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Comparing the Dotcom Crash to Today (with Tom Cowan from TDM)

ACQ2 Episode

June 19, 2023
June 19, 2023

Every now and then, we come across super interesting and under-the-radar (at least to us!) public markets folks like NZS Capital who make us think differently about the art of investing. TDM is another one of those groups — founded 18 years ago in Australia, they’ve compounded a single, private pool of capital at 26% per annum over nearly two decades. That’s Warren & Charlie territory!

TDM recently published a memo comparing the current “post ZIRP bubble” market with what happened in the years following both the dot-com crash and the GFC in 2008. As always, past performance isn’t necessarily predictive of the future, but what happened back then surprised us and might surprise you too. More importantly, it gave us the perfect excuse to sit down with TDM cofounder Tom Cowan and share the conversation with you all. Tune in and learn alongside us!




We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Season 1, Episode 26
LP Show
June 19, 2023

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
June 19, 2023


Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

Season 4, Episode 1
LP Show
June 19, 2023

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

Season 1, Episode 11
LP Show
June 19, 2023

6. Booking.com

Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.

Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
June 19, 2023

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

Season 1, Episode 23
LP Show
June 19, 2023

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Season 1, Episode 20
LP Show
June 19, 2023

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

Season 1, Episode 7
LP Show
June 19, 2023

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Season 1, Episode 2
LP Show
June 19, 2023

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: acquiredfm@gmail.com
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!


  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at: https://www.wsgr.com/

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: Hello, Acquired listeners. We have got a great ACQ2 interview today with Tom Cowan, the co-founder of TDM Growth Partners. TDM is a team I got to meet when they asked me to interview Ed Catmull, co-founder of Pixar, last year at their annual event at the Sydney Opera House. They're very thoughtful investors, much like our friends at NZS Capital.

Their strategy is a very concentrated portfolio investing across a small set of public and late-stage private companies. They're also really unique. They don't fundraise. Their LPs are the same families that started investing with them 18 years ago. I should say, their track record is insanely impressive and consistent. They have 26% annualized return over that time period, and they have nearly 60X’d their original invested capital over those 18 years.

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

Tom, welcome to ACQ2.

Tom: Super excited. Thanks for having me, Ben and David. I have to say, I have listened to a lot of your podcasts over the years and have learned a lot.

Ben: You just dropped the TDM growth market memo for the year that I was totally fascinated by. To kick off right in the crux of the memo, when you look at all the companies in the stock market, when the market resets, the highest growth businesses tend to peak the earliest. You illustrated this in November of 2021. And then, of course, they fall the deepest in a market reset.

I think everyone can understand this intuitively. But what is less obvious is how each market reset is similar but unique in its own way. I want to tee you up with, what did you observe about this particular reset in the last couple of years, where we could have learned from the past, but in what other areas is it unique?

Tom: Let's dive in there just to set the scene and be clear and go back the last 20 odd years. In our mind, there have been three major resets. There's the dot-com bust, there's the global financial crisis, which no doubt during this podcast, I'll refer to the GFC, which is actually an Australian term that no one else seems to talk about.

David: I didn't realize that's where it came from.

Tom: Yeah, that's where it comes from.

David: We all just started calling it that in the last couple of years.

Tom: That's exactly right. I only learned that recently. The final one is obviously this period we've just been through. Let's call it the Covid recovery of free money and crazy valuations.

Having said that, I think there are lots of corrections over the last 20 odd years. You had the terrorist attacks, you had the European debt crisis in 2011–2012, you had the tech meltdown in 2016, and obviously the very short but very sharp Covid lock down period. For the purposes of our memo, we're really deep-diving on those three major resetting events.

What we did is we wanted to look at the proxy for the highest growth businesses and to assess how they performed over those periods. In the most recent period, we use the Bessemer cloud index, which really is a good proxy for our investable universe and follows the fastest growing tech businesses. But unfortunately, that didn't exist in the two prior periods, so we had to attempt to recreate that with our own indexes.

David: This is so fun. I love that you went back and you created your own historical indexes.

Tom: We can dive into how we went about doing that, but we've had a crack at it. I would say they're comparable, but obviously not exactly the same.

Ben: For anyone who hasn't looked at the BVP (Bessemer Venture Partners) cloud index, we'll link to it in the show notes. It's a fantastic resource to view all the real time multiples and market caps of all the top cloud companies that are public and really understand what's going on in the market with that type of company, for anyone who's not familiar.

Tom: Yeah, it is. It's a favorite of ours for sure. If I get back to that original question, I think when we look at those three periods, there's a number of similarities that I think are worth calling out. Generally speaking, as you touched on the high growth businesses actually outperform in the bull market, then they fall dramatically following that event. In the current drawdown, and particularly in the dot-com bust, shall we say, they fell further and faster than any of the other broader indexes.

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

I don't think that's a surprising piece. It's obviously yet to be determined exactly how we come out of this particular period. I think we can say for the dot-com and the GFC, the growth businesses significantly outperformed following the bottom of those markets for the first year in particular, but then on a multi year basis.

If we bring that together, when we look at all that data and the way we think about it, it's very advantageous to be investing in these high growth businesses through the cycle, but you have to have the stomach for it. There is much higher volatility, and you have to be able to be emotionally stable, shall I call it, during those periods.

One final thing that I think is worth calling out—this one's worth writing down—valuations matters. We need to stick that on our wall. Remember that. For the next boom, look at that little post-it note that you've written next to your computer.

David: I think, perhaps, in the memo that it's very unlikely that when you're investing at north of 20X revenue multiples that those are going to be good investments, regardless of how good the companies are underlying them.

Tom: You might hear a bit of a rant and rave about that a bit later in this chat, but I'd love to dive in and give a bit more detail on that. It is extremely difficult to get good returns if you're paying 20 times revenue, that is for sure. A couple of our memos actually attack that exact problem.

It's also worth calling out some of the differences. I think there are a lot of differences in terms of the reason for these major resetting events. But one of the key things that we followed are, the deep dive is the period from peak to trough is very different.

The dot-com bust went for about 2½ years. The GFC was 18 months. Currently, in this, let's call it the Covid recovery resetting event, we're 18 months in. Having said that, plenty of water under the bridge. Exactly how that plays out is yet to be determined.

