What's Important for the Business (Notes from Sep. 16 - 22, 2019)

Ah, the art of learning. What can you absorb in the time that you allotted? Hopefully it was the good stuff, the one you can apply and remember. We're not going to retain it all - far from it. Different surveys and studies will say between 10-30%, depending if you're reading, listening, seeing things. Repetition, talking about details or applying what you're picking up can improve those numbers - and it's why there is still a ton of money being raised/made on improving it (Blinkist, Anki, Quizlet, rise of audio books and podcasts). This is all without bringing in the idea that the internet has allowed such a flood of ideas that opposing ones can exist simultaneously, persisting through its strong supporters. So, if you're not doing research and coming to your own conclusion, it's likely to be lead to whichever way you resonate with someone/something most (or first).In reading through Constellation Software President's letters to shareholders, you see a valiant attempt at conveying how he, executives and board members looked at the business health for the year - and refreshingly so, not explicitly through rose-tinted glasses. He critiques and suggests an option that reversion to the mean is possible based on a lower adjusted net income and cash flow from operating activities per share. Then he went through the shareholders returns on invested capital, average invested capital, and questioned the organic net revenue growth's performance (as he notes that this is a primary core to the main metric for their performance: ROIC+OGr). Once he goes through the metric and it's cash flow, he mentions that they're looking to increase acquisitions, but the environment isn't conducive to great values, so FCF may not be fully invested at attractive levels for the future. Then, he suggests a metric to cover this with a reasonable pattern, one less subject to shareholder alterations. Open to suggestions while he develops the reasoning for what another member has suggested for a good metric, he settles on FCF increase per share compared to average net income per share.I loved his breakdown for the shareholders - mentioning half the shares trade for the year. He breaks it down simply as short-term, indexers, enterprising investors (including institutional, but also generally long-term, long-haul holders). He openly asks them to help find directors and members of the board and the difficulty that they saw initially after their IPO. The next paragraph was a big one, so I'll include it:

Qualified and competent Directors are very rare, and not surprisingly, the track record of most boards is awful. According to the 2017 Hendrik Bessembinder study of approximately 26,000 stocks in the CRSP database, only 4% of the stocks generated all of the stock market's return in excess of one-month T-Bills during the last 90 years. The other 96% of the stocks generated, in aggregate, the T-bill rate over that period. This means that 4% of boards oversaw all the long-term wealth creation by markets during that period. Even more disturbing, the boards for over 50% of public companies saw their businesses generate negative returns during their entire existence as public companies.

Wow. A) The recognition of wanting to be the best and provide a great board of directors for a long-time and B) genuine concern for the long-term view and suspicion of complacency arising. Both, I'd imagine, lead him to mention that vision / strategy are not necessarily courses of action - instead, perpetual objectives as the guiding point. Whether that's seeking them out or maintaining what they had, he made sure it was top of mind. He sees that profitable VMS businesses may no longer come to be acquirable, and that he's on the lookout for other opportunities - without them being attractive, though, he'd responsibly return FCF to investors.Interestingly, he looked for Constellation to be devoid of "sycophants, mercenaries and spin-doctors" and wanted it to be a place where meritocratic results bring in "entrepreneurs and corporate refugees to invest their lives and and their capital and thrive". Quite the statement for a business of such magnitude, when, especially from the outside, many succumb to the former (hell, take a look at Tech Twitter these days and a complaint I've had is that people seem to be comfortable bouncing between 2-3 companies a year for 5, 8. 10+ years). I'd love to build something that sustained a drive through many levels of employees.

"I find there is no magic to managing and leading. If you are smart, work harder... treat people fairly, do not ask them to do anything would not or have not done, share the credit, keep learning and keep teaching, then pretty soon you have followers. If you make sure that the team members are energetic, intelligent, and ethical people...."

Yup. That's the way to build a company. Find that and hold on. And then he finalizes with the board requirements (which I'll include at the bottom).Hope you enjoy the notes this week.

