Bill Gurley – All Things Business and Investing

**Patrick O'Shaughnessy** (0:04)
Hello, and welcome everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

**SPEAKER_3** (0:24)
Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (0:49)
My guest this week is Bill Gurley, a general partner at Benchmark Capital and one of my favorite investment thinkers.
As you'll hear, despite enormous success through his career, Bill is clearly still in love with business and investing. Where many might discuss past glories, I've been incredibly impressed with how much Bill and his partners emphasize the current portfolio and market landscape. I'm thankful to have had the chance to speak with him in this format. I hope you enjoy our conversation.
So Bill, as I just said, I'm totally ashamed that until this morning, I had never heard the name Brian Arthur and never read his 1996 piece on increasing returns in business. And so I thought since it's fresh on my mind, and I know it was influential for you, that we'd start there with this idea of increasing returns, which really at the time flew in the face of much of economics, which was based on diminishing returns. Maybe you could talk about how you stumbled across this and the influence that it's had on your thinking.

**Bill Gurley** (1:38)
Yeah, so between 1993 and 96, I was working on Wall Street at Credit Suisse First Boston in the research department. And literally the first or second day fell into a friendship with Mike Mobison, who you've had on many times and who you know well.
And Mike and I, even though he was the food analyst and I was the tech analyst, we started sharing ideas and books and whatnot. And I actually don't remember which one of us, he might remember, had a book called Complexity by Mitchell Waldrop, which was about the rise of the Santa Fe Institute.
And in that book, Brian Arthur is one of the heroes, early professor at the Santa Fe Institute and someone that had a lot of different radical ideas. And so we had read that book and I think visited Santa Fe and had met Brian, but this notion of increasing returns that some company that got to a big level would find it even easier to get to the next level. And I'll tell you two open table data points that equate back to having read that paper, even though what played out was 20 years later, 15 years later, is a really fascinating concept. And I was covering Microsoft at the time on Wall Street, and you could see this at play. You could see the more of their OS that existed, the more people wrote apps for their platform, the more apps people wrote for their platform, the value of the platform was higher, and it just kept paying off. And so you ask yourself which other businesses are susceptible to this, and I would say it's just been a mainstay mental model that I've kept in the back of my mind at every single investment decision we've ever made.

**Patrick O'Shaughnessy** (3:18)
So basically always as a checklist item or something, the potential presence of increasing returns to scale.

**Bill Gurley** (3:25)
Or network effects is another word that's used. And there's two real challenges with the term and the concept. One, everybody's heard it and repeats it. So it's kind of-

**Patrick O'Shaughnessy** (3:35)
It means nothing.

**Bill Gurley** (3:36)
Right, it's been polluted, right? And so people aren't really paying attention. It's in every startup investor debt. And so you have to have judgment in terms of analyzing whether it's present or not. You can't simply say, oh yeah, it's not a black or white switch.
The second thing I would say is I do think, especially having looked at so many different businesses over the years now, there are different levels of it. And it's almost like someone should come up with some type of scoring system. There are companies that are wildly prone to network effects. And even Metcalfe's law, there are financial constructs which try and measure it. And whatever the actual Metcalfe's law equation is, that's a pretty strong form of it. Not many people have that.