Complexity Investing & Semiconductors (with NZS Capital)

okay excitement fun brevity i love it for brevity is the soul of wit who got the truth is it you is it you is it you who got the truth now is it you is it you is it you sit me down say it straight another story on the way who got the truth welcome to this special episode of acquired the podcast about great technology companies and the stories and playbooks behind them i'm ben gilbert and i'm the co-founder and managing director of seattle-based pioneer square labs and our venture fund psl ventures and i'm david rosenthal i'm an angel investor based in san francisco and we are your hosts on our tsmc episode one of the 65 sources that we used was an episode of the knowledge project with brinton johns and john

bathgate brinton and john are public equities investors at a hedge fund called nzs capital and they spend a lot of their time researching semis it was packed so full of great content that i actually watched it twice to make sure that i understood everything it was so good it was awesome and then in a wild coincidence the very next week even before we shipped the tsmc episode david and i were at capital camp great event organized by patrick o'shaughnessy and brent bishore and we ran into brinton in person and i was like i recognize that guy what do i recognize him it was like the spider-man yes like you no wait you very very much so so after like nerding out the

whole rest of the event on tsmc geopolitics semis we decided to have brinton and john on acquired and on this episode we actually didn't even get into semiconductors for the first hour since it was so fascinating to hear about their investment principles at nzs and i've said this many times on the show but yet again new frameworks that have totally changed the way that i think about the world it's frameworks all the way down ben it is all right listeners now is a great time to talk about a new partner of ours here on acquired lagora the agentic operating system that is redefining how the world's best legal teams work yep it's sort of obvious that ai is going to completely change the legal industry

i bet most of you listening have dropped a contract into some sort of ai chatbot out there lagora took that insight and asked the question what if you really built something with that power from the ground up for the legal industry so the founders did exactly what great founders do operate with obsessive customer focus they embedded inside a massive law firm for months they sat with the lawyers just watching how the work really gets done and that's how you get features that customers love like tabular review where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with lagora's bet here is interesting since it lets each lawyer handle more

complexity any given person can increase the quality of their work and do higher value work and this means that the pie can grow even as each individual task takes less time and they recently launched lagora agent offering greater intelligence and performance the agent lets lawyers set an objective then it can handle the planning and the execution and delivery of the final product legal teams get to maintain full control and transparency since they're still involved where judgment is required and lagora works where you already work you can use it within microsoft word while redlining or drafting the early lagora numbers essentially speak for themselves when they have a head-to-head pilot with their top competitor they win 70 of the time lagora now has over a hundred thousand lawyers on the

platform from 1200 legal teams in 50 countries and crazily they went from 1 million to 100 million in arr in about 18 months truly insane numbers and that is the real test plenty of things demo well but the question is whether a busy associate actually reaches for it during crunch time or whether a partner trusts it before going into a conversation with a major client if your legal team wants to check it out whether you're a law firm or you're in-house at a company you can learn more at lagora.com acquired and just tell them that ben and david sent you now as always this is not investment advice we almost certainly hold stocks that we talk about on this episode so do your own research make your own decisions but love the frameworks that we dive into

with brinton and john so without further ado on to our conversation all right well listeners we want to introduce you to nzs capital their investing philosophy and partially because we think they're a fascinating firm similar to honom of altos or hamilton helmer of strategy capital but also the deeper david and i have dove down the rabbit hole the last week of reading all the papers they've published we feel like we've gotten a lot smarter and so we basically just want to expose the world to uh more and more of that so brinton and john welcome thanks for having us thanks for having us well first let's start with complexity theory which is a concept that your whole firm is based on and you've published a 47 page paper on that is just

a full of fun little graphics but b i think probably has five to eight kind of mind-blowing concepts in them and the first one is you come right out and admit that you don't know the future what's going on with that you would be bad marketers as vcs nobody claims to know the future no i mean look the whole investing philosophy comes out of a lot of pain right so we were investors for a long time we were wrong a lot like all investors are wrong a lot on a consistent basis and we were just looking for a better way to think about things somebody suggested this book to me called the origin of wealth by eric beinhocker and sort of serendipitously at around the same time someone suggested complexity by mitch

waldrop to brad and we both read those books and origin of wealth was a slog i think it took me six months to really get through it and then swap books and started thinking about sort of a different philosophy i'd heard a little bit about complexity theory and the santa fe institute which i want to get into i think bill gurley talks about this fairly frequently and michael malvison and that's how i kind of originally got turned onto it but tell us a little bit more about what is it because you know it's it's not at all about investing it's about the world that's right yeah in fact i think it was bill gurley that recommended complexity to brad complex adaptive systems are all around us right

that's what governs the world that's how the world works we don't know how the future is going to unfold because the system is interacting together and it creates what's called emergent behavior and emergent behavior makes predicting useless in most cases and we can have guidelines and heuristics and those are all helpful but as far as exact outcomes and what's going to happen in the future those are a lot more difficult santa fe institute started with a group of scientists from the las almas national labs and they came together and they were mostly physicists and they started talking to economists it was sort of hard sciences and soft sciences and the physicists were like hey economist guys you guys seem really

smart but you know your theories they don't work like your all your math doesn't work so what's up with that like you know with our math it's extremely precise in fact you know when the math is off just a little bit einstein's like oh your math is off that pluto should really be here and comes up with a theory of relativity right it's like we literally made the atomic bomb like it works yeah it works and so they started coming together around this idea of complexity what is complexity how do we define complexity where does it sit and because we are living in this complex adaptive system how do we think about the future how do we think about life how do we think about going forward and for us this sparked an

interest in biological systems and we found this sort of biology vein much more interesting than the traditional economics vein and much more applicable to investing than the traditional economics vein well it's so cool and am i right that y'all actually went to the santa fe institute and took courses there like how deep did you go in this we did like a lot of rabbit holes we go down very deep we quickly became members of the santa fe institute they call it the action group it's this group of non-scientists that are allowed to sit in on a lot of the the science and so then we took this complexity course over a weekend brad and i did at stanford and that was just a ton of fun actually john and joe the two other

investors on our teams they took a longer course they actually had to do real work brad and i didn't have to do homework but we just learned so much and i remember sitting outside of this cafe at palo alto with brad and we just sort of been at this course with devra moore this lady that teaches at stanford who studies ants and i thought man this concept of resilience is really fascinating you know it's really more about resilience than it is about predicting the future and it's about adaptability biology doesn't really care that much about the future they care about adapting to this wide range of futures my bees don't really care if it's going to snow tomorrow they can adapt to snow they've

learned how to do that over millions of years and what if we looked at companies like that and so then you know of course we kept reading we kept writing this was probably 2011 2012 and in 2013 we published this long paper that you referenced which is super geeky but it's got a lot of pictures because that's the way we think you've got the back to the future delorean and it's got the delorean like what more could you want right we're really hoping for a delorean for the office that's our dream office furniture on the note of ants this is probably the first and best example of an extreme version of resilience in an organization can you share the insight you had there yeah so we attended this class

by deborah gordon and she has been studying this group of ants for 30 years into mexico they obsess over this group of ants right and they know what every ant is doing at all times and what they found was really fascinating they found that about half the ants in the colony weren't doing anything they were just sort of sitting around and then they had half the ants doing these defined jobs and that's very counterintuitive we think of ants as sort of the ultimate productivity machines but it turns out ants aren't optimized around productivity they're optimized around longevity they're optimized around resilience around living as long as possible let's say it that way so that was really insightful for us we

thought man all these companies are optimized around productivity and wall street only makes it worse because we're obsessed over quarterly earnings and so what if companies were really optimized around this long-term thinking of course we see that with lots of companies most of them tend to be run by founders because founders have a lot of skin in the game and they think long term but there are ceos that think that way also we know that the average tenure of a ceo in s&p 500 is less than five years so they're not optimized like ants are they're trying to get a lot of return really quickly but companies that take this long-term view are so much more interesting when i read that in your paper the thing that hit me

over the head i was like oh this is warren and charlie's you know laziness bordering on sloth that's exactly it the goal is not productivity the goal is long-term steady returns and resilience i think warren and charlie grok this very early and you know there's a lot of science behind it math but they don't need that they're so good with folksy wisdom so then the thing that hit me of course i'm like well a company's not gonna have half their employees sitting around doing nothing but just as a fun thought experiment what if a company only was growing at half the growth rate of a high growth company but you know it's a marathon on a sprint they could do that over

40 50 years instead of thinking in these five and ten year time horizons do you have any good anecdotes on i know you have this firm belief that uh hyper growth is bad and actually slow very long-term compounding growth is the real holy grail yeah i mean i think what we're generally looking for is we kind of use groupon as an example whether that's fair or unfair of like we're not looking for the next company to hit x revenue run rate in the shortest period of time or whatever it is like we're really looking for this durable resilient growth and i think that the way you framed it then that you know if a company does have employees that are driving the i guess level of growth that

you know you'd be seeing in a hyper growth firm that's okay as long as it's hyper durable and so you could look at i mean look at dan or her kind of like some of the classic iconic growth companies that have compounded for decades and that's generally where you see the compounding is obviously you compounded 10 to 12 percent a year or in the teens but you can do it for 10 20 30 40 years you can just get tremendous value creation so i guess some companies in the portfolio we admire that do that would be someone like texas instruments where they have a really decentralized culture and they actually push responsibility and decision making down into the deeper parts of the organization and so the ceo

is not really a manager he's a capital allocator and he almost has to think more like an investor and a portfolio manager than you know an operator and so i think that's what we really look for is companies that can provide this durable growth again it's very buffet like we're hopefully finding companies where you can just set it and forget it and they're going to put up moderate to healthy growth for 10 20 30 years and in our framework which we can talk about around resilience and optionality that's what we're looking for in the resilient bucket of the portfolio is these companies that can really compound it at a healthy rate for for a very long time yeah so you guys have these two concepts and then one kind of super concept that combines both of them

of resilience and optionality that you look for in investing and neither of those are terms that most investors are familiar with can you define what you mean by both of them and maybe give a few examples of companies sure on the resilient half of the portfolio we kind of say you know it when you see it which i think is kind of an unsatisfying answer but generally what we're looking for are companies that are further along kind of in their s-curve and their growth trajectory and so this would be companies we own in the head of the portfolio be someone like a microsoft or a tsmc where we're not looking for value stocks or kind of like cheap companies we're looking for companies that are

