找出真正重要的1%股票｜Henry Ellenbogen访谈

To run a company well, you have to be in the “and” business, not the “or” business. You have to drive growth, measured by market share, in the short term. You have to drive innovation or allocate capital well to position yourself better for the future. And you have to drive profitability.

But I believe the path to building a compounder—or even what some people would say is a generational company—through the public markets is proven.

I thought an interesting place to begin would be with you telling us the origin story of your investment philosophy. We're going to talk in deep specifics about a lot of things in the world today, so that people understand where you're coming from and how you came to your philosophy. I just love to begin there, with the key ingredients of the recipe that's become how you attack and think about markets. Where did it come from? Where did it start?

There are probably a couple of places it comes from. One was, frankly, my own personal background. I came into investing not directly out of school. It's not like I went on a finance path. I went into politics. I wasn't an economics major. I was actually an organic chemistry and a history and technology major, and I worked in politics for many years. As I started to try to figure out what I wanted to do professionally, eventually I started to think more about investing and got involved in it.

I started to think about investing based on a lot of the same principles that I learned in science, particularly biology: in order to have organizations or organisms that sustain over a long period of time and persist, much like human beings, they have to be in balance with their ecosystem. You see it today. I'm a father of 2 boys, and you see it today when children develop. They have to basically go through certain curves, like child, adolescence, teenager, adult, and they have to be in balance. If they are, they can thrive and do incredible things. And if we as human beings do that, look at all the success humans have had relative to every other species.

1. Origin of an Investment Philosophy

I started to think, why shouldn't investing follow the same rules we see in science? Why shouldn't investing mean that there should be a healthy balance between companies that invest in their customers, their employees, their shareholders, and actually support their greater communities? That really resonated with me, and in many ways I was lucky, too, that I ended up at likely T. Rowe Price early in my career.

The guy who became my mentor, Jack Leaport, believed in this. He believed you invested in small companies run by people who thought like owners. They woke up every day to make themselves better. They gave their employees a good deal. They had good cultures. They allocated capital well. This is what created companies that could grow and sustain. And that was how he had been so successful over the 25 years he did what he did. That resonated with me.

What happened to me, though, was a bit of good luck. I was asked halfway through my career at likely T. Rowe Price to manage the New Horizon Fund, and I started reading all the shareholder letters. At that point, it was turning 50, so I went into the archives and read the shareholder letters and tried to understand what drove the success of this fund over 50 years. At the time, it was the oldest, but also, most people would say, the most successful-performing small-cap growth fund in the country.

In doing it, I started to realize, wow, it was really only 20 stocks over 50 years that drove the performance. Coincidentally, Jack—or maybe purposely—decided to have a 50th birthday party for the fund. All the fund managers came, except for likely T. Rowe Price himself, who had managed the fund but had passed away.

I talked to one of the managers, who told the story of meeting Sam Walton on the IPO roadshow when Walmart first came public. For those of you who don't know, Walmart came as a super-small company. It only had 50 stores, and obviously Walmart became Walmart. I went back and looked and thought, “Wow, this is definitely one of the 20 stocks that mattered.” But unfortunately, it was sold.

They sold it.

The retail fund I was managing had about $8 billion, which was the largest pool of small-cap growth money in the country. Had the stake in Walmart not been sold, the stake in Walmart would have been greater than the sum total of everything that I was managing.

I'm not saying people had made bad decisions before, but the math was that one bad decision—or maybe you had to make that decision every day, because the public markets are open every day—actually wiped out all these other good decisions mathematically that had been made. And so what that caused me to do was, at that point, start to really study the history of the U.S. public market.

Since then, I think a lot of people have talked about the likely Bessembinder study that came out of Chicago.

Yeah, the 4% thing, right?

That's true. But at the time when I did this, no one had actually asked the simple question in the history of the U.S. equity market, which is, to me, representative of capitalism: If there are 4,000 public stocks on average, how many of them truly are great?

The philosophy we have today is predicated on the idea that over a rolling 10-year period, you have about 40 stocks that compound wealth at 20% a year, or go up a little over 6 times. So about 1% of the stock market are the valedictorians. That's what we want to go do.

2. The "One Percent" of Stocks

Since then, like a lot of things in life, you get through looking at lateral examples—biology—and then you look at anecdotes. If you like to double-click, or you're maybe a geek on data, you start to really study it. Since then, we've tried to create an investment philosophy that maximizes the probability of investing in those 40 companies.

The other thing is that about 80% of those companies actually start their compounding journey as small-cap companies. People always say, “Henry, why do you love small-cap companies?” I say, “Well, I love them because I love the people side of the job, but I also love them because 80% of these great companies actually start as small caps.” That's what we're trying to maximize, because we think that's what creates long-term wealth and economic growth.

What we have done is purpose-built an investment philosophy and, just as importantly, tried to purpose-build an investment organization that can go do that.

Your firm is literally named as an ode to this concept: durable, long-term compounding growth for the companies that you back. Give us one more click of detail after that original insight. You've identified that you want to be in this group of 40 companies as best you can possibly approximate. What are the common elements that you've discovered fit your personal and your team's style and are indicators that you might have one on your hands?

I know you do late-stage private investing as well, so you're looking at these companies when they're at or near their IPO. We'll talk about going public later on and why that's valuable, but what have you refined to be the most important signposts of a company that might be one of these 1% valedictorians?

If you've been one before, you have a higher probability of being one again, [laughter] right? Which sounds so simple but is actually really interesting.

We look at who has actually done it. If we don't really know the company and we haven't studied it before, we'll double-click and essentially study it, see if there's an opportunity. If not, we'll do a case study on it. We want to learn it.

One of my partners, likely Anu Kote, teaches a class at Columbia Business School, the Value Investing Program. Partially, this is our way of going back to school as an organization, and partially it's our way of giving back to our community. The class is based on this, and the students literally do about 6 case studies a year. Over time, you build out a library of them.

You start by studying the ones who've done it and then, obviously, trying to study the patterns of those who've done it. Second of all, they're diversified across the economy.

We're in a period of time where AI is so impactful. My view on the impact of this is probably no different from that of a lot of the other speakers you've had. I would say what I think about when I think about the power of AI and really studying it is that I don't only think about the companies that are the first or second derivatives, or maybe companies people would categorize as technology companies.

I also think about the existing diversified companies outside of the technology space that could be huge companies here. As an example, when you go back and look at the era of cloud and mobile, for sure you wanted to own Amazon in that period of time. But actually, if you look at retail, once Walmart and Costco really understood what Amazon was doing but still had relative scale, they leveraged their advantages. And since they basically got on the same curve, 62% of all retail has gone to those 3.

So for sure, one might have been better than the other, but actually all 3 were good.

What was the best Russell 2000 Growth stock—or, for your investors who don't know benchmarks, the best small-cap company—over that 10-year period in the 2010s?

Well, actually, it was Domino's Pizza, which was a modest-growth company.

It didn’t average 10% growth over the period of time. Well, it turned out that, having gone back and studied Domino’s from the beginning and obviously having owned the stock for some period of time, the pizza market in the United States, when Domino’s started its run, had a third of the market that was local. So, probably like a lot of listeners, I have my favorite local pizza place, and I like it because the pizza’s great.

And then the other third, we know, right? There are the nationals—Domino’s, Papa John’s, Little Caesars, and others. In the middle third, there used to be a place in DC called Armand’s that had about 30 locations. They had local or geographic scale, but they didn’t have the scale of Domino’s, and they didn’t have great pizza.

When Domino’s started its run, first of all, it started by making the product a little bit better. But if you talk to Patrick Doyle, who was CEO at the time, and you really study it, what they started doing was recognizing that there are 3 value equations in pizza: quality, value, and convenience. What they realized was, if we really invest in technology, we can make convenience a lot better.

So they really invested in their app and built a direct relationship with their customer very early on. They could then target that customer more efficiently with couponing, what have you, and drive scale through that box. When you do something well—you improve the product, which probably was slightly above average, really iterate on convenience, and now have a direct relationship with those customers—all of a sudden, the brand halo started getting a little bit better, right?

3. Domino's

You put all that together against a wonderful franchise business model, which is ROI-light, and you end up with a great stock. One of the things we think a lot about at Durable is which of the companies that are in distribution or trucking, who are already good and maybe investing on a different curve, have the ability to use AI to either substantially lower their relative cost versus their competition, gain more revenue scale, and then reinvest that in a way where you create something that’s permanent over the companies that maybe get to this late, if they ever get to it.

Often, those are the best stocks when you study the markets, because you’re already in a physical-world business where the technology advantage transitions into a physical-moat advantage, or a distribution or scale advantage. That’s one of the patterns we’ve observed. We call that the good-to-great thesis internally.

And then the second way is people. If I think about the investments we have today, we tend to be in business with certain people we’ve known for 20 years now. Maybe they’re doing the same thing, or maybe they’re doing the next thing, but we think these are the type of people who build great organizations. Obviously, we have to meet new people, too.

