Special Invest Like the Best on Acquired

In this special episode of "Acquired," hosts Ben Gilbert and David Rosenthal engage in a candid conversation with Patrick O'Shaughnessy, CEO of O'Shaughnessy Asset Management and host of the "Invest Like the Best" podcast. Patrick discusses his journey from philosophy major to running a quant fund and building a venture fund, alongside his successful podcast empire. Key themes include the importance of technology in asset management, the value of open research, and the evolution of O'Shaughnessy Asset Management, particularly through its innovative investment platform, Canvas. The episode also touches on the role of media in business, with Patrick's podcast serving as a prime example of leveraging content to build brand and trust. Additionally, Patrick shares insights from various guests featured on his podcast, highlighting the power of asking the right questions and continuously learning in public.

• This episode is unique and does not follow the regular format of discussing a numbered company.
• Ben Gilbert and David Rosenthal introduce Patrick O'Shaughnessy as the special guest.
• Patrick is the CEO of O'Shaughnessy Asset Management and host of the Invest Like the Best podcast.

"Now, you'll notice this is a very abnormal episode for us. I didn't say a number. We didn't talk about a company in the intro."

The quote emphasizes the departure from the usual episode structure, highlighting the special nature of the episode featuring Patrick O'Shaughnessy.

• Patrick has a diverse background as a philosophy major, now running a quant fund and a venture fund, and has built a podcast empire.
• He expresses hesitancy to share his story due to fear of boring people with repetitive stories.

"You were a philosophy major. Now you're running a quant fund. You have a venture fund. You've built this amazing podcast empire."

This quote summarizes Patrick's diverse professional journey from philosophy to finance and media.

• The Acquired community offers deeper insights into company building and investing.
• The LP show, monthly calls, book club, and author Zoom calls are benefits for community members.

"You'll get access to the LP show where we dive deeper into the fundamentals of company building and investing."

This quote explains the value proposition of the Acquired community for those interested in company building and investing.

• Pilot is an accounting firm for startups and growth companies, offering comprehensive financial services.
• It emphasizes the importance of focusing on core business activities and outsourcing non-core functions like accounting.

"Pilot is the one team for all of your company's accounting, tax, and bookkeeping needs."

The quote highlights Pilot's role in providing essential accounting services to startups and growth companies, allowing them to focus on their core business.

• O'Shaughnessy Asset Management (OSAM) originated from O'Shaughnessy Capital Management, founded by Patrick's father.
• The firm initially started as a research firm in 1987 and transitioned to asset management in the mid-90s.
• Patrick's father pioneered quantitative methods for investing based on academic research.

"For the first several years, it was a research firm, not an asset management firm."

This quote clarifies the initial focus of the firm on research rather than asset management.

• OSAM has a longstanding partnership with RBC, which owns a minority stake in the business.
• Patrick shares a personal connection with Canada through his experiences with RBC.

"They're our largest, our longest standing client. They actually are the only outside owner of our business."

The quote signifies the depth of the relationship between OSAM and RBC, emphasizing RBC's role as a significant client and part-owner.

• Patrick's father's insight involved applying quantitative methods to investing, akin to a data-driven approach to value investing.
• OSAM has integrated investing with media, using platforms to evangelize their quantitative approach.

"Is it fair to characterize it as like a data-driven approach to the old Ben Graham style? Graham and Dodd value investing."

The quote explores the relationship between traditional value investing and OSAM's quantitative approach.

• Invest Like the Best is a podcast that evolved from Patrick's father's book and investment philosophy.
• The podcast aims to share portable lessons from successful managers and investors.

"The original version of the research was literally the dogs of the Dow strategy."

This quote explains one of the initial simple quantitative strategies that OSAM's research focused on.

• OSAM spun out of Bear Stearns before the financial crisis in 2007.
• The transition involved maintaining continuity of track records and client relationships.

"We actually left in the year before the March 2008 blow-up of Bear Stearns in the summer of 2007."

This quote provides a timeline for OSAM's spinoff from Bear Stearns, highlighting the fortuitous timing before the financial crisis.

