Past Success...

Investment Analysis Clubs Saul’s Investing Discussions
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Hey Fools,

Just worth noting the past success of our CEOs and the CEOs of a few other popular companies …

Before Roku, Anthony Wood was a major player at Netflix and created Replay TV which was acquired by Direct TV.

Before The Trade Desk, Jeff Green created a company called AdECN which was acquired by Microsoft.

Before Coupa, Rob Bernshteyn was on the Exec Management team of a company called Success Factors which IPO’d.

Before DataDog, Olivier Pomel was VP of Technology at Wireless Generation, a company acquired by News Corp.

Before Zoom, Eric Yuan was one of the first software engineers and rose to the title of VP of Engineering at WebEx which was acquired by Cisco.

Before Netflix, Reed Hastings founded and sold a company called Pure Software which IPO’d and then got acquired.

Chad Hurley (YouTube) Reid Hoffman (LinkedIn), Jeremy Stoppelman (Yelp), and the spacefaring gentleman who founded a notable car company built PayPal which was acquired by Ebay prior to being spun off again. Look up PayPal Mafia to see all the other titans who came out of that company. Again, like attracts like.

Before Alteryx, Dean Stoecker was a co-founder of a company called SRC LLC which was founded in 1997 and ultimately became Alteryx. Impressive to stay alive and focused on data analytics that long.

Before Okta, Todd McKinnon was Head of Engineering at Salesforce.

It’s notable how often this simple narrative plays out:

An elite person founds a company, or rises to a high-level at one, and has major success.

They score big money and learn key lessons. (Or as Dungeons & Dragons players call it, gain “experience points.”)

They leverage that money and those lessons to get it right with their next venture, which is fueled by:

  1. Need to run their own show
  2. Desire to fix a problem they’re passionate about, uniquely qualified to fix and has TAM big enough to be give them a purposeful challenge
  3. Escaping clutches of a large company that stifles innovation

Nothing really new here or Earth shattering. If a company is racking up the kinds of numbers this board demands, obviously they’re not run by people with track records of drug addiction and long periods of incarceration.

I guess I’m just putting a little more red meat on the bone in terms of degree. If a CEO’s past gig ended in meaningful success - company sold (Jeff Green, TTD), company IPO’d (Rob Bernshteyn, COUP) or the person rose to a high level at a monster company (Todd McKinnon, Salesforce) - this intangible data point deserves a high value.

BD

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First, let me say that I whole heartedly agree with BroadwayDan’s point. As investors, we want strong management teams running our companies, and past experience is one good data point.

However, I would not describe Replay TV as he has:
Before Roku, Anthony Wood was a major player at Netflix and created Replay TV which was acquired by Direct TV.

Wood founded Replay TV in 1997 and, beating TiVo by weeks, sold its first units in 2000. In 2001 it was sued by numerous TV companies for its commercial skipping and content sharing features. Wood left when the company was sold to SONICblue that same year. SONICblue itself filed for bankruptcy in 2003. Assets were sold to other companies before DirecTV’s acquisition.

I’d Replay TV a product success, but not a business success. I think Roku’s product is great, I personally love its “search across services” feature, and I think it was smart to pivot from hardware, but I do question its future.

This may not be related to investing in Roku, but the company does appear to be acting like traditional cable companies. First there was the kerfuffle with Fox over its app on Roku and the ability of Roku owners to watch the SuperBowl live at 4K. That got ironed out at the last minute. Now there’s an ongoing feud with HBO over HBO Max. As a Roku owner, I don’t have HBO Max yet. The head of HBO Max has said:
I don’t know what specific deals others have with either Roku or any of the platforms, but I know the deal we have with Apple. I know the deal we have with Google. I know the deal we have with the other platforms. There’s a certain business model, and we’re happy to pay people to help us acquire subscribers. Again, it’s a pretty standard way of doing business.

I don’t want to get too deep into the details of the impasse that we’re in right now. But there’s a pretty standard way of bringing these apps to market on these platforms.
https://www.theverge.com/2020/6/2/21276932/att-hbo-max-warne…

Is this smart of Roku to play hardball with content providers, or will it alienate customers like me, who might decide to go with AppleTV, FireTV or something else instead?

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Isn’t this the very definition of survivorship bias?

For all the big winners, there’s a graveyard full of companies that are led by people with past success but that nobody remembers or talks about.

