My guest today is Jeremy Giffon. I spend all my time trying to find people who have some “singularity” to them. People who seem like they can do an N of 1 something. Having spent many days with Jeremy recently, he strikes me as one of those people. He was the first employee and general partner at private equity firm, Tiny, which buys and holds internet and technology focused businesses. Prior to that, he was on the founding team of MediaCore, which was acquired by Workday. The focus of our discussion is about esoteric opportunities that exist in private markets. How misaligned incentives and co-ordination problems create special situations for people like Jeremy to invest in. The rest of the conversation is wide-ranging and covers everything from compensation advice to meeting your heroes. Please enjoy my discussion with Jeremy Giffon.

Founders Podcast
Founders Episode 136 - Estee Lauder
Founders Episode 288 - Ralph Lauren

For the full show notes, transcript, and links to mentioned content, check out the episode page here.
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This episode is brought to you by Tegus, the modern research platform for leading investors. Tired of running your own expert calls to get up to speed on a company? Tegus lets you ramp faster and find answers to critical questions more efficiently than any alternative method. The gold standard for research, the Tegus platform delivers unmatched access to timely, qualitative insights through the largest and most differentiated expert call transcript database. With over 60,000 transcripts spanning 22,000 public and private companies, investors can accelerate their fundamental research process by discovering highly-differentiated and reliable insights that can’t be found anywhere else in the market. As a listener, drive your next investment thesis forward with Tegus for free at tegus.co/patrick.

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Invest Like the Best is a property of Colossus, LLC. For more episodes of Invest Like the Best, visit joincolossus.com/episodes. 

Follow us on Twitter: @patrick_oshag | @JoinColossus

Show Notes
(00:03:15) - (First question) - What defines the nature of a perfect business in his mind
(00:05:21) - Key characteristics he’d look for in a perfect investment
(00:09:58) - Coordination problems that excite him
(00:14:02) - Raising funds and ghostship companies 
(00:16:17) - Examples of a special situations transaction in private markets 
(00:18:55) - Building up a sourcing mechanism
(00:22:18) - The biggest mistakes he’s seen in buying and selling companies 
(00:25:42) - Refining the underwriting process
(00:28:57) - Thoughts about minimum rates of return and multiples on capital for the investments he makes 
(00:30:44) - Being lazy enough to wait for good deals on enduring businesses 
(00:33:32) - Why people do things they don’t like 
(00:35:47) - Whether or not he feels like he knows what he wants in life
(00:40:48) - Invest Like The Best - Kevin Kelly; The reward for good work is more work 
(00:42:58) - Hiring CEOs
(00:44:54) - Really good respective returns in low risk companies and why those opportunities continue to persist   
(00:47:05) - Tactics for negotiating with and sourcing CEOs  
(00:50:37) - Binaries - pre and post fall
(00:55:58) - Being hard to kill
(00:59:15) - His favorite interview question 
(01:06:07) - Having an audience is incredibly underpriced 
(01:10:13) - What else is significantly underpriced
(01:12:14) - Things he feels are overpriced today writ large
(01:15:54) - Criticisms of the cult of learning
(01:20:21) - The one call that everyone needs to make 
(01:27:18) - Meeting your heroes and having mentors 
(01:30:48) - Notable differences between the business environments of Canada and the US
(01:33:13) - Lessons learned from people he admires and models for seeing the world 
(01:35:35) - Views he holds that would make people scratch their heads
(01:40:02) - The kindest thing anyone has ever done for him 

This episode is brought to you by Tegas, the modern research platform for leading investors.

Tired of running your own expert calls to get up to speed on a company, Tegas lets you ramp faster and find answers to critical questions more efficiently than any alternative method.

The gold standard for research, the Tegas platform delivers unmatched access to timely, qualitative insights through the largest and most differentiated expert call transcript database.

With over 60, 000 transcripts spanning 22, 000 public and private companies, investors can accelerate their fundamental research process by discovering highly differentiated and reliable insights that can't be found anywhere else in the market.

As a listener, drive your next investment thesis forward with TGIS for free at tgis.co slash Patrick.

Before we transition to the episode, I want to highlight the Founders Podcast, which is part of our Colossus Network.

David Senra, who hosts Founders, has devoted his life to learning from history's greatest entrepreneurs, and every week he distills the lessons of a different founder.