Ben: We're recording this on June 8th of 2023. You're pegging it basically to mid-December of 2021 is where the drawdown began.

Tom: November was close enough.

David: I feel like I'll never forget this in retrospect, but it was when all the CEOs did big stock sales. Elon did the big stock sale. Satya I think sold. Who else? Did Jassy and Bezos sell? A bunch of people sold.

Tom: There was certainly plenty of craziness going on in 2021. I think for those that had lived through some cycles before, it was pretty clear that the market had overstepped where it should be.

Ben: What were some of the differences then this time? You mentioned we're 18 months in. We don't know where it's going to go yet. Other previous corrections had been over by now. I'm not going to ask you the hard question of, have we hit the bottom and are we in the recovery now? Because I think that's a little bit of a fool's errand to talk about. Maybe illustrate the differences a bit more.

Tom: I think probably the key difference that's worth pointing out is that, in this particular period, the broader indexes have only fallen from peak to trough so far—I'm going to say so far—between 25% and 36%, which is when you compare to the previous two periods, the broader indexes, I think S&P 500 and Nasdaq fell 50%-plus. I'd certainly call that one out.

When we look at this particular period, being quite confined to those high growth businesses. We go back to that Bessemer index, and it's fallen 65%, peak to trough, so well in excess of those broader indexes. As I said, it feels quite confined to the high growth businesses at this particular point.

Ben: It's funny. People have commented in the past that, well, the dot-com bubble was the end of the world just for tech. It didn't contaminate the broader stock market, but 2008 hit the whole market, but not tech as heavy. I think what you're saying here is really interesting. The broader markets have fallen 25%–36%, but Tech has gotten nailed, or high growth tech anyway. This particular drawdown, at least in magnitude of drawdown, looks a lot more like 2000, like the dot-com burst than it does like 2008.

Tom: Yeah, I agree with that. There's no doubt about that. Interestingly—once again, it is too early to call—so far as we're moving from the trough, which was November 2022, those broader indexes have also recovered faster.

If you dig it even a little bit deeper, if you look at the Fang in particular, the largest of those technology businesses. They're actually not that far from their peak. There are lots of nuances going on at the moment. I just think it's too early to call exactly where we're going to end up.

Ben: I got to take us off script for a moment here and say, with Meta, Google, Apple, Amazon, and Microsoft, do you think of those as high growth tech businesses, where you lump them in with this SaaS index?

Tom: No. They're not in the Bessemer index. I think if you certainly look at their growth rates at the moment, they certainly wouldn't meet the high growth criteria. There, obviously, are a large proportion of the NASDAQ, so we'll put them in the NASDAQ bucket from a high growth bucket.

Ben: Which I think is an important distinction, and one that is missed in people talking about tech and recovery. You got to be a little bit more specific. Are we talking about five of the largest companies in the world that are incredibly diversified and at this point slow growing? Or are we talking about high growth SaaS?

Tom: Spot on. We say that all the time. You've really got a deep dive into what you're talking about. I think this current period is a great example.

Ben: Okay. Following up on this, I want to dive into the methodology you use. Can you share the synthetically-created indexes for dot-com and GFC that you use for this analysis?

Tom: As I mentioned before, the favorite was the Bessemer. It didn't exist, so we did have to recreate it. If you look at the Bessemer index today, Adobe existed back in 2000, and only Adobe and Salesforce existed back in 2008. That's why we had to recreate it.

We then went about the process of how we are going to compare these periods. We then basically took a screen. We said, okay, what is the criteria of the Bessemer index? What does that look like? And how do we attempt to recreate it?

Our screen was very simple. It was looking at software and technology businesses, revenue had to be more than $50 million, US only, and market caps are between $100 million and $100 billion. What that created was two indexes for those periods that actually look very, very similar to the Bessemer index.

All three indexes end up with about 75–95 businesses in them. All three indexes ended up with median revenue of between $600 to $700 million, and all were fast-growing. If we look at the Bessemer index, it was growing in 2022 at about 30%. You go back to the synthetically-created index for the dot-com period, it was growing about 24%. For the GFC, that index we created was growing about 79%.

David: That's super interesting because I naively think back to the dot-com companies of like, oh, those weren't real companies. But no, it worked.

Tom: We can get into that. There was a lot of that.

Ben: Those are not showing up on the screen because they're not doing $50 million in revenue.

Tom: They're not showing up. The silly, silly stuff, which I'd love to dive into a bit later, doesn't show up on the screen.

Ben: Remind me, were you exclusively screening for tech companies? Or when you screen by these financial metrics, do they just skew tech?

Tom: No, we specifically screen tech, trying to replicate the Bessemer cloud. It was just the easiest way to go about it.

Ben: How do you define that? Because I think there's been a lot of debate over the years of what's a tech business and what's not.

Tom: We're using, in this instance, the cap IQ definition of software and technology. When you think about the 2000 period, it does include technology hardware. Roll forward 20-odd years, that's not part of the Bessemer index. There are some nuances. That's why we say it's not a perfect comparison, but I think there's enough there to draw some meaningful conclusions.

I do think it's worth pointing out just quickly, all three of these indexes are equal weighted indexes. They're not indexes based on market cap. When you think about the Nasdaq, it's weighted by size. The largest companies have the biggest impact on that index. This is an equal weighted index across all three of these. I know that's in the technicalities, but I'll say it's worth calling out quickly.

Ben: No, it's helpful. It's helpful to understand, why aren't you just using the Nasdaq? (1) The Nasdaq is too broad of a bucket for the specific thing you're looking at, which is software companies. But (2) the weighting of the index matters a lot, especially when you're trying to look at what is the index's growth rate, and what is the index's margin profile.

I want to reiterate something you just said. The dot-com index that you created grew at 24%, but the BVP cloud index in 2022 was growing at 30%. For comparison, I think you said 17% for 2008. These companies in the run up to 2022, while the market sure was frothy, the companies themselves, from a top line perspective, were actually growing materially faster than the dot-com era.

Tom: Yup. When you look at that, we would certainly say, the current group of companies are the highest quality, fastest growing, most disruptive companies that we think can grow into very large businesses. There's certainly a very sizable bucket of those when you compare it back through the previous two periods. I think that comes out in the growth thread.

