Letter #137: Reece Duca and Bob Casey (2023)
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Letter #137: Reece Duca and Bob Casey (2023)
Founder of IGSB and Operating Partner at IGSB & CFO of Tegus | How to Craft a Winning Investment Process and Spot World-Class Companies
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Today’s letter is the transcript of a conversation between IGSB Founder Reece Duca and former IGSB Partner and current Tegus CFO Bob Casey. This is the first time Reece has agreed to sit down for a long-form interview, and it did not disappoint! While I was planning to send out a different letter this Saturday per my usual posting schedule, I enjoyed this conversation so much that I wanted to share it immediately! (Note: we will return to regular scheduling with Letter #138 coming out next Tuesday.)
I’ve previously shared Reece’s story here, along with a presentation he gave, but this was the first time he’s opened up about his story and the birth, and subsequent evolution of, IGSB.
And while Reece had never publicly discussed his philosophy or story (and I’ve never met Reece or anybody from IGSB), in Letter #121: Reece Duca (2014), I highlighted these five things IGSB did differently that contributed to their success:
1) They’re based in Santa Barbara, which, while is hardly the finance hub that New York is, or the tech hub that Silicon Valley is, has allowed them to stay grounded and maintain an independent viewpoint (similar to why/how Warren Buffett is based on Omaha).
2) They have a tight-knit team that was anchored by five partners (Reece, Tim, Bill, Mike, and Luise) who are tied together by decades of shared experiences including schooling, family, and sports, which has allowed them to build a long-lasting partnership based on a culture of trust and fun.
3) They manage no outside money—the fund was seeded with Reece’s stock market proceeds and they never took on outside clients, shareholders, or limited partners. They did use debt in the early days, but they have been debt free since the late 70s. Managing no outside money has 1) allowed them to be true principal investors and take on true long-term views and positions, and 2) allowed them to be flexible and invest where their interests take them (i.e., in the early days, IGSB was more focused on public equities, but have since moved more toward venture capital and company-building).
4) They mix diversification and concentration. They are diversified across stage and asset class, having invested in both public markets (i.e., Autodesk, FedEx, Mercado Libre, ToysRUs, Williams-Sonoma) and private markets (i.e., Advent, AirBnB, AppFolio, Facebook, The Learning Company), and even started a few (i.e., GlobalEnglish). However, they are concentrated in their investing, having 1) focused exclusively on best-in-class B2B software over the past few decades (i.e., VMS for real estate and farming) and 2) doubled down when they saw success (i.e., when AppFolio IPOed, IGSB owned more than 1/3 of the company).
5) They give new investors immediate responsibility, runway to grow, and a path to promotion. When Tim Bliss started at IGSB, Reece gave him a $500k portfolio to manage. He made Partner within 5 years. Today, Tim leads Partners Fund, which he started with several of his IGSB Partners. When Marc Stad first joined IGSB, he was given a $1mn portfolio to manage. He made Partner and was in charge of the firm’s Hong Kong office within 5 years. Today, Marc leads Dragoneer, which he started in 2012 and has grown into a ~$25bn fund.
And after listening to this conversation, I think my analysis holds up pretty well! In this discussion, Reece actually calls out and highlights each of these five points, and further expands on each and articulates their role in IGSB’s success and longevity. Having never met Reece or the IGSB team, listening to this talk was a great confirmation of what I’d learned, and it’s now one of my favorite things I’ve ever written.
While I was previously able to identify the big differentiators that have made IGSB special, this talk was especially fun because I was able to hear more stories and learn more granular details about the creation and buildup of IGSB, such as Reece’s initial $75k seed capital had actually started with $2k, the role that mentors played in his life, and lessons from five plus decades of investing.
Bob Casey is a Partner at Partners Fund Capital and the CFO of Tegus. Previously, he was an Operating Partner at IGSB and the CEO of Mindflash, a learning management system. Before that, he was the VP of Platform at Clover Technologies and the Founder and CEO of YouRenew (acq. by Clover).
I hope you enjoy this conversation as much as I did! It’s truly a special one.
(Transcription and any errors are mine.)
