Key Takeaways
- Henry Ellenbogen's investment philosophy emphasizes understanding people and change, rooted in diverse academic and professional experiences.
- Durable Capital Partners focuses on identifying the top 1% of companies, often led by "Act II" entrepreneurs with prior success.
- The firm distinguishes between failing and transforming companies, prioritizing long-term compounding over short-term market signals.
- Durable Capital employs a "dollar cost averaging up" strategy for early-stage growth companies exhibiting competitive advantages.
- AI and robotics are seen as major disruptive forces, creating new cost curve advantages that could significantly impact various industries.
- The firm's culture promotes intellectual honesty, continuous learning, and a collective approach to making colleagues better.
Deep Dive
- Ellenbogen proposes that going public is a viable path for emerging private companies, contrasting with the trend of remaining private indefinitely.
- Netflix's transition from DVD-by-mail to streaming is cited as an example of a successful transformation, despite significant stock declines and a cash crunch.
- The public market's daily scrutiny and investor feedback can instill discipline, pushing companies like Duolingo, Toast, and Affirm to demonstrate a path to profitability.
- Companies must operate in an 'and' business, balancing short-term market share growth with long-term innovation and profitability.
- Henry Ellenbogen's investment philosophy is shaped by a background in organic chemistry, history, and politics, not solely finance.
- He draws parallels between scientific principles, particularly biology, and market analysis, emphasizing balance in stakeholder relations.
- His mentor, Jack Laporte at T. Rowe Price, influenced a focus on investing in small companies run by owner-minded individuals with good culture.
- Studying the New Horizons fund's 50-year history revealed that only about 20 stocks drove its performance.
- Ellenbogen's concept of "Act II" entrepreneurs describes founders who leverage past successes for new ventures, exemplified by Workday's founders.
- Durable Capital Partners itself operates as an "Act II" endeavor, structured to support long-term compounding and navigate change.
- The firm values founders with prior experience in tackling complex problems and building scalable systems, especially in emerging technologies like cloud computing.
- Max Levchin is highlighted as another "Act II" entrepreneur, with Durable previously investing in Sly and currently involved with his firm.
- Durable Capital is structured with team continuity, typically allocating 10-15% of capital to private markets and the rest to public markets.
- Investments are underwritten with a three-year outlook, aiming to increase positions in companies demonstrating competitive advantage and adaptability.
- The firm employs a "dollar cost averaging up" strategy for early-stage growth companies that achieve projected growth and de-risking milestones.
- Top public company positions include DoorDash, Affirm, and Toast, often increased during market downturns.
- Public market earnings seasons exhibit increasing volatility, even compared to the 2008 financial crisis.
- This volatility is attributed to institutional flows driven by short-term performance pressures and quantitative models.
- Durable Capital's "doing less to do more" strategy emphasizes deep business understanding and a longer time horizon to navigate stress.
- Profound understanding of companies like Colliers and Duolingo allows Durable to identify long-term winners amidst volatility.
- The current AI-driven technological shift is compared to prior internet, mobile, and cloud revolutions, potentially impacting all IP-based businesses.
- Affirm is cited as an example of a company leveraging AI to improve efficiency and manage legal, merchant contract, and compliance costs without increasing headcount.
- Henry Ellenbogen learned from Jeff Bezos about Amazon's strategy of reinvesting economic advantages into infrastructure to build a persistent competitive moat.
- AI's potential is likened to "Kaizen" in the physical world, offering uncatchable advantages for companies that capitalize on it early.
- Robotics is in early stages but rapidly iterating due to machine-to-machine learning and general-purpose AI models.
- Initial findings suggest robotics is already cost-competitive with physical labor in some use cases, with costs expected to decrease further.
- Companies investing in robotics and distribution infrastructure now could achieve similar deflationary cost curve advantages to Amazon over two decades.
- This investment could create power-law businesses, giving early adopters a 2-3 year lead over competitors.
- Investment memos at Durable Capital focus on competitive advantage, operating culture, leadership, and capital allocation for durable growth.
- The firm conducts quarterly operating reviews and mandatory three-year look-backs on initial underwriting versus actual performance.
- This process fosters learning and accountability, acknowledging that investors improve with experience.
- A 2022 CEO tour revealed conversations centered on market transition and operating principles, contrasting with a decade of readily available, cheap capital.
- Durable Capital aims to build an investment firm that improves over time, even after initial partners depart, by studying successful firms.
- The firm hires individuals like Anook Day and Corey Schull, some without prior investment experience, believing in their potential to grow.
- It values the fresh perspectives of junior team members, citing Anook Day's contribution to understanding the millennial mindset.
- The firm seeks individuals with deep intellectual curiosity, a desire to learn, resilience, and a team-oriented competitive spirit.