Acquired - Complexity Investing & Semiconductors (with NZS Capital)

0:00Okay excitement fun brevity For brevity is the soul of wit Welcome to this special episode of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert and I'm the co-founder and managing director of Seattle based Pioneer Square Labs and our venture fund PSL Ventures. And I'm David Rosenthal and I am an angel investor based in San Francisco. And we are your hosts.

0:52On our TSMC episode, one of the 65 sources that we used was an episode of the Knowledge Project with Brinton Johns and John Bathgate. Brinton and John are public equities investors at a hedge fund called NZS Capital, and they spend a lot of their time researching some ice. It was packed so full of great content that I actually watched it twice to make sure that I understood everything. It was so good. Awesome.

1:18And then in a wild coincidence, the very next week, even before we shipped the TSMC episode, David and I were at Capital Camp, great event organized by Patrick O'Shaughnessy and Brent B. Shore. And we ran into Brent and in person. And I was like, I recognize that guy. What do I recognize him, Brent? It was like the Spider-Man. Yeah, definitely. You. No, you.

1:38very, very much so. So after like nerding out the whole rest of the event on TSMC, geopolitics, semis, we decided to have Brinton and John on acquired. And on this episode, we actually didn't even get into semi-conductors for the first hour since it was so fascinating to hear about their investment principles at NCS. And I've said this many times on the show, but yet again, new frameworks that have totally changed the way that I think about the world. It's frameworks all the way down, Ben. It is. All right.

2:08Listeners. Now is a great time to talk about a new partner of ours here on acquired. LaGora, the agentic operating system that is redefining how the world's best legal teams work. Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. LaGora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

2:36So the founders did exactly what great founders do. Operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love like tabular review where you.

2:56drop in a folder of hundreds of contracts, and it pulls every key term into a grid a lawyer can actually work with. Lugora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work, and this means that the pie can grow even as each individual task takes less time.

3:15And they recently launched LaGora agent offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting the early LaGora numbers essentially.

3:43speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over a hundred thousand lawyers on the platform from 1200 legal teams in 50 countries. And crazily, they went from one million to a hundred million in ARR in about 18 months. Truly insane numbers. And that is the real test.

4:08Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in house at a company, you can learn more at logora.com slash acquired and just tell them that Ben and David sent you.

4:29Now, as always, this is not investment advice. We almost certainly hold stocks that we talk about on this episode. So, do your own research, make your own decisions, but love the frameworks that we dive into with Britain and John. So, without further ado, onto our conversation. All right. Well, listeners, we want to introduce you to NCS Capital, their investing philosophy, and partially because we think they're a fascinating firm, similar to Honam of Alto's, or Hamilton Helmer of Strategy Capital.

4:59But also the deeper David and I have dove down the rabbit hole the last week of reading all the papers they published. We feel like we've gotten a lot smarter. And so we basically just want to expose the world to more and more of that. So Brenton and John, welcome. Thanks for having us. Thanks for having us. Well, first, let's start with complexity theory, which is a concept that your whole firm is based on and you've published a 47 page paper on that is just A full of fun little graphics, but B, I think probably has five to eight kind of mind-blowing concepts in them. And the first one is, you come right out and admit that you don't know the future. What's going on with that? You would be bad marketers as VCs. He claims to know the future. No, I mean, look, the whole investing philosophy comes out of a lot of pain, right? So we are investors for a long time. We are wrong a lot. Like all investors are wrong a lot on a consistent basis.

5:57And we're just looking for a better way to think about things. Somebody suggested this book to me called The Origin of Wealth by Eric Beinhawker and sort of serendipitously around the same time, someone suggested complexity by Mitch Waldrup to Brad. And we both read those books and Origin of Wealth was a slog. I think it took me six months to really get through it. And then swap books and start thinking about sort of a different philosophy. I'd heard a little bit about complexity theory and the Santa Fe Institute, which I want to get into. I think Bill Gurley talks about this fairly frequently in Michael Madison, and that's how I kind of originally got turned onto it. But tell us a little bit more about what is it, because you know, it's not at all about investing. It's about the world. That's right. Yeah. In fact, I think it was Bill Gurley, that recommending complexity to Brad.

6:47Complex adaptive systems are all around us, right? That's what governs the world. That's how the world works. We don't know how the future is going to unfold because these systems is interacting together and it creates what's called emergent behavior and emergent behavior makes predicting useless in most cases and we can have guidelines and heuristics and those are all helpful. But as far as exact outcomes and what's going to happen in the future, those are a lot more difficult. Santa Fe Institute started with a group of scientists from the Los Angeles National Labs and they came together and they were mostly physicists and they started talking to economists It was sort of hard sciences and soft sciences and the physicists were like hey economist guys you guys seem really smart, but you know your theories

7:30They don't work, like all your math doesn't work. So what's up with that? Like, you know, with our math, it's extremely precise. In fact, you know, when the math is off just a little bit, Einstein's like, oh, your math is off, the Pluto should really be here and comes up with a theory of relativity, right? We literally made the atomic bomb like it works. Yeah, it works. And so they started coming together around this idea of complexity. What is complexity? How do we define complexity? Where does it sit? And because we are living in this complex adaptive system, how do we think about the future. How do we think about life? How do we think about going forward? And for us, this sparked an interest in biological systems. And we found this sort of biology vein much more interesting than the traditional economics vein. And much more applicable to investing than the traditional economics vein. Well, it's so cool. And am I right that you all actually went to this head of attitude and took courses there? Like, how deep did you go in this? We did. Like a lot of rabbit holes. We go down very deep.

8:27We quickly became members of the Santa Fe Institute. They call it the action group. It's this group of non-scientists that are allowed to sit in on a lot of the science. And so then we took this complexity course over a weekend, Brad and I did at Stanford. And that was just a ton of fun actually, John and Joe, the two other investors on our teams. They took a longer course. They actually had to do real work. Brad and I didn't have to do homework. But we just learned so much. And I remember sitting outside of this cafe at Palo Alto with Brad and we just sort of been at this course with Deborah Moore, this lady that teaches at Stanford, who studies ants. And I thought, man, this concept of resilience is really fascinating. You know, it's really more about resilience than it is about predicting the future. And it's about adaptability. Biology doesn't really care that much about the future. They care about adapting to this wide range of futures. My bees don't really care if it's going to snow tomorrow. They can adapt to snow. They've learned how to do that over millions of years.

9:25And what if we looked at companies like that? And so then, you know, of course, we kept reading, we kept writing. This was probably 2011, 2012, and in 2013, we published this long paper that you referenced, which is super geeky, but it's got a lot of pictures because that's the way we think. You've got the back to the future delorean in there. It's got the delorean. Like what more could you want, right? We would be really hoping for a delorean for the office. That's our dream, office furniture.

9:47On the note of ants, this is probably the first and best example of an extreme version of resilience in an organization. Can you share the insight you had there? Yeah, so we attended this class by Deborah Gordon and she has been studying this group of ants for 30 years in New Mexico. They obsess over this group of ants, right? And they know what every ant is doing at all times and what they found was really fascinating. They found that about half the ants in the colony weren't doing anything. They were just sort of sitting around. And then they had half the ants doing these defined jobs. And that's very counter-tuitive. We think of ants as sort of the ultimate productivity machines. But it turns out ants aren't optimized around productivity. They're optimized around longevity. They're optimized around resilience, around living as long as possible. Let's say it that way. So that was really insightful for us. We thought...

10:36Man, all these companies are optimized around productivity and Wall Street only makes it worse because we're obsessed over quarterly earnings. And so, what if companies were really optimized around this long-term thinking? Of course, we see that with lots of companies. Most of them tend to be run by founders because founders have a lot of skin in the game and they think long-term. But there are CEOs that think that way also.

10:57We know that the average 10 year of a CEO in S&P 500 is less than five years, so they're not optimized like ants are. They're trying to get a lot of return really quickly, but companies that take this long term view are so much more interesting. When I read that in your paper, the thing that hit me over the head, I was like, oh, this is Warren and Charlie's laziness bordering on sloth. That's exactly it. The goal is not productivity. The goal is long term steady returns and resilience.

11:26I think we're going to try to like rock this very early and you know there's a lot of science behind that math but they don't need that. They're so good with folksy wisdom. So then the thing that hit me of course I'm like well companies not gonna have half their employees sitting around doing nothing but just as a fun thought experiment what if a company only was growing at half the growth rate of a high growth company but you know it's a marathon on a sprint they could do that over 40 50 years instead of thinking in these five and ten year time horizons.

11:54Do you have any good anecdotes on I know you have this firm belief that hyper growth is bad and actually slow very long-term compounding growth is the real holy grail? Yeah, I mean I think what we're generally looking for is we kind of use Groupon as an example whether that's fair unfair of like we're not looking for the next company to hit X revenue run rate in the shortest period of time or whatever it is like we're really looking for this durable resilient growth and I think the way you framed up then that if a company does have employees that aren't driving the level of growth that you'd be seeing in a hyper growth firm, that's okay, as long as it's hyper durable. And so you could look at, I mean, look at Dan or her, kind of like some of the classic iconic growth companies that have compounded for decades. And that's generally where you see the compounding. It says, obviously, you compounded 10 to 12% a year or in the teens, but you can do it for 10, 20, 30, 40 years. You can just get tremendous value creation. So I guess some companies in the portfolio we admire.

12:50that do that would be someone like Texas Instruments where they have a really decentralized culture and they actually push responsibility decision making down into the deeper parts of the organization. And so the CEO is not really a manager. He's a capital allocator. He almost has to think more like an investor and a portfolio manager than an operator. And so I think that's what we really look for is companies that can provide this durable growth. Again, it's very buffet like we're hopefully finding companies where you can just sit and forget it and they're going to put up moderate to healthy growth for

13:1810, 20, 30 years, and in our framework, which we can talk about around resilience and optionality, that's what we're looking for in the resilient bucket of the portfolios, these companies that can really compound it at a healthy rate for a very long time. Yeah, so you guys have these two concepts, and then one kind of super concept that combines both of them of resilience and optionality that you look for in investing. And neither of those are terms that most investors are familiar with. Can you define what you mean by both of them maybe give a few examples of companies. Sure, on the resilient half of the portfolio, we kind of say you know when you see it, which I think is kind of an unsatisfying answer. But John, we're looking for our companies that are further along kind of in their S-curve and their growth trajectory. And so this would be a company we own in the head of the portfolio. It would be someone like a Microsoft or a TSMC where we're not looking for value stocks or kind of like cheap companies. We're looking for companies that are healthy growers that we think can terribly grow for the next 20 years.