healthy growers that we think can durably grow for the next 20 or 30 years and our turnover in this half of our portfolio is around 10 so this is the hopefully set it and forget it part of the portfolio and so they know a few characteristics we tend to see in that part of the portfolio our mission criticality and switching costs which i know you guys cover well and some of the deep dives you've done i mean just scale like tsmc we can talk about in more details just like a classic scale company where you know we talk about power laws in our investing framework and pockets of industries where one company can take 90 to 95 percent of the profits in a given

industry and tsmc is a great example of that and then you exactly the way you guys laid it out so well on your episode on tsmc is you really get the flywheel going right where the more scale you have the more you can reinvest the more you can impact your customers and it just becomes this beautiful compounding machine the last bucket we probably would see in the resilient part of our portfolio is just network effects based competitive advantages where you see companies that really hit their inflection point and again especially in digital markets you'll tend to see a handful of companies or potentially you know one or two companies take most of the economics in a given market like digital advertising or smartphones or there's so many markets where there's you know

one or two players that have 80 to 95 percent of the profits and so we tend to see those in the resilient part of the portfolio well and one thing i think was really counterintuitive about how you guys think is you're actually not looking for moats the companies you just described and i think a lot of investors think about like oh wow well like they've got really deep moats and so of course you want those as your you know long-term compounding holds but you guys have a little different perspective on this right yeah we have a little bit of a different take and so i don't want to offend anyone that uses the term moats i think it's a great term and it's a great part of anyone's kind of investing toolkit but i

guess one of the things that we're careful about is like looking for companies where part of their moat is inserting themselves into the value chain or into their customers share of wallet basically where they put themselves in a position to extract as much economics as possible and so i think that can be viewed as especially in kind of a more of like an industrial age view of how competitive advantage has evolved is is that something that we try to avoid we're not trying to look for a company where they feel like they have customer lock-in and then all of a sudden they can raise price three to five percent for the next 10 years part of our framework and the reason we named the firm

nzs capital is we're looking for non-zero sumness so looking for a win-win outcome for all constituencies across kind of the value chain that includes the company's employees and their customers and also kind of society in the environment at large and so we're just careful looking for companies where all of a sudden if i have this moat then i can screw my customers over the next 10 years right i think that's what we're careful about i noticed i don't think you guys hold apple right but you do some of the other large tech companies and this feels like a perfect example to me like oh apple like incredible moats they're getting pretty good at value capture over there yeah yes that's a very nice polite way of putting it you obviously see it with spotify in the eu and

epic here in the u.s and being in the news flow constantly i just think when you get to a point you're taking so much economics for your business which already has the largest market cap in the world that your key partners on your platform are taking you to court or taking you up to various regulatory bodies or writing white papers on how you're screwing your customers that's just what we're trying to avoid and who knows it might work out perfectly for apple over the next 10 years it makes you less resilient yes exactly is that the idea that if there's consumer surplus money left on the table for consumers where they're not getting every dollar extracted that they could by the

company that that company is more resilient over time even if they're not making every profit dollar and growing as quickly as they could today i agree with that i mean if you really have a management team that's thinking really long term i don't know why you wouldn't give up a little bit of extra economics for your key partners whether that's suppliers or developers on your platform or your customers to really solidify your trajectory over the next 10 to 20 years versus i don't want to pick on apple too much but like what's the gross profit impact if they cut their app store take rate from 30 to 15 across the board what is that like five percent of gross profits it's meaningless to them and

it would create so much value there's obviously knock-on effects of that but anyway i think that's what we're looking for as companies that are paying it forward like again back to the tsmc example because you guys covered it so well tsmc has lower gross margins than most of their customers and so at any point they could probably take their margins from 50 to 60 and say hey i'm i basically have a monopoly in this market but the way you know morris chang architected the culture there is on you know long-term value creation and really creating a platform for their customers to create massive you know amazing businesses and so i think that's the way we think about it yeah and just for

listeners to put some numbers behind this concept which i think is just great from this nzs white paper 15 percent growth over 10 years would deliver more than a 300 return not bad but 15 percent growth over 15 years would almost double the 10-year return if we could populate our top 20 positions with these types of resilient companies we'd only trim and add around periods of volatility all the the real absolute dollar value of compounding shows up in the out years so you just want to make sure that you're still compounding in the out years that's right and it's sort of where we take issue with porter this is of course michael porter competitive strategy porter's five forces thank you yes um

if we take a cynical view of porter a lot of people have interpreted of hey build a mode around your business and then stick it to your customers on price right i'm not saying that's what he said i'm just saying that's the way it's interpreted and that's a terrible way to build a business because eventually someone will undercut that and offer actually a better value prop to the customers and because all of this value are in the out years it was really not a value maximizing way to run the business either so we think this concept of creating more value than you take is really important and porter agrees he actually revised his thinking and in 2019 wrote a paper in institutional

investor called where esg fails where he talked about this concept of shared value and that's not him trying to say that purely because it's good for the world to care about all your constituencies you know not just your shareholders but also your customers and partners he's literally making an economic argument for shareholders that that's the long-term value maximizing thing to do right i think that's right and you know he was a consultant for intel back when arm processors were starting to come out and actually dominate the mobile space and they came out with this sort of dumped down processor the atom yeah exactly but even before that they came out with a cheaper version of it but in reality that's not what they should have done they should have actually embraced a totally

different business model like arm dead where they were just selling ip and enabling a whole ecosystem instead of trying to take all the profits for themselves okay so that's the resilience side of ncs thinking and the portfolio then you also marry that with something very different tell us a little bit about optionality and how you think about that yeah really we're thinking about the future we're just thinking about how broad and safe is the prediction we're making so we can make these very broad safe predictions like we think electronics are going to push deeper into the world right i think in nine out of ten copies of the multiverse that's happening but there are other predictions like we think evs are going to dominate the world and tesla is going to be the power law winner inside of evs

that may only happen in two out of ten copies of the multiverse you know it's certainly not 10 out of 10 so these predictions are much narrower and the range of outcomes is much broader and so that doesn't mean we can't invest there because it's incredibly asymmetric if we end up being in that copy of the multiverse but if we're not and it's a zero it also doesn't torpedo the portfolio so i feel like actually you guys could give the master class here since you're such great venture capital investors but that's really what we're trying to expose ourselves to and these earlier stage public equity companies and so how do you actually then apply both of these very different principles inside the

same portfolio are you picking some stocks because you're maximizing for resilience and you say that look this is a great compounding slow growth but durable company and then there's other companies that you're investing in because you say oh my gosh if this thing's right it's going to be really right like venture capital asymmetric upside right or is it blended in some of the same companies you're right it tends to be these two portfolios in one so we concentrate resilience that's about 15 names and just over half the portfolio and then we distribute optionality so that's about 40 names also just under half the portfolio max position size one and a half and in the middle it's between one and a half two and a half one and a half three we don't own anything and that's percent of the

portfolio thank you very much percent of the portfolio i say this stuff so much sometimes i don't complete the sentences and then sometimes we find these very resilient companies that are actually layering on optionality to the business so they have both they have this resilient base but then they have optionality on top of that and you call those companies root mo's yeah we're such geeks it's so bad resilience with out of the money optionality it's just a shortcut on the team that we use and those are the companies that you bump up to seven eight percent of the portfolio right yeah what are some examples of those well i mean sort of there's a couple right the classic example would

be amazon in 97 when they went public you know i think around a billion dollar valuation nobody could have foreseen aws right that wasn't anybody's dcf oh yeah they're going to also create infrastructure that everybody in the world is going to use create businesses they sound so silly right but another one that we had in the portfolio years back was ebay i don't know if you guys remember the marketplace business was struggling they brought in a new ceo john dono they had paypal and really you weren't paying for any of paypal if the marketplace business would recover that more than cover the cost of entry of course marketplaces did recover paypal ended up being great john donoho is an amazing leader and that was a classic root mo stock so in that situation you've got a

fairly resilient business or the hope is that the marketplace is a resilient business and then paypal is the out of money option that you sort of have that's being valued at zero but clearly is a a very valuable business that's exactly right well i think what's cool about this yeah right this makes a lot of sense in investing this also makes a lot of sense in how you should run your company yeah and that the best ceos think this way as in how do i create resiliency in my core business but then what are the options that i'm investing in for the future on top of it to my mind there's no better example than amazon of just this is the whole operating philosophy of the company right

so we love this concept because we think it's true in the universe and so therefore the narrow slice of investing that we're using it for we're pretty sure is also true but it works really for everything i mean it works for parenting parents don't know what we're doing like i have four kids i have no idea what i'm doing so i'm just trying new things all the time well that didn't work okay well it's you know so there's a little optionality involved too and then sometimes your optionality becomes resilience and that's what you're hoping for but you just try a lot of new things so i don't know for us it's a life philosophy fantasy football is another area where i can like you can

apply resilience and optionality very well actually you can't get out of your head once you start kind of practicing this which is so funny all right i'm going to take us in a totally different direction i want to talk about the difference between normal distributions and power law distributions and listeners of the show who are in venture capital or in startups and have tried to raise venture capital or successfully raise venture capital will know you know they get this answer from vcs all the time that our portfolio construction is really a power law we fully expect a third of the portfolio to go to zero a third to return capital and really only like one or two companies at the sort of head of the curve are gonna be this hopefully 10 50 100x that sort of gets us a

great return regardless of what else you know happens in the portfolio you guys interestingly are sort of applying that thinking at much later stage companies hopefully ones that aren't going to zero you know the way that a frail 10 million dollar valuation startup could how does that work and what was the insight that made you realize hey the world is not normally distributed actually in certain scenarios it's very power law distributed right well once you accept the fact that all of life is governed by complex adaptive systems and the markets are also governed by complex adaptive systems which means emergent behavior you can't predict the future you focus on adaptability then of course those complex complex adaptive systems tend to be governed by power laws so it's sort of a natural follow-on