If you want an entry point, I highly recommend starting with episode 136 on Estee Lauder, or episode 288 on Ralph Lauren.

I hosted David on Invest Like the Best last summer and it's hard not to walk away insanely energized after listening to any episode with him.

You can find a link to founders and those episodes in the show notes of this conversation.

You can also search all past transcripts on our website, joincolossus.com.

I'm Patrick O'Shaughnessy and this is Invest Like the Best.

This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money.

Invest Like The Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolossus.com.

Patrick O'Shaughnessy is the CEO and founding partner of Positive Sum and the CEO of O'Shaughnessy Asset Management.

All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of Positive Sum or O'Shaughnessy asset management.

This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

Clients of positive some or O'Shaughnessy asset management may maintain positions in the securities discussed in this podcast.

I spend all my time trying to find people who have some singularity to them, people who seem like they can do an N of 1 something.

Having spent many days with Jeremy recently, he strikes me as 1 of those people.

He was the first employee and general partner at private equity firm slash holding company tiny, which buys and holds internet and technology focused businesses.

Part of that, he was on the founding team of media core, which was acquired by workday.

The focus of our discussion is about esoteric opportunities that exist in private markets, how misaligned incentives and coordination problems create special situations for people like Jeremy to invest in.

The rest of the conversation is wide-ranging and covers everything from compensation advice to meeting your heroes.

Please enjoy my discussion with Jeremy Jafon.

All right, Jeremy, so we're gonna talk a ton about all sorts of different topics.

You wrote an essay that I don't think you've published, but it's about the nature of a perfect business in your mind.

Can you describe some of the elements of what you would view to be like the perfect canonical business?

Yeah, the perfect business for me is getting paid a tremendous amount of money for your words, just your advice.

I really do think the old school merchant banks and M&A boutiques like Lazard and Allen and Co.

And some of these places are pretty close to the perfect business where someone has decided that your wisdom is so worthy that they're just gonna give you hundreds of millions of dollars for it.

You can generally build equity by investing in the deals that you're advising on.

And for the best ones, there's also this idea where the organizations are either selection effects or treatment effects.

And so a selection effect would be Harvard or a modeling agency where most of the prestige comes from picking the people.

Whereas the SEALs or something like that, to some extent will have a treatment effect.

You become a different person by going through this program.

And I think the best organizations do both.

By virtue of being selected by the company, it really helps you for your entire career.

Like I really admire certain organizations where you can just tell someone been at a consulting shop or something, or been at a really good bank and just the way they write emails or the way they think or whatever.

But I really like this idea of you can just tell the polish.

Maybe there's a path to becoming a principal.

I don't actually think you need that necessarily.

But You should be certainly be clear about it.

There's nothing worse than all these VCs that have never promoted from within to a partner, but then you ask associates and analysts there and they're like, oh, I'm gonna be a partner 1 day.

And it's like, no, you're just totally wasting your time.

I think that would be close to the perfect business because I guess what I'm after is leverage.

And the idea of basically being able to be compensated super highly for your words is pretty close to just speaking money into existence, which I think is very close to the perfect business.

My friend Ali said to me recently that the best way to think about a great merchant bank is that you literally make things more valuable just by investing in them, basically is what you're saying.

I have the same question about the perfect investment.

I would love you to take on this because you're pretty unique in, I've talked to as many investors as anybody, And almost every investor will be focused on the asset or the thing that they're putting money into, whether that's equity or debt.

So there's a million people that are incredibly smart from Buffet on down about the qualities of a business or the qualities even of a founder or the legal structure around something.

I think you uniquely come at investing very often from the meta circumstances of the situation surrounding the asset and the deal and the incentive structures for all the stakeholders in a deal.

And so with that lens, I'd love you to describe your perfect investment, if you will.

know if it's a reachable, but to me, the perfect investment would be 1 where you actually never have to talk to any of the people or know anything about the business.

You can just understand the circumstances around it and the incentives of the various interested parties and feel out why this opportunity exists, why you can solve it, and then why you're getting paid for it without ever knowing anyone.

I think a lot of these, especially in the private markets, are just coordination problems.

You're basically coming in into a log jam and just unjamming it and you can get paid for that unjamming.

When it comes to buying software businesses, it's amazing how many people would ask me about technical due diligence.

If this is a business that people are paying millions of dollars for.