Relevant Resources
Transcript
Bob Casey: Thanks for joining us today. I'm Bob Casey, the CFO of Tegus, and I have the pleasure of being here with Reece Duca, the founder of the Investment Group of Santa Barbara. Prior to joining Tegus, I had the pleasure of working, everyday, with Reece at the Investment Group of Santa Barbara. He's been an incredibly private person, has not spoken much publicly about the history of a firm that's now in its 54th year. I'm really excited to have Reece joining us and to hear from him as he shares a bit about the evolution of the Investment group of Santa Barbara. Reece, thanks for joining us.
Reece Duca: You’re welcome.
Bob Casey: Can you start out by maybe just telling us a bit about the Investment Group of Santa Barbara?
Reece Duca: IGSB, we're an investment firm in the investment business. We started, as you said, 54 years ago. The original money was what I had when I finished the Stanford Business School, I had $75,000. We've never had any additional assets. We've never managed anyone else's assets other than our own assets. My 50 odd year partner, Tim Bliss, joined in the fifth year, he came as an intern. I put them on an agricultural project. By the end of the summer, I said, This guy's really talented. And he went back, finished his last year at Harvard, joined me, and he and I essentially built IGSB together.
Bob Casey: When we talk about IGSB today, what are some of the common themes that we're going to hear about?
Reece Duca: There's a half a dozen key things, but really, the most important ones are: We don't manage outside money, we have always had concentrated investments--and when I say concentrated investments, I'm talking about having maybe 70 or 80% of our assets in two, three, or four companies. We may own five or six companies, but 70%+ of our assets, it can be two or three or four--we talk about clarity of purpose and simplicity and focus. And we think that the most important thing in the investment business is to keep everything absolutely as simple as you possibly can. We think complexity is the biggest barrier to high performance in the investment business. And so we design around complexity. And we also think that it is extremely hard to find exceptional companies. And that most companies aren't exceptional. And so whatever your strategy is, it has to be designed to--how do you distinguish between what is exceptional and what isn't exceptional? Those are some of the kind of core themes.
Bob Casey: How did IGSB start?
Reece Duca: You know, life is serendipity. You plan certain things in your life, but a lot of what happens are really accidents. They're you were at the right place at the right time, by accident. And I'll say that some of the things that led to me starting IGSB definitely fit that. I grew up in Palo Alto. I had an uncle that lived in Santa Barbara. I would come down--I was a surfer kid--I would come down to Santa Barbara, I'd look around as we're here--now we're looking at the water and--but Santa Barbara was just one of those places that was magical and gorgeous. And so my uncle asked me, Where are you going to be applying to go to school? And I gave him a shortlist. I don't even remember what the shortlist was, but I gave him my short list. And he said, Have you considered UC Santa Barbara? And he said, Let's jump in a car, I'm gonna take you out there. And so we went out, we walked the campus, and I looked at this place and I said, This is phenomenal. And they have several miles of shoreline, it just--gorgeous site. And had I decide, Okay, I'm going to apply to UCSB. It turned out to be the only school I applied to.
And so I come to UCSB thinking I'm going to be an engineer. And then I take an economics class from a professor, this fella by the name of Herb Kay. And he had done his PhD at Stanford in economics. And the PhD was about companies and business models that had started during the Depression and had been able to survive and thrive in the Depression, World War Two, and then the Consumer 50s. Because the timeframe he was looking at was 1930 to 1960. And what were the business models, and what were the attributes?
And later in the term, this is after class, he said, Reece, I received a new grant. I'm gonna hire a new research assistant. I can tell you're engaged in the class. You read everything, you ask the right questions. And if you're interested, it's yours. Tell me before tomorrow morning at 645, but it's yours. And so I thought about it for about 30 seconds and I said I'd do it. So I ended up being his research assistant, his reader, his grader, and his personal investment researcher for the next three and a half years, which was like one of the most incredible gifts any student could ever have.
What I say to people who talk about Herb Kay as being an extraordinary economics professor: What he was was an extraordinary investor masquerading for about 10 years of his career as an economics professor. And what he had done to develop his investment strategy. And his investment strategy was focused solely on public investing. He didn't invest in private companies. But the most important interaction I had with him was on S-1s. And he would, every two weeks or so, he'd give me two or three S-1s. And he'd tell me, Look at the following three things. Read it from cover to cover and come back with the right question. We're gonna get on the phone with the investment banker, we're gonna get on the phone with the CEO, we're going to talk to a couple of customers. And so I'd go back to my dorm room, or my apartment room, and I'd spend time reading these S-1s and I'd come back, and half the time he would reprimand me for missing this and Why didn't you think about this, and I'd leave a little bit with my tail between my legs, but I realized my learning curve was going through the roof as it relates to my role as an investor.