14:1430 years in our turnover and this half of our portfolio is around 10% so this is the hopefully said it and forget it part of the portfolio and so they know a few characteristics we tend to see in that part of the portfolio are mission criticality and switching costs which I know you guys cover well and some of the deep times you've done I mean just scale like TSMC we can talk about in more details just like a classic Scale company where when you talk about power laws in our investing framework and pockets of industries where one company can take 90 to 95% of the profits into given industry and TSMC is a great example of that and then you exactly the way you guys laid it out so well on your episode on TSMC is you really get the flywheel going right where the more scale you have the more you can read best the more you can impact your customers and it just becomes this beautiful compounding machine.

14:56The last bucket we probably would see in the resilient part of our portfolio is just network effects based competitive advantages where you see companies that really hit their inflection point. And again, especially in digital markets, you'll tend to see a handful of companies or potentially one or two companies take most of the economics in a given market like digital advertising or smartphones or there are so many markets where there's one or two players that have 80 to 95% of the profits. And so we tend to see those in the resilient part of the portfolio.

15:24I think it was really counterintuitive about how you guys think is you're actually not looking for moats. The companies you just described and think a lot of investors think about like, oh wow, well, they've got really deep moats. And so of course, you want those as your long-term compounding holds. But you guys have a little different perspective on this, right? Yeah, we have a little bit of different take. And so I don't want to offend anyone who uses the term moaks. I think it's a great term and it's a great part of anyone's kind of investing toolkit.

15:50But I guess one of the things that we're careful about is looking for companies where part of their mode is inserting themselves into the value chain or into their customers' share of wallet basically, where they put themselves in a position to extract as much economics as possible. And so I think that can be viewed as especially in kind of a more of an industrial age view of how competitive advantage has evolved. Is that something that we try to avoid? We're not trying to look for a company where They feel like they have customer lock in and then all of a sudden they can raise price three to five percent for the next ten years. Part of our framework and the reason we name the firm and ZS Capital is we're looking for non-zero summedness so looking for a win-win outcome for all constituencies across kind of the value chain that includes the companies employees and their customers and also kind of society in the environment at large and so we're just careful looking for companies where all of a sudden if I have this mouth and I can screw my customers over the next ten years right I think that's what we're careful about. I noticed.

16:45I don't think you guys hold Apple, right? But you do some of the other large tech companies, and this feels like a perfect example to me of like, oh Apple, like incredible modes. They're getting pretty good at value capture over there. Yeah. Yes, that's a very nice play with putting it. You obviously see it with Spotify and the EU and Epic here in the US and being in the news flow constantly. I just think when you get to a point where you're taking so much economics for your business, which already has the largest market cap.

17:10in the world that your key partners on your platform are taking you to court or taking you up to various regulatory bodies or writing white papers on how you're screwing your customers. That's just what we're trying to avoid. And who knows, it might work out perfectly for Apple over the next 10 years. It makes you less resilient. Yes, exactly. Is that the idea that if there's consumer surplus?

17:29money left on the table for consumers, where they're not getting every dollar extracted that they could by the company, that that company is more resilient over time, even if they're not making every profit dollar and growing as quickly as they could today. I agree with that. I mean, you really have a management team that's thinking really long term. I don't know why you wouldn't.

17:46give up a little bit of extra economics for your key partners whether that's suppliers or developers on your platform or your customers to really solidify your trajectory over the next 10 to 20 years versus I don't want to pick on Apple too much but like what's the gross profit impact if they cut their app store take rate from 30% to 15% across the board. What is that like 5% of gross profits? It's meaningless to them and it would create so much value. There's obviously not going to be effects of that. But anyway, I think that's what we're looking for as companies that are paying it forward. Like again, back to the TSMC example, because you guys covered it so well. TSMC has lower gross margins than most of their customers. And so at any point, they could probably take their margins from 50% to 60% and say, hey, I basically have them an oply in this market. But the way Morris Chang architected the culture there.

18:29is on long-term value creation and really creating a platform for their customers to create massive, amazing businesses. And so I think that's the way we think about it. Yeah. And just for listeners to put some numbers behind this concept, which I think is just great from this NZS white paper, 15% growth over 10 years would deliver more than a 300% return, not bad. But 15% growth over 15 years would almost double the 10 year return.

18:55If we could populate our top 20 positions with these types of resilient companies, we'd only trim and add around periods of volatility. All the real absolute dollar value of compounding shows up in the out years. So you just want to make sure that you're still compounding in the out years. That's right. And it's sort of where we take issue with Porter. This is, of course, Michael Porter, competitive strategy, Porter's five forces. Thank you. Yes. If we take a cynical view of Porter.

19:21A lot of people have returped it of hey build a motor on your business and then stick it to your customers on price, right? I'm not saying that's what he said. I'm just saying that's the way it's interpreted. And that's a terrible way to build a business because eventually someone will undercut that and offer actually a better value prop to the customers. And because all of this value are in the out years, it's just really not a value maximizing way to run the business either. So we think this concept of creating more value than you take is really important. And Porter agrees he actually revised his

19:51thinking and in 2019, wrote a paper in an institutional investor called where ESG fails, where he talked about this concept of shared value. And that's not him trying to say that purely because it's good for the world to care about all your constituencies, you know, not just your shareholders, but also your customers and partners. He's literally making an economic argument for shareholders that that's the long term value, maximizing thing to do, right? I think that's right. And, you know, he was a consultant for Intel.

20:19back when our processors were starting to come out and actually dominate the mobile space and they came out with this sort of dumbed down processor. The atom? Yeah, exactly. But even before that, they came out with a cheaper version of it. But in reality, that's not what they should have done. They should have actually embraced a totally different business model, like ARMDA, where they were just selling IP and enabling a whole ecosystem instead of trying to take all the profits for themselves. Okay, so that's the resilience side of NCS thinking and the portfolio. Then you also marry that with something very different. Tell us a little bit about optionality and how you think about that. Yeah, really, we're thinking about the future. We're just thinking about how broad and safest the prediction we're making. So we can make these very broad, safe predictions like we think electronics are going to push deeper into the world, right? I think in nine out of 10 copies of the multiverse, that's happening. But there are other predictions like we think EVs are going to

21:17dominate the world and Tesla is going to be the power law winner inside of EPs. That may only happen in two out of ten copies of the multiverse. You know, it's certainly not ten out of ten. So these predictions are much narrower and the range of outcomes is much broader. And so that doesn't mean we can't invest there because it's incredibly asymmetric if we end up being in that copy of the multiverse. But if we're not, and it's a zero, it also doesn't torpedo the portfolio. So I feel like actually you guys could give the master class here since you're such great.

21:46venture capital investors, but that's really what we're trying to expose ourselves to and these earlier stage public equity companies. And so how do you actually then apply both of these very different principles inside the same portfolio? Are you picking some stocks because you're maximizing for resilience? And you say that look, this is a great compounding slow growth, but durable company. And then there's other companies that you're investing in.

22:15Because you say, oh my gosh, if this thing's right, it's going to be really right. Venture capital asymmetric upside right. Or is it blended in some of the same companies? You're right. It tends to be these two portfolios in one. So we concentrate resilience. That's about 15 names and just over half the portfolio. And then we distribute optionality. So that's about 40 names, also just under half the portfolio.

22:38max position size one and a half. And in the middle, this between one and a half, two and a half, one and a half, three, we don't own anything. And that's percent of the portfolio. Thank you very much. Percent of the portfolio. I say this stuff so much, sometimes I don't complete the sentences. And then sometimes we find these very resilient companies that are actually layering on optionality to the business. So they have both. They have this resilient base, but then they have optionality on top of that. And you call those companies root mose? Yeah.

23:07We're such gigs. It's so bad. We love it. We're through resilience out of the money optionality. It's just a shortcut on the team that we use. And those are the companies that you bump up to seven, eight percent of the portfolio, right? Yeah.

23:20What are some examples of those? Well, I mean, sort of, there's a couple, right? The classic example would be Amazon in 97 when they went public, you know, I think around a billion dollar valuation. Nobody could have foreseen AWS, right? That wasn't anybody's DCF. Oh yeah, they're going to also create infrastructure that everybody in the world is going to use create businesses. They sound so silly, right? But another one that we had in the portfolio years back was eBay. I don't know if you guys remember the marketplace business was struggling. They brought in a new CEO, John Dono.

23:47They had PayPal. And really, you weren't paying for India PayPal. If the marketplace business would recover, that more than cover the cost of entry. Of course, Marketplaces did recover. PayPal ended up being great. John Donahose, an amazing leader. And that was a classic root most stock.

24:04So in that situation, you've got a fairly resilient business, or the hope is that the marketplace is a resilient business, and then PayPal is the out-of-the-money option that you sort of have that's being valued at zero, but clearly is a very valuable business. That's exactly right. Well, I think it's cool about this. Yeah, right. This makes a lot of sense and investing. This also makes a lot of sense in how you should run your company. Yeah. And that the best CEOs think this way, as it, how do I create resiliency?

24:34in my core business, but then what are the options that I'm investing in for the future on top of it? To my mind, there's no better example than Amazon of just this is the whole operating philosophy of the company, right? So we love this concept because we think it's true in the universe. And so therefore the narrow slice of investing that we're using it for, we're pretty sure is also true, but it works really for everything. I mean, it works for parenting.

24:57Parents don't know what we're doing. Like I have four kids. I have no idea what I'm doing. So I'm just trying new things all the time. Well, that didn't work. Okay. Well, it's, you know, so there's a little optionality of all, too. And then sometimes your optionality becomes resilient. And that's what you're hoping for. But you just try a lot of new things. So I don't know. For us, it's a life philosophy. Fantasy football is another area where I can, like you can apply resilience and optionality very well. Actually, you can't get out of your head once you start kind of practicing this, which is so funny. All right. I'm going to take us in a totally different direction.

25:25I want to talk about the difference between normal distributions and power law distributions and listeners of the show who are in venture capital or in startups and have tried to raise venture capital or successfully raise venture capital will know. You know they get this answer from VCs all the time that our portfolio construction is really a power law we fully expect a third of the portfolio to go to zero with a third to return capital and really only like one or two companies at the sort of head of the curve are going to be this hopefully.

25:5310, 50, 100X that sort of gets us a great return regardless of what happens in the portfolio. You guys, interestingly, are sort of applying that thinking at much later stage companies. Hopefully, ones that aren't going to zero, the way that a frail $10 million valuation startup could. How does that work? And what was the insight that made you realize, hey, the world is not normally distributed actually in certain scenarios. It's very power lot distributed. Right. Well, once you accept the fact that All of life is governed by complex adaptive systems and the markets are also governed by complex adaptive systems which means merge of behavior you can't predict the future you focus on adaptability then of course those complex adaptive systems tend to be governed by parallels so it's sort of a natural follow-on but the insight here is all risk models are based on these Gaussian these normal distributions right but

26:46In fact, the world doesn't work that way. And so there's a really fascinating economist named Ole Peters who's done a lot of work here and said, wait a second. Your wrist models are sort of like airbags that go off at stop signs, but not when you get in a crash, right? This has always been my beef, you know, what I was a business schooled with. Economics has applied to like business and investing in the real world is you studied this stuff and you're like, wait a minute, I actually work in the industry and this is not how it works.