• Patrick studied philosophy in college and had no initial intention of entering the finance industry.
• He joined OSAM to observe and assist in setting up the business, gaining valuable experience.

"I literally graduated two months earlier."

The quote places Patrick's graduation in close proximity to his start at OSAM, marking the beginning of his career in asset management.

• Traditional asset management involves managing clients' assets for a management fee.
• The business model is simple and recurring, similar to SaaS, with fees taken directly from managed assets.

"It's literally as simple as you take control over other people's assets."

This quote succinctly describes the fundamental operation of an asset management firm.

• The asset management business model is described as simple and one of the oldest.
• It involves a research team and a chief investment officer who build predictive models to buy stocks.
• There's a distribution side that communicates with investment advisors, maintains relationships, and discusses performance.
• Operations and support functions are also present, similar to other businesses.

"un by a research team, a chief investment officer, in our case, a team of quantitative researchers building predictive models to buy stocks. That's the research function or product function. And then there's the distribution side of the house."

This quote explains the basic structure of an asset management firm, highlighting the key roles and functions within the business.

• Asset management fees can be a flat fee based on assets under management or a performance incentive fee.
• Performance incentive fees are additional charges for outperforming a benchmark.
• Some investors prefer a zero management fee with a generous incentive fee to ensure the manager's interests align with performance.

"The much more common is just a flat asset management fee that's based on assets. But you can contractually do anything you want."

This quote outlines the common practice of charging a flat asset management fee and indicates the flexibility in structuring fees.

• Public asset managers typically use a fee-based structure.
• Private equity, venture capital, and hedge funds often have a significant performance component.
• Capacity constraints in private markets necessitate incentive fees to motivate managers.

"The primary driver is that a strategy like ours in public markets could accommodate billions tomorrow with no real marginal cost to us and without affecting the market price."

The quote explains why public asset managers can work with large capital inflows without significantly impacting the market, contrasting with the private markets.

• Large capital inflows into private markets, especially venture capital, can significantly increase prices.
• The SoftBank Vision Fund is mentioned as an example that impacted venture returns due to its large investments.

"Like billions of dollars have come in and they have impacted the market hugely."

This quote highlights the effect that substantial investments can have on market dynamics, particularly in private markets.

• Some founders have described the due diligence process by large funds as lacking rigor.
• There is a contrast in the level of due diligence between public market analysts and those in early-stage markets.
• The east coast vs. west coast mentality is mentioned, suggesting a need for a balanced approach.

"Absurdly not enough. If you're thinking about even the biggest hedge funds and the amount of work they would do to deploy, say, a billion dollars into a business, it is crazy."

This quote emphasizes the perceived insufficiency of due diligence conducted by some large investment funds when deploying capital.

• Osam has evolved from a traditional asset manager to incorporating more software into its business model.
• Canvas is a software that allows for the creation of customized investment strategies.
• The development of Canvas is influenced by ideas from the software industry and is seen as a way to deliver Osam's product.

"I think of us today as a software business that happens to monetize through asset management."

This quote signifies the shift in Osam's business strategy, highlighting the importance of software in their operations.

• Canvas is a client-facing software used by financial advisors to design customized strategies for their clients.
• The software considers the client's tax preferences, stock ownership preferences, and life risks.
• Osam's business model focuses on supporting advisors, not the end investors directly.

"Our client are the advisors."

This quote clarifies that Osam's primary clients are the advisors who use their software to serve the end investors.

• Osam considers whether to sell licenses for Canvas to competitors.
• There is a debate about using the same tools to compete against clients.
• The platform strategy involves focusing on a core audience and not getting distracted by potential other uses of the product.

"I don't have a great answer to this. I like one definition of a platform, which is that you're not using the same tools to compete against your clients."

This quote captures the ongoing strategic consideration about how to position a platform in relation to competitors and clients.

• The podcast "Invest Like the Best" was started as an open search for knowledge.
• It was not intended as a marketing tool but has become a critical asset.
• The podcast has grown organically, driven by curiosity and the quality of conversations.