Obviously it's different in a hard tech company or something, but even then, if it works, it works.

Do you really need to know that much about a product?

It's serving a niche thing and people are paying millions of dollars for it and they don't leave or whatever, do you really need to know that much about buying a business if the guy is getting divorced or there's some tax law change or he has some other exogenous catalyst that you can just tell.

I mean, this comes back to the people thing.

You sit down with them and it pains them to be selling the business.

I'm probably going to do that deal just from that fact alone.

1 of my favorite quotes that I think about probably every day is the Groucho Marx quote about, I don't want to be part of any club that'll have me as a member.

People never think about this with investing.

You better have a very good reason and no 1 ever has a good reason.

If you believe markets are slightly efficient, then if it's landing on your doorstep, you're either the luckiest person in the world or everyone else has passed on it.

And it's probably the latter, unless you have a very good explanation.

And so I think I take comfort in, oh, this is a really messy situation and I totally understand why other people's incentive structures don't allow them to fix this problem and why I can uniquely.

And so that's why I think it's easy to make low risk investments if you like understand things that way.

You have a very good explanation of, yeah, I got paid for this because I did these 3 or 4 things And there's these 5 different stakeholders and they all wanted these different things and I figured out how to solve it and it unlocked this log jam.

I like things that are very explainable when it comes to investing at least.

You can be a stock market genius, your favorite book on investing ever.

Yes, that is my favorite book on investing ever.

The big thing that really turned a light bulb on for me in that was when Greenblatt would describe things like index or mutual fund has to dump this because they have some weird legal thing about what they can or cannot hold.

Okay, so now I understand and I like that certainty.

It's boring, I do view it as construction work.

It's not glamorous, like macro or something, but it is very clear and understandable, and you can still make astonishingly good returns, because at the end of the day, they can be difficult problems to solve.

And even in the Greenblatt instance, you're probably 1 of 100 people who is actually reading the 150th page of the legal offering of the warrants offering or whatever, right?

And so maybe that's your explanation for why you get paid, because you're the only guy who's gonna read 150 pages of a rights offering of a small cap.

I always ask investors, what is their edge?

And I'm always shocked how few have a cogent answer.

And maybe it's because people don't think about it.

You can just say I'm smarter than everyone else.

There's certainly cases of that, but you should have some reason why you think you can do better than everyone else.

Even if it's just your cost of capital, like it can be anything, but most people cannot articulate why they're better than the next person, which I think is crazy in a business where you get paid for beating a benchmark.

You and I have talked a lot about how this special situation manifests in today's market environment.

We're doing this in early summer of 2023.

Maybe you can describe taking that philosophy and applying it to the current opportunity set and what you see, what gets you excited through the lens of solving coordination problems or undoing log jams in the market environment of summer 2023.

This one's great because it involves 2 parties that don't know anything about financial capital structures, which are founders and VCs.

And so that presents a lot of opportunities.

In this present day, you have all these companies that massively over-raised and are now realizing that even with a good viable business, The founder person is never going to make any money because the prep stack and because they just raised too much and You get this weird situation where VCs don't have any incentive to tell you to shut down.

There are exceptions There are a handful of really great VCs, which is both economically and morally the right thing to do.

But for the most part, a VC has no good reason to tell you to shut down because they're in the outlier business.

And a founder is going to just, first of all, just be terrified of telling their investors that They failed.

Maybe you have 10 million a year of revenue, but you're only going to grow 60% this year.

Cause you raised it 300 million or something.

And you're going, oh man, am I going to have to do a down round?

If I do a down round, then I'm really going to get drowned out on the prep stack.

It's going to be another 5 years, but you don't want to go to your board and say, I want to give up on this company.

I just realized I'm never going to make a dollar from it.

And your board doesn't want to come to you and say that because then there's this boogeyman story of my VC told me to give up the coordination problem.

And I've done this and we'll continue to do this, which is you can literally just talk to both of these people in private and then broker something together and they're both relieved.

They're both relieved because the VC, it's just a pain in the ass.

I talked to 1 large VC who was complaining about all the audit responsibilities of all these dead companies.

And then you talk to the founder and the founder also wants out.

Probably if you start thinking about breaking up, it's already over.

But you're going to drag that out for another 2 years.

Because you only get so many years really where you can take these shots.

