Discovering Innovative Companies with Marcelo Lima
May 11, 2021 – By Samantha Bailey
In this conversation, 7investing Lead Advisor Matthew Cochrane sits down with Marcelo Lima, the founder and managing partner of Heller House. On the Heller House’s website, it states, “As acolytes of Benjamin Graham and Warren Buffett, we are standing on the shoulders of giants and adapting to a world permeated by software, network effects and zero marginal costs.”
Lima describes his evolution from a Warren Buffett-type value investor to an investor who instead seeks out the world’s most innovative companies. He even wonders if starting as a Buffett investor hindered him early on in his investment career because he believed Buffett that new technology was too hard to understand.
When studying new technologies, Lima says he approaches everything like he’s a student. That can mean purchasing 900-page textbooks on the microbiology of cells or attending developer conferences and trying out new software products. A few years ago, when studying Amazon.com (NASDAQ:AMZN) he toured one of its fulfillment centers. This experience helped him appreciate how advances in robotics would help the e-commerce giant become even more efficient at delivery and logistics.
Lima also discusses the size and valuations of tech giants. He believes the total addressable markets more than justifies some of today’s larger market caps but believes valuation must always be carefully weighed with a company’s optionality and growth.
Along the way, Lima and Cochrane also discuss the possibility of Miami as the next great tech hub, why Mark Zuckerberg is perennially underrated, and whether virtual and augmented reality is an inevitable platform.
01:03 – Marcelo’s Journey from a Software Engineer to Founder of an Investment Fund
02:55 – Marcelo’s Evolution as an Investor
14:26 – A (Literal) Hands On Approach to Investing in Amazon
25:03 – Dividing Leadership of Companies into Missionaries and Mercenaries
38:08 – Does Facebook Need to Own a Hardware Platform to Succeed in the Long Run?
44:30 – Is Facebook a Greater Threat to Apple than Apple is to Facebook?
47:04 – Weighing Valuations
Matt Cochrane 0:00
Greetings, fellow investors. I’m Matthew Cochrane, a lead advisor at 7investing, where it is our mission to empower you to invest in your future. We do that by providing monthly stock recommendations to our premium members and educational content that is freely available to everyone for just $49 a month or $399 for an entire year. You can gain access to all of our monthly stock recommendations, company updates, and market commentary, listeners. Today, I am very excited to introduce Marcelo Lima, the Founder and Managing Partner of Heller House, he can be found on his website, Hellerhs.com where he blogs regularly and on Twitter where I find his takes both entertaining and thoughtful. On today’s show, we’re going to explore Marselo’s strategy for investing and technological disruption, and how he has evolved as an investor over time. I’ve followed Marcelo for a long time and am very much looking forward to this conversation. So let’s get to it. Marcelo welcome to the show.
Marcelo Lima 1:00
Matt thank you so much. It’s great to be here with you.
Matt Cochrane 1:03
Of course, of course, Marcelo, you’ve had a very interesting career path. After graduating Cornell in the 90s, you were a software engineer. So how did you go from being a software engineer to founding an investment fund?
Marcelo Lima 1:18
Yeah, I asked myself that as well. Sometimes I think maybe I should have stayed in software engineering. During that software engineering stint, those are like the four first years of my career after college. It was right after the .com bust. So remember, it was the.com bust in 2000. And it happened a few months before I started my job. And back then I was just an immigrant with an H1B Visa. So I was sort of, quote unquote, stuck to my job because it was very hard to find a job in technology after the bust. So I sort of had to stick it out with that company I was at. And then what happened is 9/11 came shortly thereafter. And then we had a big recession, most of my friends were going back and doing some sort of MBA or business school degree or something like that, because there were few jobs. And I just thought I would do something entrepreneurial on the side as sort of a side hustle. So I started doing a bunch of things on the side. And in the process of raising money for one of the projects we had, I ran into somebody who had studied engineering at Cornell as well. And he was doing real estate, finance, and making a lot of money. And so I decided to join him. And that was sort of my entrance into the world of finance and investing. And as soon as I started working in real estate finance, I read Warren Buffett’s biography, and that completely got me hooked into the whole value investing thing.
Matt Cochrane 2:55
That’s a perfect segue to my next question, because I’ve heard you say that you started off as a warren buffett style value investor. And yet, that’s something like, following you now, I would have never guessed. Because when I read your post today, it’s usually about companies such as Amazon or Facebook, not Berkshire Hathaway. So what sparked your evolution as an investor?
Marcelo Lima 3:22
It’s funny, because if you look at the history of technology, there are things that supplant other things, and eventually obsolete them. So one example is if you and I were here doing this podcast, it would have been impossible. But let’s say we’re doing an interview in person in let’s say, some time in, I think it was the 1700s, where canals were all the rage, there was a canal mania, and people were digging canals and investing in canals, and it was a big thing. And all of a sudden, the railroad comes along. So maybe this is a little bit later, maybe this is now the 1800s. And the railroad comes along. And you and I are just these really old school value investors and we say, well, railroads are new technology, I don’t really understand it. I think I’m gonna stick with my canals.
There were many situations where people got completely obliterated by that because now the railroad connected one city to the next and delivered the cargo directly and bypassed the canals altogether. So, and this happens over and over and over again in the history of technology. There were companies, utilities that all they did was city gas, so all the illumination and cities in London, for example, were the illumination was powered by natural gas. And then of course electricity came along and disrupted that kind of business because now you’re stringing cables everywhere and wiring ever electrically. So you see the pattern going on. And I think that if Warren Buffett and he was born in 1930, if he had been born, let’s say, you know, 70 years later, let’s call it, he would be a very different type, he would be focusing on different types of businesses.