27:15Right, exactly. And being venture capital investors, you see this all the time. With public companies, it's also true. There are a few big power law winners. We see them in the markets today. They're driving the entire market, right? This is our reality. There's a great study that you guys referenced in the paper that I'm wondering if you could just talk a little bit more about it. The toy example of a coin flip, a coin flipping contest where, let's say you win $50 or whatever, when you lose, you lose 40.

27:43That sounds like investing to me. There's an expected return of 10%. What actually happens when you run that contest? Wait, real quick before you answer. Is it that? Is it when $50 lose 40 or is it 50%? Oh, it's present. Okay. Yep. So if it's $100, then yeah, you're right, David. It's 52% down 40%. Got it. Okay. Yeah. The concept, it gets to the heart of modern portfolio theory and expected utility theory and the flaws of that. So back to the multiverse.

28:13The way this works is if you had a hundred people flipping coins and they did it for enough time you would actually see a nice study positive return and that looks like on average the experience of the participant is winning but that's not really true what you get is a lot of people going bankrupt and a few massive winners sort of the Buffets and the Soros is the investing world right so the average is not average and in one portfolio theory you're taking an ensemble of all these but that doesn't really make sense because I don't really care about your outcome, David, or Ben, your outcome. I care about my outcome. I only get to live in this one universe. I don't get to live in yours. I don't get to live in the multiverse. My outcome on average is that of loss. It's that of bankruptcy. When the time average does not equal the ensemble average,

28:59that is called a non-ergodic system. And you guys can put it in the show notes, Olai Peters works on this. It's super geeky, but really fascinating. That's so cool. Well, this is so counterintuitive. You would think if you presented that game to me, I would be like, oh, for sure, I want to play that game. The odds are stacked in my favor. But most people who play that game will lose, and then a few will win really, really, really big. That just blew my mind reading that.

29:23Yeah, the distribution set is not normally distributed, it's parallel distributed, so that changes everything. And that's why all these wrist models are like your bags that go off at stop signs, right? It's because it turns out the world doesn't work that way, so.

29:35You know, we hear on a regular basis, oh, this was a three standard deviation event. You know, which, if you understand the math, the three standard deviation events you expect, oh wow, I'm so lucky to have seen one of these in my lifetime. But we see them a lot according to the media. And so they're sort of ridiculous. 99.73% of all events should fall within three standard deviations is the way the math works. Meanwhile, I mean, I've been in this business for.

29:5813 years and already been through two recessions that are way outside of three center deviations Britain has as well And so it is just kind of a funny kind of common sense thing that when you're practicing this stuff that the normal distribution doesn't really make them much sense Britain mentioned I took this course at the Santa Fe Institute It was actually around this time last year and like I mean, just power laws were just like so cool. It's amazing I mean one of one of the examples we use in the white paper is if you plot like earthquakes by frequency and intensity that just like in nature naturally forms a power law which actually makes a lot of sense you're gonna get you know one or two or three heavy magnitude earthquakes a year and then a lot of small ones but also if you plot the frequency of every word in the book mobi dick that actually also forms a power loss the is mentioned 15,000 times and then the next word is and and that's like 7,000 times and then there's like the super long tail of words that are only

30:45You know, use, you know, a handful of times. Again, it's when these things, once you see it, and it's amazing for starting companies, obviously, like we mentioned, especially in kind of digital markets, because, you know, the world is going towards more markets where a winner can take all and, you know, becomes much more of a power-a-law dynamic. And so that's why we just always have our kind of attendance up for these power-a-law dynamics. And that's honestly a big part of when we're looking for optionality, that's what we think about. It's like, is this a company that is relatively earlier stage in public markets that has the opportunity to power a large market? Which is why, of course, you're making 40

31:15diversified optionality bets here because it's funny to think about this, but the statement of, let's go back to the stop sign example. Yeah, the vast majority of the time, the fact that these airbags don't work is totally not an issue, but it's a massive issue, the moment that you need them the most. Very similarly, all of the gigantic, outsized economic value is created from the three, four, five, six, seven sigma events in the world. And so It's kind of ludicrous to be like, well, the vast majority of the time, this investment philosophy is very sound. And you're like, yeah, but we're not really trying to index on how many days out of the year it's sound. We're trying to index on how much value can get created at the end of the portfolio 50 years from now. And that's going to be driven by the outliers. So we have to be prepared and fully optimize around the outliers, not close our eyes to the few days that they might exist.

32:10It's such a good point. I'm really glad you brought it up because what we're really playing for on the functionality half the portfolio is a symmetry and really it's not about batting average like it's okay for only right 30% of the time which is not intuitive at all for public markets investors I think I think everyone wants to be right 55% of the time 60 whatever it doesn't have to be that high to have good long-term returns, but we're playing for slugging percentage where even though only one out of three work, but those are multi-baggers and can really create a lot of value over a long period of time. And that's the beauty in that half of the portfolio. And we've seen it. We've been doing this for years now and it is amazing how you see these companies emerge as value creators and generate a lot of value for the portfolio out of relatively small starting position sizes. It gets back to this whole idea of, you don't know what's going to happen. If you set everything up with the idea that you don't know, I think in a lot of ways

32:56Most venture capitalists Grock this idea and set up their portfolios in this way But I think lots of people myself included in the past Didn't fully understand this you say the paper I think you use nicer language than this but I'll use my own language This is my quote that conviction this idea of conviction that so many people in venture talk about an entrepreneur's like I've conviction I'm convicted which Convicted means you're convicted for crime. But anyway, I have conviction that in this company, I'm going to lead this investment. Conviction is kind of stupid. Conviction is saying, I think my view of the future is going to be right. And really what you want is optionality. And like, you need people to have conviction because otherwise, there would be no entrepreneurs, right? That example of the coin flipping contest, that is exactly the dynamics of becoming an entrepreneur. The expected value is positive.

33:50and yet the vast majority of people who start down that path go bankrupt. And then a few people win really, really, really big. But when you're constructing a portfolio, what you actually want is a lot of those bets. You guys have, you know, 30, 40 optionality names in your portfolio. As a venture fund, you want 30, 40 quote-unquote names in your portfolio, venture portfolios with five or 10 are very non-resilient. Yeah, that's right. I mean, we use conviction as a synonym for overconfidence.

34:20I think that's what really is the right way to think about it. Conviction for us means, hey, I've done a ton of work, so I've got a lot of stunt costs, which means I've got bias. And I think that my view of the future is better than yours. That is literally what you're saying. Would you say that? Yeah, right. So who knows, right? What we're trying to do with the tail of the portfolio and I think what you guys are trying to do in venture capital investing is maximize the probability that we get lucky.

34:46I just ripped that off from Albuson. It's very good at calling it what it is. And we're just trying to maximize the probability that we get lucky. I also think, I mean...

34:55Just changing your mind is the hardest thing to do as an investor when you're wrong. And I think if you kind of stand in a row and say, this is my highest conviction idea, it just makes it that much harder to Britain's point. I'm just like introducing bias into the equation. And so when I also think if you kind of invert it, I think it's fine to have an optionality position that you actually don't have that high conviction on, like to Britain's example on Tesla. Like, I don't think that we have super high conviction that Tesla's going to power a lot of the EV market, but is there some probability where they do that? And it's worth

35:22You know, multiples of what it is today. Sure. That's the way that we kind of think about conviction. And again, I don't want to piss anyone off. That uses the word conviction, similar to modes. Like it's fine. Everyone has their own process. And we're not trying to like push what we do on anyone else. This is just what has worked for us over time. And so what I think we're very careful about is just introducing bias into our process. And luckily we all I have run on our team knows each other well and can call each other out. But I do want to be a little careful. Well, I have two points to make that this cultural one I think is the second. But let me start first with

35:48At the end of the day, this is a Buffet concept. This idea that it's better to be approximately right than exactly wrong. That's another way to describe this optionality phenomenon here, where it doesn't sound nearly as strong to stand up in front of an investment partnership and say, I have very little conviction in this, but it could totally work, and if it does, it'll be really big. That's about the best I can tell you right now. That does not get everyone around the table excited, but in a very Buffet sense, If it works, it's going to be so freaking successful that this is a great price to own it at. And like, do I know if this is the right price to own it at? Not at all. How many versions of the Multiverse do we have railroads? Like all of them, right? And they're important. And how can we recreate that? We can't. It's been possible. And so I think you're right. Buffett and Munger say this so easily, so naturally, and we're just saying it in a much more complicated way.

36:42That's the second point. I'm curious about it. What are some guardrails that you have in the internal culture to reward non-conviction? To reward like, yeah, I don't know, but it could work. And if it does, it could be really big. And here's why it could be really big. Well, the funny thing is the way we view team, so we think investing is inherently a team sport. It's a terrible solo sport for the most part.

37:04And the way we do team is our role is calling out bias in each other. Now these are uncomfortable conversations because nobody likes to get their bias called out. But we all know that bias is really easy to identify other people and really difficult to identify yourself. And so by opening yourself up to having being called out, then your probabilities go up as an investor. So it feels unnatural to us at this point to say, I have super huge conviction that this micro cap stock is going to rule the world one day, right? It's like, that would feel really odd. Everybody's like, are you okay? Feeling all right? I think the way we've also set it up with our framework is we just inherently expect failure. I think more than other public markets investors might like if we put something in the optionality of the portfolio, and by the way, that half the portfolio turns over a lot more quickly than the resilient part of the portfolio, which makes sense. Like we are going to be wrong a lot.

37:54And luckily, there's smaller positions. And so you're not going to torpedo the portfolio as long as the most important thing to do is just admit you're wrong and move on. And so I think building that into the culture where it's OK to be wrong and move on and fail quickly versus string ourselves along on a three-year journey on a tough position. And so that's one cultural way that we've architected the way the team works together. That has really helped. It basically gives yourself a license to take some risk that maybe you otherwise wouldn't take if you were sitting on a different team or within a different organization.

38:21And do you try and document here's the reasons why I'm making this optionality bet so you know you can decide to rotate it out of the portfolio if those reasons are no longer true. Yes, everything's written down and actually Brad, which is an investor on the team is amazing at.

38:38pulling the stuff back up and say, you said, blah, blah, blah. He must be really popular on the team. Oh, yeah, he's great. But we love Brad. He's just very good at remembering and then pulling the source data and saying, hey, look, you've drifted. Do you guys points to it? It's not, is there operating margin exactly 22% this year or like as a revenue executive that's running with auto basically are we approximately right on the thesis, right? It's not like we feel like we can predict the future, but you can certainly have checkpoints along the way. And we call this usually with Penny.

