yeah so if you're web three curious or maybe you're your web three skeptical these are fun episodes to listen to because they're super non-defy non sort of crypto use cases yeah they're like real world applications yeah which of course we wanted to dive in and tell those stories you know what I'm curious about after this episode and I feel it you know the universe works in funny ways right like I think everything sort of aligned that a bunch of stuff happened all at once is the Santa Fe Institute and complex like everything we talked about on this episode it just seems like such an amazing place I've always wanted to go to Santa Fe period I've never been there but to go like to class the LA the we should do something because we before this we had our Michael mobson episode he's the chairman of the board there we're a kindergarten is actually investing in a company that the CEO is also a board member there just like there's too many stars aligning we got to go the universe is telling you something David I think it is I think it is well with that thank you to our sponsors the soft bank Latin america fund modern treasury and to fund rise and listeners we will see you next time let's see you next time