There’s the Douglas Adams quote, the guy who wrote The Hitchhiker’s Guide to the Galaxy, he says something like, he says, everything that you were born with is normal. And all the technologies that you were born with are just there. Anything that’s invented, when you’re young, is exciting and cool. And maybe you’ll get a career in it. Anything that’s invented after your, I think he said 35 years old or something, is unnatural, and against the natural order of the world. So I think it’s very important for us as investors to be constantly renewing ourselves, and really looking at the world with a beginner’s mentality, and pushing against the tendency to think that anything that’s newfangled is, is a joke, or is a fraud. And you could see that very much. Getting a little bit off topic. But you can see that very much with things like cryptocurrency, where Buffett calls it rat poison squared, and a lot of people very early on it came out saying that it was a fraud without having done the work to understand what it really is. So I think if Buffett again, had been born much later, he would be investing in the things that we call technology companies, because they’re new and exciting. But 50 years from now, you know, Amazon and Facebook will be like railroads.
Matt Cochrane 6:49
Sure. Sure. Sure. So you brought up Buffett. So let me just ask, as you know, Warren Buffett and Charlie Munger held court last weekend as they do every year and answered questions. And look, I consider Warren Buffett, the greatest investor who has ever lived. I guess some people might argue that but one of the best who’s ever lived, no question. His track record, the longevity of the his track record is, is unparalleled, as far as I’m concerned. So I hate criticizing Buffett because I have so much respect for him. And I think some people just always take it the wrong way. But has him missing these technological trends, with the exception of Apple, which was a killer investment, no doubt. Has that tarnished his record a bit.?
Marcelo Lima 7:38
I agree with you. I’m a huge Buffett fan. I’ve been to Omaha for many, many years, I think almost every year since 2006, with a few exceptions. And I’ve read everything he’s ever written all the way back to the partnership letters, all the Berkshire Hathaway letters, I think I’ve probably watched every single interview. And that, frankly, was a bit of a liability for me, early on, because during most of my tenure at Heller House, because I avoided looking at new technology, precisely because of what I learned from him, which is that technology is fast moving and difficult to understand, although to give him credit at at one Berkshire Hathaway meeting, and I was there. Somebody asked him if you could study any sector today, what would it be? And I think he said technology. And so that was sort of the one endorsement that I heard, but there’s sort of this one thing like this one line, and that’s it. And it’s sort of buried somewhere in the Berkshire Hathaway meetings.
Matt Cochrane 8:40
Marcelo Lima 8:41
I agree with you that he is the greatest of all time. He’s the GOAT right?
Matt Cochrane 8:48
No question. And like let me say that again, because people take it the wrong way. No question. He’s amazing.
Marcelo Lima 8:55
Yeah. And I like to, I like to sort of poke a little bit of criticism at him on Twitter just to get reactions from people and see what people think.
Matt Cochrane 9:06
Right. Right. Well, that’s one way to do it, as I found out, too.
Marcelo Lima 9:10
Yeah. But a part of me feels a little bit frustrated. That, you know, he received the Jeff Raikes memo. So Jeff Raikes is an executive at Microsoft. And he read Buffett’s biography in 1997. This was the Roger Lowenstein biography, which was published in 1996. And he sent Buffett a very nice email saying, Wow, I just read your book. And this is how Microsoft is similar to Nebraska Furniture Mart or See’s candy or Coca Cola. He drew all these analogies. It’s a fascinating email. It’s in the public record, because it came out as part of a lawsuit later on – the Microsoft antitrust lawsuit. I think it was because of that, that it came out. And of course, Buffett, avoided investing in Microsoft because he was good friends with Bill Gates and he didn’t he didn’t want any improprieties. But then a few years later, Larry Page and Sergey Brin apparently visited Buffett and told them all about Google. And Buffett said, Wow, I knew how how crazy the business model was. Because every time you clicked on a Geico ad, they made like eight bucks, or however many dollars it was, and it was like zero cost to them. So he got a lot of insights, I think very early on. And, but it frustrates me a little bit that he didn’t adapt as quickly as I would have liked.
Matt Cochrane 10:40
Right, right. Sure. Sure. So we’re talking about things like bleeding edge technology. And these days, that includes things such as AI or machine learning, robotics, a host of other topics? How do you research these things while differentiating yourself from other investors? I mean it has to go beyond reading the same sell side research as everyone else, or going to the same conference calls as everyone else. What do you do to research these trends that are, I mean, at least speaking for myself, and I think most investors like, it’s kind of unfamiliar, almost intimidating to really dig into these types of topics.
Marcelo Lima 11:24
Yeah, I, I really like to take sort of a students approach. If you were in college, and you’re studying a new topic, you would take an introductory course, and you would have all the assigned readings and exercises and all and things like that. I’ll give an example. So I’m, I’m learning about a few few different industries right now. One of them is biotech, and CRISPR. And I bought a graduate level microbiology of the cell textbook. So it’s like this 900 page, textbook that goes over the entire microbiology of the cell. And the reason I think that’s important is because if you want to read a scientific paper, they’ll have all the the jargon of that, that subject. And it’s it’s intimidating at first, like, What’s an endonucleus? Or, you know, what are enzymes? And what do they do, etc. Protease inhibitors, there’s like, all these different pieces of jargon, that once you read the background and how those things were discovered, and then how the naming came about, it becomes Okay, well, that’s trivial, right?