39:05I think there's usually three or four things that really move the stock as we call those key leverage points on any position. And so you can generally check in on those and make sure that we're on track. Well, one of my big questions, I think that didn't quite make sense to me in reading your paper. Can you talk about what you do with your optionality part of the portfolio as things evolve in it and how you start an optionality position?

39:34There are two copies of the multiverse where this works, and then X amount of time passes, and you start to have more of a view of which copies, you know, two out of ten, and now, you know, maybe it's like two out of five or two out of three are like, you know, as it evolves, what do you do? Exactly. There's like kind of two scenarios that you can really see that's happening. A good example.

39:55is beyond Peloton before the pandemic. You know, in the stock, obviously went parable like they were huge beneficiaries of work from home, but it's also just a really dynamic company, you know, that's really in its life cycle building, a brand and a platform. And so with a company like that, you know, I think it's still.

40:09early days to call that business resilient for many reasons both just like the context of the company of we're going through digestion after the 2020 kind of a record year for them and off the charts here I should say so for position like that we'll just trim it and you know we have this cap of how big in the portfolio we allow optionality positions to get it's generally pretty clear like how much of this is something that's a really durable inflection in the business and sometimes I guess it is both like I think Peloton is definitely a different company in this version of the universe versus the non-COVID version of the metaverse right

40:37But I think we can't cross it over. Well, this is so different that you trim it. You know, the canonical VC wisdom is ride your winners as long as possible. You know, the things that are working are likely to continue to work so don't sell. But that's not the approach you guys take.

40:53Yeah, it's a really good question we talk about a lot because you're certainly in some cases leaving money on the table. I think if we're not letting our compounders really express themselves over time and so there are stocks we will let them will own them earlier in their life cycle and let them cross over in the resilient head of the portfolio and so we'll do that a few times a year and I think it does kind of force us to average up if the company.

41:11and actually buy more stock potentially at multiples higher than our initial purchase. It's so hard to do. It's so hard to do but I think it's actually, I thought about this a lot. This is actually kind of part of our process where we're kind of forced to do it which is really helpful because otherwise it's hard to just look at the stock and buy more but we're saying we're making this explicit decision that we're going to take this from 150 basis point position to 250 basis points.

41:31And so we're going to add capital because this business has structurally changed and actually belongs in the resilient part of the portfolio. And so there are companies where we've done that where they're honestly just more mature or they're becoming more of a platform. You can actually see the network effect starting to hit. And honestly, some of that is the valuation conversation also that there are plenty of platform-like companies we might want to own in the resilient part of the portfolio, but in the current market environment, they're trading at valuations that we would not consider resilient. And so that's another reason we would own them as optional positions. But it's a really good question.

41:59what we try to do is not make sure that an optional position ends up in the head of the portfolio, because that's something we've just learned. The hard way that, you know, if you have a stock that can have a 50 to 70% drawdown, you know, and it's the starting point is a 5% position. That one is a crush your performance, but then you're also probably hamster on where you've got a stock that's still a relatively big position, and you don't really want to add to it, and then you just kind of have to take your licking, and so that's something that we've learned through experience. Yeah. Well, I'm wondering if even just thinking about this past two-year COVID cycle,

42:28You've kind of seen this happen. The stocks that were huge, multiverse winners in the beginning, the Pelotons, the Zoom, Cedo, and the like. I'm thinking Zoom. Zoom went from, I don't know what, $70, $80 a share to $600 a share, and then backed down to, I think it's at like, $280 right now. So you've kind of seen this happen, right? The optionality played out, that was correct. But then returns pulled back.

42:55We're always looking at what's happening to the range of outcomes. Is it widening? Is it getting broader? Is it prediction becoming safer? Or is it remaining narrow? And so with a company like Zoom, it looks a lot to us like a feature. So now the question is can it become a product and eventually maybe a platform? Can it develop an ecosystem around it? We don't know. But to take your example, let's say in the middle of the pandemic, it was sort of a cool feature. It was better than everything else out in the market, still is.

43:20And then this big ecosystem came around it and it became a full-blown platform. Well then the range of outcomes would narrow and the prediction would get safer, right? And so then that would warrant that becoming a bigger portion of the portfolio. Valuation is a key piece and this is the piece that we get every day as public investors and valuations, expensive valuations, forced predictions. I have to believe a lot more at 10 times sales than I do at 10 times earnings. So we're seeing, okay.

43:46What is the prediction of the company and what is prediction the market is forcing us into and are we comfortable with that? So we are at an unprecedented investment climate where everything on a, you know, whatever basis you want to revenue multiples, earnings multiples, unprecedented highs. Any asset you could invest in be it stocks or farms or crypto is forcing you to make predictions.

44:10What I've heard this whole podcast so far is you actively avoid trying to make predictions so how do you respond in an environment where there's very little resilience in your ability to invest without making a prediction and have a margin of safety there.

44:26You just inserted yourself into the weekly NZS meeting, investment meeting that I think was the question. That's right. This is most of our time. That's great. Just down let's say in any time. Yeah, part of this is interest rates, right? We've never had negative interest rates and then stimulus. And so those effects on all assets which are unprecedented. We think about this a lot. We don't know the answer exactly. But you know, this could get us into our top of some of the connectors because there's a few building blocks of the information age. And we are an epic shift. We're still early days.

44:55from the industrial age to the information age, and semiconductors are the new oxygen in this environment. And so, we look at some of these companies, we think the valuations are actually quite reasonable, and we choose to sort of bring the portfolio more towards resilience, and these are one of the ways we do what we do in multiple ways. Yeah. Like you used the railroad example, they're 10 out of 10 copies of the multiverse in the future going forward where railroads are important. Right. They're probably also 10 out of 10 copies of the multiverse where semiconductors are important.

45:25Exactly. Well, that's an amazing way to transition to semiconductors. I mean, I was looking for the right hook and you know, Brent and I think you bring that up. I was prepared to make some joke like, wait, you guys know something about semiconductors? I think TSMC's like a top three position for you guys. I think your other top positions, Amazon, Microsoft, they use a lot of semiconductors. And I think Salesforce is probably up there too. And TI is one of your top positions, right? Yes, that's right.

45:51Maybe even before getting into some of the nerdy or semiconductor topics, let's stick with an investment one. What semiconductor companies do you own right now in the name of resilience and which in the name of optionality? Let's start with the two different versions of semiconductor, right? So there's a lot of semiconductor makers that are on the digital space on the leading edge, right? They're making three nanometers and odd and these are the high compute functions. And there's other semiconductor makers that aren't really dependent on that leading edge. They're more dependent on having the breadth of a catalog. That would be like a Texas Instruments that has 100,000 parts, or a microchip. And so in our top positions, we're more heavily weighted towards the catalog name. These names that the lifetime of a part is 30 or 40 years. And the margins are high. The growth is pretty good. There's clear NZS in the business. They're definitely creating more value than they take.

46:44And they're very hard to replicate, not because what they're doing. So technically hard, it's hard, but it's because the breadth of what they have would take you decades to recreate. I've always kind of hoped that Buffett would buy a catalog semiconductor business. I just feel like those are like just classic Buffett businesses where they're probably not going to look honestly that different in 20 years than they do now. They'll have higher margins and be bigger and they'll be selling into, you know, cool electronics that we don't even know about, but they're also still selling into like water meters and coffee makers and just everything in your household or in a factory or

47:12you know, anywhere you look, it just has these cheap but high margin chips in them. So, and I guess to inter-question a little bit just on the semiconductor impact on the portfolio, we have about a third of the portfolio in semis, and that goes across the whole value chain, like Tipper Itens Point. We invest in kind of like the catalog analog microcontroller companies. We'll invest in digital company, like in Bidia, that's actually...

47:33in the optionality tail of the portfolio right now, because for valuation and context reasons, we're big investors and semiconductor capital equipment, and those actually are head of the portfolio. We do those as resilient TSMCs, resilient position, and then kind of the broader ecosystem, like Kate Insta and systems, which you guys brought up on the TSMC episode, that's kind of the key, one of the two key kind of cat software platforms for designing a chip, and it's also a position. And so there are kind of more less household name type positions. We own as optional positions, like a company like Cree, which is early in Silicon Carbide, which is an alternative technology to Silicon that's used in electric vehicles, including the Tesla Model 3. And so that's a classic example where there is some version of the Metaverse, where it's a massive platform in Silicon Carbide. The market goes from being a $1 billion market to a $30 billion market. But you know, I don't know if there's a 50% chance of happening or 20 or that kind of thing. It's like a little bit of a walk around the portfolio in terms of semis.

48:26That silicon carbide thing is the first time hearing of it. Is that changing the substrate of the wafer? That's exactly right. Instead of using a silicon, like a bulk silicon wafer, he used a silicon carbide wafer, which is actually the wafer itself is much more expensive and it's very hard. It's one of these classic semiconductor processes where there's some black magic that goes into it. And honestly, most of the people that know how to do this are all in the research triangle in North Carolina.

48:49Cree is the one company that has two-thirds of the market for the substrate itself, and then they will sell the chips. They're the ASML of Silicon garbage. So potentially, then that's a classic option now, right? We honestly don't know, but there's a chance where either this stuff isn't that hard to do, and they have a two-year league on their competitors, or it's incredibly hard to do, and they do become one of these companies where they're doing something that no one else in the world.

49:09can do, and so that is kind of classic optionality for us. But it makes electric vehicles and charging and also renewable energy and really high voltage applications much more efficient. And so it's like really one of these companies where their core competency has just like all the sudden the market really needs what they can offer. And so the market is growing extremely quickly. You're seeing a lot of activity around from other companies trying to get into the market as well. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta.

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51:18Let's do a little sidebar if you guys are game that I just thought of that. I think this could be a really cool case study if you're willing to talk about it about the NZS process. So you mentioned, John, that you own cadence as a resilient position in the portfolio, having just done our TSMC episode and get deep dive on the whole semi industry infrastructure. You mentioned they also have a competitor synopsis. And the two of them, it's like a duopoly in the EDA space. How did you decide to own cadence?