but the insight here is all risk models are based on these gaussian these normal distributions right but in fact the world doesn't work that way and so there's a really fascinating economist named ole peters who's done a lot of work here and said wait a second uh your risk models are sort of like airbags that go off at stop signs but not when you get in a crash right this has always been my beef you know when i was in business school with economics as applied to like business and investing in the real world is you studied this stuff and you're like wait a minute i actually work in the industry and this is not how it works right exactly and being venture capital

investors you see this all the time with public companies it's also true there are a few big power law winners we see them in the market today they're driving the entire market right this is our reality there's a great study that you guys reference in the paper that i'm wondering if you could just talk a little bit more about it the toy example of a coin flip a coin flipping contest where let's say you win 50 or whatever when you lose you lose 40 that sounds like investing to me like there's an expected return of 10 what actually happens when you run that contest wait real quick before you answer is it that is it win 50 lose 40 or is it 50 oh it's percent okay yep so if it's

a hundred dollars then yeah you're right david it's 50 down 40 got it okay yeah the concept it gets to the heart of modern portfolio theory and expected utility theory and the flaws of that so back to the multiverse the way this works is if you had a hundred people flipping coins and they did it for enough time you would actually see a nice steady positive return and that looks like on average the experience of the participant is winning but that's not really true what you get is a lot of people going bankrupt and a few massive winners sort of the buffets and the soros of the investing world right so the average is not average and in one portfolio theory you're taking an ensemble of all these but that doesn't really make

sense because i don't really care about your outcome david or ben your outcome i care about my outcome and i only get to live in this one universe i don't get to live in yours you know i don't get to live in the multiverse so my outcome on average is that of loss it's that of bankruptcy so when the time average does not equal the ensemble average that is called a non-ergotic system and you guys can put in the show notes olay peters works on this it's super geeky but really fascinating it's so cool well this is so counterintuitive you would think if you presented that game to me i would be like oh for sure i want to play that game the odds are stacked in my favor but most people who play that game will

lose and then a few will win really really really big that just blew my mind reading that yeah the distribution set is not normally distributed it's power law distributed so that changes everything and that's why all these risk models are like airbags that go off at stop signs right it's because it turns out the world doesn't work that way so you know we hear on a regular basis oh this was a three standard deviation event you know which if you understand the math that three standard deviation events you expect oh wow i'm so lucky to have seen one of these in my lifetime but we see them a lot according to the media and so it's sort of ridiculous 99.73 percent of all events should fall

within three standard deviations this is the way the math works meanwhile i mean i've been in this business for 13 years and already been through two recessions that are way outside of three standard deviations britain has as well and so it is just kind of a funny kind of common sense thing that when you're practicing this stuff that the normal distribution doesn't really make that much sense britain mentioned i took this course at the santa fe institute it was actually around this time last year and like i mean just power laws are just like so cool it's amazing i mean one of the examples we use in the white paper is if you plot like earthquakes by frequency and intensity that

just like in nature naturally forms a power law which actually makes a lot of sense you're going to get you know one or two or three heavy magnitude earthquakes a year and then a lot of small ones but also if you plot the frequency of every word in the book moby dick that actually also forms a power loss the is mentioned 15 000 times and then the next word is and and that's like 7 000 times and then there's like this super long tail of words that are only you know used you know a handful of times again it's one of these things once you see it and it's amazing for starting companies obviously like we mentioned especially in kind of digital markets because you know the world is going towards

more markets where a winner can take all and you know becomes much more of a power law dynamic and so that's why we just always have our kind of antennas up for these power law dynamics that's honestly a big part of when we're looking for optionality that's what we think about it's like is this a company that is relatively earlier stage in public markets that has the opportunity to power law you know a large market which is why of course you're making 40 diversified optionality bets here because it's funny to think about this but the statement of let's go back to the stop sign example yeah the vast majority of the time the fact that these airbags don't work is totally not an issue but it's a massive

issue the moment that you need them the most very similarly all of the gigantic outsized economic value is created from the three four five six seven sigma events in the world and so it's kind of ludicrous to be like well the vast majority of the time this investment philosophy is very sound and you're like yeah but we're not really trying to index on how many days out of the year it's sound we're trying to index on how much value can get created at the end of the portfolio 50 years from now and that's going to be driven by the outliers so we have to be prepared and fully optimize around the outliers not close our eyes to the few days that they might exist that's such a good point i'm

really glad you brought it up because what we're really playing for in the optionality half the portfolio is asymmetry and really it's not about batting average like it's okay if we're only right 30% of the time which is not intuitive at all for public markets investors i think i think everyone wants to be right 55% of the time 60 whatever it doesn't have to be that high to have good long-term returns but you know we're playing for a slugging percentage where even if only one out of three work but you know those are multi-baggers and can really create a lot of value over a long period of time then that's like the beauty in that half the portfolio and we've seen it we've been doing this for years now and

it is amazing how you see these companies emerges as value creators and generate a lot of value for the portfolio out of relatively small starting position sizes it gets back to this whole idea of you don't know what's going to happen if you set everything up with the idea that you don't know i think in a lot of ways most venture capitalists grok this idea and set up their portfolios in this way but i think lots of people myself included in the past didn't fully understand this you say in the paper i think you use nicer language than this but i'll use my own language this is my quote that conviction this idea of conviction that so many people in venture talk about and entrepreneurs like i have conviction i'm

convicted which convicted means you're convicted of a crime but anyway i'm i have conviction that in this company i'm going to lead this investment conviction is kind of stupid conviction is saying i think my view of the future is going to be right and really what you want is optionality and like you need people to have conviction because otherwise there would be no entrepreneurs right that example of the coin flipping contest that is exactly the dynamics of becoming an entrepreneur the expected value is positive and yet the vast majority of people who start down that path go bankrupt and then a few people win really really really big but when you're constructing a portfolio what you actually want is a

lot of those bets you guys have you know 30 40 optionality names in your portfolio as a venture fund you want 30 40 quote-unquote names in your portfolio venture portfolios with five or ten are very non-resilient yeah that's right i mean we use conviction as a synonym for overconfidence i think that's what really is the right way to think about it conviction for us means hey i've done a ton of work so i've got a lot of sunk cost which means i've got bias and i think that my view of the future is better than yours that is literally what you're saying when you say that yeah right so who knows right what we're trying to do with the tail of the portfolio and i think what you guys are trying to do in venture capital

investing is maximize the probability that we get lucky i just ripped that off from albison he's very good at calling it what it is and we're just trying to maximize the probability that we get lucky i also think i mean just changing your mind is the hardest thing to do as an investor when you're wrong and i think if you kind of stand in a row and say this is my highest conviction idea it just makes it that much harder to britain's point on just like introducing bias into the equation and so and i also think if you kind of invert it i think it's fine to have an optionality position that you actually don't have that high of conviction on like to britain's example on tesla like i don't think

that we have super high conviction that tesla is going to power a lot of the ev market but is there some probability where they do that and it's you know worth you know multiples of what it is today sure that's the way that we kind of think about conviction and again i don't want to piss anyone off that uses the word conviction similar to moats like it's fine everyone has their own process and we're not trying to like push what we do on anyone else this is just what has worked for us over time and so one thing we're very careful about is just introducing bias into our process and luckily we all everyone on our team knows each other well and can call each other out but

i do want to be a little careful well i have two points to make that this cultural one i think is the second but let me start first with at the end of the day this is a buffett concept this idea that it's better to be approximately right than exactly wrong that's another way to describe this optionality phenomenon here where it doesn't sound nearly as strong to stand up in front of an investment partnership and say i have very little conviction in this but it could totally work and if it does it'll be really big that's about the best i can tell you right now that does not get everyone around the table excited but in a very buffett sense if it works it's going to be so freaking

successful that this is a great price to own it at and like do i know if this is the right price to own it at not at all how many versions of the multiverse do we have railroads like all of them right and they're important and where can we how can we recreate that we can't it's been possible and so i think you're right buffett and munger say this so easily so naturally and we're just saying it in a much more complicated way that's the second point i'm curious about what are some guardrails that you have in the internal culture to reward non-conviction to reward like yeah i don't know but it could work and if it does it could be really big and here's why it could be really big

well the funny thing is the way we view team so we think investing is inherently a team sport it's a terrible solo sport for the most part and the way we view team is our role is calling out bias in each other now these are uncomfortable conversations because nobody likes to get their bias called out but we all know that bias is really easy to identify in other people and really difficult to identify in yourself and so by opening yourself up to having being called out then your probabilities go up as an investor so it feels unnatural to us at this point to say i have super huge conviction that this micro cap stock is going to rule the world one day right it's like that would feel really odd

everybody was like are you okay you feel all right i think the way we've also set it up with our framework is we just inherently expect failure i think more than other public markets investors might like if we put something in the optionality tail of portfolio and by the way that half the portfolio turns over a lot more quickly than the resilient part of the portfolio which makes sense like we are going to be wrong a lot and luckily there's smaller positions and so you're not going to torpedo the portfolio as long as the most important thing to do is just admit you're wrong and move on and so i think building that into the culture where you know it's okay to be wrong and

move on and fail quickly versus like string ourselves along on a three-year journey on a tough position and so that's one cultural way that we've architected the way that the team works together that has really helped it basically gives yourself a license to take some risk that maybe you otherwise wouldn't take if you were sitting on a different team or within a different organization and do you try and document here's the reasons why i'm making this optionality bet so you know you can decide to rotate it out of the portfolio if those reasons are no longer true yes everything's written down and actually brad which is an investor on the team is amazing at pulling this stuff back up and say you said blah blah blah he must be really popular on the team

oh yeah he's great though we love brad he's just very good at like remembering and then pulling the source data and saying hey look you've drifted to your guys points too like it's not because their operating margin exactly 22 percent this year or like as a revenue exactly at this runway we thought it would be it's like are we approximately right on the thesis right it's not like we feel like we can predict the future but you can certainly have checkpoints along the way we call those usually with any stock i think there's usually three or four things that really move the stock as we call those key leverage points on any position and so you can generally check in on those and make sure that

we're on track well one of my big questions are things that didn't quite make sense to me in reading your paper can you talk about what you do with your optionality part of the portfolio as things evolve in it and how you start an optionality position there are two copies of the multiverse where this works and then x amount of time passes and you start to have more of a view of which copies you know two out of ten and now you know maybe it's like two out of five or two out of three or like you know as it evolves what do you do exactly there's like kind of two scenarios that you can really see this happening a good example is we on peloton before the pandemic you know in the