And I think it helped for me, it really helps build the the mental models that I need in that subject area, for me to be able to evaluate whether something is legitimate or not. And for me, that’s the only way I can do it is really have a good technical understanding. So with software as a service, I really have to talk to developers and attend developer conferences and try the product myself. I’m not saying it’s the only approach or I’m not saying it’s like the best approach, but it’s the approach that I like. So I really take sort of a student’s approach to it.
Matt Cochrane 13:15
Gotcha. And I know you also, when it came to Amazon, like you toured one of their logistics and fulfillment centers, and you wrote about it on your blog, a year or two ago, I guess, before COVID. So probably like a year and a half to two years ago. And I know, you were describing what the robots were doing at that factory. I actually have a little quote here, near the end of that post you wrote, given these advances, Amazon will soon be able to apply automation to the unpacking, picking and packing processes, this will massively improve productivity, doing it faster, and with fewer mistakes than humans will also allow these workers to move from repetitive low skilled jobs to higher skilled jobs. So when you when you go on site to things like that, like I want to talk about Amazon, but I almost want to just also want to kind of dig into how this visiting this factory or logistic center and just seeing what they were doing with robotic technology, like how does that help you? How does that kind of thing help you understand, like, what’s actually going on when they invest or making an acquisition of a robotics company?
Marcelo Lima 14:26
Yeah, so I’ll give you the the background of that, which is, it’s a lot of this is developing insights by connecting the dots, mentally, so sure, a few years, a few years before this fulfillment center tour. I visited Amazon in Seattle. And I actually met with a few employees there and one of them ended up becoming a friend and he works in the robotics division of Amazon. Now, he didn’t tell me anything. That’s not in the public record, but he pointed me towards this has been publicly said, and we’re working on robotics. And then I attended several conferences that Amazon puts, not only the cloud services one, but also one on automation and machine learning, etc. And so you could then see the advances in robotics. So in one of these conferences, for example, one of the big challenges is sensing. And so if you have a bin that has a bunch of junk in it, and by junk, I mean, one thing is a roll of scotch tape, and then a balloon and a pencil, it’s very difficult for a robot to look at that. Do image segmentation to separate all the objects, and then have a hand or mechanical arm that has the grasping capability of grasping something that’s hard and also grasping something that’s soft. Like the test is, can I grab a grape without squishing it?
But recent advances now have made this possible, or increasingly possible. And so you can start then connecting the dots. And then you visit the fulfillment center, and you see how things are done. So the fulfillment center has the Kiva robots. And then you go look at what Kiva has been doing. And the Kiva is just that yellow thing that you see in the photo, the Kiva thing is on the bottom, that yellow thing are the bins, and they use the image, the band to figure out where things are, but there’s a human that has to unpack the bin, and put the items in the box.
So let’s say you ordered a book, and you ordered some cookies, and you ordered a roll of scotch tape, the bin will come to your station, and it has several different little bins inside of that big bin. And there’s a light that shines on the scotch tape. So the scotch tape is on bin number one, for example, there’s a light that shines there. And then you as a human have to go take that scotch tape out of bin number one, put it in the box, then the light shines on bin number 17. Which, which are the cookies that you ordered? And then you have to manually pick those cookies and put it in the in the box. And then finally, it’ll shine on the book that you bought on bin 27, let’s say. And I thought well, that seems like it should be trivial eventually. For a robot to do as well. Right?
Matt Cochrane 17:30
Marcelo Lima 17:31
So you just, you know, you just sort of connect the dots. And that’s what I was trying to do there.
Matt Cochrane 17:35
Gotcha. Yeah, that’s, I mean, what you just explained is, is amazing, but it’s also like, you can see where, you know, a robotic army can’t crumble the cookie, when it grabs it. Can’t rip a page on the book, when it grabs that, you know, like all those things. So I see how that’s challenging. But it’s just the technology already in place with the lights, that is totally fascinating. Amazon’s obviously making so many investments in the cloud and in logistics, and in retail, I mean, they’ve completely changed the way retail is done. But they’re also a one and a half trillion dollar company give or take.How do they fit in now I mean, we’re talking about technological ages, and how we’re in this age of disruption. Are they too big to grow from here? We can take it beyond just Amazon too. But you have these big companies like Microsoft, Amazon, Apple, go down the list, Alphabet, that are huge, multi trillion dollar companies, one to $2 trillion. Are they too big to grow? Like, how does that? How does these immense size of these like, organizations, how does that factor? How do they grow from here?
Marcelo Lima 18:57
You know, I, I play tennis with, haven’t seen him in a while, but I used to play tennis with this guy from Sweden. And a few years ago, when Apple was a lot smaller. I remember him telling me, how is it possible the company is bigger than Sweden’s GDP right? So it’s likely how, and I thought in my head, well, I don’t know. How do you know, why is that so relevant? I guess. We tend to anchor on on certain things. And in his case, he was thinking about his country of origin. And we think about, it’s very hard to fathom these numbers. What I just do is I just look at what does this company do, and you follow the company very closely. So Amazon just reported earnings and guided to I think it was 30% growth in ecommerce for the next quarter, which is insane because it’s an acceleration. From where they were a while back.