51:48and I'm assuming not synopsis or do you hold both. We've talked a lot about both of them over the years. We've owned cadence for nine or ten years back to our days at our previous employer. I think on cadence it's a few things. I mean it's actually kind of a cool store. I'm just kind of like how we even kind of got into the idea of investing and EDA is part of our kind of process for finding new ideas and just kind of being up to speed on what's going on the industries we follow is going to like industry trade shows instead of investor conferences like we don't generally go to a lot of like big investor conferences and so when early last decade I used to go to all these chip conferences and like every presentation it was like someone from TSMC and someone from ARM and then someone from either cadence or synopsis and at the time cadence and synopsis reviewed is these sleepy crappy companies and we'd love to use some scene we love arms let's do some work on cadence you know and then we

52:37The more work we did, I mean, both companies are amazing. Like, there are a lot of credit. I think what steered us towards Cadence. One is the management team. So, Lipu Tan, at the time, was the CEO. He's actually moving into the executive chair role this year. He just was like one of the iconic leaders in the SEBI industry over the last 11 years. He was actually a VC, previous to being the CEO of Cadence. And he was just on the board and had to come in and basically turn around the company. But he was just so focused on the culture of the company. I mean, he told us what we wanted to hear. You know, which held.

53:04But in terms of turning around the culture and really taking a company that was in a very difficult position in the financial crisis and really like re-architecting the product positioning of the company and he's so customer-centric, that was how we kind of first got involved with Cadence. We do think they're taking market share especially in digital markets like where they would be selling to an Intel or an Apple or an Nvidia. We think they're the sharegainer but both companies it's like an extremely high quality do happily and so I think you've been fine either way. And do you end up doing one-on-one meetings with

53:33the CEO at the level of capital that you're deploying. Yeah. So this was back to our previous firm where we were, there was more than a hundred billion dollars of the UM to deploy and technology was a decent chunk of that. And so like a cadence is a great example, we were actually their biggest shareholder for multiple years. And so at that point, we had really strong dialogue with them. And I honestly would just bump into the CEO and airports in a conference, yes, because everyone, some of these are if that big of a universe, everyone's kind of going to the same things, you know? And he's very tall. He's very tall too. So it's easy to spot. Yeah. Yeah. You're not going to miss him.

54:03And it's honestly just like such a good person too, like we would talk about life and kids and a lot more than just our investment in their company. And so it's actually something we think about a lot as NCS is a younger company with less AUM behind us. And we have a lot of relationships from being in the industry for a long time, but it's an open question of how often do you really need to talk to? If I need to talk to the CEO of a company four times a year, probably not or six times a year or 10 times a year, like the way we're investing, especially with the resilient company realistically.

54:28Maybe a check-in every year or two, or if there's something obviously that's really critical to thesis, we can check in. But that was kind of the way we grew up investing as a lot of management interfacing. I'm always curious with public market investors. How do you think about that? And it sounds like you do find it very useful to have conversations with management versus...

54:47All the information's out there. You know, I would imagine on the one hand, like, well, of course I want to know, like, I could glean so much more information and, like, subtle signals from talking to somebody in person. On the other hand, I kind of think, well, I really care about what you do now, what you say, and I can just see what you do in your filings. How do y'all think about that? This has changed a lot over the past decade because, of course, seeing a management team talk is easier than it's ever been, right? It's publicly available.

55:11There are sometimes when it's helpful, there's sometimes when it's harmful, you know, it probably nets out to be net helpful. But I'm just thinking of one interaction that we had with Rich Templeton, the CEO of Texan Spence in February 2009, right? It's terrible time. Everybody's unhappy. It's really rough. Rich walks in the room, big smile on his face. How's it going, boys? You know, a recession is a terrible thing to waste. And you're like, what's going on? I love it.

55:38And so he clearly had a different mentality of hey, this is where we make all of our returns of the next decade. We're going to go buy equipment for pennies on the dollar. We're going to sort of systematically lower our capex to sales ratio. And we're going to go get customers and sign them up because we're running our fabs full out still and other people aren't. And he's just one of these amazing leaders. You know, when he took the company over, they have 40% of the business geared towards wireless and Nokia.

56:05was a massive customer, the largest customer, and he bled that down to zero. So clearly this embodiment of a company that's built around adaptability instead of these point predictions. And so people like that are helpful to interface with. But honestly, we probably could get everything we need at this point without meeting with them as well. David and I were explaining our research process to some friends the other day. And you know, one of the things that I think that is Chronically under-viewed on YouTube is presentations by executives at industry conferences, and that's a thing that we've relied on really heavily. Everyone goes and watches Elon Musk give his talk at the recode conference. About 358 people watch the YouTube video of Gwenshot well presenting at an aerospace industry event.

56:54There's a lot of really interesting information about the company probably more so than the big shiny public-facing stuff That's exactly where I did maces me I don't remember the last time I watched the computer history interview as between Chancen and Morse Chang Oh so good it was under a 3000 view something like that I was like how does that have three million views you're like am I watching the wrong feed or how could there not be more views of this you know it's like the next no sense there should be a million views it's so funny We send stuff like that around all the time. I couldn't agree more. Pretty now, we're sending some stuff back and forth earlier this week. It's mostly free, too. And from industry trade organizations, and it's a huge resource. And you also, you do get a little bit of a different flavor if you see a management team at an investor conference. Or if there's even not a road show and coming through town, but you're the fifth investor, they've seen that day, it's like you kind of are getting the company line, right, versus hearing what they're really pitching to their broader stakeholders at an industry conference is such a good resource. Yeah. When we're doing an episode just as

57:49Two, three, three plus hour deep dive on a company. We almost never talked to people actually at the company. Maybe we should, but we get all the insights we need from obscure YouTube videos, books, presentations, you know, white papers. To Britain's point, there's so much material out on these companies and stuff by management teams these days. And we do it in our, you know, basements. I think you guys are onto something with this acquired thing. We'll see. Okay, so...

58:15I'm going to take us into the more technical side of semis now. Britain, you sent an email when we were batting around topics and you said, well, what if we start by talking about the UFO crash that happened in Roswell in 1947, where we got the first semiconductor technology and then began to reverse engineer it at Bell Labs. Winky face was the first tech transfer. That's exactly right. I mean, we know exactly when semiconductors came to Planet Earth, it was July 7, 1947.

58:40And then you needed a backstory, you know, when they were, they took the UFO over to Area 51, they're like, how do we like get this in the world without people knowing? And, you know, of course, inter-William Shockley. Fresh from the war, doing research on radar, submarine warfare, and he's already got top secret clearance. We're like, okay, where could this come out of Bell Labs, Shockley? Oh, yeah, that's it. That's the backstory. We'll give it to Bell Labs. That's the whole backstory and semiconductors. I think we're done. There you go.

59:10Exactly. I actually don't know the history. I know he was like super involved in World War II, right? He was. Yeah. There's this great book, by the way, called The Idea Factory. It's the history of Bell Labs. So if anyone's interested in the history of the semiconductor, you should definitely check it out. Not only the semias, but information theory from Cloud China, which came around the same time. Right. Also from Bell Labs, right? Also from Bell Labs. Yeah.

59:34And so yeah, in the 40s, he took a leap of absence from Bell Labs and did work actually with the Secretary of War on radar and some rewarfare. Okay. And so just to keep pushing on this, the reason that this is a plausible story that we got these from UFOs is because the magic behind how a semiconductor works is so mind blowing and unfathomable that you could just sort of experiment your way to finding this, right? That's sort of what you're going for here. Yeah. I think that's right.

1:00:04It really was this overuse, but quantum leap. They had backing tubes. That's what the switches were made out of, right? It was one of the few places where there was still pure science being done about labs. And they said, when you have the switch, that doesn't break, because it was sent a lot of people out in the middle of nowhere to replace these backing tubes. This could go on very long, but there was some key insights around doping, Germany. You're on the acquired podcast, so it's a favorite. It dealt yourself.

1:00:29Right, there are these few key insights, and it wasn't just Shockley, it was two other guys, Britaine and Bardeen as well, and so the three of them together came up with these insights and just right after the war, some of it was during, but most of it was just after it, and they figured out, oh, you can dope this substrate germanium with different sort of end-type and p-type is what they're called, and when you run a current through it, it changes, so it actually does the switching in solid state.

1:00:55And this idea of solid state switching, which of course came about because of the transistor. And then later on was made to integrate a circuit by Kilpia Ti is what sort of enabled the foundation for all modern electronic devices. Over the last decade, I've read the Wikipedia pages for semiconductor for transistor for I remember the first time trying to look up, like, how does a flash drive work? Like, I've got this cool USB drive and I put it my computer and I read the whole Wikipedia page. And afterwards, I was sort of just.

1:01:24blinking. Like, yeah, I still don't understand. This actually was not helpful. And it is one of these things where most of the time, especially having like a computer science education, I feel like I can connect every building block to the next layer of abstraction building block on top of it, where eventually at some point after a few years of studying computers, you're like, wow, cool. I pretty much get how we go from physics to like operating a operating system on a monitor.

1:01:52I understand all the building blocks in between, but somehow the really is something right around this layer where like I never quite can jump from the physics to like how it actually works and then how it manifests in information and bits on a computer. I think I just need to go read a few more books, but it is one of these things where when you sent the alien joke, I was like, you know, you're right that I've just taken it at face value that this works, but I don't really understand how it works. Yeah, I told my daughter that this morning and she was like, wait a second, Dad, that's really the way it happened, right?

1:02:22I was like, yeah, let's back up parenting. Okay, well, getting tactically here. So on our episode, I think we did a little bit of a high gloss shine on the story and the current state of the market, especially with TSMC and Samsung. We basically equivocated them and said, they're basically doing the same stuff.

1:02:44TSMC's one to two years ahead, obviously Samsung has the whole consumer electronics division as well. Okay, that's TSMC and Samsung. And that was probably too simplistic. So one thing I was hoping from you guys today is helping us better understand who's good at what between those two companies. Yeah, well, Samsung is an amazing company, probably not super well understood, maybe like TSMC and people know them for consumer electronics and phones obviously, but they have 50% of the market share in DRAM.

1:03:10and about a third of the market share in NAND. So, of course, as we do compute, we need more memory. We need a lot more DRAM, which is the fast memory on your phone or device or whatever. The Q stuff up, it's like a funnel, right? If you think of the funnel, you got solid state or stuff sitting there in NAND flash, moves into DRAM, then actually goes onto the chip with S-RAM, which is a really fast funnel, and then it goes into logic to get processed.

1:03:33So Samsung is very good at making memory, and like I said, they have over half of the markets here at DRAM, which is incredible. There's really only three major companies in the world, the big DRAM, two in Korean, once micron in the US. And then in Flash, they're big. They also have a decent foundry business. It's about 17% of the total foundry pie, so not as big. But DRAM and Dan are easier to make than logic. And are these branded Samsung products, or are they manufacturing them as a contract manufacturer?

1:04:00The DRam and Dan is all branded Samsung, but of course everybody uses Samsung. So it'd be next to impossible for Apple to get all the memory they need without having a massive relationship with Samsung. So they're frenemies. So the four or eight gigabytes of memory in your iPhone that's coming from Samsung. That's coming from Samsung. Yeah. Exactly. And so these are easier to make. They have fewer steps.