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I’ve been following these stories about the great CEOs, but the problem I have is virtually every CEO out there could have something similar written about them.

ZS: Jay Chaudhry cane from a small village in India and started 4 companies and sold them all. ZScaler is Z for Zenith as in his last startup he will not sell. Awe inspiring! The problem is it doesn’t really tell what will happen next.

I find it very difficult to piece together grand conclusions about someone from small articles. For instance, the Cramer interview of Eric Yuan when all the problems were happening. I knew pretty much what he would say and I was right. Apologetic and talking about how he would do better. It’s great if you’re an engineer or hiring an engineer to develop a great product that you want to hold himself accountable, but it says nothing about delegation and negotiating skills, and other things needed to grow a company to a $10 billion revenue company. I know Yuan is ranked as one of the best to work for but I don’t have a complete picture of what he can handle. ZS is also one of the best employers to work for.

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Folks,

I did acknowledge that my point may be too obvious in my post. I just noted that our CEOs seem to have a track record of selling a company and it inspired me to share. Maybe I broadened the point too far to be helpful. I normally hate comment threads as they just clog the board and quickly become unpleasant. But I have an important broader point to make.

There are three legs to the investing stool:

  1. Financial Analysis. 2. Business/Tech Analysis 3. Narrative/Intangibles - Management, people, branding, consumer sentiment, etc.

I realize that #3 can be irritating, overly simplistic and feel like total BS. But consider this…

12x writes,

ZS: Jay Chaudhry came from a small village in India and started 4 companies and sold them all. ZScaler is Z for Zenith as in his last startup he will not sell. Awe inspiring! The problem is it doesn’t really tell what will happen next.

I like the satire of “Awe inspiring!” I really do. But truth is no one claimed anything was awe inspiring. And the fact that Jay Chaudry sold four companies and does not plan to sell this one is useful information. Acquisitions limit our upside and change the risk/reward dynamic. That he sold four companies is impressive. That he rose from presumably humble roots is useful info and a positive. Also I’m not sure I believe him. When a fella has a track record of selling his companies it strongly suggests that’s what he’ll do in the future.

The problem here is when 12x/you (pardon 3rd person) says,

“It doesn’t really tell what will happen next” it suggests that a well constructed financial model will really tell us what will happen next.

First of all the future is utterly unknowable. We are all guessing. Some guesses are better educated than others. While it is critical to analyze the numbers, business, technology, etc. It IS helpful to study the narrative/intangibles.

That ZScaler is named ZScaler because Z is for Zenith as in the CEO won’t sell this company is also useful. It tells me that Chaudry doesn’t excel at branding. This name stinks. If you were selling a product which would you rather sell - CrowdStrike - which just plain sounds cool and which helps the prospect understand what the company does - Crowdsource information to better protect all their clients and strike back at the “adversary” OR ZScaler, because you know, Jay Chaudry sold a lot of companies and doesn’t plan to sell this one? (Maybe there’s a better narrative around Zenith Scaler but still the name just stinks.)

As far as actually predicting the future, the fact is that at some point salespeople have to get into a room and close deals. The story of how CrowdStrike got its name is a lot more valuable than how ZScaler got its name. It’s legit and visceral. It gets the blood flowing. I find Kurtz to be a much more energetic, charismatic leader than Chaudry. He has a flair for marketing and branding. ZScaler is a bad name that must be overcome by good tech. CrowdStrike is a killer name that increases the likelihood of sales. From what I can tell the work-from-home shift has contributed to ZScaler’s rise. Before that they were struggling.

This bit of information is a complement to the methodologies used here. If the financial analysis says there may be a terrible outcome, bad outcome, okay outcome, good outcome, great outcome the Narrative/intangibles should be factored into the prediction.

Anyway, the broader point is if investing was as simple as analyzing numbers and consistently making accurate predictions based on financial models, the code would have been cracked and the entire industry utterly transformed by this fact.

I am convinced that what makes Saul such a spectacular investor is not just an ability to understand the numbers and business but that he has an intuitive sense of when a great story is unfolding and what part of the story we’re at. For example, Elastic is a complex story. It may yet be a massive home run. But like any complex story it takes longer to set it up. And I think Saul sensed this from the numbers whereas a Narrative-minded investor feels it just from hearing the story.

Anyway, 12x - I sincerely appreciate your post and your massive contributions to this board using more traditional methods.

BD

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