And of course, cloud computing is very early in the adoption curve, if you look at the penetration of cloud services as a percentage of the existing IT services industry, and of course, that ITservices industry is not a fixed number, it’s a very fluid number. It is growing. And also, there’s new market creation that’s happening, because you are enabling a number of new things to be put into Cloud services that were never possible to be put in cloud services. And you’re enabling a number of new applications that themselves create additional demand. I just, frankly, look at the evidence. And if these companies are growing very fast, and the markets appear to be still under penetrated, and ecommerce is still under penetrated, then to me, I don’t, I don’t really anchor on the size of the company. If it’s 1 trillion, 2 trillion, whatever, I just look at my my models, and does the IRR from here look attractive based on various assumptions of growth and margins, etc. Because it’s super tricky. If you went back 10 or 15 years, and you had been trying to invest in Amazon, or Facebook, or any of these companies, and you had a very rigid sense of the total addressable market, you wouldn’t have pulled the trigger on any of them.
Matt Cochrane 21:34
That so true. And it’s something I try to incorporate too, like what I call optionality. Where a company like, again, I mean, like you pointed out, you go back 15 years, and I mean, who had AWS figured in for Amazon’s financial models, you know, and the margins and revenue that that entity was going to, was going to introduce into Amazon’s numbers. How do you account for that optionality, though, like how much, this is something I struggle with, because these tech companies are amazing, they are innovative, a lot of times, they’re still led by their founders who have this vision in their head of where they want to take the company, which is almost always well beyond what the company is currently doing. I mean, Amazon, I mean, it’s a a great example, we can stick with that started as an online bookstore, you know, and in the in the 90s. At what point do you think it’s too optimistic to start accounting for all this optionality? But at what point do you think you’re not being realistic to not account for any of it?
Marcelo Lima 22:40
That’s a fine balance. What I like to do is, markets typically don’t like to pay for unseen optionality for too long. What I mean by that is, let’s suppose you have a model of a company. And your model says there’s a 12% IRR from here. Sure. That is usually too low for us to invest in. But you could, let’s say you were optimistic, and you would say something like, well, it’s 12% IRR. But it’s based on the businesses that the company has, but the company is inventing new things. So maybe it’ll go up from here, and that’ll that’ll turn out to be a much higher number. And then a few months go by, and markets really like to worry. So there’s always something that worries the market, right? Recently, it’s been the 10 year has gone up, the interest rates are going up, oh, Janet Yellen said this or that. And then, and then your stock gets crushed.
Now, instead of a 12% IRR, let’s say it’s now a 16 or 17% IRR, nothing has changed. The same optionality is still there. It’s just that now, the company is not like, 17% IRR is something I could live with. And so and so now you see what I’m saying? Markets tend to sometimes give it credit, and sometimes not. And you want to take advantage of those moments where price is more attractive based on what you can see. Now to your to your second point. I think it’s very important to invest in companies where the founder has a vision to do something much bigger. Why? Because if the company is going to be a very static type of business, and he knows he’s only going to have that core product, then sure, you might have attractive returns, but you’re not going to have great returns over a long period of time. In order to have great returns over a long period of time. The company needs to find new products and services. That horizon two, horizon three, and onwards. And so a company that has invention in the DNA and exploration and R&D into new I think is very, very important.
Matt Cochrane 25:03
Gotcha. And I’ve heard you’re talking about the founders and visionaries. I’ve heard you divide leadership of companies into missionaries, and mercenaries. What is that difference? Can you explain that?
Marcelo Lima 25:18
Yeah, the mercenary is, you take an old industrial company, for example, an old school company, like a company that was founded 100 years ago, and it’s mature, it’s growing, maybe half a percent a year, or maybe it’s not growing at all, or maybe it’s growing very little. And all the founders are gone, the culture of the company is very transactional. So the employees are there, they’re not super motivated because there’s no great vision. And the board of directors hires this new CEO, gives the CEO a compensation package that says if you raise earnings per share a certain amount every year, you get a bonus. And then if you work to retire after a certain number of years, you get a golden parachute. That depends on the earnings per share in your 10 or whatever.
What’s your incentive? So incentives are super powerful. We know this from life and Charlie Munger talks about this a lot. Absolutely. Yep, consistently underestimates, right, the power of incentives. And if your incentive at that point is really not to rock the boat, it’s, you’re not going to go out and have this incredible visionary zeal to change the company and really burden, that requires investing a lot. And that would burden your your earnings per share during your tenure. So why would you do it? Meanwhile, you have here, a missionary leader, who is, the company is a startup, they have a completely different mentality, they want to change the world, and they want to – they’re doing something that’s going to disrupt you.
So they’re able to hire the best and brightest, because the best and brightest get really excited about a missionary type of company with an incredible founder who’s technically capable, and they’re gonna work really hard to disrupt you. And they don’t really care about profits in the short term because they’re focused on a much bigger prize. And the irony is that the missionary ends up making a lot more money than the mercenary over time, because the missionary frequently wins and disrupts the incumbent. So I think it’s very important to understand when you’re investing what type of company it is, I’m not saying it’s wrong to invest in the mercenary one, but you just have to understand that dichotomy and make sure you don’t fall into a trap.
Matt Cochrane 27:48
Sure. So, Jeff Bezos, I mean, you know, in my mind, one of the greatest CEOs or founders or entrepreneurs ever, just stepped down from his role as CEO of Amazon and Andy Jassy is taking over who, by all accounts is extremely competent and capable. How do you if you were holding Amazon? I don’t know if you have a position, but how do you how do you judge a transition like that? I mean, that’s huge. I mean, Bezos was there since Amazon’s founding 20, some years ago, and led it from being an online bookstore to the juggernaut it is today, like, how do you judge a transition like that? How do you know if they’ve gone from being a missionary mindset to a mercenary mindset?