One of our largest holdings is Duolingo, right? We first spent real time with the CEO, Luis (likely von Ahn), during COVID. During the COVID era, as the markets reopened, they went to highs, and the private markets were white-hot in the zero-interest-rate environment. People were meeting people on Zoom, and I remember meeting Luis with my colleague Julio. I called Julio up, and I was like, “What do you think?” And he was like, “Well, it’s a super impressive business. They’re leading their market, they’re on the right side of their consumer, and the product’s great.”

And I said, “Yeah. Luis reminds me of likely Tobi Lütke from Shopify, right? The last time I spent time with someone that technologically strong—Luis had been head of AI and ML at Carnegie Mellon—but also had that much business clarity and was so crystal clear at communicating that he could make complex topics simple, that even I could understand them, was when I spent time with Tobi when Shopify was private.”

I said, “We’re going to clear our schedule, and whenever Luis spends time with us in Pittsburgh, we’re going to go spend time with him.” I think what matters is understanding the patterns, having studied them, understanding what creates the environment—Sak Kachoria is famous for saying, “Why now?”—and what could lead that, not only on the technology side but across the economy.

But I think the clarity you have when you’ve spent time with thousands of executives and have seen the ones who’ve done it makes you want to do more with them. Then you have seen the ones who are trying to do it but remind you so clearly of the ones who have done it.

Can you say a little bit more about this notion of Act 2 teams and management teams, and why that is an interesting concept to you when you’re thinking about the relationship between an Act 2 team and a potentially very durable compounding company?

This is something that is so dear to me because, one, it’s something we invest in, but two, it’s actually at the heart of Durable itself, right? It’s one of the reasons that I think Durable is just different from other investment firms, because we ourselves were an Act 2 team.

Right?

At my prior firm, I invested in Workday when they were at about $100 million in revenue scale. The 2 co-founders of Workday, likely Aneel Bhusri and Dave Duffield, had been the people who pioneered HR systems of record in the previous client-server world. They were literally the people who built PeopleSoft at scale, and there was a lot of history there, but there was a very aggressive takeover by Oracle.

In many ways, they felt they had frankly completed their vision, and so they came together. What also really lit up the vision was the cloud. Now, this sounds so obvious today.

Yeah.

But in 2012, when we invested in Workday, I think a lot of investors’ understanding of the cloud was not as obvious, and frankly, I’m not sure I fully understood it either. But what I did understand was that this was an Act 2 team.

There’s a bunch of stuff you have to build into the product that, for lack of a better word, is exception management. If you don’t understand that exception management because you haven’t done it before, you’re not going to properly be able to do it. Because this was an Act 2 team, they knew how to leverage modern technology but also build the system of record in a way that dealt with the edge cases at super scale.

4. Betting on "Act Two" Teams

Obviously, they also understood what segment of the market to go after and then how to serve it. That, to me, is the image we have at Durable when we look at an entrepreneur who has solved and successfully won in a product area or an area of business but now wants to go do it again. There’s a huge advantage when you go do it again, right? You are essentially solving the same problem with total clarity at the beginning.

The other thing is, if you’ve been successful, it allows you to align all parts of the organization—the people, the organizational structure, and the investors—exactly how you want to go do it. Max (likely Levchin), right? A lot of people know Max, obviously. He’s one of the co-founders of PayPal, and we first invested in Max, actually. It was one of my first private investments in my whole career. We invested in Slide, [laughter] right?

For many years, until recently, we were not investors in Affirm. I used to joke to Max, “I’m like the only investor in Max who hasn’t made a lot of money.” [Laughter.] With all jokes aside, Max, to me, represents the best of an Act 2 entrepreneur.

For those of you who don’t have the benefit of knowing Max, first of all, he truly understands technology, and he really understands how it can be used in very complex systems to solve problems. He can recruit exceptional people because he speaks their language. He’s also a very good leader, and people believe in him. He’s also exceptionally resilient, right? Max is a perfect example of an Act 2 entrepreneur that we had already been in business with.

When you look at it, if Durable does anywhere from 5 to 10 new investments a year, a lot of the time it’s actually with Act 2 entrepreneurs. If we’re lucky—and this happens because of compounding relationships from having done this for 20 years—a lot of the time it’s with people in whose previous act we were actually investors.

I think that’s also great, right? They know us, and we know them. We know each other’s strengths, and we know exactly how we can help each other. Look, this is like the Maxes of the world and the Aneels of the world getting to do business with who they want, but I think what it allows them to do is, with a clean sheet of paper, decide who they want to be in business with.

Obviously, from our standpoint, we don’t do a lot of new things, and it allows us to really align our resources to support them.

What changed the most in your own Act 2? As you structured Durable itself to have the same features of the companies that you’re looking at investing in—last a long time, do really well, be tightly aligned, all these things that you’re referencing—what were the biggest learnings that you took with you and that you jettisoned coming from your first act to your second act?

Actually, I almost named Durable Act 2 Capital, by the way.

Oh, wow.

It was such a prominent view in what I was trying to do. We talked a little bit about the investment philosophy.

I mean, the investment philosophy is really simple. Let’s invest in small companies that can compound over time and become large companies. What’s our advantage that we bring over other investors? I think we’re great at people and understanding change.

Basically, everything we do at Durable, because we’re an investment-driven firm, is in support of that investment mission. Essentially, we started with a clean sheet of paper and said, “If we were going to purpose-build an investment vehicle to allow us to do this, how would it actually be structured?” The percentage of capital that we put in the public markets and the private markets is aligned against that, and organizationally, how are we going to align against this?

The way we think about people is very purposeful. We really believe that very few people actually operate the way we do. We think Durable is just different. My partner Katherine, who was there when we first underwrote Figma and also when we led the investment round in 2021, is the same person who was at the all-hands meeting with Figma when Dylan announced to the company that they were going public and is still the person who looks at the company when they announce their public earnings and what have you.

5. Building Durable Capital

I mean, that’s just different, right? So you have to have people who can work with companies that are valued at $2 billion, are private, and have $30 million of run-rate revenue. Now Figma is a $1.2 billion company, a public company, and they can continue to work on that. Investment firms aren’t structured that way, so if you want to have people who can do that, you have to develop them internally.

Second of all, it’s time allocation, right? In general, at any point in time, we probably have 10–15% of our capital in the private markets and the rest in the public markets. We have to be willing to spend the appropriate time on new ideas. When we look at Duolingo and the right decision for Duolingo—and maybe the right decision for us—is only to invest $20 million, we don’t look at it as a $20 million investment in a $15 billion vehicle. We don’t look at it as 10 basis points or 12 basis points. We actually look at it as our future compounder.

Our investment memos are fundamentally written differently than those of other investment firms. When we look at an early-stage growth company that is not already competitively advantaged, we write the memo that says, “If Duolingo does what we think it can do over the next 3 years, not only do we make a fair return for the risk of the company, but at that point in time, we would want to buy more at these higher prices.” If we can’t write the memo that says we want to buy more at higher prices, we can’t buy the shares, and our thesis can’t be that it gets bought. That has to be aligned.

The investors we’re in business with are incredible investors. We have to be transparent with them that, in order to pursue this philosophy, we’re going to have what people would call monthly or quarterly volatility in our performance when they look at our performance. That sounds so obvious, but increasingly, the market has changed where capital is short-cycle. So many people are on one-month incentive models, not even yearly—one month. We have to be very transparent with our investors and tell them what we’re trying to do, deliver on those promises, but deliver on those promises over the right period of time.

I’m so intrigued by this dollar-cost-averaging-up concept: you’re not willing to invest in the first place if you’re not excited to invest more at higher prices if it goes well. Is that the right way to think about it—that the way you build a position over time is by investing more as the price goes up to build your fulsome position?

Yes and no. There are really 2 parts of our portfolio, right? When we’re looking at what we call early-stage growth companies, it could be Duolingo as a private company, or it could be Duolingo after it goes public but is still not competitively advantaged at that point in time. It didn’t have cash flow; it didn’t have P/E ratios. We still view that as an early-stage growth company where we’re saying, in the future, it could be competitively advantaged.

The operating culture could be clearly established, where we could look back and see the excellence of it and the adaptability of it. Then we could look at the growth formula and really understand it. Obviously, along the way, we really believe these are our kind of people who can scale organizations. When we look at the 3-plus-3, we’re underwriting it on a 3-year basis in general, though not always. If it does what we think it can, we would then want to buy more as it, in our lexicon, gets bigger, but also derisks and then proves to be a competitively advantaged business.

That shows more resilience and the ability to financially balance growth, profitability, and innovation—basically, to prove its ability, in the case of Duolingo, to become more than just a powerful app teaching people to speak a foreign language for self-improvement, and to start doing it for learning that basically increases educational ability to participate in the economic world. They’re obviously going into different subjects with chess.