1:04:24but still they're very hard so DRAM takes around 400 steps and over a month in the fab working 24-7 to make and NAND has a little bit fewer steps than that but actually NAND is getting more difficult because they're stacking it into 3D so as you get more layers it's actually getting more complex but logic is still the hardest stuff to make these system on chips that TSMT makes and of course It's just imagine making one thing over and over versus making a menu of what if you had to be a restaurant that made every kind of food on the planet, right? It'd be really hard to be good at all these foods. And that's what TSMC is doing. So that's some of the different Samsung is also doing logic, but they have a different business model, right? They compete with their customers. So it's harder for their customers to trust them, whereas TSMC doesn't have that conflict. What do you think makes for a more resilient company, playing at multiple spots in the value chain such that you compete with your

1:05:15customers and have optionality or being super pure play so that you have no strategy conflicts. I mean, I think it depends. I mean, if you're talking about something in semi conductors in the main like Intel's the classic example of this where they're more vertically integrated. I mean, the hard thing about doing that is you have to fight battles on multiple fronts. Intel has to fight TSMC on process technology, which in itself is one of the hardest things you know any technology companies had to do over the last 20 years and that's why Intel has been surpassed by TSMC right but they also have to fight AMD in their core kind of like chip design market where AMD enabled by TSMC is innovating faster than they have in the last 20 years and like really delighting customers and taking share from Intel kind of real time or you know Nvidia where they're trying to just basically marginalize the CPU would make the CPU less relevant so Intel's less relevant so I think that's the hard thing about

1:06:06being vertically integrated in semis versus being more of a second horizontal. Pure play is the needs of Moore's Law are just so difficult. It's hard enough to just do one of these things well and do multiple of them well and mix it harder. So I generally think Britain's point on just like the business model difference between Samsung and TSMC is so spot on because I mean TSMC is like the neutral party they will never ever compete with their customers. And if you think about the amount of trust that the company has to put in TSMC because they're betting.

1:06:32their entire company on TSMC's ability to make this chip for them and to have capacity for them when they need it. Just like the amount of trust, and this has kind of been worse, you know, Chang's hallmarks and he founded TSMC, that's just something that Samsung can't quite offer because they just have a different business model and they're not willing to, not that they're not willing, they just don't have the capacity to build kind of a massive foundry. They can't change, right? Like that could have shut down two-thirds of the company. Yes, exactly. How do you all think about it, especially since TSMC's such a large...

1:07:01Position in the portfolio. Yeah, how do you think about the geopolitical risk? Because we did this whole big long episode and the conclusion I think we came to was this company's amazing. There's like no fault we can find in this. Except it.

1:07:13You know China might want to like you to take over the land that they sit on this enormous company ending risk Yeah, even on TSMC's last earnings call so when asked them like what they thought about Taiwan's sovereignty And I'm just like what a world we live in that like that's an open question that an analyst can ask about an earnings call like what do you think about China invading your country? So Britain and I are not like geopolitical experts at all I think we spend a lot of time thinking about just the importance of TSMC to the world and I do think TSMC is top five most important technology platforms to the world. I think TSMC is more important than Apple. If Apple disappeared off the face of the Earth, I actually think it would be painful for everyone that loves iMessage and FaceTime, but it really would not be as big of a deal versus if, for some reason, China moved to Xi's Taiwan, or however it went into play, and all of a sudden TSMC's fabs were shut down, then the Western world would be set back at least five years, if not 10. It's in terms of technology progress and by the way, technology progress is...

1:08:06driving most of GDP right now. And so you do read about what's happening with the auto sector and shortages. It's like, you've seen nothing. If you think shortages kind of from the way the auto guys manage their inventory and kind of just like the classic post recession, semiconductor shortages, you always get, you go from there to, you know, what would happen if TSMC, if Taiwan sovereignty wasn't questioned in TSMC, that stopped making way first for some period of time. I just think the impact on the global economy would be extremely painful. Then that brings you to the logical conclusion of,

1:08:35Hopefully the US and the West would move to protect TCC at all costs or at least get the people out of there. I guess I shouldn't joke about it, but it wouldn't be totally dissimilar to what's happening in Afghanistan where I think you would just airlift as many TCC folks out of there as possible in a short period of time. But then you have no fabs there to produce, I mean, TCC fabs a quarter of the digital chips made in the world right now. And so it would be a lag of multiple years between, you know, when you get those people out and when you actually start making wafers again. So it's a very complex topic.

1:09:04I think another way to think about this is just an ecosystem perspective so like TSMC as a company is very valuable but it's not Super valuable without ASML and Glam and AMAT and KLA, right? So when you think about the ecosystem of semiconductors and ASML of course is not valuable at all without TSMC and Samsung there are this handful of companies called 15-ish maybe more that If you think of them as one super company, which is kind of what they are, it's like a super organism, right? Kind of like my bees are a super organism. It's like a ecosystem, you mean? It's like a complex addictive system. Well, it's like a complex and yeah, so predicting the future is really hard. So anyway, yeah, if you think of it as a super organism, this is probably the most important super organism on the planet. If it's not, it's certainly one of the top most important. So could you recreate that elsewhere in the world? You absolutely could if you had access to the rest of these pieces, which in the West.

1:09:55We do. It would just take to John's point a long time, and that's why people are sort of saying, maybe we should take some risk out of this place, and, you know, ASMR calls this semiconductor sovereignty. We're building this fab, of course, in Arizona, this five-nanometer ETSMC fab, but it wouldn't be a stretch to think that they will be built again in Europe. This happened before, but of course, when technology reaches a fairly stable state, you want to optimize around efficiency, so you get these hores on all.

1:10:25Type models, right? I remember when Apple bought P.A. Semiconductor, I was on record going, this is the stupidest thing ever. Qualcomm makes these really good Semiconductors. Broadcom makes them. T.I. makes a great application processor. And this is the origin of you deciding that you don't know the future and say you should. Yeah. What I said was the dumbest thing ever. That's for sure. But when technology changes, I just didn't have a concept for the smartphone. So technology was about to change quite a bit. And in that change, you really want to be vertically integrated because you're not.

1:10:54pushing efficiency or pushing sort of product technical ability. You know, we see this with Tesla as well, vertically integrated. So, you know, can you imagine Ford having an AI day? Like, that's just kind of funny, right? Well, they could have something then they would call it an AI day. Right. See that happening. Yeah. Oh, man. MKBHD just did this awesome thousand mile road trip with a Tesla Ford, Machi Mustang, and a gas car. And it was just amazing. Like, look, the Mustang, like, it's a good car.

1:11:24It's really good, but we couldn't complete the road trip because we went to a charger. It directed us to this charger. The charger was broken. Then we went to another charger. Well, that was like, you know, it charged at a rate of like a mile every five minutes or whatever. So then we got stranded and the Tesla was like, yeah, we were half an hour shorter on the trip than the gas car. Nice. It's directed us to the charging networks. It told us which is all to go to all this stuff. So I guess like the full circle.

1:11:52question or answer your question on like how we even incorporate the geopolitical risk on TSMC is I mean I guess it'll never be our like a 10% position for that reason as there is always this risk but also I think it's important I mean the my like kind of cheeky answer that's probably not fair as if if there is enough conflict between China and Taiwan that TSMC that they're like kind of you know business sovereignty or is under concern or people are worried about them being nationalized by China or something The whole US market is going down. It's not just TSMC. I mean, I think they would be kind of like the epicenter, but it's not like this is going to happen in isolation. And so at that point, who knows if there could be, you know, more of a more world world three type global conflict coming from that. And so I kind of say, like at that point, the performance of our TSMC common stock is probably not my biggest concern that day, you know?

1:12:35Okay, so let's say TSMC is a resilience position. Let's say there is a black swan event, which the fact that we're all forecasting it. And so as everyone else means it probably isn't that black swan if there's sovereignty gets challenged. So the point of optionality positions is to benefit from these black swan events. Do you guys have any ideas on if the whole US market went down in this situation? What could you hold that would hedge it?

1:13:03The obvious hedge would be like defense stocks, but we probably wouldn't own them because of additional things. Those are very high in ZS businesses, but honestly, that would be the one pocket of the market that probably would fare. Okay. But Brunett and me didn't interrupt you. I was just going to say if you get to rebuild all these fabs somewhere, you're going to need a lot of equipment. And so you're leaving 20 years of equipment in the ground somewhere and you've got to recreate that. That would probably be pretty defensive against that outcome. There's also a guess owning.

1:13:28China tech companies I mean this is questionable like if all this is really going down like I don't think China my ADRs are probably going to stop working all right Do you have any China tech possession you know tens on or others are we don't we've own China tech for a long time but we put this portfolio together at the end of 2019 it just looked sketchy to us, honestly, I don't know, for lack of a better word. And so we own zero China Tech. We just thought we don't have to be there. There's other places that are very interesting. And it's a question of ownership. We're not really sure who owns these companies. And through the ADR structure and the VIE structure, we know we don't own them. So we just set out. Yeah, it makes sense.

1:14:13I want to come back to some more technical questions. Another thing that I think we kind of glazed over in our TSMC episode is the current state of Moore's law from a literal perspective, but then probably more interesting the current state of the spirit of Moore's law. And I was wondering maybe John, let's go to you. Could you give us a little bit of a download on like, does Moore's law still work at least spiritually?

1:14:38Yeah, I'm glad the way you framed it that way because it is kind of like a religious debate and people much smarter than me in the semi industry around like both sides of is like the true Gordon Moore Moore's law still holding up I think for the spirit of Moore's law we still have we visibility probably for the next 10 to 15 years and to be honest that's like the industry never has more than 10 to 15 years of visibility. I think obviously the death of Moore's law has been pronounced for a very long time, but I think that's one thing to keep in mind is there are a lot of things out there that's going to keep us driving down more slow. And so one thing that you guys covered well in the TSMC episode is the implementation of EUV systems for May of Somal. And they actually are allowing us to shrink the transistor kind of the fundamental building block due to dimensionally. So I've actually put more registers into a chip. And so A Somal is kind of on record saying they think that the EUV will last about 15 years.

1:15:24In terms of they'll allow us to keep doubling the number of transistors on a chip every 18 months for 15 years or just it will be an effective way of getting any performance. Yeah, I think it will be an effective way to drive performance and like drive shrink basically is the way the industry kind of frames it is. You'll be shrinking the transistor to pack more performance into a chip. But I think the broader point you hear from the industry a lot is this concept of more than more, which is kind of, you know, a cheeky pun.

1:15:52The semi-guys, they're real, real hoot. Exactly. So geeky. Let's have the broader point around where Moore's law is going now. It's not just about the transistor. It's really about the package. And so you're seeing a lot more innovation. Not just some like, can we put like more transistors onto one gigantic chip to drive more performance? You can actually split up.