When I finished high school, I had $2,000. I had saved this money, I had worked in a butcher shop, and I'd done a teeny bit of investing. And so I arrived at UCSB with $2,000. I spent the three and a half years with Herb Kay, I leave UCSB, I have $7,000. So after UCSB, I applied to business school, I applied to a couple business schools, got into all the business schools, and decided to go to Stanford.
So I arrived at Stanford with my $7,000 and no clear intention of what I was going to do for investments then because I had no idea how heavy a workload I was going to have. And I wanted to get to know my classmates and my professors and those kinds of things. And essentially, what I did, I did nothing the first term. At the end of first term, I realized I wasn't going to flunk out, I was going to be able to handle the academics.
And I then started looking at what companies were currently registered, what companies had filed S-1 in the previous year. And then I called a couple of the bankers that I got to know through Herb and kind of ask, Who is likely to file in the next year? And I kind of created a radius around Stanford of about 50 miles, I could drive there in an hour. So I started contacting the CEOs of these companies and told them I was a Stanford graduate student, and I was interested in their company, explain why. And invariably, they'd invite me to come visit.
So [a jump mic] or I'd go visit, they would carve out a half hour for the visit, it would end up being two or three hours, they'd invite me back, they'd introduce me to their wife, they'd tell me to come over for dinner, really, whatever I wanted. So I did this for the remaining time while I was at Stanford.
The $7,000 I started with became $75,000 when I graduated. And essentially, that is the seed corn for IGSB. We've never had one additional cent of money other than that original $75,000. But that was the genesis of IGSB.
Bob Casey: Okay, so you leave Stanford GSB with $75,000. Can you tell us a bit about the next couple of decades?
Reece Duca: Let me kind of just mention a couple of words about the last couple of months at Stanford. My faculty advisor was Professor [Coleman], was just a wonderful gentleman. And he--one day, I was going down to the cafeteria and he tapped me on the shoulder and said, Meet me in the offices. I've reviewed your job offers, and I want to give you my thoughts and help you kind of sort through it toward the end. And I thanked him profusely for doing that. And I said, Can I ask you one question? I said, What do you think about the idea of me just continuing to do what I'm doing, just to invest my own money? And he kind of halted and he looked at me. He didn't say it, but it was it was obvious. He thought that was the craziest idea he had ever heard, from a second year GSB student. And he explained why. He knew I was an investor, he didn't know how well I did or how poorly, kind of process I used or, but he said, Nah. Five years, you might want to do it, or maybe 10 years, probably more likely. And he said, But to do it now, I think that's a big mistake. So, again I thanked him, and I kind of headed out the door.
And I reflected on it and I also thought about who else would have given me advice. My dad had died when I was 14 and I know my dad would said, What do you Professor Coleman say? And I would have told him what Professor Coleman said, and my dad, who would go extremely rational, would have said, That sounds like pretty solid advice. And so, I got in my car, and I was driving back to my apartment I had in Mountain View. And so I get to Mountain View, and I say, I'm gonna take the $75,000, and I'm gonna manage my own money.
And that's essentially what I did. The first few months were rocky, because what I realized was, even if I had the skills, which I thought I did, with hindsight, I realized there were so many skill gaps I had. So I said, Okay, what I'm gonna do is, I need some kind of a survival network and I need a survival strategy. And the survival strategy essentially was the Herb Kay S-1 strategy, but simplified based on what I knew at that point in my life were my skills, and my capabilities.