As you progress as a business more toward what we view as a competitively advantaged business that’s, for lack of a better word, baked but still has growth, we underwrite those with the view that if it does that scenario, we would want to buy more. If not, we just can’t get involved.

Now, in my career, I’ve invested in over 100 private companies, and I think I’ve been involved in over 50 IPOs. How many of them do we still own? Well, we probably still own more than anyone else in the markets, right? Even if I look at Durable, among our largest positions in the public markets are DoorDash, Affirm, and Toast. We led those last private rounds, right? So, yeah, they persisted, and we bought more at different points on the curve.

I would say, in a Durable growth company, because of market volatility and this kind of agency problem that I think about that’s forcing people to have a short-cycle view of the public markets, you’re probably buying more of them when they’re down.

One of our favorite entrepreneurs is a guy named Jay (likely Hennick), essentially CEO of likely Colliers, but he was also the founder of FirstService, and we own both of them. We’re actually involved in a private investment with him. In the case of Colliers, I think it’s a very misunderstood company. For sure, the brand suggests it’s a commercial real estate broker, and commercial real estate brokers don’t do well in general when interest rates are high.

But I think what’s misunderstood about Jay—and he’s done this time and time again—is that, because of his understanding of local incentives—he was really a disciple, and his mentor was Peter Drucker—his sharpness of capital allocation, and the way he sets up the partnership model when he buys companies, people haven’t realized that he’s built an incredible business.

He’s built an incredible business both in asset management on the real estate side, in Harrison Street, and he’s also building a terrific consulting platform. Our insight there starts with Jay, but it starts with understanding that, actually, the asset quality of Colliers is not the quality of a commercial real estate firm that’s cyclical. It’s actually a really good real estate asset manager and an emerging, really strong consulting firm.

Last year, when people were worried about the weak commercial real estate market and interest rates, we bought a lot more of that company when it sold off based on short-term macro concerns. So, in that part of the portfolio, we’re probably buying more of the companies when they go down.

You said something really important and interesting that I’d love to dive into, which is the principal-agent problem. My question is a market-structure question. We’ve talked before about some crazy percentage of just marginal volume that happens inside of the platforms—the Citadels, Millenniums, Balyasnys, and Point72s of the world. How do you feel that contributes to volatility? I’m curious about your thoughts on changes to market structure in general since you’ve been doing this—how it contributes to that volatility, what opportunities it creates, and what dangers it creates.

It’s something I’ve thought a lot about. I started thinking a lot about it 2 years ago, and in hindsight, I probably should have started thinking hard about it 3 years ago. But you don’t get everything right.

There was a period in my career when the quant funds really started to do great—the Two Sigmas of the world. One of the things we really stress at Durable is humility, right? We never look at a problem and assume we’re right and the other person’s wrong. We never assume we’re good and the other person’s bad. We actually look at things and assume the other person’s really smart, and ask, “What can we go learn from them?”

This relates back to the way we think at Durable, but I went and studied the quants. What I concluded was that the short-term alpha game is probably going to be won by the machines paired with the humans. At the time, it was when, for the first time, computers paired with humans could beat the best human chess player.

Mhm.

This is obviously when I went to spend time with the principal at Two Sigma. I learned he was doing exceptionally well. But anyway, I got to know him, and we talked a lot, and I realized there were real limitations to what the quants could do.

And so I started realizing that if it’s a repeatable problem based on known data, actually, the quants are pretty good. So what does that mean at the time? Well, it means if you’re just a person who buys an industrial company because the PMI is down and historically, when the PMI rerates and gets better, you make money, that’s not going to work. The machines are just going to be better at that than you.

But if you’re like what we were at the time—people who are really good at understanding people and really good at understanding change—that was really advantaged. And basically, at my old firm, I did an internal teaching on man versus machine. I said, as a result, what the New Horizon Fund is going to do is double down on these 2 things and get better at them.

6. Market Structure and Time Arbitrage

We’re going to get more focused on what we do on the people side of our business, both in the public and private markets. And we’re going to get more focused on where change impacts both our early-stage growth companies and our durable-growth companies, and where we’re basically investing where we’re not advantaged versus these machines. We probably shouldn’t have done it anyway, but we’re going to stop doing it. But we did it, of course, all within our investment philosophy.

And that’s basically what we’ve done at Durable as we’ve gone and studied Millennium and Citadel. First, let me be very clear: I deeply respect those organizations. I think they’re great at what they do, and I actually believe the people who work there are very talented. We start from the view that these are exceptionally talented people who are actually very good at what they do and are high-quality people.

But what we have said is, what do they do and what is the limitation? One of the limitations is, if you work at a firm that deeply measures your risk every day and then, if you have a bad period of time measured over a month, but certainly 3 months, you get your capital cut back and there’s a good chance you get let go. It probably means you can’t have a time horizon longer than your career horizon.

And what we’ve also noticed, because we not only understand things anecdotally, we also study them, is that if you look at the last public-market earnings season—which was companies reporting Q2 this past year—earnings volatility was higher than in any earnings season since the financial crisis. Even though, during the financial crisis, as we all know, the fundamental banking system in the U.S. was under question, which meant the economy and the markets, as we know them, really had a wide dispersion of opportunity. The markets tend to be a lot more volatile when they’re making lows and making highs, and yet this was the most volatile earnings season.

I think the reason for that is basically the fact that we estimate somewhere between 80% and 90% of institutional flow is driven either by firms that have one-month and three-month time horizons or by the quants that have to take these price signals into account, and then their models are optimized for this.

And so what we have said at Durable is really simple: let’s go do less so we can do more. Because if we’re going to accept volatility in stocks, we have to really understand the business and the people, like we do at Colliers, such that if Colliers is down because people are worried about commercial brokerage because of interest rates, actually, the markets are probably right. They’re probably right 90% of the time.

But if we understand what’s unique about that culture and how they allocate capital, and we understand deeply the quality of that franchise because we’ve studied it for 20 years and we know the people who run it, well, that’s a reason why we’re willing to basically lean into that stress.

The same thing applies when I look at our early-stage growth portfolio. I spoke about Duolingo earlier. They came public the last time the capital markets were really open to companies, which was 2021. There’s been a lot written about the 2021 IPO class, right? How they came public in a zero-interest-rate environment and how so many of these companies were actually going to have a tough time getting to profitability. As interest rates went up in 2022, I think, correctly, a lot of people said, “Just throw them all out,” right? The average loss-making company in 2022 in the Russell 2000 Growth went down over 70%.

Our view was, “Makes sense. The market’s probably right, but not all of these companies are unable to adapt. Not all of these companies lack businesses that are good enough to make real economic returns.” Our view was that not all of these companies lacked the discipline and organizational fortitude to transition and become successful companies in a world that actually required profitability based on the change in interest rates.

Duolingo is an example of a company that we actually bought more of in 2022. That was an example of an early-stage growth company that we dollar-cost averaged down, right? And I think we’re advantaged in that, right? Because if you’re rule-based in what you do or you have a 1- or 3-month time frame, you just can’t own Duolingo. You can’t own more Colliers.

You said people and change. We’ll talk more about both, but starting with change: We’re in the midst of probably the biggest technology shift or change that any of us will ever see. You’ve invested and lived through several others—internet, mobile, cloud. Can you put this one in frame of reference with the other ones that you’ve lived through? You mentioned so many times studying the past and studying history and seeing patterns. What patterns do you think might apply this time, and what patterns do you need to throw out and re-underwrite from first principles here?

So, I started writing about AI in our shareholder letters in 2022.

Yeah.

At the time, I said, having seen the internet, cloud, and mobile, this is going to be at least as powerful as the internet. I said we’re going to approach this with humility, go spend time with the people who are closest to it, and constantly be learning. And I also said Durable is not a thematic investing firm or a compounding investing firm, so just because we think something’s going to be big doesn’t mean our investment meetings are going to be, “AI is going to be big. Let’s go buy AI companies.” It’s going to be, “Let’s really understand change, and then understand how it impacts the companies that we invest in, how they’re going to basically benefit from it or become better by it, or at least not get disrupted.”

I’ll lay out in a second why I think it probably is more impactful than the internet was. It’s not only going to affect every technology company, which you see in the markets, but it’s also going to impact, in this case, I think, almost every company that needs white-collar and IP employees to drive their work.

Let me start with the second one first, because I think fewer people have talked about that one. As a student of business, most people would know that by the end of the 2010s, everyone knew that if you were a product-based business, you needed to understand your China cost. It was kind of on the cover of every business magazine and then every popular magazine in the 2010s.

Basically, all that meant was, if you were in a global supply chain and there was a part of the world with huge scale and resources, like China in the Far East, that could make a product substantially cheaper when you landed it at your factory or to the consumer, you had to understand it. If you didn’t leverage it yourself, you were basically going to go out of business. That was the first derivative.