stock obviously went parabol like they were a huge beneficiary of work from home but it's also just a really dynamic company you know that's early in its life cycle building a brand and a platform and so with a company like that you know i think it's still early days to call that business resilient for many reasons both just like the context of the company of we're going through a digestion after the 2020 kind of a record year for them and off the charts year i should say so for a position like that we'll just trim it and you know we have this cap of how big in the portfolio we allow optionality positions to get it's generally pretty clear like how much of this is something that's a really durable

inflection in the business and sometimes i guess it is both like i think peloton is definitely a different company in this version of the universe versus the non-covid version of the metaverse right but i think we can't cross it over well this is so different that you trim it you know the canonical vc wisdom is ride your winners as long as possible you know the things that are working are likely to continue to work so don't sell but that's not the approach you guys take yeah it's a really good question we talk about it a lot because you're certainly in some cases leaving money on the table i think if we're not letting our compounders really express themselves over time and so there are stocks we

will let them we'll own them earlier in their life cycle and let them cross over in the resilient head of the portfolio and so we'll do that a few times a year and i think it does kind of force us to average up if the company you know and actually buy more stock potentially at multiples higher than our initial purchase oh it's so hard to do it's so hard to do but i think it's actually i've thought about this a lot this is actually kind of part of our process where we're kind of forced to do it which is really helpful because otherwise it's hard to just look at the stock and buy more but we're saying we're making this explicit decision that we're going to take this from 150 basis point position

to 250 basis points and so we're going to add capital because this business has structurally changed and actually belongs in the resilient pocket of the portfolio and so there are companies where we've done that where they're honestly just more mature or they're becoming like more of a platform you can actually see like the network effects starting to hit and honestly some of that is a valuation conversation also that there are plenty of platform-like companies we might want to own in the resilient part of the portfolio but in the current market environment they're trading at valuations that we would not consider resilient and so that's another reason we would own them as optional positions but it's a really good question and i think what we try to do is not

make sure that an optional position ends up in the head of the portfolio because that's something we've just learned the hard way that you know if you have a stock that can have a 50 to 70 drawdown you know and it's the starting point is a 5 position not only does it crush your performance but then you're also probably hamstrung where you've got a stock that's still a relatively big position and you don't really want to add to it and then you just kind of have to take your licking and so that's something that we've learned through experience yeah well i'm wondering if even just thinking about this past two-year covid cycle you've kind of seen this happen the stocks that were huge

multiverse winners in the beginning the pelotons the zooms you know and the like i'm thinking zoom you know zoom went from i don't know what 70 80 a share to 600 a share and then back down to you know that i think it's at like 280 right now so you've kind of seen this happen right the optionality played out that was correct but then returns pulled back we're always looking at like what's happening to the range of outcomes is it widening is it getting broader is the prediction becoming safer or is it remaining narrow and so with a company like zoom it looks a lot to us like a feature so now the question is can it become a product and eventually maybe a platform can it

develop an ecosystem around it we don't know but to take your example let's say in the middle of pandemic it was a sort of a cool feature it was better than everything else on the market still is and then this big ecosystem came around it and it became a full-blown platform well then the range of outcomes would narrow and the prediction would get safer right and so then that would warrant that becoming a bigger portion of the portfolio valuation is a key piece and this is the piece that we get every day as public investors and valuations expensive valuations force predictions i have to believe a lot more at 10 times sales than i do at 10 times earnings so we're seeing okay what is the prediction

of the company and what is prediction the market is forcing us into and are we comfortable with that so we are in an unprecedented investment climate where everything on a you know whatever basis you want to revenue multiples earnings multiples unprecedented highs any asset you could invest in be it stocks or farms or crypto is forcing you to make predictions and what i've heard this whole podcast so far is you actively avoid trying to make predictions so how do you respond in an environment where there's very little resilience in your ability to invest without making a prediction and have a margin of safety there you just inserted yourself into the weekly nzs meeting investment meeting then i think this is most of our dialogue oh just dial us in any time yeah part of this is interest rates right we've

never had negative interest rates and then stimulus and so those effects on all assets which are unprecedented we think about this a lot we don't know the answer exactly but you know this could get us into our top of semiconductors because there's a few building blocks of the information age and we are in an epic shift we're still early days from the industrial age the information age and semiconductors are the new oxygen in this environment and so we look at some of these companies we think the valuations are actually quite reasonable and we choose to sort of bring the portfolio more towards resilience and these are one of the ways we do it we do it multiple ways yeah like you use the railroad

example there are 10 out of 10 copies of the multiverse in the future going forward where railroads are important right they're probably also 10 out of 10 copies of the multiverse where semiconductors are important exactly well that's an amazing way to transition to semiconductors i mean i was looking for the right hook and you know brenton i think you bring that up i was prepared to make some joke like wait you guys know something about semiconductors i think tsmc is like a top three position for you guys i think your other top positions amazon microsoft they use a lot of semiconductors and i think salesforce is probably up there too and ti is one of your top positions right yes that's right maybe even before

getting into some of the nerdier semiconductor topics let's stick with an investment one what semiconductor companies do you own right now in the name of resilience and which in the name of optionality let's start with the two different versions of semiconductors right so there's a lot of semiconductor makers that are on the digital space on the leading edge right they're making three nanometers and on and these are the high compute functions and there's other semiconductor makers that aren't really dependent on that leading edge they're more dependent on having the breadth of a catalog that would be like texas instruments that has a hundred thousand parts or a microchub and so in our top positions we're more heavily weighted towards the catalog names these names that the lifetime of

a part is 30 or 40 years and the margins are high the growth is pretty good there's clear nzs in the business they're definitely creating more value than they take and they're very hard to replicate not because what they're doing so technically hard it's hard but it's because the breadth of what they have would take you decades to recreate i've always kind of hoped that buffett would buy a catalog semiconductor business i just feel like those are like just classic buffett businesses where they're they're probably not going to look honestly that different in 20 years than they do now they'll have higher margins and be bigger and they'll be selling into you know cool electronics that we don't even know about but they're also still selling into like water meters and coffee makers and just

everything in your household or in a factory or you know anywhere you look it just has these cheap but high margin chips in them so and i guess to enter your question a little bit just on the semiconductor impact on the portfolio we have about a third of the portfolio in semis and that goes across the whole value chain like tip ritten's point we invest in kind of like the catalog analog microcontroller companies we'll invest in a digital company like nvidia that's actually in the optionality tail of the portfolio right now just because for valuation and context reasons we're big investors in semiconductor capital equipment and those actually are head of the portfolio we do those as resilient tsmc is a resilient position and then kind of the broader ecosystem like cadence to design systems

which you guys brought up in the tsmc episode that's kind of the key one of the two key kind of cat software platforms for designing a chip is also a position and so there are kind of more less household name type positions we own as optional positions like a company like cree which is early in silicon carbide which is an alternative technology to silicon that's used in electric vehicles including the tesla model 3 and so that's a classic example where there is some version of the metaverse where it's a massive platform and silicon carbide the market goes from being a 1 billion dollar market to a 30 billion dollar market but you know i don't know if there's a 50 chance of happening or 20 or that kind of thing it's like a little bit of a walk around

the portfolio in terms of uh of semis that silicon carbide thing is the first time i'm sort of hearing of it is that changing the substrate of the wafer that's exactly right yeah instead of using a silicon like a bulk silicon wafer you use the silicon carbide wafer which is actually the wafer itself is much more expensive and it's very hard it's one of these classic semiconductor processes where there's some black magic that goes into it and honestly most of the people that know how to do this are all in like the research triangle and in north carolina cree is the one company that has two-thirds of the market for the substrate itself and then they will sell the chips they're the asml of silicon

carbon so potentially then that's a classic optionality right we honestly don't know but there's a chance where either this stuff isn't that hard to do and they have a two-year lead on their competitors or it's incredibly hard to do and they do become one of these companies where they're doing something that no one else in the world can do and so that that is kind of classic optionality for us but it does it makes electric vehicles and charging and also like renewable energy and really high voltage applications much more efficient and so it's like really one of these companies where their core competency has just like all of a sudden the market really needs what they can offer and so

the market is growing extremely quickly you're seeing a lot of activity around from other companies trying to get into the market as well all right listeners now is a great time to tell you about a longtime friend of the show vanta ai has scrambled the whole security picture it used to be that you proved that you were secure once a year on audit or a static pdf then everyone would nod and you're done but in an ai first world that doesn't hold up anymore yep your risk surface changes every week now a vendor turns on an ai feature or someone writes in a new model without telling it and your posture is different than it was last week let alone at your last audit vanta's own research found that around