But let me give you some context about the next 14 years from when I left Stanford to go... and look back here, today, in our country, and in the world, and here we are, 2023, and I look back, 14 years, we're 2008, 2009. And we have seen the S&P up about three fold, we've seen the NASDAQ up about six fold. And so anybody, like I was at that time, a young student, if you're in that 14 year period, you had a tremendous wind at your back. What I didn't realize in [1968 - Reece mispoke and said 2008] that I was starting my career with my $75,000, and over the next 14 years, in 1982, the indexes were going to be identical to what they were in 68. And during that 14 year period, you are going to have two market declines, peak to trough, index declines of 50%, individual stocks were down 60, 70, 80%, including excellent companies, and you're going to have T-bills at 15%. Toward the end of the 14 year period, you're going to have unemployment above 10%, you are going to impeach a president, and you are going to have the most chaotic world possible, to survive. Now, had I known that, I might have taken one of the jobs, but I didn't. And so here I was-- that was the ocean I was swimming in. And now--that was the chaos and the turbulence of the market during that period. So I had my modified S-1 strategy.
When I left Stanford, I assumed I was going to invest solely in public companies, but within one year, one of my Stanford professors decided he was going to spin out and start a company with another professor and he came to me and he said, You're out there looking at these companies all the time and you're looking at models that work and thinks that they will work. Do you want to join with the founding team? I really liked this guy. And I didn't know the other professor that he was partnering up with, but anyway, I ended up saying, Yes, I would. And then two years later, one of my classmates started a company. So within three years, now I had the public investing, and I had two private investments.
But over the first five years, the $75,000 went to $2mn. So we started the second five years with the the $2mn. During the second five years--and again, we're in this 14 year period--and the second five years was even more chaotic than the first five years. The $2mn went to $7mn. So our skills were improving. We had one little payday from one of our private companies. I began to see the hint of the symbiosis between looking at public companies, kind of with a financial lens, with the types of things that you get with annual forms and 10-Ks and 10-Qs and talking to management, talking to customers, those kinds of things. But what we hadn't really done at that point was understand none of that is as important as the business model. You have got to understand and focus on the business model. The business model will tell you the durability of the business, the sustainability of the business, the barriers to other people in your space, the value proposition to customers, all these kinds of things that are staggeringly important to determine, Is this an exceptional company? Our model was, as I said at the very beginning, hyper concentrated that we would have 70-80% in two, three, maybe four companies.
The private investing, we were learning a lot from-- we had a chance to look at a lot of business models. We weren't focused on any particular type of business model. We ultimately began to focus more. What we realized was that if you looked at a lot of different business models, you weren't going to become an expert at any of them. You'd have a superficial knowledge, you'll be able to read the financial statements to be able to do those things. But when you were talking to customers, you didn't know the unique idiosyncrasies of any particular market and you didn't know exactly what kind of questions to ask. So if you wanted to focus on reducing risk, you diversified. If you wanted to focus on knowing your investments better than anyone else knew them, have a confidence you understood the business opportunity of your investments, the industry, the strategy, the tactics, you basically have a limited amount of time.
And we think one of the things that investors do, is they create complexity that's hard to deal with. If you have a portfolio of 20 companies, you're not going to be an expert in 20 companies. And so what we realized early on, and again, it was a little bit of an extension of what we saw Herb Kay doing, but we got to see it up and close as we were managing our own money, is that our biggest position, and our second biggest position, invariably, were the ones we knew the best. And when we on five or six or seven or eight, we didn't know number seven and eight very well. And then I could also see my business school buddies and their portfolios. And then they had, in their portfolios, 15 and 20 and 25 companies. That became obvious that they did not know company 15 and 20 anywhere near the way we knew our companies. And so it became obvious to us that concentration was really key to returns.
Bob Casey: Why do you not have any outside investors? Didn't you feel like you were leaving something on the table?
Reece Duca: I don't know whether we were leaving something. All of our friends said, You're leaving something on the table. By the fifth year, we had a lot of people asking us to invest their money. But there's a difference between being an investor and being in the investment business. The investment business is a business where you're managing other people's money, you get paid a fee, in some cases you get paid a carry, and you're considering different things. You're interested in how much assets you had under management and your quarterly report and all the ways in which you reduce the--losing your clients, your limited partners, your investors.