The second derivative is actually that there are a lot of businesses that are spread businesses. You look at a lot of distribution businesses as an example. If you distribute, you talk about a great business like HVAC, the industry tends to put a spread on the raw material. If your HVAC unit basically inflates at 3% to 5%, that’s good, and if your HVAC unit deflates at 3% to 5%, that’s bad. And so, if you were a spread business on top of it, that was problematic.

Every company that was product-based or derivative-product-based had to understand China cost. And I think the same thing applies to AI. But I think it’s not product-based this time; it’s IP-based.

So let’s go back to Max Levchin as an example. Affirm, most people would think about—and correctly so—as basically a fintech company that empowers people to get access to credit in a safe and pretty compliance-friendly way, with no tricks. And he’s doing even more than that now. But at the end of the day, because he is regulated, he has a lot of legal costs in the company. He’s got hundreds of thousands of contracts with merchants, and he’s got to monitor his partners on how they basically communicate credit.

If you talk to him—and he’s talked publicly about this—he has great belief that Affirm can grow at the rates it’s growing at for a reasonable period of time. In addition, they can do it without adding headcount. The reason for that is obviously he’s going to lean out a lot of processes that weren’t possible to go do before AI.

I’ll tell you a really funny story about that. I learn so much from him. He called me one day after he reported earnings and explained to me, “Henry, you’re always asking me about how I’m using AI to become more efficient, and I feel like I was late to the curve, but I finally figured it out.”

And so he says, “I have this team that goes around the company and understands processes, and we start not from a cost standpoint, but from a leaning-out standpoint.”

I think I’m making real progress there. That’s why I’m able to make this public pronouncement. And he’s like, “Isn’t this great?” [Laughter.] I say to Max, “Why don’t you come to D.C., and let’s go see likely Mitch Rales?”

Danaher, which he and his brother started and of which he’s chairman, has been doing this for 40 years. It’s called DBS, and they basically brought Kaizen back to the U.S. They’re obviously more of a healthcare company now, but they started by going into factories, putting processes up on whiteboards, studying how they could lean them out, basically leaning them out, and coming back in a month later to make sure that—because change is hard—the change held. Then they basically built a whole business system, which has not only helped build Danaher, but there are over a dozen Fortune 500 CEOs in the United States who basically started their jobs at Danaher, including the guy who just turned around GE. So, since you’re so excited about this, let’s actually go to, essentially, the teacher of the godfather in the United States.

The reason I say that is this is just so profound, it’s even hard to get your head around: Mitch would say that for 40 years at Danaher, we’ve been able to really lean out product-based businesses’ working capital, but in many ways, I feel like we’re just getting started on processes that are done by humans. The second example that I’ll talk about—and I’m trying to talk about things that haven’t been talked about as much on this show—is when I first really understood what was going on with the internet. I ran a global TMT fund, and my largest investment was Amazon, right? We invested in it when it was like a $10 billion company.

So I used to go to Seattle twice a year. Interestingly, these are things you remember because it was far from Baltimore. No one would come with me because it was a small company and people thought I understood it. I used to go have lunch twice a year with Jeff Bezos. At the time, I worked for the firm that was his largest outside shareholder, and it was obviously my research position for the firm.

I learned so many things from those meetings, but one of the things I learned is that the very best businesses that leverage technology leverage it in a way where they use it to lower costs and drive revenue, resulting in them gaining 30% or more incremental market share in their end market. Then they take that unit-economic advantage and reinvest it in something that is persistent, even if their competition were to wake up tomorrow and do the exact same thing with people just as good as they are.

To me, that’s one of the definitions of a durable competitive advantage: if your competitor basically does a competitive moat attack, doing the exact same thing with people as good as they are, it doesn’t matter; you’re too far ahead.

As we’ve all come to understand with Amazon, they took that 3% to 5% cost advantage of getting that box to you and their ability to put more than 1 item in the box, and they used that economic advantage to then go build physical fulfillment centers. They basically reinvested in capital and infrastructure that allowed them to go down that 3% to 5% cost curve for 20 years.

Then, as I said earlier in the show, they woke up, and the only people who could play their game when eventually everyone realized what they were doing were the people who still had the scale, the customer relationships, and the trust of Walmart and Costco. Eventually, when they figured it out, all 3 of them were great. The problem is, the rest of retail was not so good.

And so that’s what we think about here. If I say it back to you, what we’re about is: we’ve seen, through Mitch and others like him, this 40-year benefit of Kaizen brought to the physical-product world, and AI represents a sort of kickoff of Kaizen to the human-work world. That is going to have lots of stories like the Amazon story you just told, where someone gets on one of these curves early and they can’t be caught. So you’re trying, I’m sure, to define who those people might be.

If you think about all the people who have navigated change as CEOs—the best that you’ve worked with—I’m an investor with Dave Duffield in his latest company, and so he comes to mind because now he’s tackling AI. The guy is incredible. If you think about whether it’s Mitch or Jeff or Dave, or people like this that you’ve seen operate, what methods have impressed you the most in how they themselves adapt—first their own mentality, and then their teams—to these fast-changing circumstances? This is a question for everyone out there who’s running businesses and facing this same change, which is a risk and an opportunity at the same time.

Yeah. So let’s pick on Luis, right? We talked about Luis earlier, right? Duolingo has a lot of opportunity with AI and a lot of risk, right? The stock, depending on the day, reflects it, right? When OpenAI demos how you can use OpenAI to basically do translation, a lot of times the stock goes down. Or when Apple shows you how AirPods can be used in the physical world for live translation, the stock goes down. I don’t think the market’s wrong there. It’s probably wrong on the magnitude, but I think what the market is saying is there’s a risk here.

That’s probably one of the higher-risk names in our portfolio. What do we look for in Luis, Max, or Dave Duffield? I think the first thing we look for is a business that already is operating well, right? Because if you’re not operating well when you have to deal with change, you’re not going to be able to do 2 things at once, right? You can’t do a turnaround and do well.

The second thing we would say is a business that already was winning in its first end market. All the definitions we would have about winning apply: substantially gaining market share and driving real economic profit that allows it to reinvest in this next S-curve. The other thing we really care about is people.

7. Adapting to Discontinuous Change

We really stress resiliency at Durable. It’s one of the reasons we like investing so much in act-two managers, right? We can go study their resiliency. When you’re an investor in Max and you saw how resilient he was in Slide, and now you understand how he’s got to be resilient to implement AI to lean out his costs and drive his revenue before his competition does, you’re like, “We’ve seen him under stress before,” right?

I think you’re looking for people who have a perspective, can execute, but also are humble, right? We at Durable write down our views on AI every 6 months and update them. As we’ve gone more into this period of change, probably we’re less wrong. Our perspective is more informed than it was as we change it every 6 months. But we’re learning, right?

We have the benefit of having a job that allows us to spend our time reading and thinking and talking to smart people. Even if these are really talented people, most likely they don’t have as much time to go do it as we do. We have to be very humble in our approach. They have to have a perspective and figure out how to go do this—not be paralyzed—but they also have to be humble and constantly learning.

The last thing I think we practically have to think about as investors is back to the memo: if you have a high-risk situation, which we would all agree Duolingo is and Affirm is, and you’re really close to that part of the change, then you need to be compensated for the risk.

What we would tell people on Duolingo is, yes, because of this risk, the discount rate has gone up, but probably, commensurate with that, the opportunity has also gone up. We can articulate it, right? Luis has talked about being 20 times faster and generating content, and we’ve already seen it. He’s publicly said he developed chess, which is doing incredibly well, and my kids really love that product. I mean, they’re addicted to it.

At first, it was 2 people for 6 months. Then he added another 4 people, and he developed a product in 9 months. That’s the best product he’s ever done. If you ever talk to him and ask, “How long would it have taken in the past?” he’s like, “I don’t know. I probably need 4 to 6 times as many people, and it would have taken 4 times as long.”

You could say a startup could do that, but he’s doing it on his platform. That product is well over 1 million DAUs and is growing at astronomical rates, and it’s a great underserved end market. It could be a huge business. Yes, the discount rate has gone up, but this company was purpose-built for AI.

You actually have a person who studied AI and taught it at Carnegie Mellon, has an organization of A-players who are agile in his company, and is humble and constantly learning—a proof point on how it’s making him faster than other people.

It’s driving real value, and obviously that means the probability of it going from a point solution or a couple of products to the suite is higher.

Can I stack a couple of the things that you’ve said that interest me the most into an even bigger question? If I take physical Kaizen and digital Kaizen just to shrink the concepts down, if those were to have a kid, it might be robotics.

I’m really curious how you approach the potential—with an unknown timeline—that we might get a second wave of Kaizen. The physical labor economy is way bigger than the digital labor economy, so we may get a second application of Kaizen over the next 40 years, like the first one we saw from Mitch and Steve’s company. How do you think about that opportunity and potential change?

It’s something we have really thought hard about. Here’s what we have tried to do. First of all, we have tried to get smart by meeting with the entrepreneurs and talking to the companies that we’re involved in that we know are leading this area, just to try to learn. We only recently did this with robotics.

