Elad Gil – How to Identify Interesting Markets

**SPEAKER_1** (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** (0:47)
My guest this week has a fascinating background. He's a PhD in biology but has split his time as both an investor and an operator. As an investor, he's involved in companies like Airbnb, Coinbase, Instacart, Opendoor, Stripe, Square and Pinterest. Not too shabby. As an operator, he helped both Google and Twitter scale their businesses, in the case of Twitter, from 100 employees to over 1500 in a two-year span. He's just written a book about these experiences called the High Growth Handbook, which is largely the topic of our conversation. Our talk is centered on what makes for a good investment and even more specifically how Elad identifies an interesting market.
Operators and early-stage investors will find lots of nuggets in this fun conversation. Please enjoy.
What is your general process for evaluating a young business and getting involved?

**Elad Gil** (1:35)
I think there's sort of three answers to that. I'll give you the generic answer, the data-driven answer, because now I've invested in enough companies that I can look back and tell you what worked. And then I can also maybe share two or three non-intuitive items in terms of areas that I didn't expect when I first became an investor that now are really clearly obvious in hindsight. The generic answer is that really there's three things that I care about for early stage investing. And I think the biggest difference between me and most angels or people who write these really early checks is that I really focus on the market first. Is there a real need for the product? Is there traction? Is it something that I would use or that I know businesses that would use? And so number one for me and probably number two for me is market. And most early stage investors say that the most important thing is team.
And if Andy Rachleff, one of the founders of Benchmark who I know you've had on, has a great rule that people call it Rachleff's Law, which is basically if you have a great team in a terrible market, the market wins. If you have a terrible team in a great market, the market wins. And if you have a great team in a great market, something magical happens. And I'm a very strong believer in that. So first and foremost, I look at market. Second, I look at team. And third, is it people that I actually like? So if they call me at 10 o'clock at night on a Saturday, will I actually pick up the phone and want to help them? Because life is short. And that's literally happened to me. The founders of Stripe, for example, the first time they were buying a company, literally called me at 10 o'clock on a Saturday and asked to meet and talk through how should they be buying companies? So once you've had a few experiences like that, you just don't want to work with people that you don't want to spend time with. Yeah, I mean, the data driven answer, if I look back at the data in terms of what's actually worked in the set of companies I've invested in, number one is that they launched a product or at least had a crappy demo when they started raising money.
And so I think the fact that they actually built something, even if it was awful, showed a mentality of going and building. So that's one key thing. So just investing in a PowerPoint deck tends not to work well, although, for example, I think I invested in Opendoor and Wish before they had much built. But even then, there was sort of something going on. Second is organic growth, even if it's a very small base. So most early stage investors really discount early traction. So they'll say, well, I went from 100 to 120 to 150 over two months, three months, is that real? But in reality, if something's growing 20, 30% a month organically just through word of mouth, usually there may actually be something there. So I think that's a clear sign, even if it's tiny numbers. Third is on the enterprise or SaaS side, if they have one or two major brands that are using them that just found them randomly, then that's usually a very good sign. So when I invested in PagerDuty, which is now a very successful company on the ops infrastructure side, they had, I believe, Amazon and Apple as customers. I don't know if they still do, but seven, eight years ago, they did. And they didn't have a sales force, it was just four engineers. And they were just getting traction because the product was so good that random people at big companies were finding it and adopting it, even if they were sort of overruling their own internal IT to do it.