Ben: Listeners, if you do want to read the whole memo, we'll link to in the show notes. It actually might be a nice illustrative guide since there are a lot of tables and stuff as Tom is talking here, if you want to click that link. But Tom, I want to ask you, aside from growth rate, where companies in 2022 are growing meaningfully faster than the previous other peaks before the draw downs, what is one other characteristic that was super different about this time when you look at the financial statements of companies versus previous eras?

Tom: When you look across the indexes, a major call out is the gross margin loan. That really goes to the point I was trying to make before, around there are some technology hardware businesses in that dot-com index. The gross margin from memory is around 40%, or I think 41% back in the dot-com index. When you compare that to the Bessemer index, gross margin is at 76%.

Interestingly, though, the earnings then flow that down to EBITDA, it's actually the reverse. Back in 2000, the median EBITDA margin was 14%, where in the Bessemer index back in 2022, it was 6%. That really probably goes to the growth at all cost mentality that we've had in the last couple of years.

Ben: If I had to speculate a little bit too, one thing to point out is, oh, my God, that is a stark difference, 41% gross margin in 2000 versus 76% in 2022. With the advent of cloud computing, we have real SaaS companies with real gross margin profiles that let you get tremendous operating leverage on your fixed costs when you are at scale, but many of these companies are still subscale.

That's why you see down at the profitability line on EBITDA that these companies in 2022 weren't actually generating any cash because engineers are so expensive, all the fixed costs of building your go-to market machine were so expensive, that anybody who was sub scale, sure, you might be set up for great operating leverage, but you're currently experiencing the negative side of operating leverage, which is, if you don't have massive scale, then your fixed costs are killing you.

Tom: Spot on. You've nailed that point. I would also say, though, obviously, back in 2000, this recurring software business that we now know as SaaS didn't exist. When you look at those technology businesses, they weren't recurring revenue. Obviously, on the software side, it was perpetual license (say).

David: This makes me think a little bit. The growth at all costs, as you said, Tom, to maybe not excused, but really put into context, even though it's just a couple of years ago on what these management teams and boards were doing. This comparison really does call out to me, too. It wasn't totally irrational.

You have these amazing businesses. If you have an 80%-plus gross margin business, and with a lot of headroom in your TAM, growth at all costs, things get excessive, of course. But you can see the temptation of like, of course, I want to reinvest all my profits in growing because this business is amazing, so I want to land grab and capture it because when I turn on profitability, my God, there's going to be a gusher of cash flow on the other end. In a way, that didn't exist with the old business models.

Tom: I think that's true, and I think it's also true that we are in a period where there's mass disruption. I definitely understand the temptation. We would argue and have argued on many of our, if not all our boards, that growth at all costs is not a healthy thing to grow a business. We can see the temptation, but believe that to build a business on a 10- to 20-year view, you've really got to be making decisions and building a business that is profitable. There's really a cultural piece there that I think people don't necessarily understand. You're starting to see that unwind now and some of the consequences of it.

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

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

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

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

Ben: The capital pool is just those 20 families?

Tom: Correct.

Ben: And my understanding is you don't fundraise as a firm.

Tom: That's correct. We haven't taken on a new client for a very long time. That, in part, goes to our structure in that we don't have a fund life. We have an evergreen pool of capital with no mandate restrictions. That allows us to achieve or allows us to invest in those businesses for a very long term.

Ben: It also reduces the number of business activities that have to occur within your franchise, so you can focus on the core thing without fire drills coming up, where you need to do something for fundraising purposes.

Tom: I think it simplifies our business model. It really allows us to focus on what we want to focus on, which is investing. The other restriction we've put into our business is self-imposed restriction. We only invest in 10–15 businesses. We want to be super focused, highly concentrated, eat, live, and breathe those businesses, so we can know those businesses better than anyone else.

David: It's the punch card approach.

Tom: A hundred percent. She talked about the other day of getting everyone a punch card just to remind themselves. It is the punch card.

David: I'm imagining you have a giant one on the wall on the entryway to the firm with the punches that you put in.

Tom: That's actually a good idea. We've actually only invested in 60-odd businesses in 18 years just to put the punch card mentality in perspective, which is very different from most growth firms, either public or private.

David: That's an average of three a year, and that's across both public and private.

Tom: Yup, that's public and private. This is probably maybe a little bit too deep, but part of that is about 15–20 of those businesses have actually been taken over, I'm going to say, without our consent. We didn't own enough of the business to influence the outcome. Obviously, in that situation, we're forced to go and find new investments. It's not always up to us, so to speak.

Ben: You're trying to paint it negatively that you invested in businesses that got acquired so you had to go reinvest the proceeds elsewhere.

Tom: It's funny you should say that. We actually have this discussion with our clients a lot. We do see it as a negative. We want to own businesses for 10 and 20 years. There's been a number of instances where we've invested in a business. We've followed it for many years, we finally invest, and then 6–12 months after, the investor gets taken over.

In fact, our memo at one of our investments back in 2010, was a company called RiskMetrics. We'd literally been following the company for three years. We've been meeting them every quarter. When we finally got to a price where we were happy to invest, the company was taken over by MSCI. I can't remember exactly. Let's call it 70% premium.

We sent off an email to the CEO saying, we would like to talk to you. We caught up the next day. He was expecting a pat on the back and how exciting, thanks very much for the 70% return. I'm like, what are you doing? Why are you selling? I think that's a different perspective, the way we think about it. We're trying to make four or 4, 5, 10 times the money ideally over a period of time.

David: You're like, is this decision written in stone? What can we do here? Can we reverse this?

Tom: That’s exactly right. He still tells that story. I think we're the only investor to be upset with him.

David: This conversation implies a sense of scale. What's your sense of scale? When you talk about having an influential position in companies, what are the positions that you're taking?

Tom: The positions can range from a couple of percent to our largest position today in terms of ownership of companies, about 40%. We've always been a minority shareholder. Regardless of whether that is a few percent or 40% of a business, we always behave the same way.

We're there to support management, we're there to back management, and we're there to do whatever they would like us to do to help them get better, but we're certainly not there to tell them what to do. Our position size in terms of ownership really doesn't change our behavior.

Ben: How early do you think you can determine that a business is one you'd like to be a part of?

Tom: Early in terms of size of business or early in terms of relationship?

Ben: Actually, both questions.