If we started writing down our conclusions, we would have to be humble that they could change every 6 months in AI, in what you would say are more data businesses or digital businesses. We only started doing this literally in the last month, where we documented it for the first time. I’m going to do something that I don’t love to do, which I know means our views here are very early and probably deeply wrong, but I’ll give you all our initial conclusions.

In certain use cases, it’s pretty clear that already the cost is lower than the equivalent analog process, or basically—

Physical labor process.

Physical labor process. And yet, as we all know, this is the earliest and worst that robotics is going to be. Because machines are iterating with machines and it’s being powered by general-purpose models, not by specific-purpose models, this is riding a curve that is definitely geometric.

Back to this mental model of Amazon that drives so much of what we think about durability at Durable: What Amazon was able to do was ride a cost curve where they were deflating the cost of sending a box out at 3 to 5% a year for 20 straight years. The people who did not leverage the right distribution infrastructure, the right investment in robotics at that time, or the right ML models when they came into play to basically plan inventory and deal with suppliers, actually were probably at a curve that inflated at 3 to 5% but, at best, were flat.

That differential in a low-margin business—you compound it over 5 years. Honestly, that’s all you need to know. That’s what we’re starting to get our heads around at Durable, which is: If in many areas robotics is at par, and there’s a lot of data that says it’s lower cost in certain cases, the use cases are about to go up.

The cost on the existing use cases probably doesn’t go down at 3 to 5% at this point in the curve. Because of the scale brought in, the human capital brought in, the IP built on, and the fact that you’re going to be able to use these general-purpose LLMs to power it, it probably goes down at more like 15 to 20%. But maybe it’s more than that, and it goes down even faster.

Then we wake up in 5 years, and the people who put themselves on one cost curve, if they compete against the people who put themselves on the other cost curve, those could be power-law businesses. What we have thought really hard about is who’s going to benefit from this curve, where their competition—even if they woke up tomorrow, even if they put the same amount of money into this problem, even if they could hire the same quality of people, which is unlikely because they have not invested in the distribution infrastructure or the technological infrastructure to compete on this curve—is probably 2 to 3 years behind at minimum.

Every day that they wait, they’re probably getting further behind. It’s apparent to everyone at Durable why our understanding of change has been great for our investments in Duolingo, Affirm, and Shopify. But actually, I think it’s about to really advantage our understanding of people and change as we go invest in the other 70% of the economy.

If you think about all the businesses you’ve backed, do you have a favorite kind of competitive advantage or source of competitive advantage? So much about your whole process is: Does it have it already? Is it on its trajectory to get there? There are different kinds—scale, network effects, et cetera. Are there favorites that you find yourself returning to as the best sources of long-term competitive advantage?

I love physical real estate, right? I love Amazon, or we’re investors in Carvana. I love their reconditioning centers because at the end of the day—

You can’t spin those things up.

You can’t spin those things up. They’re these things that are super messy, right? You’ve got to acquire the land. You’ve got to put it in the right place. You’ve got to build the right network. Then you’ve got to stand it up with the right capex and the right systems. And then you have to have the right operating culture.

This is really, really hard. If you put your real estate in the wrong place, then your cost of transport is more expensive. The culture you’ve got to go build there is super hard. I deeply love these physical-world moats that exist, and really our portfolio has a lot of them, right, in one way or the other.

That’s why, when you and I talked about robotics, my mind went to distribution. Where can robotics basically take already advantaged businesses and make them more advantaged? But there are others.

8. Physical Moats vs. Soft Moats

The other thing I really believe is these soft things that are incredibly hard. I think about the example of Danaher so much, right? What Mitch and Steve have done is just stunningly hard to imagine: that for nearly 40 years they’ve compounded wealth at 20% in something that didn’t have deep physical moats or data network effects like Meta or Google have. I see the potential in OpenAI just like the people who believe deeply in it do, and those data network effects are amazing.

The ones where you’re really sharp on human capital—you’re really sharp on what talent really means, not the sticker of talent—you’re really sharp on your operating excellence, the culture of it, the constant improvement of it, the system behind it, like Kaizen, and then you allocate capital against your businesses to really hold them accountable. I think it’s amazing.

In our portfolio, if I were to walk you through the businesses that FirstService is in, which Jay Hennick is chairman of, and what Colliers has, where he’s CEO and largest shareholder, neither of them actually has these super-sharp competitive advantages. Yet if you’ve really studied Jay and truly understand his human-capital culture, how he attracts and holds people accountable, and his ability to decentralize incentives so people are aligned in businesses ranging from residential management of condos to roofing and restoration, and then how they allocate capital, it’s just super impressive.

How they sell things that don’t have a path to be great and how they buy businesses, but do it in a way where it actually aligns incentives and compounds with them, is also impressive. The other thing is, if we’re going to invest in small companies, those companies, by the time we find them, tend to be pretty large. So we have to be pretty sharp at really understanding other competitive advantages.

You’ve mentioned memos a few times—the memos you write internally. What have you learned makes for a fantastic structure of an investment memo? What works for you?

We’re a writing culture because, at the end of the day, human beings are innately human. When we are involved in something, it’s very hard to have the executive distance that you need to really hold yourself accountable to what you thought and actually hold the companies accountable to what you would like them to do, especially since we really do know the people we invest in. We invest in really high-quality, interesting people, and we’re deeply rooting for everyone to succeed.

Unlike a venture-capital firm or private-equity firm, we have to be able to understand when things aren’t working out so we can sell them. But just as importantly, if we’re going to go invest in something that has real risk, like Duolingo, we have to understand when things like Duolingo are really inflecting and maybe we see it and other people don’t, so we can go buy more of it. We’ve got to be able to do both.

When we write an investment memo, it’s in service of our investment philosophy, making sure we’ve done the work and can clearly articulate: Why is a company competitively advantaged, or will it be? What would it have to do? Why is this operating culture excellent, or why does it have the seeds of an excellent operating culture?

Why does this leader think like an owner, where they can basically make the business better, which we define as gaining market share through the cycle? And do we think they can allocate internal and external capital such that it both drives more durable growth and makes their asset base more valuable over time? That’s our investment memo.

But then, just as importantly, through both modeling and clearly spelling out what we’re tracking, we have to be able to do our quarterly operating reviews at Durable, where we go through the entire portfolio with the entire investment team on every single investment.

We have to look at how the companies are actually doing against what we thought they would do. And then, for every single investment at Durable, if we own it for 3 years, we actually do a 3-year lookback on what we underwrote and what it did. And actually, that one is like so many things in your career that you wish you would have known earlier, right?

The great thing about investing, and the great investors to me, actually, are better at 70 than they are at 50. Hopefully, I’m in my 50s and I’m better than I was when I did this at 30. You just learn. You understand patterns better. Hopefully, you remain humble so you don’t get too stuck in your ways.

You surround yourself with smarter, better people, both internally and externally. But one of the things is that you develop better processes. One of the processes that we only started about 2 years ago was that we always did quarterly KPIs or operating reviews, but we actually didn’t go back and look at an investment that we’d owned for 3 years and just say, “3 years ago, we thought they would do X, and now they did Y.”

When we do them, they’re so simple. The conversation, of course, is where was it different and why? But the preparation for that meeting is, at least on the written side, so simple. It’s 2 slides. But, of course, we’re all human, and even though we try to hold each other accountable, if you get together every quarter and something deviates a little bit, you tend to excuse it.

Of course, if it deviates a little bit for 12 straight quarters, it’s actually kind of staring you in the face. And that’s why we’re such a big believer in investment memos.

I think in 2022, you went and did a tour talking to CEOs about the state of the market, operating principles, and things like this. I’m curious to hear you reflect on that tour, but I’m even more interested to hear: if you were to do a tour of every CEO in the portfolio today—and maybe you’re doing this actively—what would the message be today that’s different from the message in 2022?

I felt in 2022 that we truly had expertise to add to the conversation, and that was at the highest level. By the way, I don’t say “we” versus “us.” Every CEO I talked to, every investor I talked to, and even Durable—which is a fundamental investment firm that really values businesses based on cash flow and never felt money was going to be free forever—had actually made simplifying assumptions based on almost a decade of free money.

Basically, anyone who has been taught how to value companies understands that, at the end of the day, all companies have to be valued on free cash flow and organic growth. At the time, we got to a point where 30% of all Treasuries in the world actually had negative yields. Relative to inflation, you were being paid to borrow.

9. The End of Free Money

That basically means it was logical for venture capitalists to value companies and not care about profitability at all. It was logical for companies in the public markets to buy low-quality businesses that could never earn their cost of capital but use cheap debt to do it. It was logical that, if you sat on companies’ boards, you really wouldn’t ask hard questions about trading off growth, profitability, and innovation because you didn’t have to.

If you go back to the conversation we had when we eventually studied compounding, we ran that study across periods. We looked at the public markets and asked ourselves a simple question: in the world of positive real rates, which is the entire history of the U.S. equity market except for that short period of time, there were on average about 40 compounders. During the period of free money, there were 120.