And if you're really dead set on trying to build a huge company, wasting 2 years of your mid or late twenties or something is a huge waste.

And ironically, your VCs would probably be happier for you to give up and back you again, or keep the money or whatever.

And so that's a situation where you've got this asset, so a company that's doing $10 million a year, which is maybe, you know, if it's a SaaS business, maybe the best asset on the planet.

If 1 person owned that, if you have a net negative churn on great multi-year enterprise contracts, It's the best asset that you could possibly own.

But because of its weird financing situation, it's like a dead asset with these 2 parties that both want the same thing but won't talk to 1 another.

And so that's like a classic example of a dislocation.

I don't really need to know anything about the company there to know that there's an interesting opportunity.

You can go a level deeper and start thinking about the VC's economic incentive, which these are questions founders never ask.

There's 1 case where business is doing like 15 million a year.

And I get on the phone with their main board member and he was like, Oh yeah.

He's like, I think that was in the Uber fund.

And it's just these crazy things that like, if these 2 people talk to 1 another, there'd be huge unlocks.

And so, yeah, you'll get a situation where a VC is happy to give away basically a business that's making lots of money and a founder is happy to either run it profitably or take another shot on goal.

And all of this can just be unlocked by having a little bit of knowledge and then solving these coordination problems.

A pro forma like example of the sort of transaction that could solve that specific long jet.

And is this the same thing I've heard you talk about like ghost ship companies before?

Yeah, they call it ghost ship because everyone knows there's just no financial outcome that's gonna happen.

And it's this weird thing because there's cash in the bank, you're making money, the team's happy, everything's going well.

Still sailing along, but it's just you've screwed up, unfortunately, because you didn't really understand capital structures.

It's funny, if you have top tier VCs, you actually get better deals because good VCs understand that returns are driven solely through power laws.

And so anything that is not that 1 company in the fund, they actually don't care about.

All they care about is preserving their reputation.

So I've seen recaps done for a million bucks.

You can offer the founder 500 grand personally, and you can cram down the rest of the equity to 10 or 20%, and you can recap the business, or in a lot of cases, you can just cut costs, and then the business becomes very profitable and then it can run.

And I mean the real kicker on these, most of the time growth will either increase or stay the same when you cut a ton of costs.

A weird side effect of venture capital is that you never get to see the counterfactual on growth.

So a lot of times your company is growing for some reason, probably inherent to the product or something like that, but because you've taken all this venture capital, you have to spend it.

You can't just leave it in your bank account.

And so you'll hire a bunch of people or spend a bunch of money on dumb stuff and then you will falsely attribute that spending to the growth, but in fact it was not at all related.

And what's funny about this is you can never run the counterfactual because of the venture capital dynamic and so it's really hard for people to believe.

But I mean 1 thing that I ask founders, like if you take a founder out for a few beers and you're like, how many people could you cut from this business?

Everyone is essential and that's a really well run business but the majority of the time, yeah, well, we raised all this money so we tried to hire a big sales team and it's not really working but it's not going so badly that we have to cut it or whatever and we get to tell our board that we're doing something and so there's all these weird optimizations that can be had just by broaching these misaligned incentives.

I would love just to keep nailing the points.

I just think it's a really interesting opportunity space right now, given market conditions with other examples, like categories of special types of situations in private markets that you've seen or done transactions in before, especially because of the environment that we find ourselves in today where cost of capital has gone up.

I think there's probably more willingness and ability to do these special sorts of deals.

Whereas in years past, you might say, ah, it's easy to raise money.

So maybe give us another couple examples of a classic special situations transaction that you've done in private markets.

Some of these are so good, Red doesn't even talk about them because I know no one's doing them.

An example is, anytime a large tech company makes an acquisition of another mid-sized company, There's almost always assets in there that need to get divested or the acquirer doesn't want.

What's funny there and other misaligned incentives is the incentive of the corp dev or the acquirer is not at all related to maximizing price.

What they want and what so many people want all the time in investing is just, they don't want to hassle.

And fair enough, let's say a Fortune 500 tech company buys a company for $500 million and they want to divest a $50 million asset, does anyone get any credit for that $50 million sale?

And so what's really wanted there is just make the poor CorpDev guy's life easier.

Another is sometimes startups have 2 product lines and one's working and 1 isn't.