Marcelo Lima 28:39
We’ve seen a few of those transitions recently, right? So you had Ballmer succeed, Bill Gates didn’t work out so well, but Ballmer was making some moves that were really head scratching at the time. Of course, then Satya Nadella took over. And it’s been phenomenal for Microsoft shareholders. And Bill Gates has been on the board of directors during that whole period, and very sort of somewhat involved or very involved. And you’ve also seen it happen with Alphabet, right? Sergey Brin and Larry Page are no longer involved in the management of the company. And it’s worked out pretty well. You’ve seen it happen with Apple, where the founder passed away, Steve Jobs. And somebody who is very close to the founder, Tim Cook took over and has managed the company extremely well.
So I think when there’s a very close Nexus to the founder, and even better when the founder continues to be on the board of directors of the company, I think it has a very high chance of working out well. And Andy Jassy is amazing. So he’s done an incredible – you can read about him in The Everything Store. He used to shadow Jeff Bezos early in his career, and he was an early employee at Amazon, he came up with a bunch of interesting ideas like the whole music business. And so, and he’s been doing a fantastic job at Amazon Web Services. So he’s a known quantity. He’s a very competent guy. He’s very well liked. And Bezos is still very much involved with Amazon. So I’m super confident that that will be a great transition. And you can see that Andy is a missionary type of guy, you just have to watch his, perhaps you go watch his interview as keynotes, perhaps you go read up on him, but he’s definitely not a mercenary. I would be worried if, let’s say if Bezos passed away. And there was, and there was no deep bench at the company. But you know, it’s interesting, typically, the missionary types of companies, because they attract really high quality people, they usually have a deep bench.
Matt Cochrane 30:58
Of course, of course. So I’m playing around with a theory I have. So let me get your opinion on it. I don’t think it applies to Amazon, because like you said, Bezos is still there, and very involved with the founding. But maybe it applies to Apple, where Steve Jobs passed away. And so now, he’s, I mean, tragically, you know, at a younger age. And now you have Tim Cook, who is an amazing CEO. But I worry, I mean, Steve Jobs left behind a vision. And you know, Tim Cook has been carrying out that vision. But once he gets to the end of Steve Jobs’ vision, I wonder if – does he have his own vision to go beyond that? Or, you know, I think it can lead for a long time, like a good decade or so for a company like Apple to play out the founders vision. But when you get to the end of that playbook, I always worry. And again, a long time, so I don’t think it’s anything you have to worry about in the short term. But I always worry like, is there going to be a vision beyond that? Does that make sense? Did I explained that right, or?
Marcelo Lima 32:08
Yeah, absolutely. It’s, it’s a great question. And there’s been a lot of when Steve Jobs passed away, a lot of people including me, were skeptical that, that Apple could perpetuate its success into a new management team. And I was wrong. Tim Cook has done a phenomenal job, they’ve created new products. Under Tim Cook, they’ve created the entire services business. And it’s just been, Apple has been executing incredibly well. And frankly, they’ve resurrected the computer business, the sort of the Macintosh business, the shift to the m1 chip is incredible.
I got a MacBook Pro for the first time in about 17 years. So 17 years ago is the last time I had a MacBook. And it’s the best computer I’ve ever had because the battery lasts forever. It’s super powerful. There’s never a fan noise or anything like that. And it turns on instantly. And it’s just way ahead of anything you can get in the Windows ecosystem, even though I’m a huge fan of the Windows ecosystem, because of that tight integration between software and hardware and Apple building its own silicon. So if Apple continues to really fulfill the desires of customers and surprise them and delight them. I think, frankly, the sky’s the limit for Apple even beyond Tim Cook. The question is, do they have a deep bench? I think they do. I don’t know who would be the heir apparent?
Matt Cochrane 33:48
I’m sure they’ll do. Yeah, yeah.
Marcelo Lima 33:49
Yeah. Because again, it’s a company that attracts a lot of talented people. So they probably will be able to carry the torch into new product lines. Like maybe we’ll have an Apple car in the future. I don’t know. But if they continue to delight customers, I think there’ll be they’ll be an excellent shape.
Matt Cochrane 34:07
Let’s shift gears a little bit and talk about another, I guess, controversial tech figure, more controversial, but also, in his own way, a visionary and let’s talk about Facebook and Mark Zuckerberg. There’s a few things I want to talk about Facebook with you, because I’ve seen your post and I know you tweet about it sometimes. But Mark Zuckerberg believes the Oculus can be the next great computing platform. You know, a few years ago, I know you attended an Oculus conference where one of the speakers said that VR?AR which is virtual reality, and augmented reality, mainstream adoption of that technology was inevitable. And do you think it’s inevitable and if it is, can Facebook be a winner from that?
Marcelo Lima 34:52
I tried the Oculus virtual reality goggles about four years ago for the first time and The experience was so visceral, that you put it on and there, there’s an onboarding that you do. The onboarding today is a little bit different from the one I did. They’re both delightful. The sense of present, like your brain, your brain reconstructs whatever is missing. So even though you’re not looking at necessarily the best, highest resolution, photorealistic thing you’ve ever seen, sure, it doesn’t really matter, and it’s not something that you watch on a screen, it’s something that you feel, it’s very visceral, right? It’s hard to describe, you have to really, it’s an experience. So that feeling you cannot get with any other computing platform, you can’t get it on a computer on a phone, it just doesn’t exist. That’s why I think it’s something fundamentally different. And you can start thinking about all the different use cases that that enables collaboration, gaming, education, social aspects, it’s just, it’s going to be incredible once the technology is fulfilled, and fulfilled means the form factor has to work. So it’s got to be something that’s comfortable that you can wear, that doesn’t give you a headache, perhaps, that adjusts to whatever kind of prescription you may have. It’s got to be something lightweight, with a long lasting battery life. So if you listen to Schroepfer, the Facebook’s Chief Technology Officer and Mark as well, they admit that it’s going to take a while for us to get there. But they are investing heavily. They’re trying to make it happen sooner. And I do think that it has a chance to become the next computing platform in Facebook’s hands. And I do think it’s going to be probably at least a duopoly between Facebook and Apple, because I also think Apple has a very good shot at doing this.