70 percent of companies have this quote-unquote shadow ai running with no security review at all right and that's where vanta comes in they're the leading agentic trust platform meaning they've built the thing that closes the gap and the way that they close that gap is vanta agent think of it as a grc engineer that's governance risk and compliance except that it's software and it doesn't sleep it finds the issues drafts the fixes and cuts the time that you'd spend on vendor assessments in half in half which is exactly why more than 16 000 companies today run on vanta companies like ramp cursor and snowflake all stay audit ready and catch the risks that crop up between audits across every vendor every ai tool the whole environment and that's the real value trust has to be continuous now which

is why vanta automates your security your compliance and the work to earn and prove trust we're huge fans of vanta over here and literally hundreds of acquired listeners have become vanta customers at their companies over the years so you can get a thousand dollars off vanta at vanta.com acquired that's v-a-n-t-a dot com slash acquired for a thousand dollars off and just tell them that ben and david sent you let's do a little sidebar if you guys are game that i just thought of that i think this could be a really cool case study if you're willing to talk about it about the nzs process so you mentioned john that you own cadence as a resilient position in the portfolio having just done our tsmc episode and

deep dive on the whole semi you know industry infrastructure you know you mentioned they also have a competitor synopsis and the two of them it's like a duopoly in the eda space how did you decide to own cadence and i'm assuming not synopsis or do you hold both we've talked a lot about both of them over the years we've owned cadence for nine or ten years back to our days at our previous employer i think on cadence it's a few things i mean it's actually kind of a cool story of just kind of like how we even kind of got into the idea of investing in eda as part of our kind of process for finding new ideas and just kind of being up to speed on what's going on the industry as we follow is going

to like industry trade shows instead of investor conferences like we don't generally go to a lot of like big investor conferences and so in early last decade i used to go to all these chip conferences and like every presentation it was like someone from tsmc and someone from arm and then someone from either cadence or synopsis and at the time cadence and synopsis were viewed as these sleepy crappy companies and we love tsmc and we love arms let's like let's do some work on cadence you know and then we the more work we did i mean both companies are amazing like they deserve a lot of credit i think what steered us towards cadence one is the management team so liputan at the time was the

ceo he's actually moving into the executive chair role this year he just was like one of the iconic leaders in the sub industry over the last 11 years he was actually a vc previous to being the ceo of cadence and he was just on the board and had to come in and basically turn around the company but he was just so focused on the culture of the company i mean he told us what we wanted to hear you know which helped but in terms of turning around the culture and really taking a company that was in a very difficult position in the financial crisis and really like re-architecting the product positioning of the company and he's so customer centric that was how we kind of first got involved

with cadence we do think they're taking market share especially in digital markets like where they would be selling to an intel or an apple or an nvidia we think they're the share gainer but both companies it's like an extremely high quality duopoly and so i think you've been fine either way and do you end up doing one-on-one meetings with the ceo at the level of capital that you're deploying yeah so this was back to our previous firm where we were there was more than 100 billion dollars of AUM to deploy and technology was a decent chunk of that and so like cadence is a great example we were actually their biggest shareholder for multiple years and so at that point we had

really strong dialogue with them and i honestly would just bump into the ceo and airports and a conference because everyone some of these aren't that big of a universe everyone's kind of going to the same things you know and he's very tall he's very tall too so it's easy to spot yeah yeah you're not going to miss him and he's honestly just like such a good person too like we would talk about life and kids and a lot more than just our investment in their company and so it's actually something we think about a lot as nzs is a younger company with you know less AUM behind us and we have a lot of relationships from you know being in the industry for a long time but it's an open question

of how often do you really need to talk to do i need to talk to the ceo of a company four times a year probably not or six times a year ten times a year like the way we're investing especially with the resilient company realistically maybe a check-in every year or two or if there's something obviously that's really critical the thesis we can check in but that was kind of the way we grew up investing is a lot of management interfacing i'm always curious with public market investors like how do you think about that and it sounds like you do find it very useful to have conversations with management versus all the information's out there you know i would imagine on

the one hand it's like well of course i want to know like i could glean so much more information and like subtle signals from talking to somebody in person on the other hand i kind of think well i really care about what you do not what you say and i can just see what you do in your filings how do y'all think about that this has changed a lot over the past decade because of course seeing a management team talk is easier than it's ever been right it's publicly available there are some times when it's helpful there's some times when it's harmful you know it probably nets out to be net helpful but i'm just thinking of one interaction that we had with rich templeton the ceo of texan instruments in early

february 2009 right it's a terrible time everybody's unhappy it's really rough and rich walks in the room big smile on his face how's it going boys you know a recession is a terrible thing to waste and you're like what's going on i love it and so he clearly had a different mentality of hey this is where we make all of our returns over the next decade we're going to go buy equipment for pennies on the dollar we're going to sort of systematically lower our capex to sales ratio and we're going to go get customers and sign them up because we're running our fabs full out still and other people aren't and he's just one of these amazing leaders you know we when he took the company over they have 40

of the business geared towards wireless and nokia was a massive customer their largest customer and he bled that down to zero so clearly this embodiment of a company that's built around adaptability instead of these point predictions and so people like that are helpful to interface with but honestly we probably could get everything we need at this point without meeting with them as well david and i were explaining our research process to some friends the other day and you know one of the things that i think that is chronically under viewed on youtube is presentations by executives at industry conferences and that's a thing that we've relied on really heavily everyone goes and watches elon musk give his talk at the recode conference about 358 people watch the youtube video of

gwen shotwell presenting at an aerospace industry event there's a lot of really interesting information about the company probably more so than the big shiny public facing stuff that's exactly right it amazes me i don't remember the last time i watched the computer history interview it was between chun senna and morris chang oh so good it was under 3 000 views something like that i was like how does this not have 3 million views you're like am i watching the wrong feed or how could there not be more views of this you know it's like this makes no sense there should be a million views it's so funny we send stuff like that around all the time i couldn't agree more pretty now we're sending some stuff back

and forth earlier this week it's mostly free too and from industry trade organizations and it's a huge resource and you also you do get a little bit of a different flavor if you see a management team at a investor conference or if there's even on a road show and coming through town but you're the fifth investor they've seen that day it's like you kind of are getting the company line right versus hearing what they're really pitching to their broader stakeholders at an industry conference is such a good resource yeah when we're doing an episode just us two three three plus hour deep dive on a company we almost never talk to people actually at the company maybe we should but we get all the insights

we need from obscure youtube videos books presentations you know white papers to britain's point there's so much material out on these companies and stuff by management teams these days and we do it in our you know basements i think you guys are on to something with this acquired thing we'll see okay so i'm going to take us into the more technical side of semis now britain you sent an email when we were batting around topics and you said well what if we start by talking about the ufo crash that happened in roswell in 1947 where we got the first semiconductor technology and then began to reverse engineer it at bell labs winky face it was the first tech transfer that's exactly right i mean

we know exactly when semiconductors came to planet earth it was july 7th 1947 right and then you needed a backstory you know when they were they took the ufo over to area 51 they're like how do we like get this in the world without people knowing and you know of course enter william shockley fresh from the war doing research on radar and submarine warfare and he's already got top secret clearance we're like okay where could this come out of bell lab shockley oh yeah that's it that's the backstory we'll give it to bell labs that's the whole backstory in semiconductors i think we're done there you go was shockley i actually don't know the history i know he was like super involved in uh world war ii

right he was yeah there's this great book by the way called uh the idea factory it's the history of bell labs so if anyone's interested in the history of the semiconductor you should definitely check it out not only the semis but information theory from cloud shannon which came around the same time also from bell labs right also from bell labs yeah and so yeah in the 40s he took a leap of absence from bell labs and did work actually with the secretary of war on radar and submarine warfare okay and so just to keep pushing on this the reason that this is a a plausible story that we got these from ufos is because the magic behind how a semiconductor works is so mind-blowing and unfathomable that you

could just sort of experiment your way to finding this right that's sort of what you're going for here yeah i think that's right it really was this this is overuse but quantum leap they had vacuum tubes that's what the switches were made out of right it was one of the few places where there was still pure science being done about labs and they said we need this switch that doesn't break because we sent a lot of people out in the middle of nowhere to replace these vacuum tubes this could go on very long but there was some key insights around doping germanium you're on the acquired podcast so it's okay indulge yourself right there are these few key insights and it

wasn't just shockley it was two other guys pertain and bardine as well and so the three of them together came up with these insights and just right after the war some of it was during but most of it was just after and they figured out oh you can dope this substrate germanium with different sort of n-type and p-type is what they're called and when you run a current through it it changes so it actually does the switching in solid state and this idea of solid state switching which of course came about because of the transistor and then later on was made to integrate a circuit by kilbia ti is what sort of enabled the foundation for all modern electronic devices over the last decade i've read the wikipedia

pages for semiconductor for transistor for i remember the first time trying to look up like how does a flash drive work like i've got this cool usb drive and i put it in my computer and i read the whole wikipedia page and afterwards i was sort of just blinking like yeah i still don't understand this actually was not helpful and it is one of these things where most of the time especially having like a computer science education i feel like i can connect every building block to the next layer of abstraction building block on top of it where eventually at some point after a few years of studying computers you're like wow cool i pretty much get how we go from physics to like operating a

operating system on a monitor i understand all the building blocks in between but somehow like there really is something right around this layer where like i never quite can jump from the physics to like how it actually works and then how it manifests in information and bits on a computer i think i just need to go read a few more books but it is one of these things where when you sent the alien joke i was like you know you're right that i've just taken it at face value that this works but i don't really understand how it works yeah i told my daughter that this morning and she was like wait a second dad that's really the way it happened right i was like

yeah let's let's back up uh parenting okay well getting uh tactical here so on our episode i think we did a little bit of a high gloss shine on the story and the current state of the market especially with tsmc and samsung we basically equivocated them and said they're basically doing the same stuff tsmc is one to two years ahead obviously samsung has the whole consumer electronics division as well okay that's tsmc and samsung and that was probably too simplistic so one thing i was hoping from you guys today is helping us better understand who's good at what between those two companies yeah well samsung is it is an amazing company probably not super well understood maybe like tsmc and people know them for consumer electronics and phones obviously but they have 50 of the market

share in dram and about a third of the market share in that so of course as we do compute we need more memory we need a lot more dram which is the fast memory on your phone or device or whatever the queue stuff up it's like a funnel right if you think of the funnel you've got solid state or stuff sitting there and nand flash moves into dram then actually goes under the chip with sram which is really fast funnel and then it goes into logic to get processed so samsung is very good at making memory and like i said they have over half of the markets here dram which is incredible there's really only three major companies in the world that baked dram two are in korea and one's

micron in the u.s and then in flash they're big they also have a decent foundry business it's about 17 of the total foundry pie so not as big but dram and nand are easier to make than logic and are these branded samsung products are they manufacturing them as a contract manufacturer the dram and nand is all branded samsung but of course everybody uses samsung so it'd be next to impossible for apple to get all the memory they needed without having a massive relationship with samsung so they're frenemies so the four or eight gigabytes of memory in your iphone that's coming from samsung that's coming from samsung yeah exactly and so these are easier to make they have fewer steps but still they're very hard so dram takes around 400 steps and over a month

in the fab working 24 7 to make and nand has a little bit fewer steps than that but actually nand is getting more difficult because they're stacking it into 3d so as you get more layers it's actually getting more complex but logic is still the hardest stuff to make these you know system on chips that tsmc makes and of course it's just imagine um you know making one thing over and over versus making like a menu of what if you had to be a restaurant that made every kind of food on the planet right it'd be really hard to be good at all this food so that's what tsmc is doing so that's some of the difference samsung is also doing logic but they have a different business model right they compete with