Tom: In terms of size, we do invest across all industries. We're not just software businesses. We see ourselves as growth investors. In terms of where we spend our time, we do invest across consumer, software, and healthcare in particular being the three largest markets that we think can be disrupted. It is different by area if we just focus on software.

I'd say, generally speaking, $50–$100 million of revenue. We're certainly not in that product/market fit stage, so I'd call us later stage growth investors. For consumer, that's probably $200 or $250 million in revenue just to put it in perspective. It does change with industries.

In terms of relationship, the longer the better. It's probably the simple view because you really get to understand people over time. The longer the relationship, the better often in certainly public markets and private.

We've known people, followed people, and watched people for many years prior to investing. That's our ideal setup. But at the same time, if we love a business, and we do feel alone with that management team, it can be months. It does change, but I'd say, ideally, the longer the better.

Ben: It's funny, your timescales are not at all like a venture capitalist who often needs to make a decision in days, maybe weeks, definitely not months, except in this market. Sometimes you can let it go months now of diligence. It's more like a limited partner, to be honest. It's that year plus relationship of making a very slow but very large commitment.

Tom: Ideally. I have to say, we did not on the private side because we do invest in public and private. On the private side, we did not enjoy 2021 or 2022. The idea of quick deals is not in our view the right thing, either, actually for the company or for the investor.

We actually see these things as a marriage. Every founder that we ever speak to, we say the same thing. We do say this is a marriage. Let's get to know each other, rather than rushing and trying to do a deal in weeks. We always thought that was great.

David: VCs have been saying that for decades, but the context is different. It's like, oh, let's not rush, let's take a few weeks.

I'm actually really curious on the public side of the, I won't say courtship process, that's not really what you're doing here, but the relationship building process. The proposition here of, if you become investors, you're going to have a large stake in a public company. You might probably be, in many cases, the largest shareholder with a very, very, very, almost infinitely long-term horizon relative to other public shareholders. Are CEOs even aware that something like this exists out there? How do you go about talking to them?

Tom: I'd say, normally very surprised on a few fronts in terms of how we approach it. One is the time horizon. We're really upfront. When I say we want to be owners of this business for the next 5–10 years, ideally even longer.

When we're having a conversation, we want to talk with that timeframe in mind. We actually don't care about next quarter. You see this pressure release, and they're so relieved that there's someone out there that actually doesn't want to talk about next quarter.

I think the other thing that often comes up in that conversation is that we want to talk about people and culture, and our views around ultimately, when you are investing in a business 5, 10, 20 years, the people you're backing is so important, the culture of the organization is so important and we would argue, the most important. It's the longevity and our focus on people and culture that really catches CEOs off guard.

David: Just mechanically for a public company, too, you're taking a huge portion of their float off the market.

Tom: For certain sized companies, that's definitely the case because we can own 10% or 20% of a public company. That's definitely a consideration, but we could also just be a few percent of a much larger business. Some of our businesses are $20, $30, $40 billion in market cap.

Obviously, in that situation, we're a smaller proportion, and that's not really a topic that comes up. It's more that we love to have long-term owners. We'd love to have someone who doesn't want to talk about next quarter. And we'd love to spend time with you so you can understand the business better.

Ben: Three questions for you that are all related to ground some of what we're talking about for listeners who are wondering what's going on. (1) Are you willing to give us an assets that are management size so people can understand the scale at which you're operating? (2) What was that 18 years ago to try to understand how that's changed over time, and frankly, the incredible performance you guys have been able to get? And (3) are you okay talking about some of the businesses that you're involved with today?

Tom: Maybe the first one, today, we have about $2 billion of funds, but we have not raised a lot of money. We actually started with a few million dollars, or to be specific, a million dollars back 18 years ago. We were 26 years of age. We had no track record, so we were just happy to take a small amount of money, go do what we love, and see how we went.

We started with a very small amount of money. We've raised, I don't have the exact number, but it's probably in the order of about $100 million in terms of the capital we've raised from our families. As I said, today, we manage about $2 billion.

Some examples of companies we're invested in, some you will know, and some you won't know. Maybe an example of a company we invested in historical that you wouldn't know, we actually pitched Slack at Zone a couple of years ago prior to Salesforce.

David: The Zone Conference, of course.

Tom: Yup. Sorry, The Zone Conference. This is an Australian version. That was the Australian version. That's an example of a company in the tens of billions of dollars a size.

Another one that you most likely would have heard of is a late-stage private company called Culture Amp. It's an engagement software tool that is continuing to build out its platform and is super successful. It's an Australian-founded business, but now a global business. Then there are a number of companies that you would most likely not know what I'm talking about, so maybe a couple of examples there.

I'm on the board of a company called Rokt. It's an Australian-founded, but now New York-based. That business is in marketing software. It's super successful, rough numbers, does north of $300 million of revenue growing super fast. In Australian consumer, another one you probably wouldn't have heard of is one of Australia's largest QSR businesses, Guzman y Gomez.

Ben: That's a quick serve restaurant?

Tom: It is. It's super successful, growing super fast, and disrupting the fast food industry here in Australia.

Ben: It is growing businesses across a ton of different sectors. I'm chuckling over here because lots of listeners will recognize Culture Amp if they've listened to any of the Acquired back catalog recently. We're obviously big fans over here, too. I want to ask you a question. Why do you write these memos?

Tom: That's a great question.

David: Especially if you're not bringing on new LPs.

Tom: Let's go back a few steps. We really don't like thinking about anything but our company. I would say, we spend 99% of our time just thinking about our 10–15 companies. That other 1% is thinking about more macro items, but there are periods of extreme volatility.

Early in setting up TDM, we obviously had the GFC hit us. At that point in time, we really wanted to get clarity of thought around how we're thinking about deploying capital in these extremely volatile markets.

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

Roll forward Covid, same thing. We really didn't know what was going on, to be frank. It wasn't something that we'd seen before, so we started writing these memos again for exactly the same purpose. It was just this time, we released them publicly.

Ben: Helpful. It's alignment between all the different stakeholders you have, but also just clarifying your thinking.

Tom: Basically. They're really the two key reasons why we like to put pen to paper. It's really in the periods of extreme volatility.

Ben: We started talking about this particular memo. What have the other ones recently been about?