Matt Cochrane 36:55
Yeah, yeah. That’s interesting, I do need to try the Oculus, because I keep hearing too many people talk about it. And now I’m just more and more feeling left out.
Marcelo Lima 37:07
Highly recommend it. You put it on, get yourself like a little area that you can try it on, and then put it on and go through the onboarding experience. If it’s the same one that I tried with the Oculus Quest, which is the other most recent device, you’ll be dancing, holding hands with a robot. And when you take the thing off, you’d be like, what the heck was I doing? I can’t believe I was dancing by myself holding hands with a robot. It’s just incredible.
Matt Cochrane 37:36
Marcelo Lima 38:08
What you’re, you’re referring to the IDFA. And if you look at what’s happened, for example, with when GDPR was enacted, there was also fear that Facebook was going to be impaired. And at the time –
Matt Cochrane 38:22
Now, now, just real quick, like explain what GDPR is real quickly to two listeners.
Marcelo Lima 38:28
GDPR is general data protection regulation. And it was something enacted by the European Union, where if you are a European citizen, anywhere in the world, and you are interacting with Facebook services, or not Facebook, but any digital service, That digital service provider would have to comply with all the different rules. And there’s a bunch of things that you can and cannot do, you have to control the data, you have to make sure you protect the users, private data, etc. And for Facebook, they spend, I think they spent something like hundreds of millions of dollars in legal fees. And they had the lawyers installed at the offices of the regulators for months to be able to understand the implementation of this. So imagine a huge leg up. Now, if you are a small developer, a small, let’s say, social media platform that’s trying to grow, you don’t have that advantage.
And so the irony of GDPR – well, there’s two things: One is it It hurts Facebook, but it hurts everybody else much more because it’s harder for them to comply. So the European Union in its zeal to protect privacy, and I have strong thoughts about that because I’ve never felt my – I’ve been a very, very early Facebook user, and never ever felt my privacy invaded or anything like that. In fact, I love targeted ads. I love ads that are relevant to me, I don’t like watching the pharmaceutical ad or the weight loss ad that I’m like, why am I seeing this thing?
So the European Union and its zeal to protect privacy ended up creating a very uneven competitive landscape, where Facebook is advantaged, and everybody else is disadvantaged. But then in addition to that, Sheryl Sandberg pointed out, this is before GDPR was actually enacted, she said, Look, yes, it’s going to be worse for us. But on a relative basis, we’re going to be doing better off than others. And that’s really what’s going to matter. Because if you’re trying, if you’re a small business who’s advertising, you get more signal by advertising on Facebook than on the smaller platforms that are now further disadvantaged because of GDPR. And that’s, in fact, what happened. Now with IDFA. At first, everybody was scared. And then Mark came out, he actually did this on Clubhouse. And he said, I think we might actually come out stronger because of this. Because, again, same story, they have a lot of first party data, a lot of first party data inside the Facebook ecosystem that allows, if you have first party data, you’re not subject to the restrictions of IDFA.
Matt Cochrane 41:16
Right. IDFA, for listeners, it affects Facebook’s ability to track your activity on other apps. But everything you do within the Facebook ecosystem, whether it’s Facebook, Instagram, WhatsApp Messenger, it still owns that.
Marcelo Lima 41:37
That’s exactly right. And so I don’t think that that’s going to be an issue for Facebook. And now Facebook reported earnings, and they said it’s going to be manageable. And I even joked I put this this chart of Facebook’s earnings sort of revenue per user over the last several years. And it looks like it’s on railroad tracks, right? It’s just goes up despite all the things that have happened with GDPR, and all the media panics. And the media, of course, is heavily incentivized to hate on Facebook because they perceive Facebook as a good scapegoat for what the internet caused, which is the unbundling of the media ecosystem. And so longer term, which was your question, does Facebook need Oculus to succeed? I don’t think it needs Oculus to succeed. But I think Mark very intelligently understands that it’s inevitable, somebody will build a killer AR VR ecosystem. And if you read there’s a memo that he wrote when he acquired Oculus, he wrote a memo talking about possibly acquiring Unity. And that memo is a masterclass in strategic thinking. Mark is extraordinarily underrated.
Matt Cochrane 43:01
100%. He’s so underestimated as, and he’s still in his 30s. Yeah, people continually underestimate this guy, they still have this image of a guy in his dorm room, making a social media, a crude social media app, and continually underestimated.
Marcelo Lima 43:23
Yeah, Mark is, is one of the greatest, like generational leaders of our time. And the fact that he’s so young, gives me even more, makes me even more excited, because there’s so much runway ahead for him. So he, I think correctly sees that this is inevitable. And if it’s inevitable, does he want to remain under the control of the app stores, because now, access to Facebook’s users is done through mobile, and mobile is controlled by Android and Apple. And Apple is really an antagonist here. So he doesn’t want that to extend them to the next computing platform. And so he’s making a very concerted effort into developing that computing platform himself. So imagine now a world where instead of buying whatever VR AR glasses from Apple, you do it from Facebook, and now it’s completely unfettered, you don’t have the toll booth of the Apple App Store, you don’t have any sort of issues with Apple, creating new rules for advertisers, etc. So that would be a huge game changer for Facebook.