their customers so it's harder for their customers to trust them whereas tsmc doesn't have that conflict what do you think makes for a more resilient company playing at multiple spots in the value chain such that you compete with your customers and have optionality or being super pure play so that you have no strategy conflicts i mean i think it depends if you're talking about something in semiconductors and let me like intel is the classic example of this where they're more vertically integrated i mean the hard thing about doing that is you have to fight battles on multiple fronts intel has to fight tsmc on process technology which in itself is one of the hardest things you know any technology companies

had to do over the last 20 years and that's why intel has been surpassed by tsmc right but they also have to fight amd in their core kind of like chip design market where amd enabled by tsmc is innovating faster than they have in the last 20 years and and like really delighting customers and taking share from intel kind of real time or you know nvidia where they're trying to just basically marginalize the cpu and make the cpu less relevant so intel is less relevant so i think that's the hard thing about being vertically integrated in semis versus being more of just like a horizontal pure play is the needs of moore's law are just so difficult it's hard enough to just do one of these things well and

doing multiple of them well makes it harder so i generally i think britain's point on just like the business model difference between samsung and tsmc is so spot on because i mean tsmc is like the neutral party that will never ever compete with their customers and if you think about the amount of trust that the company has to put in tsmc because they're betting their entire company on tsmc's ability to make this chip for them and to have capacity for them when they need it just like the amount of trust and this has kind of been more you know chang's hallmarks since he founded tsmc that that's just something that samsung can't quite offer because they just have a different business

model and they're not willing to not that they're not willing they just don't have the capacity to build kind of a massive foundry they can't change right like they're not going to shut down two-thirds of the company yes exactly how do y'all think about especially since tsmc is such a large position in the portfolio yeah how do you think about the geopolitical risk because we did this whole big long episode and the conclusion i think we came to was this company's amazing there's like no fault we can find in this except that you know china might want to like you know take over the land that they sit on this enormous company ending risk yeah even on tsmc's last earnings call someone asked

them like what they thought about taiwan's sovereignty and i'm just like what a world we live in that like that's an open question that an analyst can ask on an earnings call like what do you think about china invading your country so brit and i are not like geopolitical experts at all i think we spend a lot of time thinking about just the importance of tsmc to the world and i do think tsmc is top five most important technology platforms to the world like i think tsmc is more important than apple like if apple disappeared off the face of the earth i actually think it would be painful for everyone that you know loves iMessage and facetime but like it really would not be

as big of a deal versus if for some reason china moved to seize taiwan or however you know it went into play and all of a sudden tsmc's fabs were shut down then the western world would be set back at least five years if not 10 just in terms of like technology progress and by the way technology progress is driving most of gdp right now and so you do read about what's happening with the auto sector and shortages it's like you've seen nothing if you think shortages kind of from the way that auto guys manage their inventory and kind of just like the classic post-recession semiconductor shortages you always get you go from there to you know what would happen if tsmc if taiwan sovereignty was in

question and tsmc that stopped making way first for some period of time i just think the impact on the global economy would be extremely painful so then that brings you to the logical conclusion of you know hopefully the u.s and the west would move to protect tsmc at all costs or at least get the people out of there we were i mean i guess i shouldn't joke about it but it wouldn't be totally dissimilar to what's happening in afghanistan where i think you would just airlift as many tsmc folks out of there as possible in a short period of time but then you have no fabs there to produce i mean tsmc fabs a quarter of the digital chips made in the world right now and so it would be a lag of multiple

years between you know when you get those people out and when you can actually start making wafers again so it's a very complex topic i think another way to think about this is just an ecosystem perspective so like tsmc as a company is very valuable but it's not super valuable without asml and lam and amat and kla right so when you think about the ecosystem of semiconductors and asml of course is not valuable at all without tsmc and samsung there are this handful of companies called 15 ish maybe more that if you think of them as one super company which is kind of what they are it's like a super organism right kind of like my bees are a super organism it's like an ecosystem you mean

like maybe like a complex adaptive system it's like a complex yeah so predicting the future is really hard so anyway yeah if you think of it as a super organism this is probably the most important super organism on the planet if it's not it's certainly one of the top most important so could you recreate that elsewhere in the world you absolutely could if you had access to the rest of these pieces which in the west we do it would just take to john's point a long time and that's why people are sort of saying maybe we should take some risk out of this place and and um you know asml calls the semiconductor sovereignty uh we're building this fab of course in arizona this five nanometer

tsmc fab but it wouldn't be a stretch to think that they will be built again in europe this happened before but of course when technology reaches a fairly stable state you want to optimize your own efficiency so you get these horizontal type models right i remember when apple bought pa semi-connector i was on record going oh this is the stupidest thing ever qualcomm makes these really good semiconductors broadcom makes them like ti makes a great application processor and this is the origin of you deciding that you don't know the future and so you should yeah what i said was the dumbest thing ever that's for sure but when technology changes i just didn't have a concept for the smartphone so technology was about to change quite a bit and in that change you really want to be

vertically integrated because you're not pushing uh efficiency you're pushing sort of product technical ability you know we see this with tesla as well but vertically integrated so you know can you imagine ford having an ai day like that's just kind of funny right well they could have something then they would call it an ai day right see that happening yeah oh man mkbhd just did this awesome thousand mile road trip with a tesla a ford maki mustang and a gas car and it was just amazing they're like look the mustang like it's a good car it's really good but we couldn't complete the road trip because we went to a charge you know it directed us to this charger the charger was broken then we

went to another charger well that was like you know it charged at a rate of like a mile every five minutes or whatever so then we like got stranded and the tesla's like yeah we were half an hour shorter on the trip than the gas car you know directed us to the charging networks it told us which stall to go to you know all this stuff so i guess like the full circle question or answer to your question on like how we even incorporate the geopolitical risk on tsmc is i mean i guess it'll never be our like a 10 position for that reason is there is always this risk but also i think it's important i mean the my like kind of cheeky answer that's probably not fair as if

if there is enough conflict between china and taiwan that tsmc that they're like kind of you know business sovereignty or is under concern or people are worried about them being nationalized by china or something the whole u.s market is going down it's not just tsmc i mean i think they would be kind of like the epicenter but it's not like this is going to happen in isolation and so at that point and who knows if there could be you know more of a more world war three type global conflict coming from that and so i kind of say like at that point the performance of our tsmc common stock is probably not my biggest concern that day you know okay so let's say tsmc is a resilience position let's say

there is a black swan event which the fact that we're all forecasting it and so is everyone else means it probably isn't that black swan-y if their sovereignty gets challenged so the point of optionality positions is to benefit from these black swan events do you guys have any ideas on if the whole u.s market went down in this situation what could you hold that would hedge it the obvious hedge would be like defense stocks but we probably wouldn't own them because of uh i just don't think those are very high nzs businesses but honestly that would be the one pocket of the market that probably would fare okay but britain i didn't mean to interrupt you i was just gonna say if you got to rebuild all these fabs somewhere you're gonna need a lot of

equipment and so you're leaving 20 years of equipment in the ground somewhere and you've got to recreate that that would probably be pretty defensive against that outcome there's also i guess owning china tech companies i mean this is a question like if all this is really going down like uh i don't think china's my adrs are probably gonna stop yeah they haven't stopped working already do you have any china tech position you know tencent or others or we don't we've owned china tech for a long time but we put this portfolio together at the end of 2019 it just looked sketchy to us honestly i don't know with for lack of a better word and so we we own zero china tech we just thought we don't

have to be there there's other places that are very interesting and it's a question of ownership we're not really sure who owns these companies and through the adr structure and the bie structure we know we don't own them so we just set out yeah it makes sense well i want to come back to some more technical questions another thing that i think we kind of glazed over in our tsmc episode is the current state of moore's law from a literal perspective but then probably more interesting the current state of the spirit of moore's law and i was wondering maybe john let's go to you could you give us a little bit of a download on like does moore's law still work at least spiritually yeah i'm glad the way you framed

it that way because it is kind of like a religious debate and people much smarter than me in the semi industry are on like both sides of is like the true gordon moore moore's law still holding up i think for the spirit of moore's law we still have we have visibility probably for the next 10 to 15 years and to be honest that's like the industry never has more than 10 to 15 years of visibility i think obviously the death of moore's law has been pronounced for a very long time but i think that's one thing to keep in mind is there are a lot of things out there that's going to keep us driving down moore's law and so one thing that you guys covered well in the tsmc episode is the implementation of euv systems

from asml and they actually are allowing us to shrink the transistor kind of the fundamental building block you know two-dimensionally so it actually put more transistors into a chip and so asml is kind of on record saying they think that that euv will last about 15 years in terms of they'll allow us to keep doubling the number of transistors on a chip every 18 months for 15 years or just it will be an effective way of getting any performance yeah i think it will be an effective way to drive performance and like drive shrink basically is the way the industry kind of frames it is you'll be shrinking the transistor to pack more performance into a chip but i think the the broader point you hear from

the industry a lot is this concept of of more than more which is kind of you know a cheeky pun but yeah there you go those semi guys they're real real real hoot exactly so geeky but so the broader point around you know where moore's law is going now is it's not just about the transistor it's really about the package and so you're seeing a lot more innovation not just in like can we put like more transistors onto one gigantic chip to drive more performance you can actually split up you know chips into multiple chips called chiplets which amd is doing and this is a big part of intel's future strategy actually also and so having like you know one gigantic like

gpu that you would buy from nvidia you can have four smaller chips and you can kind of like stitch them together to drive more performance and so that's another way that we're going to get a lot of benefit from moore's law and then actually one thing i skipped over on the transistor side is we are moving to a new transistor architecture either a two nanometer or three nanometer depending on which company you're talking about to a gate all around architecture previously we were on finfet which has been around since i guess for the last seven or eight years i don't know the exact numbers maybe 10 there's line of sight into from here more gate architectures different materials and then when

we get to like the mid 2030s we'll kind of see how it goes but it's just it is amazing i was actually at a virtual chip design conference this week earlier in the week and there's so much focus not just i guess on this like packaging idea but even like if you have to extract that one more layer from that it's about system level performance and if you look at what nvidia or amd and kind of like the leading digital companies are talking about it's can you make more processors and actually like stitch them together into a cluster with some sort of proprietary interconnects they're really thinking more like computing companies than just like chip companies now and so that's a big change but all of