Tom: We wrote one back in February 2021. At the time, we put forward an argument that, really, the valuations were crazy. Therefore, as a result, the expectations for growth were unrealistic. We set about going through the day to explain why we thought that.

The way we did that one was, similarly, we looked at the Bessemer index, we looked at the group of companies, and took the median company. What did that company look like? At the time, the median Bessemer company had $500 million in revenue. It was trading about 15 times revenue at the time.

We said to ourselves, as an investor, we want a 20% return. What does that company need to achieve for us to achieve that 20% return? Effectively, you can go through all the details in the memo in terms of how we went about that. But effectively, what we said is that company has to grow at 30% a year for 10 years to achieve that return.

The power of compounding really plays out. You're going to take revenue from $500 million to $7.5 billion. Those are some very large numbers when you really think about that. Then you look around and say, well, who else has achieved it? The base rate is extremely low.

In fact, there are only two software companies that have achieved that. That's Microsoft and Salesforce, I should note, there are three others that are there or thereabouts. In fact, I'd say ServiceNow will most likely achieve that this year in their 10th year, and work down in Palo Alto Networks that are there or thereabouts, but probably won't achieve it in their 10th year, which is also this year. But if we were to be generous, there are five companies, so the base rate is very low.

Ben: If you're investing at 15X revenue in a high growth technology company, you have to believe that this is 2–5 times in a decade, like a very, very special company in order to generate a 20% annualized return.

Tom: Yeah, that's what the mass says, so it's tough going. When we think about that period, I think companies were growing at very fast rates at that period. It's very easy to extrapolate the near term, revenue growth, the business growing 50%, 60%, 70%, and you start extrapolating that. But you've got to then look at what that looks like over 10 years, and you get some very large numbers.

Ben: In the near term, you're not bumping into the total addressable market. You're not bumping into capital getting more expensive, therefore marketing getting more expensive, therefore a need for slower growth because you have less marketing dollars. There are all natural forces of business physics that constrain when you actually are looking at a 10-year horizon.

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

Ben: Okay, this begs the question, what do you do? Do you just sit on your hands and not invest? Is that okay, the way you're set up?

Tom: We actually talked about in the memo in terms of the way we see our role from a portfolio management perspective. These are the times where we need to think about, do we want to be offensive, or do we want to be defensive? Howard Marks talks about this quite a bit.

We argued at the time, it's time to be defensive. Things were a little out of hand. Those growth rates or the growth expectations were unrealistic. How do we behave? The way we solve that is to hold lots of cash. We've set ourselves up, as I mentioned, with no mandate restrictions, so we can very easily have 20%, 30%, 40%, 50% cash in those times, where it's really hard to find opportunities at the right price.

Ben: If you're comfortable sharing, who else does that besides Berkshire?

Tom: In terms of holding cash?

Ben: I mean holding gigantic, near majority positions of your portfolio in cash for extended periods of time and that being completely okay.

Tom: The important point there is, and it goes back to the context of why we set up TDM the way we did, our view like Buffett's view, is you need that flexibility. Most fund managers, certainly on the listed front, have constraints. They can only have a maximum of 10% cash or 90% invested.

On the private side, same thing. They've raised the fund with a timeframe. There's a fund life. There's pressure to invest in a certain period of time. We don't have that pressure. That really goes to the heart of actually why we set ourselves up the way we have.

Ben: This is the natural effect of the phenomenon that's been studied and tons of academic research about how individual investors always outperform institutional investors. You've brought the flexibility of the individual investor to an institution.

Tom: A hundred percent.

Ben: Forgive me for doing the commercial here. I figured, why not?

Tom: I don't know what else to say.

Ben: This is the 2021 memo we're talking about, where everything's trading at these crazy valuations, illustrating how hard it is to get a return worthy of the hurdle rate that you're targeting on capital, so you're holding that cash. What did you write in 2022 in the winter to springtime as markets were starting to fall apart?

Tom: That's a great question. We did write another memo because markets were starting to fall apart. At that point in time, we actually wrote one in February 2022. The Bessemer index at that point in time had fallen 36% and 40% of the Nasdaq index had fallen more than 50%.

You'd certainly started to see, I'd say in these high growth areas, a major correction. We came out and said, basically, multiples had returned to normal or long term averages. It's now time to be selective and start moving to a more offensive position.

I should say, obviously, we're a little bit early in that call. No doubt about it, but things got worse. The Bessemer index kept falling. For the moment, the low back in November 2022, where it formed 65%. Obviously, macro continued to get worse, inflation remained high, and interest rates kept rising. That uncertainty effectively meant that things continued to get worse.

Ben: What is your psychological disposition at that moment in history, where you get excited about buying opportunities as early as February? It's only down 30%-something. It would get down to 65%? How does May, June, July, August, feel for you as an investor?

Tom: This really goes to a really important part that we strongly believe in, which is, you're not going to pick the bottom. We'd love to say you're going to pick the bottom in terms of where that market ends, but it doesn't work that way. We remain really focused on, have we found great businesses? Do we love management? And is the trading attracted prices where we expect to get our returns?

As long as that's the case, we slowly methodically start deploying capital. We don't deploy it all at once. We, over many months, start to deploy their capital. We were deploying capital back in May, June, July. We're also deploying capital back in November last year.

Obviously, we've got some prices better than others. But overall, we're delighted with what we've been able to purchase in terms of business quality and the price we were able to achieve.

Ben: Dollar cost averaging is a heck of a thing to manage your disposition.

Tom: One of our learnings, particularly in the GFC, was, it allows us to manage our emotional stability. It's hard when your share prices are going down 5% a day. That's the way it feels. It's hard. The way we like to manage through that is methodically and slowly deploying capital, knowing that maybe tomorrow we get a better price, or maybe we don't, but it's okay because we've started deploying capital.

David: I've been doing a lot less public market investing over the past year.

Ben: David's become Mr. Index Fund over the last year.

David: One of the reasons is just the emotional aspect of it. I was a full-time professional venture capitalist for a decade. Now I'm a part-time professional venture capitalist for another 5 years, so call it 15 years. My mindset is just you in the private markets, there is no dollar cost averaging.

I think that was one of my big lessons from the past couple of years in the public markets. I didn't really take that approach because it just wasn't how I thought as an investor. It's like, oh, great, do you have conviction? Do you want to buy? You buy or sell. Yes, that's the discipline that I certainly could have used a lot more of.