And what we realized when not having outside investors, yes we didn't have the scale, and there were some disadvantages of it, and we were paying our own expenses out of our [investment] money, we were paying our own salaries out of our investment money, we were paying taxes out of investment money, which most people in investing businesses don't do it. I mean, they basically--their business pays them compensation and covers expenses, anything we were doing. But what we realized was that we could sculpt our strategy. We could invest in public and private companies, we could have concentrated positions. If we had outside investors, and even today, there are not too many investors who have models that would have concentrated investments in public and private and doing the things that we do as part of our everyday model. And as you could imagine, in the 70s and 80s, if we had outside investors and we tell them we're going to have 70% of our money in two, three companies, that didn't interest them. I mean, some of them think you're crazy. And some of them would say That doesn't interest me. It has too much risk.
Now, of course, we were thinking the opposite. We think that risk comes from not knowing your companies. We could de-risk it by knowing our companies better than anyone else would know them. And the other thing is mixing public and private. It became obvious to us, talking to other people. People were either going to be in private companies, either going in venture capital, or they were going to be public investors. But there were firms that did both of them. So basically, not having investors, I think, is one of the key things to our kind of sustainable success. It was a little bit unique.
But the one thing I want to say is, There's a zillion models in the investment business that will work. We just--we were creating one model. We were creating a model that worked for me and worked for Tim. And I talk about the investment business as kind of the Amazon River of money flowing. And the investment styles are the straws and you can dip 100 different versions of the straws into this giant stream of money and people figure out how to make it work economically. So there's a lot of ways to do it, it just so happened that we had the good fortune to be able to design a strategy that worked really well for my skills, worked really well for Tim's skills, and is very personalized, and has worked decade after decade after decade, essentially changing only a few things. And the things essentially that we've changed is how we've focused over time, progressively on fewer, fewer industries and business models.
Bob Casey: That's a perfect segue. You're now in the sixth decade of building the Investment Group of Santa Barbara. How has the model evolved?
Reece Duca: The first decade, we would invest--we would look at and invest in all kinds of industries and all kinds of models within the industry. And I would say with hindsight, that was good, because it gave us an understanding of how things worked in manufacturing and how they worked in retail and how they worked in oil and gas, and... But what happens is you're not an expert in anything. In fact, your knowledge is pretty superficial of any particular model. And as I would say today is the single most important thing in determining whether a company is an exceptional company or not is going to be their business model.
So by the time we got to the end of the second decade, we were focusing on essentially software companies. And over the next two decades, we essentially went from the combination of looking at consumer software companies and businesses software companies, basically to business B2B companies, essentially, then SaaS-based companies, then--we didn't distinguish between horizontal and vertical SaaS, but then we focused more on vertical SaaS than we did horizontal SaaS. And one of the byproducts of that was that we really developed expertise in how these models work.
And some people would say, Well, you're so heavily concentrated in that one industry, one set of businesses, doesn't that increase your risk? And what we would say, is that No, it probably reduces the risk. Because we're knowledgeable about those, so we understand them. And yes, we don't go after opportunities that are outside of our comfort and knowledge base, so we're going to miss a lot of things. But the companies that we do own, we actually truly understand. That's the biggest thing with the evolution of our model.
The second thing is that the--on the private investing side, we, in the very early years, we kind of looked at what VCs did, and they would own small or middle size positions in a lot of companies. So a VC partnership maybe would have 20 holdings, 25, 30 holdings And we looked at that and we said, Okay, that model doesn't work--for us. We don't want to own 30 holdings, we want it to be closer to three than 30. And the other thing that we understood was that we didn't want to own a 5% position in a private company or a 10% position, because our hypothesis was that if we were going to commit to a private company, we were going to spend a massive amount of time on that company, knowing the industry, and trying to help the management team and be the agent for knowledge transfer.
So by the time we got to the third decade, we said, Our threshold is to own 30% of private companies. Sometimes it wasn't easy to do, it took us a while. We might start with 20%, or little by little we'd buy out former founders or whatever it might be to get ourselves to 30%. And then, over the last 20 years, we've kind of moved it up 30% to a window of 30 to 40%. And I would say in the last decade or decade and a half, we would be more than happy for the right companies to own 40 to 50%. So very heavy concentration.