Matt Cochrane 44:30
So let me ask you a question. Longer term. is Facebook a greater threat to Apple than Apple is to Facebook?
Marcelo Lima 44:40
That’s a great question. By the way. I just wanted to clarify something I don’t think I’m not saying that AR VR will supplant mobile. I think it will augment it. The same way mobile augmented the desktop/PC. PCs haven’t gone away.
Matt Cochrane 44:52
Right, right. Yeah phones won’t go away. Yeah,
Marcelo Lima 44:54
I don’t think phones will go away at all. It’s a phenomenal friend factor. It’s in your pocket. You don’t have to keep it on your face the whole time. So I’m just saying I think the face thing will, will be a thing, and it will augment mobile. Now, I don’t really see it as Facebook being a threat to Apple or Apple being a threat to Facebook, I think both can be extremely successful in their respective paths. And I think it’ll be healthy for this new technology platform to arrive. Because the some of that antagonism – we won’t be talking about it as much, because then Apple will have its own product roadmap. And Facebook will have its product roadmap, and they won’t necessarily be butting heads. I mean, there is an argument to be made, let’s say that Apple will have significant market share in AR VR, let’s say.
Matt Cochrane 45:48
That’s a very safe assumption.
Marcelo Lima 45:51
Yes. Right. And, and then, if you’re experiencing Facebook, inside Apple’s AR VR, you’re still going to be subject to Apple’s rules. So you’re gonna have very different experiences, whether you’re using the Facebook, AR VR or the apple AR VR. So does that create a schism? We don’t know yet. Right?
Matt Cochrane 46:12
Right. Right. So we kind of touched on this earlier, but we talked about size and market caps, but I also, I should have talked about this at the time, buthow do you weigh valuations? So we’ve seen this sell off in recent months of some of these tech names that skyrocketed last year. And how do you weigh a company, when you have a potential category killer, that’s just going to take out a whole, you know, could disrupt an entire industry, high margins, robust growth, a lot of things to like about it? And yet, then it starts selling at 40, 50 or higher time sales? How do you weigh valuations, when you look at these types of companies that might be the next, Facebook, Amazon, etc, etc?
Marcelo Lima 47:04
Yeah, the thing I like to say his multiples are not – using a multiple is not doing valuation work. And I, you’ll learn that – I’m not saying you right, one learns that when when you start doing detailed work into the company and understanding the economic fundamentals of the company, the unit economics, margins, what can margins look like, in the future, and a lot of this has to do with the different business lines of the company, what the, the flow through margin is on an incremental user. Typically, for digital companies, it’s extremely high margin, that incremental user, and so you start then seeing, what did the different expense line items look like at maturity? You know, is this company going to have 80% of its sales be of its revenues, going to sales and marketing? And when it scales up? Of course not.
And so you start to figure out what margins look like in the future. And when you build a discounted cash flow model, you get a very different result. So, you know, when I wrote my blog post on Slack, for example, in early 2020, I sent it out to my email list, and I got a few replies from people. And by the way, I wrote the Slack blog post and I had a very detailed model on Slack. And I had attended a few Slack events, and I thought I understood the company and the mission, the founder, the DNA of the company, and economics very well. And I thought it was going to be a home run over the long term. And I got a reply from somebody who said more than one person said, Whoa, you know, nice post, but how do you justify paying 25 times sales? And that’s just not how I think, I don’t know, if life was that easy, that you could just look at, pull up the price the sales and make a decision. It’s not that simple. Right? This is I think, lazy thinking and you’re just trying to reduce a very complex set of assumptions into a simple number.
And I think you’re entitled to use that number after you’ve done the valuation work. And so I maybe I’ll do the valuation work, and then I’ll say, oh, it sells at x time sales. But at that point, the multiple of sales is irrelevant, because I already have the output of my my DCF. And just to be clear, I know my DCF is wrong. But I get it gives me guardrails to think about the company and again, going back to Slack, when Slack was acquired by Salesforce. We had a very good return. I think it was like up 70% from that blog post. In one year, so and so you might say, Oh well, but Salesforce overpaid for Slack.
And then when so when they acquired Slack, they had to publish Slack’s internal forecast for where they would see their sales in the future. And it turns out that their forecast was about within 15% of my internal forecast. So I’m like, Okay, well, I guess slack and I were thinking the same way about the future. And again, if that number is achievable, you calculate the IRR to Salesforce, the acquirer, and that’s a 12% IRR. So even though Salesforce paid 70%, more than I did, they’re still getting a pretty decent IRR. Because again, Slack did better than I expected, the results have been better. And Salesforce can probably accelerate that because Salesforce has distribution. So the synergy between Slack and Salesforce means that that 12% IRR is probably a floor. So I think it’s a very safe bet. And they really got a bargain. So yeah, but if you had been looking at multiples, you would have engineered yourself out of a great investment just because you’re not thinking about it from really, you know, the bottom up.
Matt Cochrane 51:10
Sure, that’s really interesting. It’s something that helped me like first understand that was like Pat Dorsey. He’s talking about, like when MasterCard and Visa first went public, and they looked expensive, you know, I don’t know, what the multiples were, when they went public. But he said they looked expensive, but when you modeled it out, each incremental transaction on their platforms was so profitable. That like, you know, if you just modeled out like, growth of ecommerce, which encouraged to use a MasterCard, Visa, you know, like, the death of cash, the slow death of cash, but just over time, those macro trends could drive so much potential growth for these companies. And that how profitable those each of those transactions were that he said they weren’t expensive at all, which is something you would completely miss if you just looked at their multiples when they first went public back. ’08, ’09 or whenever they went to public.