Tom: I think the other thing, the difference is you can't see the share price every day. Yes, you only get to deploy capital once at a particular point in time as a private investor. But you also don't turn around the next day and say that the price is down 10%, You don't build that muscle of really understanding that the prices do go up and down. But ultimately, the business value hasn't changed between yesterday and today.

When we talk to our clients, we often say, when you walk into your house, is there a big sign on the door that has a value? Are you thinking about that value every day? No, you're not. In terms of the businesses you're investing in, the same thing. The value of a business does not change on a daily basis. It's purely a market mechanism.

David: I think about Kindergarten Ventures, my AngelList fund that I run with my friend Nat. I think about, if somehow you had mark to market the Kindergarten portfolio over the past 12 months, it would have fluctuated wildly in value. Certainly not all, but many of the businesses that we invested in, call it in heavier times, would have been marked down a lot. Now I look at them given their growth rate and how they're doing, actually, I'm really glad we didn't sell those businesses. There was no option to in the private markets.

Ben: Illiquidity can be a feature to keep you from panicking.

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

In fact, if you were to walk into our office, there's only one person in the office that has any idea really what's happening on the market on a given day, and that's our wonderful trader, Anna. But everyone else does not have a screen in front of them. That flashing green and red screen is not a good thing in our view.

Ben: There are a few more insights from this 2023 memo that I want to ask you about. First is, how did you get the idea that it was time to write on this particular topic and compare it to the GFC and dot-com bubble?

Tom: It really started with, as we're going through this cycle, really trying to understand what does this look like? Have we experienced something similar? Certainly, as we have been going through the last eight months, we were suddenly starting to think that this is more like the dot-com bust period rather than the GFC, where, obviously, everyone was doubting the financial system as we know it. Everything was impacted immediately and falling rapidly immediately. We just wanted to really go back in time, reflect on that, and see what that looked like.

Ben: Yeah, and that supposition about it being more like the dot-com bubble, did that narrative play out?

Tom: Yes is a simple answer. But first, to dive into that and maybe give some reflection, the dot-com boom was crazy. We'd love to hop into some anecdotes there.

David: I mentioned not real companies before.

Tom: I really want to get there. But just quickly, before I get there, this growth index that we created was up four times in the two years prior to the bust, and the Nasdaq was up three times in two years. That is some crazy share price action.

Ben: That's not one company. That's a whole basket of companies. That's an index up 4X in two years.

Tom: It's quite mind-blowing when you think about the bubble part. The bust was as good as the bubble. You mentioned those not real companies. I use this story in one of my memos, but I can't help but tell it. It was actually the period where I started my career. I started in February 2000. I was bright-eyed, bushy-tailed, thought I knew a little bit about valuations.

I walked into the office, I'm doing M&A at the time, and the first thing I get put on is a merger of two businesses. I was super excited looking at these businesses, and there's no revenue. I'm like, I don't know what to do. How do you value a business with no revenue?

I got to my manager at the time and said, I don't quite understand this. We've got two businesses combining billions of dollars of value, and there's no revenue. How are we going to value it?

He turned around and said, what do you mean? This is easy. We're going to value it on the number of clicks. I'm like, excuse me, the number of clicks? Yeah, the number of visitors to a website and how often they click on the website, and then we'll split the pie based on that. I'm like, this is crazy.

Ben: Woah. You hear stories like this, but this actually played out.

Tom: A hundred percent. We used to do comps tables, so not enterprise value to revenue or enterprise value to EBITDA or PE ratios. These were comps tables based on number of clicks, enterprise value to number of clicks. No word of a lie.

David: Wow.

Ben: Wow.

David: I don't think we ever quite reached that in this most recent bubble.

Ben: Walk me through that DCF. What is the multiple on clicks?

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

Ben: As in a premium to the night before?

Tom: Yeah, to the IPO price. When everyone wanted to be part of an IPO. It did not matter what that business did. Everyone had prospectuses out and trying to work out how they get allocations.

There was one investment I made to loose term investment, I'd call it speculation. I invested in the IPO of a company called Open Communications. It was an ASX listed business that all of a sudden was worth many billions of dollars, that went up 400% day one. It was sold four years later for $7 million.

Ben: $7 million, and it was worth billions?

Tom: $7 million, not billion. It was an extraordinary period in maybe moving to the US when you do look at the larger or when we looked at the larger companies in the US at the same time. You have to look at the top 10 Nasdaq companies. Now we're, on average, trading 27 times revenue. These are the top 10 largest technology businesses on the Nasdaq that we're trading 27 times revenue.

You had things like Microsoft that was trading 20 times revenue. It then had to grow revenue fourfold in over a 15-year period to get its share price back to the 2000 period. It was pretty, pretty crazy.

Ben: I want to ask a naive finance question, and this is something I've always wondered. Discount rates are heavily related to the current interest rates of the macro environment that you're in. Basically, the Fed has a lot to do with the discount rate that you put into a model. I don't get the sense that that's what was happening in 1999.

I think the DCFs you build were basically not discounting cash flows 10, 20, 30 years out, but we had real interest rates. Can you help me square that circle and understand why, with high interest rates, you wouldn't have a material discount rate?

Tom: Interest rates back then were, I think, from memory around 6%-ish, I can't remember the exact number.

David: Wow, that's higher than today.

Ben: Which is 6% higher than in 2020.

Tom: I would love to be able to answer that question, but I have no idea. It wasn't a period, where anyone was thinking straight. There was Kool Aid that people were drinking. I don't think there is an answer to that question.

David: Yeah, we're all drinking Kool Aid to a large extent, too, but interest rates were zero, so you had this forcing function of like this giant whooshing sound of cash that needed to be deployed somewhere because interest rates were zero.

Ben: It was literally cheap. No matter what anyone's opinions were, there was going to be a crap ton of cash from the interest rate. It's like you just didn't require anyone to be drinking Kool Aid in order for capital to be free. At least in 1999, it required Kool Aid.

Tom: I think that's a very important call out. There's a big difference there. But the explanation, I'm not sure I can answer that.

David: We'll leave that to the behavioral psychologists.

Ben: All right. Let's finish off on dot-com. When you're looking at the data, what happened from peak to trough?