The other evolution was long holding periods. And with the first one of our companies we did this with, was about 25 years ago, where what we realized was that we had owned it for 10 years, we were moving into the second decade of ownership, and everybody was talking about--everybody else, in the company and other investors, were saying, Well, let's go ahead and let's sell the company. And we looked at the company, and we said, We've essentially de-risked the company, we're a leader in our space. We won't grow as fast as we grew three or four years ago, but here we are in year 10. But we look year 11 to 20, and we probably can create five times the value, six times the value, seven times value over the next decade. And it's not like we harvest in year 10 and then you pay taxes, and then you have to redeploy the money. You basically are riding with the value of the company at that time. So we started to extend the holding periods for the companies that we love.
And it also became obvious to us that our portfolio often was companies that started as private investments, may go back to--literally, we were involved in the seed investment, at a Series A and a Series B, and then the C and the D. And then on the IPO, we would consider investing. I mean, one of our companies today, Appfolio, and this is public record, we invested in the IPO, we purchased after the IPO from other investors. And pre IPO, there were other strategic investors and their mandates can change, they make an investment in year two, and in year seven, they have somebody else running their strategic investments and they decide they're willing to sell it and we--so all along this spectrum, from Series A to public companies, and then you look at it, and you say We know the company backwards and forwards, we know the management backwards and forwards, we know the opportunity backwards and forwards. Why would we harvest it and then recycle the money when we have an opportunity to continue to be big owners in an exceptional company.
Bob Casey: You talk about the fact that there are a very small number of really exceptional companies. What do you mean by that?
Reece Duca: I rely on a study from--I believe his name's Hendrick Bessembinder from Arizona State University-- and what he did is he looked at every single public company from 1926 to 2016. So he covered a 90 year period. There were a total of 26,000 companies. And of the 26,000 companies, 25 of the 26,000 companies produced returns that are T-bill returns or less. So in other words, there was only 1000 companies that could create excess returns above risk-free T-bills returns.
Now you look at public companies, and you realize that companies can come public and because there's a lot of incentives in the market, from whoever the constituent is, that their shareholders, their private equity holders, the investment bankers, whatever, you bring the companies public, but how many of them are exceptional companies? How many of them--and the reality is, most of them end up falling into that bucket that Professor Kay said, That's the gray bucket. That's the bucket of which, essentially, it's the efficient market bucket.
And so, there's only a tiny number of exceptional companies. And you understand that there's some very specific things that permit exceptional companies to be sustainable decade after decade after decade. And many, many of them have to do with getting to the point where your customers are fanatically reliant, whether it's a consumer product or whether it's a business product, but your customers are fanatically reliant on what you deliver to them. If it's a consumer product, it's somebody is hooked on Coke, and they're gonna drink coke come hell or high water. If it's a business product, it gets locked into the workflow of the business, it's something that your customers are ecstatic about. And that just essentially codified to us that what we needed to do, if we were going to have concentrated positions, we basically had to have super, super high confidence. And you had to find exceptional companies.
Bob Casey: Why was Tegus of interest to IGSB, when it had barely any customers and no real revenue to speak of.
Reece Duca: First of all, I think the Elnicks are really uniquely talented. I think Tom and Mike are very, very talented: One because of their vision, but also kind of because of their work process. And their attention to detail. And their kind of fanaticism about--in a really good way--of talking to customers and understanding customers.
When you then map that on to what I believe is the single most important thing as an investor--it's not the quantitative information, it's the qualitative information--it's having an arsenal of qualitative information that helps you reverse engineer the business models, what's actually happening at the company. And what I mean by that is, I think of companies as having two really important ecosystems. One is the goto market ecosystem. And the other is the product, and the product market fit. And within the opportunity set you're going after. who your target is, and how do you map them to specific things you do on the product side. And getting those things right are really important.
But if you're the investor, and you were to identify--I'm going to use the number 50, in some cases, maybe it's 70, maybe it's 80, maybe it's 30, but 50 customers--and you talk to those customers at length, about their relationship with a company, both in terms of the period in which the company acquired them as a customer, and what the company has done to retain them as a customer, and then all of the things around the product market fit, are you solving the problems and needs of the customer?
Bob Casey: You've designed your life deliberately and thoughtfully. You've kept an incredibly low profile--this is gonna be the first publicly available interview that I'm aware of. You live in Santa Barbara, rather than a financial center like New York, you have not raised outside capital. Well before remote work became a thing, you were living a substantial part of the year in Italy and working from there. These things may seem disparate, but I think in your worldview, they're all tied back to the same philosophy. Can you tell us a little bit about that?