"I never marketed it. I never did anything but tweet out a link to it."

This quote indicates the organic growth strategy behind the podcast, emphasizing the lack of intentional marketing.

• The podcast preceded the creation of Canvas and has influenced business strategy.
• The host's curiosity and the insights gained from conversations have informed the development of Osam's products and services.

"I sort of think about it like having APIs at our fingertips."

This quote draws a parallel between the podcast's role in gathering insights and the way APIs provide access to functionality in software development.

• The host aims to map business and investing knowledge in a formal way.
• There is an intention to publish learnings and potentially open-source a knowledge database.
• The podcast and the host's role in the investment business aim to be transparent and valuable to the public.

"We're probably going to open source that database in some interesting way."

This quote suggests a commitment to sharing knowledge and resources with a wider audience, enhancing transparency and collaboration.

• Emphasizing the importance of creating user-friendly and useful products.
• Reflecting on past experiences with unsuccessful products, leading to a focus on avoiding such outcomes.
• Iteration is crucial to refining the product and ensuring it provides value, especially from lessons learned.
• The process of revisiting past episodes for lessons as a powerful tool for recall and reinforcement.

"I've built and been part of products that no one wanted to use, and I try to be very allergic to that."

This quote highlights the speaker's past experiences with undesirable products and his current approach to avoid repeating those mistakes. It underscores the importance of user engagement and product desirability in successful product development.

• The Internet's role in the explosion of information and the resulting value in compressing and curating this information.
• The challenge of presenting information in novel ways to avoid repetition and maintain engagement.
• The personal approach to content creation, driven by curiosity and the desire to solve one's own problems, can resonate with a broader audience.

"What you're doing is you're curating it and packaging it in the best, most consumable form."

This quote captures the essence of the speaker's role in the digital information age: transforming abundant knowledge into digestible, high-quality content. It highlights the value of curation in a landscape saturated with information.

• The speaker discusses managing various concurrent initiatives, such as codifying business knowledge, launching an investment fund, and starting a new podcast.
• The key to handling these initiatives includes working hard, being transparent, and focusing on a single overarching goal or function.
• The "scout function" is central to the speaker's approach, seeking out new concepts, ideas, and opportunities that can be leveraged across different ventures.

"I actually only do one thing and it just happens to show up in a lot of different outcomes or side effects."

This quote simplifies the speaker's multifaceted endeavors into a singular focus: the pursuit of knowledge and opportunities. It reflects a strategic approach to business where diverse activities are united by a common purpose.

• The art of asking the right questions and listening to the answers is crucial in venture capital.
• The speaker enjoys the process of due diligence, suggesting that sharing insights from these conversations could benefit others.
• The concept of "the flood" is introduced, where exposure on the speaker's platform leads to significant interest in the featured companies.

"The number one most important job to be a great venture capitalist is learning to ask the right questions and then learning to listen to the answers."

This quote emphasizes the fundamental skill required in venture capital: inquiry and analysis. It underscores the importance of communication and understanding in identifying successful investments.

• The speaker discusses the power of media and content creation in building a competitive advantage.
• A strong media presence can attract more listeners and guests, creating a growth flywheel.
• The speaker expresses confidence in the compounding effect of this strategy, projecting future high-profile guests as a result.

"What if I recorded those conversations and shared them in some way, shape or form and not be too obvious, maybe publish on a lag, and again, never do any harm."

This quote reveals the speaker's contemplation of leveraging private investment conversations for broader educational purposes. It reflects a strategic approach to content sharing that could provide value to listeners while maintaining discretion and integrity.

• The speaker applies Hamilton Helmer's "Seven Powers" framework to his businesses, identifying areas of competitive advantage.
• Examples of these powers in action include brand power through consistent high-quality outcomes and counter positioning by being radically transparent.
• The speaker also discusses cornered resources, where exclusive partnerships provide unique intellectual property.

"I did literally sit down as I think probably everyone that reads seven powers does, and say, okay, which one of these can I do, which one do I already have? Or which one can I engineer?"