Marcelo Lima 52:06
Yeah, so two points there real quick is one, you’re absolutely right. And that’s true about all digital companies where serving that incremental user has frequently close to zero marginal cost. So you see very high flow through margins. The second thing that’s interesting is Visa, MasterCard have been around before the IPO they were around for decades.
Matt Cochrane 52:29
Right since the 50s. Yeah
Marcelo Lima 52:31
Exactly. So they’ve had this war on cash for decades. And you look at cash, and it’s just gone up. So that shows you how crazy these markets are, because they’re much bigger than we expect. Another example is, IBM sells mainframes. And you can go in to IBM’s website right now. And you can pull up their Investor Relations deck. And you’ll see they call it MIPS, which is millions of instructions per second. It’s the installed base of mainframes. And even though you have powerful computers, and Amazon Web Services, Azure, GCP, etc, MIPS are going up, which is mind blowing to me.
Matt Cochrane 53:12
That is mind blowing.
Marcelo Lima 53:13
So these industries are much bigger than people think. And when they die, it’s not like the Thanksgiving turkey, where it’s just like falls off a cliff. It’s either a slow death, or frankly, it just keeps going up for whatever reason. Like cash, old technology cash and old technology. mainframes, there’s there’s momentum, there’s inertia, there.
Matt Cochrane 53:35
Sure. A lot of inertia, right? I don’t want to take up too much of your time today. But I have to ask you, you moved to Miami at a young age from Brazil. You know, I’ve lived in South Florida almost my entire life. We were talking about that a little before we came on. You know, and I’ve seen you tweet about this. And I tried to encourage it whenever I see it on Twitter, but on Twitter and other social media platforms, the Miami Mayor Francis Suarez has been a very vocal and proactive about, for lack of a better term, recruiting entrepreneurs from tech hubs such as San Francisco and Boston and other states to Miami. And, you know, can Miami become the next tech hub? What’s Miami’s future?
Marcelo Lima 54:23
It was a complete accident that I ended up here, rather than somewhere else. It was out of college. I came here. And you know, looking back, I almost moved to the Bay area recently because. Yeah, I really wanted to be close to my companies and all the conferences that I attend, etc.
And what happened was, all the schools are closed because of the teachers unions. You have very, very far I think, a far left wing governance now in California, which is a pity because it’s a phenomenal state with incredible landscape and people and businesses, but the government is really, really took a turn there. And you see some of the things that for example, the city of San Francisco is trying to do. It is almost like I read a tweet from Mayor London Breed from San Francisco yesterday. And I had to read it a few times to make sure it wasn’t a parody, because she’s literally doing – trying to do something that has proven to not work many times over in history.
And you can go read about it, she’s trying to take taxpayer money and serve only a minority of people. Like art, she’s trying to give universal basic income to artists. And then it sounds sounds great, who doesn’t want to help a struggling artists, but think about the incentives that that creates, and the distortions, and then the second and third order effects like, now you can imagine people pretending that they’re artists, just just so they can get universal basic income from the city. And it’s just bizarre. So we’ve tried those experiments before in socialism, they haven’t worked. It’s not the way that we build wealth. It’s not the way that we build prosperity. What I would like to see is a government that really focuses on the problems. Her problem is not universal basic income for struggling artists, her problem is housing.
They don’t have enough housing in San Francisco, or in the Bay Area or in California, it’s a very hard problem to solve. But if we didn’t have hard problems, we wouldn’t need politicians. So that’s sort of their job is solving hard problems. And what Mayor Suarez has done is absolutely incredible. There’s a podcast that he did recently with Kara Swisher and he talks about, he just sounds like, frankly, a Reagan or a Margaret Thatcher. It’s just a very thoughtful person where you’re listening to him. And he just like nodding every time because everything he’s saying sounds very reasonable. So this is a guy who’s in favor of more immigration and understands the threat of global warming, but also understands that taxation is not the answer, and that he has to look to the industries of the future, to grow employment in the city. And that’s exactly right.
The industries of the future are the ones that are going to be the big wealth creators. And so why not attract more of those to the city. And so he’s doing a phenomenal job, I hope he continues to do it, and hopefully grows his political career, and continues with his same message as he does so. Now can Miami become a tech hub? I’m very skeptical because the network effects are super powerful elsewhere. But COVID has accelerated a lot of the sort of the remoteness of how you can do this. So now you don’t have to be physically present to close a lot of these venture capital deals, etc. And a lot of venture capitalists are saying this, they’re like, you know, I haven’t met a founder anymore. I just do it online. And so we’ll see. But I think it’s a very exciting development, the more tech hubs we have, the better.
Matt Cochrane 58:26
Sure, Marcelo, where can people find you if they’re interested more in following you?
Marcelo Lima 58:33
Well, I’m on Twitter, MarceloPLima and on Heller House, HellerHS.com
Matt Cochrane 58:40
Excellent. Well, thank you for joining us today. Happy to have you and we’ll have to do it again soon.
Marcelo Lima 58:47
Sounds great, man. Thank you so much.
Matt Cochrane 58:49
I’m Matthew Cochrane. We’re 7investing and we’re here to empower you to invest in your future. Have a great day, everyone
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