1:16:17you know chips into multiple chips called chiplets which AMD is doing and this is a big part of Intel's future strategy actually. Also and so having like you know one gigantic like GPU you would buy from Nvidia you can have four smaller chips and you can kind of like stitch them together to drive more performance and so that's another way that we're going to get a lot of.

1:16:35benefit for Moore's Law. And then actually, one thing I skipped over on the transistor side is we are moving to a new transistor architecture, either a two nanometer, three nanometer, depending on which company you're talking about, to a gate all around architecture. Previously, we were on FinFET, which has been around since, I guess, for the last seven or eight years. I don't know the exact numbers, maybe 10. There's line of sight into, from here, more gate architectures, different materials. And then when we get to like the mid-2030s, we'll kind of see how it goes. But it's just, it is amazing. I was actually a virtual chip.

1:17:04design conference this week earlier in the week and there's so much focus not just I guess on this like packaging idea but even like if you abstract that one more layer from that it's about system level performance and if you look at what Nvidia or AMD and kind of like the leading digital companies are talking about it's can you make more processors and actually like stitch them together into a cluster with some sort of proprietary interconnects they're really thinking more like computing companies than just like chip companies now and so that's a big change but all of these transistor level innovation package level innovation and then system level innovation I think we've got

1:17:33pretty good line of sight into the spirit of Moore's law continuing at least through kind of the mid 2030s. And so it seems like with the sort of creation of the system on a chip that at least let's just talk about the iPhone because it's the one I understand the best Apple became the aggregator rather than the old days of I'm going to go build my computer and I'm going to go buy a motherboard and I'm going to buy a GPU and I'm going to slot it in the PCI slot and blah blah blah Apple basically says Well, we've designed this logic board and we've designed most of the chips, the important chips, and we've situated them together. TSMC manufactures it. They do all the packaging. So you have like the bare metal, the bare metal packaging of these things. So we don't need to run it through these buses that have low bandwidth to get information from one piece to another. Let's keep playing that out a little bit based on everything you know. Where in the value chain do you think the point of aggregation shifts to over time? Where who gets to own

1:18:30Where do we put all this stuff together and I get to capture a lot of extra margin because I'm the one putting it all together. I think that's interesting thing about the semiconductor ecosystem is actually there's a lot of people capturing margin and they're capturing really high margins so this is the sign of a healthy ecosystem right. It's not one company that's making all the money throughout the whole chain we've seen margins come up and you know here's a good trivia question who has higher operating margins Texas estimates are Microsoft.

1:18:56Right. Because I ask it, you know the answer is it's TI. Wow. But, you know, it's not really appreciated how good these businesses are. That's shocking. Right? Yeah. Especially because TI, the core business, is not the leading-edge digital processors that TSMC is doing. It's the commodity stuff, right? I think this was versus key insight. You know, he said, okay, we're doing all this leading-edge stuff. We're fapping it. TSMC. And what if we just...

1:19:25trickle that business down to zero. They try to sell it. No one wanted to buy it. And boring is beautiful. And so, you know, you look at TI's end markets, two-thirds of which are industrial and auto. And I guess it's a tech company, you know, they make chips, but band, it seems a lot like an industrial company too, right?

1:19:41Yeah, I think you can make the same point that you made on TI on Nvidia, like the fabulous business model. Really, it's like a software company. It's like a video's got close to 70% gross margins and like, you know, low 40s operating margins. I did really with very little cyclicality because TSMC offloaded all that cyclicality, right? So it was just like one of the best business models. Besides, I would say enterprise software is one of the best business models in the world. And so TSMC is the enabler of that. But I think Britain's point of spot on. You're gonna see kind of in this future world.

1:20:08One of the things that's kind of cool is it takes the whole ecosystem to really drive the future of Moore's Law. You have to be just about ASTML needed better lithotools and Intel would use them and shrink the transistors and we would just brute force ourselves down Moore's Law. Now, all this advanced packaging needs litho-advanced from ASTML, but it also needs improvements from the other equipment guys like LIM research or applied materials or Tokyo Electron because you need deposition and edge steps to build these advanced packaging and multi-die packages for the advanced packaging applications.

1:20:36You also have all this off-the-shelf IP. They're going from companies like ARM or from Cadence or Synopsis. Part of what Apple does to your point then is they're really just an aggregator. They buy IP blocks off the shelf. A lot of what designing a chip is about is just buying a lot of individual IP blocks and aggregating them. The great thing about it is since Moore's Law is really freaking hard, everyone in the ecosystem does really well. I think TSMC is sitting in the middle of it will obviously do very well because they're driving a lot of the innovation also and obviously they're the key partner for a lot of this. Real quick on them.

1:21:05TSMC, I think we glossed over this on the episode because we weren't deep enough to understand it. My sense is that the open innovation platform that they've created is really important and it's kind of what orchestrates all of what you're talking about here that really takes the village of the whole industry to push things forward now. Is that true? What is that and how central is TSMC's open innovation platform to all of this? That's exactly what I was going to say. I think it's really true and there is no GitHub to the semiconductor IP ecosystem, right? The closest you get is kind of the TSMC open alliance. And there's pockets of it elsewhere. The EDA guys have a ton of IP as well. And of course, as you make these chips, you need to emulate them to see if they actually work. Hopefully before you put them in the fab, because that's really expensive. So all of these things really play together. And so when you think about how Intel was doing this for a long time, it was a closed system. It was Intel's way, Intel's process flow.

1:22:00And TSMC said, oh wait, let's form an alliance with everyone, because this is really going to take everyone to keep driving this forward. And this open architecture for this open approach has really won over. One thing that's always hard for me to understand is how hard it is to do each layer of the stack. And by that I mean, wow, it seems like the ASML guys create a pretty unbelievable machine.

1:22:27And they have a lot of services associated with that machine. Like they're even in the TSMC factory helping to assemble and operate these things. And then I sort of scratched my head thinking, well, could ASMR just kind of like become TSMC? Could they just operate their own equipment? And then I dove down.

1:22:44the other side of the slope, and I was like, well, who makes the stuff that's important to the ASML machines? And I was like, what is this Trump company? And then, of course, you go on the Trump website, which let's just let the name lie for a moment here. And they make this unbelievable laser. And they've got this crazy video on their website that shows off their laser. And I'm pretty sure what they're showing me is actually the magic of the ASML.

1:23:11UV machine. And I'm like, well, shoot, why can't the Trump company just do what ASMR does and then also do what TSMC does if they are the only ones in the world who can make this unbelievable laser? Can you guys shed any light on, is that ever going to happen? Could it ever like vertically integrate? First of all, the videos of the simulations of the laser in an EV system on the Trump website are like so freaking cool.

1:23:34They're amazing. Actually, I hadn't seen them until recently and I've heard so many times that like 50,000 pulses a second drops of multi-tin the whole spiel for me, which Ben by the way did a very good job on the on the TSMC episode. I was doing my best John Bathgate impression. I could tell you were excited to do it. I think like multiple times. You're like can I do the smelting now? Anyway, we a few things to think about. One is there's so much innovation. So the laser itself actually is 10 tons, but an EV system is 180 tons. So there's a lot of other equipment in there that's not just a laser. And actually, I was trying to find this from a dollar value. I didn't track it down, but I'm sure that number is out there. ASML's partnership with Zeiss, the lens company is also really special. And I guess Trump and Zeiss could try to partner to, I don't think they have any ambitions to do this, but they could try to partner together to kind of circumvent ASML, but like, you know, the lenses that Zeiss is coming up with are literally the most uniform lenses designed in history of the world and some of the metrics that they threw out on that.

1:24:28are incredible and I think one of the things that's unique about ASMR is you know they shipped the first UV tool in 2010 to TSMC and UV didn't even really start high volume and this was after a decade of R&D already but then they didn't start high volume manufacturing on UV until 2019 so they had like Almost a decade of learnings in TSMC's fabs on like how to get these things to actually work how to get the you know the throughput to levels where the economics actually makes sense and so there's actually this really cool conference called SPIE every February where all of as well as customers come together and basically give feedback on UV and and kind of give the updates on on where they're at and so as I live through 10 of those with all the feedback not just from

1:25:07TSMC, but from all the ecosystem partners, right? And so I just feel like the learning cycle that ASMR has been through, there's just so much more innovation in addition to the laser than the lenses. But it is. I mean, the lens is a really critical component. I mean, ASMR actually bought a laser company in 2012 called Simer. And I think they actually had like an internal laser bakeoff between Simer and Trump. And I think Trump won for UV, which is also kind of a funny, you know, trivia question. Wow.

1:25:32Fascinating. Okay, so the answer is they all add a ton of value on top of the previous layer of the stack. And like a lot of things in the tech ecosystem, there's fractals on fractals, right? It's like you say, okay, what's the most important part of this ASML tool, right? There's a fractal down and then like, you know, you keep going, but it's really the ecosystem approach that makes sense. No one can do all of this. It's just way too hard. It really does take a village. All right, listeners.

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1:27:10billion workflows annually, and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates. And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

1:27:33So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. Great. Well, John, I know you have a ASMR story that you want to share. So I'd love to hear it. Yeah. I think this is a really cool story. Like how ASMR came to be ASMR and so strategic to the world is you know, they had one competitor, which is Nikon.

1:27:58in the lithography market and then Lycon gave up on the market kind of coming into the last decade. And so I think TSMC and Samsung and Intel kind of looked around and realized like we're betting the future of Moore's Law on this one company, ASML, which at the time was like kind of a sleepy Dutch company that had like a $20 billion market cap. Like they went really new, who ASML was in 2012. And so it was so unique is that Intel and TSMC and Samsung.

1:28:21partnered and actually bought 25% of AsML to inject capital into AsML to develop EUV systems. And that started really like the iteration path of developing EUV to get EUV to where it needed to be for high volume manufacturing by the end of the decade. And so it's just such a cool story of like the ecosystem coming together and everyone in the semi industry knew how important AsML was at the time, but the world didn't really understand that. And so getting AsML where they needed to be on EUV obviously is now enabling Moore's law for the next at least 10 years.

1:28:49And is it right that they've all largely divested at this point? They have. Yes. Yeah. I mean, they honestly should have just held on to it. I mean, it would be not immaterial, so especially like Intel's enterprise value. There's so many stories like that. Like you guys covered the arm origins like all these like major ecosystem players have all like had, you know, stakes from other companies at various times, which is just kind of a funny way that the semi industry has worked. I couldn't find in our research how much of TSMC does the Taiwanese government currently own?