I've seen examples where a company is pivoted and you had a product that was kind of working, but maybe it wasn't working well enough to become a multi-billion dollar outcome and then you need to get rid of that asset.

There's obviously a bunch of stuff in bankruptcies that can be great.

I've seen situations where startups build marketing assets or basically like lead gen businesses that end up being better businesses than the main 1.

And so when the main business goes under, you can buy those marketing assets or whatever.

There's all kinds of things and it's all just downstream of venture has outsized returns so that you can just be super wasteful.

It makes more sense for every party economically to just throw it away than to do something diligent with it.

And so we're at the best opportunity of all time right now to do that because of the amount of venture that's gone into the system.

I think eventually for turns normalized, which I think they tend to do over a long stretches of time, the wasteful behavior will go away because it won't make any sense anymore.

It's a fascinating thing to think about all this stuff's under the rug, so to speak, because the pile of money is so big.

I love the idea that it's actually the best funds of the best VCs where these opportunities are most present.

I mean, interesting, weird twist on this all.

Given all that, How did you build pipeline to get to see this stuff over your investing career, most of which was at Tiny?

You're 1 of the few investors I've met that has been doing this style in private markets for a fairly long period of time.

So how did you build up a sourcing mechanism to be sure you saw this stuff?

If some mid cap tech companies acquiring some private business, how are you in that flow?

How did you work your way into that flow?

Well, tiny, I mean, in the early days, we were just very good at outreach.

Andrew and Chris, the co-founders, had very good reputations, but we would just email people to say, hey, we'd use a product, use a lot of software in a day, and some amount of it will be venture funded, But the software that you use that isn't venture funded, it's probably just a small team who's bootstrapped and you can just email them and say, Hey, do you want to sell your company?

We had to do that for the first few years.

And then eventually we built up a reputation and it kind of flipped and we would get a lot of inbound and yeah, we would see a lot of this stuff at Tiny and a lot of it was just, which I love is 1 large investment bank sent us something and they were like, we could not think of anyone else to send this to because of a mix of how weird it was and its size.

In retrospect, 1 of the very bullish signals at Tiny was when we started, people would ask us what we were buying, if they were assets.

We would say, oh, we're buying Chrome plugins or Shopify apps or whatever themes.

And people would ask, are those even assets?

At least if you subscribe to the munger theory, which is that it's better to find your own lake than to try and be the best fisherman.

I think you get a reputation for it, but honestly, There's not a lot of people out there who can do this stuff because it's really weird and it requires very fast speed of execution, which requires really abnormal underwriting abilities or requirements.

And you have to take weird risks on things that other firms can't or won't take risks on.

A lot of company buying, at least in my experience, is not dissimilar from Craigslist.

If you show up first with cash in hand, you get the deal, maybe if you're not the highest price.

And so I think a lot of it is just being willing to go and do that and say, yeah, okay, we'll do this weird thing.

Very Buffett-esque, right, where you would hear examples of him writing extremely large, increasingly large checks over his career in very short periods of time, over the weekend or something.

We couldn't believe that we had tried to sell, in my case, a business to a public company and Chris Sanders case to private equity.

And we couldn't believe that it was 6 to 9 months, steak dinners, back slapping terms, all this stuff.

And we look at Buffett who could buy a $30 billion airplane parts manufacturer in an hour.

And we were like, hold on, this company is a Stripe account and a website.

Surely someone out there can do it in less than 6 months.

That's testament to tiny successes that you clearly can, but I think a lot of that just exists for incentives and busy work and stuff.

What have you seen as the biggest mistakes in buying companies, whether it's been your own mistakes or ones that you've observed in others?

The biggest mistake is just ignoring your gut, which is trite, and I hate to say it because it's not that interesting, but it is the absolute biggest mistake.

Every bad deal I've ever done or seen someone ever done in terms of buying a private business, the first 2 minutes with meeting the owner, the principal, the seller, you could have saved yourself.

Because if you're not doing 9 months of diligence, you're basically just diligencing the principal or the seller and saying, can I trust this person?

Because we're not gonna deploy Bain on you.

And so you probably can get stuff past us.

It would be seeing if a person is trustworthy and then understanding why are they selling the business.

Because you're buying from the ultimate insider who's decided this is the exact moment to divest from the asset.

So that's already a completely bearish signal.

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Jeremy Giffon - Special Situations in Private Markets