these transistor level innovation package level innovation and then system level innovation i think we've got pretty good line of sight into the spirit of moore's law continuing at least through kind of the mid 2030s and so it seems like with the sort of creation of the system on a chip that at least let's just talk about the iphone because it's the one i understand the best apple became the aggregator rather than the old days of i'm going to go build my computer and i'm going to go buy a motherboard and i'm going to buy a gpu and i'm going to slot it in the pci slot and blah blah blah apple basically says uh well we've designed this logic board and we've designed most of the chips the important chips and

we've situated them together tsmc manufactures it they do all the packaging so you have like the bare metal to bare metal packaging of these things so we don't need to run it through these buses that have low bandwidth to get information from one piece to another let's keep playing that out a little bit based on everything you know where in the value chain do you think the point of aggregation shifts to over time where who gets to own where do we put all this stuff together and i get to capture a lot of extra margin because i'm the one putting it all together i think that's the interesting thing about the semiconductor ecosystem is actually there's a lot of people capturing margin and

they're capturing really high margin so this is the sign of a healthy ecosystem right there's not one company that's making all the money um throughout the whole chain we've seen margins come up and you know here's a good trivia question who has higher operating margins texas instruments or microsoft right because i ask it you know the answer is it's ti wow but you know it's not really appreciated how good these businesses are that's shocking right yeah especially because ti the core business is not the leading edge digital processors that tsmc is doing it's the commodity stuff right i think this was rich's key insight you know he said okay we're doing all this leading edge stuff we're fabbing it tsmc and what if we just trickle that business down to zero they try to sell it no one wanted to buy it

and boring is beautiful and so you know you look at ti's in markets two-thirds of which are industrial and auto and i guess it's a tech company you know they make chips but man it seems a lot like an industrial company too right yeah i think you can make the same point that you made on ti on nvidia like the fabulous business model really i mean it's like a software company it's like nvidia's got close to 70 gross margins and like you know low 40s operating margins i did really with very little cyclicality because tsmc offloaded all that cyclicality right so it is just like one of the best business models besides i would say enterprise software it's one of the best business

models in the world and so tsmc is the enabler of that but i think britain's point is spot on you're going to see kind of in this future world one of the things that's kind of cool is it takes the whole ecosystem to really drive kind of the future of moore's law like it used to be just about asml needed better litho tools and like intel would use them and like shrink the transistors and we've just kind of like brute force ourselves done war's law and now all this advanced packaging needs litho advancement from asml but it also needs improvements from the other equipment guys like lamb research or applied materials or tokyo electron because you need deposition and etch

steps to build these advanced packaging and you know multi-die packages for kind of the advanced packaging applications you also have all this off-the-shelf ip they're getting from companies like arm or from cadence or synopsis that i mean part of what apple does to your point ben is they're really just an aggregator like they buy you know ip blocks off the shelf a lot of what designing a chip is about is just is just buying a lot of individual p blocks and aggregating them and so the great thing about it is like since moore's law is really freaking hard everyone in that ecosystem does really well and then i think tsmc sitting in the middle of it will obviously do very well

because they're driving a lot of the innovation also and and obviously are the key partner for a lot of this real quick on um tsmc i think we glossed over this on the episode because we weren't deep enough to understand it my sense is that the open innovation platform that they've created is really important and it's kind of the what orchestrates all of what you're talking about here that it really takes the village of the whole industry to push things forward now is that true like what is that and how central is tsmc's open innovation platform to all this that's exactly what i was going to say i think it's really true and there is no github to the semiconductor ip

ecosystem right the closest you get is kind of the tsmc open alliance and there's pockets of it elsewhere the eda guys have a ton of ip as well and of course as you make these chips you need to emulate them to see if they actually work hopefully before you put them in the fab because that's really expensive so all of these things really play together and so when you think about how intel was doing this for a long time it was a closed system it was intel's way intel's process flow and tsmc said oh wait let's form an alliance with everyone because this is really going to take everyone to keep driving this forward and this open architecture or this open approach has really won over one thing

that's always hard for me to understand is how hard it is to do each layer of the stack and by that i mean wow it seems like the asml guys create a pretty unbelievable machine and they have a lot of services associated with that machine like they're even in the tsmc factory helping to assemble and operate these things and then i sort of was scratching my head thinking well could asml just kind of like become tsmc could they just operate their own equipment and then i dove down the other side of the slope and i was like well who makes the stuff that's important to the asml machines and i was like what is this trump company and then of course you go on the trump website which let's just let the name

lie for a moment here and uh they make this unbelievable laser and like they've got this crazy video on their website that shows off their laser and i'm pretty sure what they're showing me is actually the magic of the asml uv machine and i'm like well shoot why can't the trump company just do what asml does and then also do what tsmc does if they are the only ones in the world who can make this unbelievable laser can you guys shed any light on is that ever going to happen could it ever like vertically integrate first of all the videos of the simulations of the laser in an ev system on the trump website are like so freaking cool they're amazing yeah actually i hadn't seen them

until recently and i've heard so many times that like 50 000 pulses a second drops of molten tin the whole spiel from asml which ben by the way you did a very good job on the uh on the tsmc episode i was doing my best john bathgate impression i could tell you were excited to do it i think like multiple times you're like can i do the asml thing now but anyway we um a few things to think about one is there's so much innovation so the laser itself actually is 10 tons but an ev system is 180 tons so there's a lot of other equipment in there that's not just a laser and actually i was trying to find

this from a dollar value and i didn't track it down but i'm sure that that number is out there asml's partnership with zeiss the lens company is also really special and i guess trump and zeiss could try to partner to i don't think they have any ambitions to do this but they could try to partner together to kind of circumvent asml but like you know the lenses that zeiss is coming up with are literally the most uniform lenses designed you know in the history of the world and some of the metrics that they throw out on that are incredible and i think one of the things that's unique about asml is you know they shipped the first uv tool in 2010 to tsmc and uv didn't even really start high

volume and this was after a decade of r&d already but then they didn't start high volume manufacturing on uv until 2019 so they had like almost a decade of learnings in tsmc's fabs i'm like how to get these things to actually work how to get the um you know the throughput to levels where the economics actually makes sense and so there's actually this really cool conference called spie every february where all of asml's customers come together and basically give feedback on uv and and kind of give the updates on on where they're at and so asml lived through 10 of those with all the feedback not just from tsmc but from all their ecosystem partners right and so i just feel like the learning

cycle that asml has been through there's just so much more innovation in addition to the laser and the um the lenses but it is i mean the lens is a really critical component i mean asml actually bought a laser company in 2012 called cymer and i think they actually had like an internal laser bake-off between cymer and trump and i think trump won for uv which is also kind of a funny you know trivia question wow fascinating okay so the answer is they all add a ton of value on top of uh the previous layer of the stack and like a lot of things in the tech ecosystem there's fractals on fractals right it's like you say okay what's the most important part of this asml tool right and there's

a fractal down and then like you know you keep going but it's really this ecosystem approach that makes sense no one can do all of this it's just way too hard it really does take a village all right listeners now is a great time to thank our longtime friend of the show service now if you are running a large enterprise ai agents are likely spread across every team and deploying them is uh no longer the hard part yeah the hard part is knowing what permissions they have what employees are using them for or what decisions ai is making ai security for an enterprise at scale is not a small concern like the risks are real exactly and the challenge with ai is governing it securing it measuring it and making sure that it

actually delivers value that is why service now built the ai control tower yep ai control tower gives enterprises a single place to see manage govern and optimize ai across the entire business and it works with any ai not just theirs every device on your network every permission across every system every ai agent visible and secure in one place and service now can do this because they've spent more than 20 years building the operational backbone of the enterprise the workflows governance approvals security controls and institutional knowledge that power how work actually gets done across it hr customer service finance and security service now already runs more than a hundred billion workflows annually and trillions of transactions for more than 85 percent of the fortune 500 so when companies need a place to govern ai

at enterprise scale they're building on a platform at the center of how their business already operates and in a future that isn't going to be one ai it's going to be thousands of ai agents working across every function of the company but the question is who's managing them all so if you're trying to turn ai ambition into real business outcomes and make it work safely securely at scale go check out service now.com acquired and tell them that ben and david sent you great well john i know you have a asml story that you want to share so i'd love to hear it yeah i think this is a really cool story about how asml came to be asml and so strategic to the world is you know they had one competitor which is nikon

in the lithography market and then nikon gave up on the market kind of coming into the last decade and so i think tsmc and samsung and intel kind of looked around and realized like we're betting the future of moore's law on this one company asml which at the time was like kind of a sleepy dutch company that had like a 20 billion dollar market cap like no one really knew who asml was in 2012 and so it was so unique is that intel and tsmc and samsung partnered and actually bought 25 of asml to inject capital into asml to develop euv systems and that started really like the iteration path of developing euv to get euv to where it needed to be for high volume manufacturing by the end of the

decade and so it's just such a cool story of like the ecosystem coming together and everyone in the semi-industry knew how important asml was at the time but the world didn't really understand that and so getting asml where they needed to be on a uv obviously is now enabling moore's law for the next at least 10 years and is it right that they've all largely divested at this point they have yes yeah i mean they honestly should have just held on to it i mean it would be not immaterial so especially like intel's enterprise value there's so many stories like that like you guys covered um the arm origins like all these like major ecosystem players have all like had you know stakes from

other companies at various times which is just kind of a funny way that the semi-industries has worked i couldn't find in our research how much of tsmc does the taiwanese government currently own because they started by owning 50 of it that's right i looked for that too recently and i couldn't find it i want to say it's still in the 20s but i could just be making that number up i thought i actually was going to say 20 off the top of my head but maybe don't quote us on it because i don't know if that's true or not wild could you imagine if the u.s government owned 20 of intel i know right or apple or they owned a lot of ford at one point that's true yeah and sometimes people ask well

why can't just another company buy tsmc well it's a national champion the government owns a bunch of it it's just impossible right some things don't have a price at which they are uh that's right for sale exactly all right john you had one other uh trivia question for us yeah once we were talking about i kind of made the point that fabulous chip companies are kind of the best business models in the world i think one of the things that's so cool about tsmc is if you look at all the value they created like nvidia is a you know half a trillion dollar company and then add up their next few biggest customers like qualcomm and broadcom and amd that's like another half trillion and then i was trying to