  • Mike Strasser (@mstrasser), Motiv ring founder (Wharton XM)
  • Talking about the ring and how he knew the wearable would work
  • Lee Thompson (@flashpacklee), Flashpack founder, Marketing on a Budget (Wharton XM)
  • Photo journalist for 15 years
  • Talking about creating a brand through pictures, story-boarding, ethos of brand
  • If you can't tell what your hook / pitch is, probably won't sell
  • Went on first date with his now-wife from Match, wouldn't tell him a great business idea
  • Post-wine glasses, she had a business idea for 30+ year olds wanting to travel - friends having too much of a family/kids
  • Adventure travel company for solo travelers in 30s and 40s, not tours via bus and such
  • Next few dates were researching travel industry, setting up a business
  • Book trip as solo traveler, then have others that you are meeting everyone else Boutique hotels, price points established and like-minded - typically well off in careers, cash-rich
  • Launched with $15k each, savings and jumped in
  • Nobody would spend $1k+ on trips for a company that had no reviews
  • Generated a lot of PR, did a lot of viral videos by responding to twitter hashtags
  • Spent on Google ads and lost lots of money - built the website
  • Took a trip to Egypt on a budget, "come to Jesus moment"
  • If I can get on top of that and take a picture (Christ the Redeemer picture of a workman doing damage repair)
  • Wanted to take a picture on top and took a selfie
  • Mehrdad Baghai, Alchemy Growth cofounder & CEO (Mastering Innovation)
  • Boutique strategy advisory firm advising large companies on innovation strategies
  • Designing organization architecture for growth, 5-10 years
  • Active investor in tech and p/e spaces with Macquarie Group
  • Former partner at McKinsey leading Growth Practice and then 3 years as Exec Dir at CSIR, Australia's national science agency Dozens of new tech companies
  • Also launched High Resolves with his wife, Roya, in 2005
  • Fred Destin (@fdestin), GP at Accel (20min VC 1/18/16)
  • Former partner at Atlas Venture working with Zoopla (public), Secret Escapes, Integral Ad Science, Dailymotion (acq by Orange), PriceMinister (acq by Rakuten)
  • Studied life as derivatives at Goldman Sachs, first team on credit derivatives
  • Securitization of movie rights, derivatives in Pacific region for about 7 years
  • Opted out when it went from risk hedging to arbitrages
  • Moved to Speed Ventures for investing at really early seed
  • Spending a lot of time hiring the best 1-10 executives because you can't spend time getting this wrong
  • Take a model that worked in 1 city (like Deliveroo), scaling it to 30+ and got there in under 3 years old Fit consumer model and offering for the ones - brought new kinds of service to non-delivery food
  • Seed companies failing because you hire something you don't understand - wrong team kills the team Second mistake - overestimating the things you can do in the time - reality doesn't match
  • Setting arbitrary goals for not being worthy of being funded - most companies run out of money or come close, being patient and empathetic with founders
  • Investors need mental plasticity for adjusting expectations on what to best deliver
  • Founders feeling screwed over because it was never possible for them to communicate the right decisions being made Mix of market difficulty or overambitious of timing - how to improve intimacy and mutual trust
  • He likes to spend 3-6 months knowing founders - wants to do strategic sessions, whiteboard issues how you would solve it - discovery and disagree
  • Can work through disagreements, see how people work collaboratively
  • Engineer a situation of tension - hiring / decision made, create it to see pushback
  • Could we do an 8 hour wine test / road test - can we banter and have a pleasant time being together (Boston to Montreal, London to South of France)
  • Needs to ensure performance and milestones, sounding board, interest of company / employees / customers and investor with fiduciary standards
  • Had to tell guys at Real3D and say that they couldn't invest - told them early, though
  • Mentioned Boston VC that said he's said "No" so often that he just fizzles out - Fred said he tries to give constructive feedback but not always
  • He used to send very detailed No emails but would receive replies about not understanding opportunity and pushback - called stupid or not getting it
  • Now he responds with "Busy with other opportunities", but sometimes he has things fall through the cracks
  • Favorite book: Mastering Margarita, missing and saying No to successful opportunities - doesn't rue or look back like that because portfolio co's do well enough Success measure - how long it takes for knowing (16 years for him), took 10-12 for success as investor
  • Wasn't super excited about returning to London but was pleasantly surprised about how vibrant it was - still US is more tolerant about money and quicker pace
  • Competitors share, acquisitions are faster - Accel moves fast so it's advantageous but not overall
  • Boston wants to import the well of technical talent and ML - hubs working together in Europe will improve it
  • Thirteen Minutes to the Moon
  • Episode 7: Michael Collins: Third Man
  • Command module pilot for the mission
  • Test pilot before being selected as an astronaut - 90% luck he landed in that role
  • Someone wrote to Eisenhower that the best option for selection for astronauts would be experimental test pilots because apt to new scenarios and flight Compared to deep sea divers or others
  • Collins had been turned down the first time to supplement that first 7 - after a year of more experience, selected in class of 1963 with Aldrin
  • First flight was 1966 on Gemini X, rendezvous and docking maneuvers
  • Once LEO Gemini flights were successful, Apollo XI was announced in January 1969
  • July 16, 1969 - launch sequence day - was responsible for launching lunar module to turn it around from Saturn V rocket
  • Was an English major and just did guidance verbs/nouns memorization to control it
  • As they neared moon, they were on far side and lost contact with Houston
  • Takes back everything bad he ever said about MIT - accuracy of system was ridiculous, 3000 ft/s and only had 0.1 ft/s in any one direction error
  • If something went wrong for landing lunar module, Michael couldn't change his speed but it'd be up to him to figure out what to do
  • Mathematicians were responsible for coming up with a list of 18 variations for problems and what to do - some they hadn't trained for
  • He felt alone, awareness of being on the other side of the moon, solo after Aldrin and Armstrong picked up speed on their way down

CSI Board Role Search CriteriaTHE ROLEThought Partner - Thought partner for senior leadership.Long-term Orientation - Unfazed by short term pressure. Focused on CSI's long-term issues.Timeframe - Able to serve on the board for 20+ years.Investment in CSI - Willing to make a significant equity investment in CSI, above and beyond board comp.THE CANDIDATEHigh Quality Business - Understands what constitutes a high quality business.Autonomy -Appreciates the motivational power of autonomy, decentralisation.Cultural Fit - Respects and gets along with the current senior CSI management as well as the board.Ownership - Believes in the motivational power of equity ownership.High Impact / Low Ego - Will intervene when necessary, contribute meaningfully, but not dominate discourse.Out of Kitchen - Can resist the urge to get into the kitchen when there's a chef already in there.EXPERIENCEBuilder -Â Helped build or maintain (as a director, manager or major shareholder) a largeorganisation (>1000 employees) over an extended period, while providing a superiorreturn to owners (ideally including employee owners).Decentralized - Experience with a decentralised company (nice, not necessary).Capital Allocation - Experience in a capital allocation role (nice, not necessary).LIKELY BACKGROUNDFamily owned business operator or director.CEO / #2 for exceptional business.EntrepreneurSEARCH PATHSMulti-generational family owned businesses with high ROIC within reach of ournetwork and ideally local to CSI (increases involvement, eases reference checks, morelikely to know CSI, decreases absenteeism).High quality businesses with strong shareholder alignment.Great capital allocators in the corporate world.CEOs with great shareholder letters and high quality businesses.