Which I don’t know if we’ll ever see again.

Yeah, there were 3 times as many. And then we asked ourselves a simple question: what patterns only exist when money’s free? Not surprisingly, everyone would imagine that the pattern of driving growth and profitability is perennial and actually works regardless of whether money is free or not.

The other thing that was really interesting, which was really important to us and gave us confidence to go buy more of the Duolingos in 2022 when we did this work, is that if you’re a small company, you don’t have to be GAAP-profitable, and you don’t even have to have an ROI that is above your cost of capital. But you do have to show progress on your path toward it.

And then what doesn’t work? A company that doesn’t earn financial returns and is showing no progress. The other thing that doesn’t work—which we don’t do a lot of—is to go buy a low-quality, low-return business at a high price and leverage really cheap debt.

So I felt strongly because we had seen cycles before, because we truly had expertise, and also because the companies that we invest in are long-term partners. We want to invest in companies that are private and still own them when they’re public. We want to help them as they transition.

I thought we had expertise and a perspective that many people had not gotten before. To reference what this meant, we had these conversations with a number of our companies that were in that situation. We had some version of this conversation with Aman at Toast, with Luis at Duolingo, and with Max at Affirm.

All of them were a little different. As an example, with Luis, I had dinner with him and the CFO. His CFO is very talented, just like he is, and I presented them the data. Knowing them, I knew they would have a lot of questions about it, and they asked a lot of good questions.

The other thing I said to them was, “Look, Luis, when we invest in your company, one of the things I always ask people is, ‘I know we’ll articulate what we’re looking for in you, but what are you looking for in us?’” One of the things he said was, “I’m going to be a first-time CEO, and my sense is you’re going to see things based on your experience that maybe I don’t see because this is new to me.”

And I said, “The reason I wanted to have dinner with you is not because I have all the answers, but I have a strong view that you’re dominant in what you do. AI is amazing for you. AI was just getting started. You have a very unique human-capital culture. But if you’re going to communicate this strength in the market, it doesn’t mean you need to get to your long-term margin targets at 30%. You have to show progress toward it.”

With other companies, we restricted the stock. We spent more time with them. We helped them understand what this means. We even helped a bunch of them think about how to communicate what they were going to do on this path of transition to their investors.

That, to me, is different from where we are in 2025 because I felt we had real expertise there and something to add to the conversation that a lot of these executives hadn’t seen before as operators. Frankly, many of their board members had come of age in a period when money was free and probably hadn’t been involved in as many durable companies as we had been involved in.

The answer is, I think we’re probably more back to learning and normal interaction than we are to having a perspective that we’re dying to explain to people.

I heard that in your early likely T. Rowe Price days, you were studying media, and you studied 20 or 30 years’ worth of media history and condensed it down to a very small, 3- or 4-page report. Can you bring us back to that study and what you learned about media? I’m obviously interested in media. I’m curious what you learned then about media and how that has evolved ever since.

Yeah. I tend to want to do this. I always believe that if you really understand something, you can make it super concise.

Yeah. [laughter]

I was very lucky in media because I was an outsider to the media industry, and it’s something we try to do at Durable with people. I think I brought a fresh perspective to it.

When I was assigned to be a media analyst, this is so hard to believe, but the companies that were viewed as the darlings of balancing durability in terms of competitive moats and having strong growth were companies like Comcast, Time Warner, Disney, and Viacom. I did a bunch of work on the companies individually, and then I started to think really hard about it.

I started to realize that the best businesses inside all of them had been the cable networks. If you go back and read about media back then, the entrepreneurs who became the most famous were the ones who launched cable networks: John Hendrickx, Ted Turner, and Bob Johnson. By the way, John Malone basically backed almost all these people and put the most money into it. So John Malone was at the center of all this.

For 20 years, cable networks grew 20% with 20% ROEs. They were compounders, and that’s how you had all these entrepreneurs who had become billionaires. That’s how you basically had media companies that really fought over a balance of content and distribution so they could all get their fair share of these economics.

Then, when you looked at a bunch of the other industries, it was like an average-ROA business. That was what the whole industry was. But the whole thing, if you really thought about it at a systematic level, was predicated on a closed system, which is so obvious today.

The closed system was predicated on: I’m only going to show you the product or the TV show that you most want to watch when I can make the most money, when you want to consume it.

So, even in a world of linear TV, even though most people watched TV on Sunday night, the worst shows showed up on Sunday night because people had spent their money on the weekend and were going back to work, and they weren't going to go shopping and go out. The best shows showed up on Thursday night: Friends, The Cosby Show. In the movie business, obviously, there was windowing.

Anyway, I was like, okay, the best business is cable networks. That's why we had this fight over content and distribution, and it's all predicated on this closed system. I think what I believed at the time, which obviously proved to be true, was that this TMT bubble that had basically burned so many investors—and no one wanted to think anything good could come out of it at the time—had actually laid the seeds of the end of the durability of that industry.

Because even though people lost so much money on telecom infrastructure and laying the seeds of broadband, what broadband was enabling eventually was things like YouTube and Netflix, which would break down this whole, basically, closed system that was run like an oligopoly. That's basically what my memo summarized: the riskiest thing is to own the durable asset, and the safest thing to do is go buy the next standard.

Lots of people will say investing is an apprenticeship business, and you yourself have said the best investors are better at 70 than at 50 than at 30. I'd love to hear a lot about what you've learned about selecting great people when you don't know them as well, and then making them better as part of Durable over time, because that's obviously going to determine how well you do as a business.

It's a critical component. How do you do it?

One of the major goals I had with Durable when we started Durable was to actually build an investment firm that would be better the day I left, and the initial partners left, than when we were at our best while we were there. So I thought really hard about that.

It's a hell of a goal.

I went on a listening tour, and I went to see firms that had a period of greatness. Some of them didn't get it done, and then some of them actually accomplished that goal. Part of it is how we have structured Durable's incentives and the whole ethos we have internally. It was really a reinforcement of this goal about people.

You spent time with our team, and when you look at the senior people at Durable, likely Anouk Day, one of my partners, is an incredibly talented woman. She started working with me at 26. She had never worked in the investment business before. She had finished her master's at Oxford, and she was basically working at a nonprofit. Cory Shaw started working with me either at 21 or 22, right out of William & Mary.

We have a host of other people who really came out of liberal arts, not, like, rigorous backgrounds. Any time I interview people, I have to tell people, “Since I was 5, I wanted to do exactly what you're doing,” which is basically what you have to do nowadays to go work at most investment firms or banks. You've got to tell people that, ever since the age of 5, you wanted to do exactly what you're doing. But all jokes aside, we really believe that you have to be an expert in what you do and develop into it.

There's a whole matrix we have about the development of security-analysis excellence and how it's a journey. We do our reviews based on it. I tell people, “Look, on this sheet, this is a journey. I'm probably the most experienced security analyst at the firm, and I still have a journey to go here. I've got to get better.”

We also believe, at the same time, that the youngest person in the room on our investment team can actually have the most valuable perspective. We have an investment team of 12 people, and in my career, a lot of times the best insight comes from the most junior person who's looking at something with a fresh set of eyes.

Early in Anouk's career, when I was looking at consumer companies, she really helped me understand a millennial mindset, and then we did a lot of work against it. I think that led to some great investments in both the public and private markets. We were private investors in DoorDash, Sweetgreen, Warby Parker, some of the leading companies of the day.

So, what do we look for? We look for deep intellectual curiosity. If you don't want to constantly learn, that's just not who we are. We want people who really want to learn. We want people who compete but want to compete as a team sport. We have a lot of athletes. We have a lot of people who worked their way through school financially.

We want people who are resilient themselves. All of us have periods of time where we get things wrong. If you're going to practice our style of investing in a world where the market has such volatility, even on good companies like ours, you have to live with the fact that sometimes your performance isn't going to be good.

Sometimes you have to be resilient, realize you're right, believe in it, and sometimes you have to realize you're wrong. All this is underlaid, obviously, by a level of desire to be excellent at what you do, but also to make your colleagues better.

This is unique to Durable, and we're just different here. When people think about being excellent at Durable, they have to think about being excellent in what they do, and they have to be excellent at making their colleagues better. It's got to be both. We're an “and” culture.

Obviously, we talked about why what we do is just different. Our ability to invest in Duolingo as a private company and still own it today, our ability to invest in Figma when it's a $30 million company and have the same person follow it today—we have to have people who are both good at analyzing private companies that are early-stage growth companies and who understand scaled, durable-growth companies.

They have to understand the subtleties and nuances of private markets, the relationships, and the way governance works, but also truly understand being a minority investor in the public markets.

In practice, that second piece—which is that you're expected to make your colleagues better—how does that actually work in practice? What do people literally do? Is it squishy, know-it-when-you-see-it-type stuff, or is it more structured than that?