think of like their aggregate value creation and so i was trying to think about i mean apple is obviously the biggest customer and so i think in an acquired episode about the top 10 acquisitions of all time you guys assigned a value to pa semi and how much of kind of like apple's differentiation is driven by semiconductors and so if you guys know that's the top of your head that'd be my guess for kind of like apple's contribution to the tsmc diet creation for the world if that abstraction all makes sense oh man that was the most hand wavy part of that whole analysis i kind of feel like we ascribed half of apple to next and then like 10 to pa semi or something like kind of arbitrary

we were literally carving up the apple well here's the framework here's the reason it's hard it's because the notion of necessary but not sufficient is really hard to frame into a percentage apple would be worth zero if they didn't acquire next but does that mean that next is responsible for 100 percent of the value of apple absolutely not so what percentage do you assign it it's tricky yeah that'll make sense i actually don't know that the number you guys use i thought it was 25 off the top of my head which maybe that's a good rough number that you know apple's contribution is you know another half trillion dollars to the tsmc value creation story but you get the broader point right it's just it's

like trillions of dollars of market cap that tsmc has created for their partners which i think is just so cool yeah it's amazing i mean it truly you know meets the bill gates line of the definition of a platform that they've created way more value for their customers and their ecosystem than they've captured for themselves yeah which is so cool because obviously not like a traditional internet or e-commerce platform the way like most of us are a sas platform the way we think about platforms right it's just it's like a manufacturing platform which is just so unique there's one point that you're getting at here that is part of the white paper and what we discussed earlier which is around sort of leaving money on the table for your customers and leaving money on the

table for your partners and it reminds me a lot of when we did the altos episode with honom and it's really this idea that if you as the management team or if you as an investor who deeply understands the company knows that in a way that other people outside the company can't underwrite then you can do a much more intelligent job valuing the company than anybody could with a brute force metrics such as industry average earnings multiple because if you actually understand well our earnings could be this if we wanted it to or our growth rate could be this if we wanted it to but you know we're making strategic trade-offs to not do that then you actually have a unique ability to underwrite

the company's value and thus actually more of a margin of safety or more of a willingness to pay up than anybody else and so it's interesting being deeply studied about these companies where you do know that they're sort of leaving something on the table for other participants that you can be more comfortable making an investment than other people can i think that's a really insightful point ben and the thing it gets to for me is duration of the asset duration of the growth so when you leave money on the table what you're doing is you're creating goodwill for your customers and you're buying the company duration which is oftentimes the way to maximize total value right so when i think back

about ho talking about roblox he was effectively saying we just really understood how big this ecosystem could become and we kept seeing the value accrue and then it moved beyond our original investment case and therefore we became more comfortable investing more money over time and what people get wrong oftentimes is this duration because duration if you can go 15 back to your earlier example it's extremely non-linear if you can keep that flat right all the value comes in the tail and so um we just aren't very good at thinking like that our brains don't work in that non-linear fashion but when you create more value than you take and if that's your driving factor and you want to take a lot of value

it's a hard task because you have to all the times think oh wow we want to take a lot but we need to create even more how do we do that and then of course that buys duration and which is a feedback loop that's sort of the happy feedback loop if you want to think about it that way i think morris chen got this very early on and that's what created tsmc into such a great company it's so good you know we touched on this a little earlier but uh just to double underline one of the things about you all and your ethos that was kind of an aha moment for me is flat growth versus hyper growth flat growth

extended over time will beat short-term hyper growth you mean the derivative being flat right that a company grows at the same rate every year if you grow 20 a year for like 50 years like tsmc you will destroy you know every group on out there so what you need for that is a negative feedback loop right so the negative feedback loop for tsmc is i'm going to come in i'm going to take what used to be the special sauce of your business and you're going to trust me to do that that's extremely hard to do right no one wants to do that but then the more it happens eventually there's a game theory to it everybody has to do that eventually because it works so much better right so you're never going to get

100 growth it's impossible but you might get 20 for 30 years which i think the number that you guys said in your podcast was 17.7 for 30 years or something like that which is just incredible to me and when you say negative feedback loop you basically mean a governor on the growth like a natural force in that particular business that makes it so you can't have ludicrous uber style hyper growth and it ends up being long-term good for the company to have that growth governor or that negative feedback loop that's exactly what i mean so we when we think about asml right they can ship everything they can make but they just can't make anymore it's impossible right so there is a governor on the growth

wow well that's a great place i think to leave especially the semis discussion and most of this episode that it's so counterintuitive but the way that you've sort of framed up why it is long-term good for an investor to want slow methodical governed growth it's just very different than a lot of the things we talk about on this show one of the things we think about sometimes is we're looking for companies that can double in five years and double again the five years after that and all that means is we're looking for companies that can grow 15 over a decade all else equal easier said than done easier said than done much easier said than done i will just say one thing about our days you know we

get a lot of questions of well how do you do this at a small company versus a big company and part of it goes back to what we were talking about earlier it's easier to do research in these companies now than it's ever been but the second piece of it is yeah there's more details we have to deal with at times but how much extra time would you have in your regular job if you only had two meetings a week and you never had to worry about office politics you know my guess for most folks is it's about 20 hours right and so then how would you use that well we just use it for unstructured research time and the way

we think about it is we can wander around not knowing what we're doing and waste 90 of that time and 10 might be really useful and one percent might be absolutely watershed and that's really all we're looking for but you can't ever just get to the one percent you have to wander around to find it and so that's how we really structure our days and brendan that's why you run for like 24 plus hours straight and that's why i run and that's why i keep bees it's all the same thing it's where your best investment ideas come from that's right i do think this idea of like linear time versus non-linear time is really interesting and something britain and i talk about a lot because like the linear time it's

like it's probably very similar to you guys getting ready for you know your next episode it's like you're going down the rabbit hole on one topic and we do spend time doing that obviously but then we just have so much extra time to like just be out there trying to connect dots and so you never know when you're gonna have that aha moment or that that insight but having you know as much opportunity for that as possible is kind of how we've intentionally tried to structure our time i love it well we could spend another hour on how you structure your time i'm wow i was actually wondering maybe um maybe we can get oh one or both of you if you'd be up for it to join our next lp call and i'll chat about it i'm

sure folks would love to pepper you with questions and hear about how you spend your time that'd be super fun we always learn from those questions so we'd love to do it awesome well brent and john where can folks find you on the internet you can go to nzscapital.com we do try to write a lot we put it all on the internet immediately it is everything that we use internally nothing's held back because we know when we put it out there we're going to get more value back so this is our way of trying to create more value than we take our partner brad also writes a newsletter every week and so if you want to see how he spends his time you can sign up for the newsletter on nzscapital.com it's called sit all week it's just

brad's process of sitting all week and what he thinks about and brad is well he's like a microprocessor he's literally the smartest person i've ever met and the way his brain works is incredible and so if you'd like to sign up for that you can do that there as well great and on twitter i think you both have twitter handles that's right the whole team is on twitter nzscapital has a twitter account i'm bjohns3 brad is at bradsling and john is at jbathgate great we'll link to all those in the show notes thanks for having us guys thank you all right listeners now is a great time to talk about one of our favorite companies stat sig yes long time acquired partner there is a reason why the best

product teams at companies like open ai and notion atlassian figma rippling bricks and more rely on stat sig whether they are iterating on their core product features or shipping ai powered experiences at scale yep in the crazy speed of today's ai world shipping fast is just table stakes now it's basically trivial to build and deploy your app constantly the real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next whether it's a feature tweak a pricing change a performance improvement or an ai update like a model change or prompt adjustment they're not relying on instinct they're measuring what actually moved engagement retention and ultimately revenue and as more teams build with ai that learning loop

becomes even more important building with llms introduces non-determinism into your product experience the same input doesn't always produce the same output and behavior can shift in subtle ways in real world use so doing offline evals will give you part of the picture but you can really only understand the impact once your product is live with real users and then you can measure how their behavior actually changes it's very different than the way that you would ship features in a pre-ai world where you knew exactly what the software was going to do in production yeah exactly so this is where stat sig comes in it brings experimentation feature flags and product analytics into one unified system so teams can ship safely test

rigorously and directly link what they changed to how users actually behaved the result is a tighter feedback loop and learning that compounds over time so you don't just ship more you ship better so if you want to make learning your competitive advantage whether you're building new ai experiences or just evolving your existing core product go to stat sig.com acquired to get started all right listeners hope you enjoyed our conversation with brinton and john if you found it to be frankly as eye-opening as i did feel free to share it with a friend if you learn something new about complexity investing or their barbell strategy or resilience and optionality i'm sure you can think of someone that you'd want to share that with so feel

free to do so if you are not already a member of the acquired slack come join us acquired.fm slash slack some of the best discussion you'll find on the internet about lots of things that you care about if you're not an lp you should become one it's a way to get closer to what david and i do here at acquired we have these awesome lp calls once every month or two we have been on a tear recently with great lp exclusive content we just dropped uh about a month ago now a great interview with roniel the ceo of audius which is the largest so good crypto application web 3 application out there with over 6 million users and then just

before this episode we dropped another sort of web 3 episode uh this time on web 3 marketplaces centered around brain trust with adam from brain trust wow that one that one was a blast yeah so if you're web 3 curious or maybe you're you're web 3 skeptical these are fun episodes to listen to because they're super non-defi non sort of crypto use cases yeah they're like real world applications yeah which of course we wanted to dive in and tell those stories you know what i'm curious about after this episode and i feel like you know the universe works in funny ways right like i think everything sort of aligned that a bunch of stuff happened all at once is the santa fe institute and complex like

everything we talked about on this episode it just seems like such an amazing place i've always wanted to go to santa fe period i've never been there but to go like take a class they all like we should do something because we before this we had our michael mobison episode he's the chairman of the board there where uh kindergarten is actually investing in a company that the ceo is also a board member there just like there's too many stars aligning we got to go the universe is telling you something david i think it is i think it is well with that we will see you next time we'll see you next time who got the truth is it you is it you is it you who got the truth now

you