This quote illustrates the speaker's strategic application of the "Seven Powers" framework to evaluate and enhance his businesses' competitive positioning. It demonstrates a deliberate and analytical approach to building and maintaining market advantages.

• To gain notice on the internet, one must be unique and at the tail end of a distribution.
• It's important to be unapologetic about uniqueness, as seen in examples like Red Bull and mischief.
• Authenticity is key; forced strategies are likely to fail.
• Sharing thoughts publicly with a high quality bar is essential.
• Curation is necessary to maintain trust from the audience.
• The effectiveness of internet presence as an acquisition strategy may change over time.

"Don't be the Walter Cronkite solution that pleases the most people, the most average amount. Like that's a recipe for death on the Internet."

This quote emphasizes the importance of avoiding mediocrity and the need for a distinctive identity online.

• Early adopters in a market, like podcasting, gain a significant advantage.
• Establishing a brand early yields organic growth and a cost advantage over new entrants.
• The strategy of paying per listener becomes unnecessary due to organic brand growth.
• Having a head start allows for the cultivation of a dedicated audience.

"We had a call it four year head start on the podcast mania and planted our flags in our respective niches and said, this is the thing we're weird on the Internet about. Come join us."

The quote suggests that having an early presence in a niche market can lead to a sustainable advantage and organic audience growth.

• Creators should consider if they personally consume the type of content they want to produce.
• If the content already exists in abundance, it may be challenging to stand out.
• Novelty and uniqueness in a channel can be exciting and offer opportunities.
• The likelihood of success may be higher if the content fills a gap in the market.

"Do I personally already consume anything? Like what I'm contemplating putting out there? And when I started the podcast, the answer to that question was no, that it didn't exist, and it certainly didn't exist in the channel that I was going to do it in."

The quote highlights the creator's personal consumption as a litmus test for the potential success and uniqueness of their content.

• Learning from guests includes strategies for enterprise software, marketplace dynamics, open source distribution, and media interoperability.
• Insights on labor markets, e-commerce evolution, scaling businesses, and dealing with challenging situations were shared.
• The importance of adapting to technology trends and anticipating future needs is a recurring theme.
• Understanding the concept of a metaverse involves interoperability and the transfer of value.

"Chaitan Pootagunta taught me that in enterprise software, you want to take what he calls the go slow to go fast approach of picking very carefully your early customers and then patiently building for them well beyond what feels comfortable."

This quote captures the strategic advice of focusing on early customers and building a solid foundation before scaling, which is applicable to enterprise software development.

• The potential for growth and the importance of execution are key considerations for the future.
• Reflecting on past performance and setting realistic expectations for improvement is critical.
• The success of a platform like Canvas relies on technology and the ability to scale.
• Future scenarios range from failure due to poor execution to continued innovation and success without specific goals.

"I think there's just always room for improvement. I think we have a platform now that has an extremely bright future and has a very large potential future."

The quote reflects a balanced perspective on self-assessment, recognizing both achievements and the potential for future growth and improvement.

• The speaker reflects on acts of kindness that have had a significant impact on his life.
• Early bets made by others on the speaker's potential were formative and appreciated.
• An anecdote of being supported through a challenging professional tour at a young age stands out.
• Personal relationships and family support are also highlighted as sources of kindness.

"Bill really held my hand through that whole process, coached me up in an extremely positive way. After every presentation, I probably gave 50 presentations to rooms of like 50 to 150 people. And every presentation he would let me suffer through the bad parts."

This quote illustrates the kindness of a mentor who supported the speaker through a difficult professional experience, allowing for growth and learning.

• The speaker endorses the value of deeper learning platforms and the benefits of subscribing.
• The LP (Limited Partner) program of the Acquired podcast is recommended for its depth and quality of content.
• The speaker encourages others to join learning platforms to expand their knowledge and engage with a curious community.

"I am a wholehearted supporter of this thing. It's so simple, right? Which is this little deeper dive into what you guys have built. That I think, at least from my perspective, is actually even more enjoyable than the main show."

The quote expresses strong support for the LP program, emphasizing its value and the speaker's personal enjoyment of the content.