Look, I'll give you the measurement, and then I'll give you how it really works. When we do 360 reviews at Durable, we actually ask everyone to give feedback on what their colleagues did to make it better. It's important, and we're a really pleasant culture. We have high-quality people, but it's not, “Anouk helped me this year, and she's a nice person.”

It's, “If you're following DoorDash, Anouk helped me understand DoorDash because of her knowledge about agentic commerce on Shopify.” Or, “When we did an investment review as an investment team, she took a special interest and followed up with me.” Or, “She went to a meeting that was important and gave me her perspective.” We ask people to point to specific investments that they have helped with.

The second thing we do is, I'm one of these people who believes that if we want to have great people, we have to attract great people. We have to basically allow great people to become great and provide the environment. But I also believe we have to have the right amount of process that enables true excellence and creativity.

From an hours perspective, we probably do less or the same amount as other investment firms, but I think the impact is really high. I'll give you a simple example. We do the same investment meeting everyone else does on Mondays, but we do an additional meeting where we go through ideas that we're looking at and vet them together.

If we're going to spend more time on an investment, everyone's in the room when we decide to go do it. People start to learn what is a good use of their time and what's not a good use of their time. If we're going to go look at something, who do I have to go answer these couple of questions with in the next stage of investment due diligence? Is there a colleague here who can help me do it?

We get together on Fridays. By the way, we do it in the office. We get together, have lunch as an investment team, and talk about insights. You don't prepare for this meeting, but it would be, “Hey, I had an interesting conversation with a CEO,” or, “Maybe this week—we'll talk about it— I listened to OpenAI DevDay, and this was what I thought was interesting.” Or, “Maybe I thought about this. Does anyone think about this?”

We're trying to look for lateral insights to learn from each other. We do investment reviews where we do deep dives on stocks. Multiple people look at them. I learned this from—you had Kelly on from the firm Lone Pine.

Really?

I learned that from Steve. I'm sure Lone Pine still does it. We do what we call KPI operating reviews, where we go through the whole portfolio and every colleague reports to everyone else how they did.

We don't do this to have a session where someone says, “You're great,” or, “I got it wrong.” It's more like, “Here's clinically what happened,” and everyone can learn from it, but also lend their lens, because it's not great or bad. A lot of times it's subtle: this thing was good, this thing was mixed. People can have their lens.

We get together twice a year and have off-sites. You can probably tell we have a lot of fun at Durable, but our off-sites don't look like other people's off-sites. We used to do team-building activities.

And now KPI reviews.

And now we don't do them, right? Why don't we do them? Because we're actually a group of people who like learning from each other and sharing insights. The activity we're going to get together for over 3 days is going to be—we're going to do look-backs, we're going to look at reviews, we're going to go study an industry, we're going to go talk to a CEO, and then we're going to all learn from something such that we can all make each other better.

It must be very powerful, when you're making an initial projection on a KPI or something, to know that in 6 months, 1 year, 2 years, and 3 years hence, it's going to be looked back upon. You probably sharpen your pencil a little bit.

You do, but I think what’s special about our culture—and I always tell this to people before they join—is that we tend to hire young people and develop them. But if you’ve been anywhere else, you don’t believe us.

People think that when we get together and do KPIs or 3-year look-backs, or when we do a session where we look at reinitiations in the portfolio—things we sold before and then bought back—that we’re trying to figure out why we sold it in the first place. Maybe we got it wrong. We don’t do any of this in the spirit of “You made a mistake.”

This is an environment where you should critique yourself negatively. It’s like, no, we should be intellectually honest, just like we want our executives to be. We want to be clinical in what we did, but then we want to do it in the spirit of trying to learn from it and get better, or put our data out there so we can learn from our colleagues who might have a valuable perspective to make us better.

If we can take the attitude of intellectual honesty, self-improvement, and humility, that makes us better.

When you were doing your tour to learn about the franchises that were better at the end of the founders’ run and those that didn’t make it, what did you learn? I won’t mention the names of those who didn’t make it because, you know, the thing about not making it is a little bit like our investment memos when we invest in great people who are trying to build companies. A lot of them do great things, and they just don’t make it, right? I mean, as you know, in success there’s a lot of good fortune.

Yeah. I think what I learned was, if you don’t architect the system on day 1 for success, then you end up with a lot of conflicts that sometimes undermine what you could have accomplished.

We try really hard at Durable not to make compromises. If we go hire someone on the investment team, we want to hire someone who one day could be a senior partner or one day could basically manage the capital base, right? Or, if we were ever to launch a new product, go launch that product. We’re looking for people who can be as good as I am, or Anouk is, or Cory is, or Katherine. We want great people.

For sure, you usually start in our partnership as an associate, right? So you’re going to start supporting someone, and you’re truly going to be an apprentice in their way. Then, even when you become an analyst, the first 3 years, you’re probably doing real analytical work, but you’re early in your journey. We don’t want to hire you. We don’t want to promote you unless we think you can actually one day lead the investment organization and drive the firm. The reason I feel that’s so important is we just don’t have that many—

Just like the companies. If you don’t believe it can get better, you don’t do it. [Laughter]

Right? So that’s hard, right? The other thing that’s hard about it is, when I went and looked at these firms, I do think there is a level of growth you have to pursue, right? Durable is a performance-driven organization. We break every tie in pursuit of investment excellence.

We haven’t really marketed ourselves or tried to get new investments since 2022. Why is that? I think we’re performing really, really well, but I basically believe markets are pretty full. We’re a long-only firm. We’re not going to short, and we’re not really going to try to time markets.

But if you’re going to be our investor over time and we’re going to do well by you, we should probably take more of your capital when, on balance, the entry point is lower than higher, right? So we’re going to break everything down. We’re going to really understand, if we’re going to do less, what it means to be able on the public side to own meaningful positions in companies and to really be able to trade if there’s quarterly volatility, such that we can buy more when things are attractive.

If we’re only going to do maybe 5 a year—and I think since 2023 we’ve done 14 new private investments, so we’re back to doing 5 a year—and we’re going to start relatively small, a lot of times we start by investing $10 million or $20 million, it’s going to make an impact for our investors, right? We’ve got to be a performance-driven organization.

And for our entrepreneurs, we’ve got to be able to do exactly what we’ve done for Louise. We have to be able to do for Dylan what I think we’re doing for Dylan. We have to be able to support Canva and Bending Spoons and the next generation of those. We’ve got to go do that.

With that said, I do believe that these investment firms that have persisted have actually done a good job of, at some point in time, while the initial team was at its high performance and still had plenty of runway, starting to prove that other people could participate in the investing process, right? That’s something that we started to do internally with how we approach the private markets, and we’ve got to, over time, flesh that out.

What is your pitch to all the great and emerging private companies out there that they should soon or eventually be publicly traded?

Yeah, this is controversial, right? I love what we do because, first of all, the world keeps on adapting. When I first started investing in private companies, it was highly controversial that any late-stage private company would be valued at above $1 billion.

10. The Argument for Going Public

We talked about Workday earlier. When we led the investment round at Workday at $2 billion, everyone thought we were crazy. We invested in Twitter at $1 billion, and I was severely publicly critiqued. Now people look back at that and it’s just like, wow, the idea that you would have a $1 billion private company—that’s not even newsworthy anymore.

What has changed, obviously, in the private markets is that you can be a growth company that loses money continuously or is marginally profitable, and not only be valued at $1 billion, but be valued at $100 billion. There’s even a view—and I think it’s thoughtful, I’m not criticizing it—that you can be an indefinitely private company. For SpaceX, maybe Elon is correct and SpaceX never has to go public.

That’s really only happened in the last 5 years, and some people correctly pointed out that this might be an incredible path for certain companies. By the way, I think there’s some truth in it. In the ideal situation, you’re not beholden to short-cycle performance, so you can drive growth, innovation, and, at the right point in time, profitability and discipline in your business.

You can do it on a time frame that lines up with your individual business or your own competitive reality and not have to deal with the public markets. I get it. I actually think it’s very thoughtful.

Here’s the good news about life: we’re going to run an experiment, and we’re going to know the answer, right? I’m not saying that’s wrong. Here’s [snorts] what I think. First of all, I don’t think it’s for everyone, but I believe the path to building a compounder, or even what some people would say is a generational company, through the public markets is proven. If you understand how to do it, it’s actually very clear what you do.

Let’s go back to the compounder studies, and then I’ll give you a real-life example or 2. When you look at these compounders that were 6x companies in 10 years—the 40 of them—the average one has a period of time where the stock goes down 50%. They don’t go down 50% only when the market is down 20%. They go down 50% when they basically go through transition.

I’ll give you an example from my career. Netflix started as basically a DVD-by-mail business. To Reed’s credit, he realized that streaming was the future, and he wanted to tackle this offensively. Now, like any transition, it’s a little messy, right?

First of all, he tried to split the company, right? He announced—

I remember. Yeah.