Tom: I mentioned peak to trough took about 2½ years. Interestingly, this synthetic index that we've created for that period fell 65% during that time, which is exactly what the Bessemer index has fallen this time around in terms of peak to trough. But obviously, 18 months.

Ben: That took 2½ years, and this only took 1½ years so far.

Tom: It depends where you think we are in the cycle. It was actually about a year from peak to trough. If the trough is in fact at 65%, we've obviously moved on six months, and we're above the trough. I'm a little bit nervous making any call exactly where the trough is, but I'm going to say, so far.

Ben: I want to ask you the same question about 2008. But first, while we're in dot-com land, what did that recovery look like for your constructed synthetic dot-com index?

Tom: The recovery was much quicker for that index than the broader indexes. One year after that trough point, the synthetic index was up 140%. The Nasdaq was up 70%, and the S&P 500 was up only 30%.

Ben: So much faster rebound?

Tom: Much faster in terms of the first 12 months. But I think the most important part is that our performance continued. That synthetic index was actually back to its peak in January 2004. It took the Nasdaq 15 years to get back to its peak.

David: Wow. That's really a counter to the historical narrative of like, you think, oh, the dot-com crash happened, and it took 15 years for Microsoft to get back to its share price. But you're saying if you take the highest growth index, it was actually only three or four years before it was back to its peak.

Tom: Correct. When you go to the situation, obviously, the Nasdaq is market cap-weighted. The largest companies have a very large impact on that outcome.

Ben: People might be wondering, wait, for some specific set of companies, it only took 3–4 years to get all the way back to January 2000–level valuations for these high growth tech companies. What were the companies? What were some of the standouts in that index that we would know today?

David: Actually, I have the list up in front of me. I have the appendix from the memo. It's pretty interesting to see what these companies are. Let's see, we've got Oracle. Apple is actually here in the index here. We're talking about Microsoft taking forever, Apple recovered.

Ben: Apple was already 25 years old.

David: Yeah. Western Digital, Intuit is in here, Adobe, Paychex, NetApp.

Ben: David, it's interesting. I guess I'm still in the place of, if I was trying to apply that lesson of making sure I stay in the high growth companies through this period of time trying to equate it to what it is today, and maybe Tom, is the Bessemer cloud index exhibiting some of the same signs of the fastest to recover?

Tom: It does look like history is repeating itself again. You got the fast growing index, or the BVP index is up around 35%, which compared to the Nasdaq up 30%, and the S&P 500 which is up only 20%. I would say that there's still a long way to go. Exactly, how this plays out is still uncertain. I would still argue right now, the best value is in that group of companies rather than the broader indexes.

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

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

David: I'm looking at some of the companies that are in the Bessemer index right now. It's companies like Confluent, Zoominfo, Twilio, Okta, GitLab. Again, you have whatever opinion you want on these companies, but a lot of people use their products.

Tom: That's for sure.

Ben: It's interesting, Tom. I want to just call something out for the audience here. Most of the time, when you see some hedge fund manager on CNBC, and they're saying it's the best time ever for these companies, and it's unlike any other time in history because so many people use technology companies, and the intrinsic value is so strong, we're so excited about the future of technology, it's like, yeah, but you have to be because your entire business says you need to mostly be investing in these companies. You've really built a reputation on doing that. You can't really keep holding cash.

But with you saying this, you don't have to be saying this. You are not necessarily talking your book, to be saying, hey, we think these companies are really strong, and we're excited to be investing right now, because you could do anything.

Tom: I think, also importantly, we're not looking for more clients. I think those two things, we're just sharing our view. We're really sharing our perspective. Hopefully, over time, that will prove out, but there's really no other reason for it.

Ben: I think we've hit a lot of the comparisons to 2008, but I know you have a particular example in 2008 that's an interesting case study on all this.

Tom: It's quite a painful one, I should say, Ben. It's one of those ones where you get a little bit of a shiver down the spine when I think about it, but it was a big miss from us. It really does speak to this particular issue.

The example is Salesforce. We did a bucketload of work on Salesforce from 2006–2008 and really tried to understand the business. The share price doubled over that period. The business was performing exceptionally well, revenue was growing 50%. It was trading on our revenue multiple at the time about 6½.

It peaked in July 2008. Obviously, Lehman went bust in September, and the share price then fell 70%. That period was very quick and rapid. But for those investors that did have the courage—unfortunately, we weren't one of them—at that point, roll forward less than three years, and the share price was up sevenfold. Those types of moments and those mistakes that we reflect on that really impact the way we invest today and really burnt into our memory.

Ben: As you reflect back on that, you made the decision not to invest. Was that a lack of conviction? Or was that, hey, we've identified something structural, where we actually think this is a bad investment, and we don't think this company will continue to compound capital?

Tom: What happened in those extremely volatile times is certainly what we do. We start looking internally at what we already own. We start deploying capital in those businesses that we've really got to know over a long period of time that we're already invested in, rather than deploying capital into new ideas.

Obviously, in hindsight, if we had our time again, in that instance, it was a mistake. It would have been much better to invest in Salesforce at the time. I don't think it was a particular call in terms of Salesforce specifically. It was more of a call, what businesses do we know better, and what businesses do we understand really well? Let's focus on the existing portfolio.

Ben: We've talked a lot about buying and buying opportunities. I think that most people who talk about investing spend a lot of their time talking about buying. What's just as important is selling.

In moments where businesses are trading that you own at 15X, 20X, or north of 20x revenue, and there are heady times and free capital everywhere, how do you think about that? Do you start trimming down the positions? Or do you say, you know what? We just know that the market price is not the correct price, but we're just going to hold all the way through the peak and the trough, and then ride it out for another 10 years?

Tom: For us, as you may have gathered at the top of the show, valuation does matter. It's something that we really think about a lot. It's potentially the only thing that we actually have disagreed with Buffett over the years. He obviously always said that when you own a great business, you should own it forever.

The foundation of how we think is based on many of his principles, but that one we have disagreed with. We do believe that owning businesses at crazy prices is not the right thing to do, so we are always looking at our expected returns from those prices. We always point to one of his most famous investments as an example of that, which is Coca-Cola.

For the first 10 years, he did exceptionally well. He compounded his capital at 25% a year or was making 10 times his money. But roll forward to year 30, he's only compounding his capital around 10%. Those last two decades, from an opportunity cost perspective, were actually very costly.