1:29:18Because they started by owning 50% of it. That's right. I looked for that too recently and I couldn't find it. I want to say it's still in the 20s, but I could just be making that number up. I thought I actually was going to say 20 at the top of my head, but maybe don't quote us on it because I don't know if that's true or not. Wild. Could you imagine if the US government owned 20% of Intel? I know, right? Or Apple or they owned a lot of Ford at one point. That's true. Yeah. Sometimes people ask, well, why can't just another company buy TSMC? Well, It's a national champion. The government wants a bunch of benefits system possible. Right. Some things don't have a price at which they are for sale. Exactly. All right, Dan, you have one other trivia question for us. Yeah, what's we're talking about. I kind of made the point that fabulous chip companies are kind of the best bit of models in the world. I think one of the things that's so cool about TSMC is if you look at all the value they created like Nvidia is a half a trillion dollar company and then

1:30:14add up their next few biggest customers, like Qualcomm and Broadcom and AMD. That's like another half trillion. And then I was trying to think of like their aggregate value creation. And so I was trying to think about, I mean, Apple's obviously the biggest customer. And so I think in an acquired episode about the top ten acquisitions of all time, you guys assigned a value.

1:30:31to P.A. Semi and how much of Apple's differentiation is driven by semiconductors. And so if you guys know that, stop your head. That'd be my guess for kind of like Apple's contribution to the TSMC diagram creation for the world. If that abstraction, it'll make sense. Oh, man. That was the most hand-wavy part of that whole analysis. I kind of feel like we ascribed half of Apple to next and then like 10% to P.A. Semi or something like kind of arbitrary.

1:30:58We were literally carving up the Apple. Well, here's the framework. Here's the reason it's hard. It's because the notion of necessary, but not sufficient is really hard to frame into a percentage. Apple would be worth zero if they didn't acquire next. But does that mean that next is responsible for 100% of the value of Apple? Absolutely not. So what percentage do you assign it? It's tricky. Yeah, that'll make sense.

1:31:23I actually don't know that the number you guys use. I thought it was 25% off the top of my head, which maybe that's a good rough number. Apple's contribution is another half trillion dollar to the TSMC value creation story, but you get the broader point. It's like trillions of dollars of market cap that TSMC has created for their partners, which I think is just so cool. Yeah, it's amazing. I mean, it truly meets the Bill Gates line of the definition of a platform that they've created way more value for their customers and their ecosystem than they've captured for themselves. Yeah, which is so cool because obviously not like a traditional

1:31:52Internet or e-commerce platform the way most of her SaaS platform that we think about platforms, right? It's just like a manufacturing platform, which is so unique. There's one point that you're getting at here that is part of the white paper and what we discussed earlier, which is around sort of leaving money on the table for your customers and leaving money on the table for your partners. And it reminds me a lot of when we did the Alto episode with Honom. And it's really this idea that If you as the management team or if you as an investor who deeply understands the company knows that in a way that other people outside the company can't underwrite, then you can do a much more intelligent job valuing the company than anybody could with a brute force metrics such as industry average earnings multiple.

1:32:44Because if you actually understand, well, our earnings could be this if we wanted it to, or our growth rate could be this if we wanted it to, but we're making strategic trade-offs to not do that, then you actually have a unique ability to underwrite the company's value, and thus actually more of a margin of safety or more of a willingness to pay up than anybody else. And so it's interesting being deeply studied about these companies where you do know that they're sort of leaving something on the table for other participants that you can be more comfortable making an investment that other people can. I think that's a really insightful point, Penn. And the thing it gets to for me is duration of the asset, duration of the growth. So when you leave money on the table, what you're doing is you're creating goodwill for your customers and you're buying the company duration, which is oftentimes the way to maximize total value, right? So when I think about how I'm talking about roadblocks,

1:33:39He was effectively saying we just really understood how big this ecosystem could become and we kept seeing the value of crew and then it moved beyond our original investment case and therefore we became more comfortable investing more money over time and what people get wrong oftentimes is this duration because duration if you can go 15% back to your earlier example It's extremely non-linear if you can keep that flat right all the value comes in the tail and so we just aren't very good at thinking like that our brains don't work in that non-linear fashion, but when you create more value than you take, and if that's your driving factor, and you want to take a lot of value, it's a hard task, because you have to, all the times think, oh, wow, we want to take a lot, but we need to create even more. How do we do that? And then, of course, that bisoration, which is a feedback loop, sort of the happy feedback loop, if you want to think about it. And that way, I think Morris Scheng got this very early on, and that's what created TSMC into such a great company.

1:34:38It's so good. You know, we touched on this a little earlier, but that is to double underline. One of the things about you on your ethos that was kind of an aha moment for me is flat growth versus hyper growth. Flat growth extended over time will beat short term hyper growth. You mean the derivative of being flat, right? That a company grows at the same rate every year. If you grow 20% a year for like 50 years, like TSMC, you will destroy you know, every group on out there. So what you need for that is a negative feedback loop, right? So then they get a feedback loop for TSMC is, I'm going to comment, I'm going to take what used to be the special sauce of your business and you're going to trust me to do that. That's extremely hard to do, right? No one wants to do that. But then the more it happens eventually, there's a game theory to it. Everybody has to do that eventually because it works so much better, right? So you're never going to get 100% growth as impossible, but you might get 20.

1:35:32for 30 years, which I think the number that you guys sent to your podcast was 17.7 for 30 years or something like that. That was just incredible to me. And when you say negative feedback loop, you basically mean a governor on the growth, like a natural force in that particular business that makes it so you can't have ludicrous, uber style, hyper growth. And it ends up being long term good for the company to have that growth governor or that negative feedback loop. That's exactly what I mean. So we think about ASMR, right? They can shut everything they can make, but they just can't make it anymore. It's impossible, right? So there is a governor on the growth. Wow. Well, that's a great place, I think, to leave, especially this Emmy's discussion in most of this episode, that it's so counterintuitive, but the way that you've sort of framed up why it is long-term good for an investor to want slow, methodical, governed growth. It's just very different than a lot of things we talk about on this show.

1:36:28One of the things we think about sometimes is we're looking for companies that can double in five years and double again in the five years after that. And all that means is we're looking for companies that can grow 15% over a decade. All else equal. Easier said than done. Easier said than done. Much easier said than done. I will just say one thing about our days. You know, we get a lot of questions of, well, how do you do this at a small company versus a big company? And part of it goes back to what we were talking about earlier. It's easier to do research in these companies now than it's ever been.

1:36:57But the second piece of it is, yeah, there's more details that we have to deal with at times. But how much extra time would you have in your regular job if you only had two meetings a week and you never had to worry about office politics? My guess for most books is it's about 20 hours, right? And so then how would you use that? Well, we just use it for unstructured research time.

1:37:16And the way we think about it is we can wander around not knowing what we're doing and waste 90% of that time. And 10% might be really useful. And 1% might be absolutely watershed. And that's really all we're looking for. But you can't ever just get to the 1% and you have to wander around to find it. And so that's how we really structure our days. And Brendan, that's why you run for like 24 plus hours straight. And that's why I run and that's why I keep bees. It's all the same thing. That's where your best investment ideas come from. That's right.

1:37:46I do think this idea of linear time versus non-linear time is really interesting and some Britain I talk about a lot because the linear time, it's probably very similar to you guys getting ready for your next episode. It's like you're going down the rabbit hole on one topic and we do spend time doing that obviously but then we just have so much extra time to just be out there trying to connect dots and so you never know when you're going to have that aha moment or that insight but having as much opportunity for that as possible is going to have we've intentionally tried to structure our time.

1:38:13Well, we can spend another hour on how you structure your time. I was actually wondering maybe we can get one or both of you, if you'd be up for it, to join our next LP call. And I'll chat about it. I'm sure folks would love to prepare you with questions and hear about how you spend your time. That'd be super fun. We always learn from those questions, so we'd love to do it. Awesome. Well, Brent and John, where can folks find you on the internet?

1:38:37You can go to NZScapital.com. We do try to write a lot. We put it all on the internet immediately. It is everything that we use internally. Nothing's held back because we know when we put it out there, we're going to get more value back. So this is our way of trying to create more value than we take. Our partner, Brad, also writes a newsletter every week. And so if you want to see how he spends his time, you can sign up for the newsletter on NZScapital.com. It's called Sit All Week.

1:39:03It's just Brad's process of sitting all week and what he thinks about. And Brad is, well, he's like a microprocessor. He's literally the smartest person I've ever met. And the way his brain works is incredible. And so if you'd like to sign up for that, you can do that there as well. Great. And on Twitter, I think you both have Twitter handles. That's right. The whole team is on Twitter and his capital has a Twitter account. I'm B. John's three. Brad is at Brad's wing. And John is at J. Bathgate.

1:39:31Great. We'll link to all those in the show notes. Thanks for having us guys. Thank you. All right listeners. Now is a great time to talk about one of our favorite companies, Statsig. Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale. Yep. In the...

1:39:56crazy speed of today's AI world. Shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers, and how fast you can use that signal to guide what you shipped next. This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved. So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to Statsig.com slash acquired to get started.

1:40:38All right, listeners, hope you enjoyed our conversation with Brinton and John. If you found it to be, frankly, as eye-opening as I did, feel free to share it with a friend. If you learned something new about complexity investing or their barbell strategy or resilience and optionality, I'm sure you can think of someone that you'd want to share that with. So feel free to do so. If you are not already a member of the acquired Slack, come join us acquired.fm slash slack. Some of the best discussion you'll find on the internet about Lots of things that you care about. If you're not an LP, you should become one. It's a way to get closer to what David and I do here at Acquired. We have these awesome LP calls. Once every month or two, we have been on a tear recently with great LP exclusive content. We just dropped about a month ago now a great interview with Ronil, the CEO of Audius, which is the largest. So good.

1:41:31crypto application web 3 application out there with over 6 million users and then just before this episode we dropped another sort of web 3 episode This time on web 3 marketplaces centered around brain trust with Adam from brain trust Wow, that would that would was a blast Yeah, so if you're web 3 curious or maybe you're your web 3 skeptical these are fun episodes to listen to because they're super non-defy, non-crypto use cases. Yeah, they're like real-world applications. Yeah, which of course we wanted to dive in and tell those stories. You know what I'm curious about after this episode and I feel like the universe works in funny ways, right? I think everything sort of aligned that a bunch of stuff happened all at once. It's the Santa Fe Institute and complex like everything we talked about on this episode. It just seems like such an amazing place. I've always wanted to go to Santa Fe period. I've never been there, but to go take a class daily, we should do something.

1:42:27Because before this, we had our Michael Mobison episode. He's the chairman of the board there. Where kindergarten is actually investing in a company that the CEO is also a board member there. There's too many stars aligning. We gotta go. The universe is telling you something, David. I think it is. I think it is. Well, with that, we will see you next time. We'll see you next time.