He was going to have Netflix and likely Qwikster. He had to go back because he violated customer trust and churn spiked.

The other thing that happened was, in that period of time, the stock—he was buying back stock at $280—and the stock went to $70. I remember this really well. When I was at likely T. Rowe Price, I led a PIPE to basically recapitalize Netflix, right?

Reed’s a great entrepreneur for a lot of reasons. I remember calling him on a Saturday and saying, “Hey, Reed, look, I could be reading this wrong, but there is a scenario here where the market’s right and you have to raise money.”

He said, “Henry, what are you even talking about?”

And I said, “Reed, I’m a huge admirer of what you’re doing. I believe in what you’re doing. I believe it’s offensive, but I also believe it’s a tough financial transition. You’ve got to go from a variable-cost business model, where the studios rent you DVDs on a usage basis, to a fixed-cost business model, where you’ve got to write big checks to people like Discovery and Disney to basically acquire content, plus the fact that you hadn’t launched any original programming, but you were investing in original programming.

“If you run this scenario based on the potential subscriber losses in this transition, you’re going to run out of cash, or at least the market’s going to think you’re going to run out of cash, and your stock is going to go down a lot more than $70.”

To Reed’s credit, he said, “I have not thought about this as much as I thought I should.”

“Let’s talk tomorrow. I’ll get the CFO on the phone. You go through your scenario. We’ll go through ours, and I can learn.”

And look, at the end of the day, when we showed him our data, he was like, “Look, I don’t agree with your scenario on subs, but yours is not out of the realm of a reasonable thought process.”

He ended up raising a PIPE. When I was at likely T. Rowe Price, we put in half of it, and then TCV—Jay Hoag—did the other half. This, to me, is the classic example of a market-leading company embracing a transition. They obviously ended up winning, right? We did that PIPE at around $4.5 billion. Look at the market cap of Netflix today. It was a little messy, but it worked out well.

So what does the public market do? First of all, it sent a signal to Netflix that you’re under a real transition here, and maybe your assumptions on your financial model—you need to have a wider range of scenarios. Second, if you work at Netflix, you could say, “Well, you had the pain of seeing your stock go from $280 to $70.” By the way, people think that was a great investment. I always point out to people that a year later, it was in the 50s, right? So a year later, did it look like a great investment? Right?

But I think what it does is allow you to do this properly. You have to be resilient. You have to have a culture. It allowed Reed to align external and internal investments and get his entire senior team aligned on what they needed to do, but also realign incentives. I point out to people that, actually, I believe to build a great company, you have to balance growth, profitability, and innovation.

You know, I talked earlier about how, if you’re a growth company, you don’t have to trade on a P/E, but you have to show that path back to the conversation with Duolingo and Affirm in that transition, and you’re better off doing it sooner rather than later. If you’ve got to realign your internal team, actually realigning people to the right mark is really helpful. The people who want to re-up, re-up, and the people who do it actually get handsomely rewarded, while the people who don’t obviously can move on. I think that’s really good culturally.

Could I correctly boil this down to the positive value of daily marks and the depth of public markets and their investors—that those 2 things in combination are sort of the reason why being public might be valuable relative to the private alternative?

But I think, probably because I use the Netflix example when they were fully formed and they were a disciplined company, I also think that putting discipline into a company when your corporate culture has already formed and may be in stasis—I don’t want to use the word “stasis”—but at a certain scale, it’s hard to change, is not good, right?

So I actually think to run a company well, you have to be in the “and” business, not the “or” business. You have to drive growth measured by market share in the short term. You have to drive innovation or allocate capital well to position yourself better for the future. And you have to basically drive profitability. Partially, profitability allows you to invest, but profitability actually forces you to drive efficiency and discipline through the organization and make sharp decisions on capital.

11. The "Warriors" Mindset

What I always tell people about this is you should think about your CFO’s function not as a policeman, but actually as someone who sets standards that force you to make sharp decisions. I think people realize this more today than they did a couple of years ago. A lot of times, when you prioritize and focus on what really matters, agility and excellence come in, and you accomplish more. When you try to do too much and essentially investment has no cost, a lot of times it’s lazy and it’s not sharp.

I feel like we’ve covered so much ground. I’m curious if there’s any other ingredient in Durable’s story or your story that we haven’t covered that you feel is essential to understanding you, what you’re doing, and why you’re doing it.

I think we want to have fun, and we actually root for everyone. The reason I say this is I’m a huge sports fan—a huge sports fan—and I love studying sports. To me, there are 2 types of competitive greatness, and they both work.

There’s Michael Jordan, who was such a fierce competitor that, essentially, if you didn’t rise to his level, he drove you out of there, right? It works, right? Those Bulls showed up with a chip on their shoulder every game, and it was amazing. They were great.

And then there are the people who play basketball and say, “This game is great, and we want to have fun, and we want to elevate the game, and we want to win.” The people who compete with us, we think they’re great, and we’re rooting for them. Of course, if we’re going to play against them, we’re going to be competitive on that day, and we’re going to win. But we want to have fun, and we believe everyone can win.

I think that’s durable, right? And I think that’s really important to me. When we invest in people, that’s the kind of person we want to invest in. We’re public market investors at our core. If we have to—and we did—because we think it’s right for our clients, go sell Affirm, which we did, because we believe from a risk-reward standpoint we have to go do it, we’re going to go do it.

It’s not our money; it’s our investors’ money. We have to be fiduciaries first. But when we did that, we wanted to see Max win, and we never stopped talking to Max. In fact, I think he would tell you that some of the things in our relationship where he learned from me more than I learned from him actually happened during the period of time when we didn’t own his stock, because we don’t think about it as a stock. We think about it as wanting to see Max win.

Even investors—I don’t think about competing against investors. There are so many investors whom I respect, and honestly, if they’re doing their craft well and they’re high-quality people, we want to see them win. That is so core to the way we deal with people and the way we hold ourselves accountable.

Is that like the Steph Curry Warriors at their peak approach, to contrast against the Jordan approach or something?

Yeah. I mean, that’s exactly how I think about the Warriors, right? Steve Kerr, I think, is amazing. John Wooden—amazing. I think John Wooden is the greatest coach of all time.

Think about what John Wooden wanted from his players. He wanted them to be great people. He didn’t necessarily believe they all had the same molds. Kareem Abdul-Jabbar and Bill Walton were maybe the 2 greatest college basketball players of all time in their eras, but definitely in the top 5—totally different people. He accepted that, but he wanted them to be great not only as basketball players, but as people.

He was measuring UCLA against that. Frankly, of course, the output of that is the success they had. That was the Lakers with Magic Johnson, right? You watch those guys play basketball—

And they just were having fun and they were elevating the game.

12. Kindest Thing

I remember going and seeing the Warriors when Steph, Draymond, and Klay were coming up, and the energy of those people was amazing. They transformed the game, right? They changed the 3-point shot. Of course, when you see greatness like that, you have to go learn from it.

I’ve gone and understood the way Steve Kerr is and how he cares about competitiveness, but he cares about mindfulness. He cares about fun. If you’re going to be a new Warrior, he’s going to go visit you in your hometown to truly understand who you are as a person, right? That, to me, is great. And that, to me, is part of what being durable is, right?

It’s a wonderful excuse to ask you my traditional closing question: What is the kindest thing that anyone’s ever done for you?

You know, I prepared for this one, Patrick, because I do listen to your show. I have to say it’s my mom. My parents got divorced when I was young, and my mom really raised me. I learned so much from her.

The thing my mom did for me that, in hindsight, was so wise and proved to be so kind was that I took a leave of absence from Harvard to go work on a campaign for a state representative running for the U.S. House of Representatives, and she was totally supportive of that. He was expected to lose, and, in a long story, I became his campaign manager and ended up winning.

You were 19?

Yeah, I was 19. I came to her and I said, “Mom, I want to go to Washington, D.C., and be chief of staff for Congressman Deutsch.” She said, “Wow, you really want to do that?” And I said, “Yes. In order to do that, I can’t take another leave of absence from Harvard. They don’t let you do that. I have to drop out.”

She was not of the Bill Gates—or, I guess, future Zuckerberg—belief in the world. It was not her ethos, but she was really accepting. She was very thoughtful and listened to me. She said, “Henry, if that’s what you really want to do, it sounds like a very thoughtful decision. It’s a very adult decision. And if you’re going to go do that, I’m always here for you. I love you. I’ll always be your mother. You can come to me with anything.

“But what it practically means is you need to be responsible for basically paying for your education, right? Because you say you want to go back there. I’m going to take you at your word, but you’ve got to go do this now as an adult because you’re making a real adult decision.”

And that was it, and I tell this story to my two sons because I think it was, frankly, very important, but also kind. It taught me that if you're going to go make major decisions, you have to be thoughtful about them, and people will support you, but you have to be able to basically be responsible for the consequences.

An amazing, beautiful story. Different flavor than lots of these answers that I get. I love it. Henry, thank you so much for your time.

Thank you.