Ben: Fascinating. You're zooming in on, even though the blended IRR over the entire period was good, it could have been great if he just recognized that it was way overvalued by year 7, year 10, or something like that.

Tom: Yeah. Ultimately, for him, it's the amount of capital that he has to deploy. I don't think it's a fair comparison. We have $2 billion of funds, he has a much larger pool of capital and has for a long period of time. He's trying to achieve something different, but for us, we are smaller, we are more nimble. We do believe that, unfortunately, at times, we do need to sell our businesses.

Ben: Let's bring it all together. You wrote this big memo. I felt like you were winking and nudging the whole time of implying, hey, maybe here's what people should think or should do in this environment, if you're willing to make it a little bit more explicit. What should investors do at this moment in time? And how should they think about the moment that we're in here in June of 2023?

Tom: The way we think about it is, as long as you have a 5–10 year time horizon, now is a wonderful time to invest. It's tough times that is the best time to deploy capital. It's not the frothy times and the boom times, it's actually the tough times. That's really what ends up differentiating investors in our mind.

We touched on before, but it's that emotional stability to where the volatility and really, in these tough times, focus on, can I buy some great businesses at a wonderful price, close my eyes, and have that 5–10 year time horizon? We have no idea where this market is going on a 6-month view, on a 12-month view, on a 2-year view.

Our degree of confidence really comes in from a 5-10 year view. We will get through this. One thing I can say is, we will get through it. These are the times where we really feel that we can set up our portfolio for the next 5–10 years.

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

Tom: I think, Ben, or you've seen firsthand, where you currently interviewed Ed Catmull for us at our People and Culture conference last year that we do care really deeply about this topic, and it's something we're very passionate about. I would agree with you, the vast majority of investors do think it's too touchy-feely. I think that comes out when we meet our CEOs, and we met those CEOs for the first time.

Often, that first meeting can go for an hour or two, and we're just talking about people and culture. The CEO turns around at the end of the meeting and says, I've never had a meeting like that, or I've met hundreds of investors, and no one's ever asked me about people and culture.

I think we're pretty confident that the vast majority of investors would definitely align with your thinking there. In terms of our key learnings, I think there's been a couple of key things or a couple of key reasons why we've really become quite passionate about this.

The first one is, when we started going on boards, we actually really started to see this up close and personal. You get to see this team of people with a certain leader that maybe isn't fulfilling that leadership role correctly. You replace that leader, you put a great leader in, and that same team significantly improves their performance just based on that one chance.

I think the other thing is really, as we've reflected on the mistakes—we've made many over the years on those investments which haven't gone right—what mistake have we made? Nine out of 10 times, it's been around the people. That's certainly the area that has brought this to light from our perspective.

A funny story, I was actually listening to one of your old episodes the other day, and I almost fell off my chair when I heard Culture Amp. There was a Culture Amp ad, which is, as I mentioned before, one of our late-stage growth portfolio companies. It's one of those things, which they've gone to the data that they collect, which is a lot of that surrounds the engagement scores of the companies and the software that they use to collect that data.

What they've done is gone and look back from 2017–2023 for the 500 listed companies. Those companies with high engagement scores, how did they perform? For those that have listened to the back catalog, they would know that those companies outperformed by about 6.7%.

Ben: And outperformed in share price. Literally, investors are more excited about—

David: Literally, the stock performed better.

Tom: Correct. We're actually also trying to think about how we can put some data around this. Is there a way to actually prove this out from a data perspective? Hopefully, we might be able to share that in future months. But I suppose, most of our learnings, whilst supported by the Culture Amp data, is really what we've seen up close and personal as we've invested over the last 18 years or so.

David: You can imagine this is probably hard, if not impossible to do for regulatory reasons in public companies. But you can imagine in diligence on private companies for VCs or for all you have crossover investors, wanting to see like, hey, I want to see your Culture Amp data as I'm trying to evaluate you as an investor.

Tom: It's actually one of our first question. Interestingly, some companies have started to disclose it publicly. As an example, Wise, which is a listed company in the UK, actually has a full page in their annual report talking about their Culture Amp data, so we love that additional disclosure.

There are other ways that are probably worth mentioning in terms of how we looked at the diagnosis from a data perspective as a public company investor when they don't. Ideally, they do disclose it. But if they don't disclose it, it’s glass door and blinds obviously give you some insight. You've got to be a little bit careful with it, but there are some ways of gathering data. I'd say, probably the best way or the most value we get is actually spend to customers. Ex-employees, yes, but customers is a wonderful way, which I think surprises [...].

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

Tom: They're not for us. That's probably the simple answer to that. We only have to invest in 10–15 businesses, and we want to be proud of those businesses that we invest in. We want to be proud to own them, we want to be proud of the way they behave. In simple terms, those businesses are not for us.

In time, though, I would say our view is that we'll unwind. They may have a very powerful position today that allows them to do that. It allows us to treat their people in that way. But ultimately, we would argue, over a long period of time, those businesses, regardless of their power so to speak, will most likely be disrupted.

Ben: It's hard to be durable when you're—

Tom: Correct. Very hard to be durable if you treat your key asset, which pretty much in every single business, is your people.

Ben: I think this is a great place to leave it. We will put the link in the show notes if you're interested in checking out the full memo. Tom, I'm curious for you, any other parting thoughts to leave folks with as we settle in here?

Tom: I think my parting thought is that investing is hard. I think when you live this every day, it's not easy. I've said it a number of times, but the thing that we focus on a lot and certainly would advise anyone we speak to around investing to focus on, is that emotional stability front. You have to be able to wear the volatility to get wonderful returns over the long term. From an investor's perspective, that's probably the key thing to think about as we think about these tough times.

Ben: Tom, that is a great, great place to leave it. Where can people find you or TDM on the Internet?

Tom: Where can you find me? I'm not on Twitter.

David: Good for your sanity.

Tom: Indeed. The best place to find any of our content is on the TDM Growth website. TDM is on Twitter, so there are lots of great content there.

Ben: Awesome. Thank you so much.

Tom: Thank you so much. Loved having a chat.

David: Thanks, Tom.

Ben: Awesome. Listeners, we'll see you next time.

David: We'll see you next time.

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.

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