Reece Duca: I actually think about this and when I talk to my son and daughter but how do you design your life, or I talk to students at Stanford or UC Santa Barbara. We all pretty much control our own destiny. I think, to a great extent, people don't realize how much they do control their own destiny.
And I go back, and my dad became sick when I was 13, he died when I was 14. And I--during the six months for when he was diagnosed to when he passed away, I spent a lot of time [where]--and what you realize is, none of us really know what's going to happen next year. And early on, I made a decision that basically, I want to, again, it goes back to the concept of simplification, I wanted to have a clear purpose in my life. And the purpose is to provide for myself and my family, but also help other people. Because I look at my life, and I would honestly say that having various mentors in my life dramatically changed the outcome. And some of them were people like Professor Kay, others were like family members, they were certain classmates, and of the things that became important to me, money was really not high on the list. It so happens in the investment business, the outcome is money, but that was not--money has never been a goal of mine. My goal is basically to wake up in the morning, love what I'm doing, love who I'm working with, be proud of what I'm doing, helping other people to be successful.
One of the things about IGSB, and when you talk to Tim or Bill Rauth or others, it was--IGSB, we had no formal contractual relationship. It was a handshake. Everything we did for 50 years, how we allocated ownership, all of these things were we sat down at a room and we would say, Okay, what did you want to do? Okay, how would you like to do it? Boom, we do it. And you realize, this is one of these knock on wood things--you hear stories about Trump, but you--I look at kind of other people in this industry, and how they conduct themselves and how they get into lawsuits and stuff. Over five decades of doing all the private companies we've done, public companies and stuff, and we've never had a lawsuit. And it's because you simplify your life, identify what's important. A high profile is never important today. In fact, I considered it a negative.
And being able to do things like going to Italy. The byproduct of removing yourself from the hustle and bustle of this industry and having--because it's a firehose of data. If you look at the investment industry, when I got to Italy, I would have anywhere between one and three banker boxes of files, and I could, by myself, in the quieted room, I would think about our companies. And I would think in a way that I simply couldn't do it if I was in my office. And the impact, with the private and with the public companies, was a little bit different.
But all along, what I think is important is, 1) Am I learning?, 2) Am I having fun?, and 3) The IRR will take care of itself. Because if you're learning and having fun, you're gonna have an IRR.
So that's just kind of--and I tribute a lot of that to--I had a loving family, I had a really simple life. And I'm so appreciative for all the people who have helped me. But they teed it up for it. They were my grandparents, and the great generation, and the great teachers I had.
Bob Casey: Some incredible talent over the course of the last few decades, and you have a real eye for talent. You talk about Tim Bliss, you talk about Bill Rauth, Marc Stad started his career at IGSB, many others. What do you attribute that too, and how have you focused on developing that talent?
Reece Duca: I think one of the most important thing is you want to be a [fan]. If you're asking people, and you liked them to work with you, what you're saying is, you're willing to mentor them, you're willing to have them participate in a way that's successful and healthy for them. You want them to develop their skills, not extend your skills. So you have to realize that everybody has their own unique capabilities, and you let them participate in a way that works.
One of the things that that we did early on, I mean, first of all, is selecting people. And one of the things that I think is very important is, you select people for character, you selected them for judgment, you select them for their capacity to work in complexity, because that's the business we do. But it all starts with character. And so you're trying to select people who you think can be successful. And then--and that you're gonna have fun working with. Because as Tim always reminded people, was that the investment industry is always going to have some form of turbulence. It's like being in the high seas, and you're on a boat, and you're gonna be thrown all over the boat. And so you have to figure out is who you want to be on the boat with. So you're selecting people who, you say, I like them, I like their character, I liked how they think, I'm going to learn from them, I'm going to enjoy being with them.
But the second thing you do is you let them be themselves. And part of that--one of the ways we did it was we would give them a bucket of money. And we'd call it kind of their--that's their learner cap. And it kind of didn't matter to us whether they made money or not. What was important is committing them to make their own decisions, and helping them understand the consequences of their decisions in a way that the next decision they made and the decision after that.
The thing we didn't do was we never brought anyone in as an analyst, that they were going to feed information to me or to Tim or to Bill Rauth. And we actually, over the years, there were a couple of people we hired, and they wanted, they essentially wanted to be analysts, they didn't want to be decision makers. But that's really not our model. Our model is to let Tim Bliss be the best version of Tim Bliss, let Reece Duca be the best version of Reece Duca, let Bill Rauth or Marc Stad or Steve Karans or whatever, because all of them have unique talent.
Bob Casey: What are the most important lessons you've learned in your career?
Reece Duca: So some of the lessons are life lessons and some of the lessons are associated with business. But basically, again, a lot of it has to do with keeping things simple. That complexity is basically the biggest barrier to do good--Yeah, probably said that five or six times. Always work with people who you love. As human beings, do you enjoy spending time with them, you're proud of working with them. You, over time, you want to learn about things that help you refine your judgment. I think what I've learned over the course of my life is that people have some god given capabilities, and they built a school when they were... but ultimately, the thing that distinguishes whether people are able to make good decisions is the reclinement of their judgment. So to me, that's one of the most important things.
And then realizing we make mistakes. And you want to learn from those mistakes, and you want to be able to identify your mistakes early, but mistakes are good. There's nothing bad with mistakes. Early on, in IGSB's career--longevity--that I would say, a third of the time we would identify a company that we thought was an attractive company, that within a year, we figured out wasn't attractive for a whole host of reasons. And it took a while--you have to really leave your ego at the front door, because you don't want to admit--and I remember, it was actually somebody we had as an intern, who kind of did the calculation--because he asked me, How often do you lose money? And I, off the top of my head, I gave him a number. And it was a low number. And I said, why don't you go to Linda, get the data, and you can go back to everything we've done. And this guy came back about three weeks later. And he had poured through everything. And he said, You don't make money on about a third of your investments. I said, That can't be--that's not true. And what it turned out was that the things we had lost money--we lost a little bit of money. But what it was was, we would make an investment. And we would still be doing our work. We'd be doing our customer calls, and we'd be doing our industry checks, and we'd be doing our competitor calls, and then very quickly kind of realized, we probably, our initial hypothesis was probably wrong. And this has way more risk than we thought. So we didn't ever say we're not going to sell it till it's back where we bought it. The date we figure out that a company is likely to be different than our initial hypothesis, we sell it. It didn't, it never mattered. But what you realize is, you'd make lots of mistakes. And early in your career, you're gonna make lots of mistakes. The key is rectifying them quickly.
Bob Casey: Any thoughts on what the next decade might look like?
Reece Duca: Hesitant to give you any thoughts because predicting those kinds of things are tricky. But this is what I'd say, is, I think the last 14 years have been a real anomaly. I don't think... if someone were to ask me, What's the likelihood you're gonna see NASDAQ up six fold and you're gonna see S&P up three fold, I would say, Very, very low probability. Is it possible that the market is essentially flat or maybe it's up over the next 14 years? Maybe it's up one time. That's possible, also. But I think that there's a lot of factors that make the the future more difficult.
I also think that, from an investing standpoint, things that were ignored for the last decade or more, basic fundamental performance of companies where there was an interest in funding early stage companies with very large amounts of money, very vision-driven with essentially, the strategies that probably were going to be very difficult to develop into profitable, sustainable [parts] of business. And so I look at the importance of cash flow. And I would say that over the next decade, I think people are going to look at cash--particularly for exceptional companies, they're going to look at the companies that can continue to grow, but the most important thing is how do they convert it to cash. And they're gonna look at real earnings of companies. That adjusted earnings and stock-based comp that that is clearly an expense to the company, I think investors are going to understand those need to be factored in in a different way than they have in the past.
But I think the biggest thing is, the companies that have exceptional models are going to be the ones that are going to be throwing off a lot of free cash flow. And investors are going to pay for it.
Bob Casey: Reece, thank you so much for joining us today. Really appreciate it.
Reece Duca: It's fun to see you. It's always fun to talk about these kinds of things.
Wrap-up
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Letter #137: Reece Duca and Bob Casey (2023)
Thank you for sharing. Great to see a different model for investing in software companies.
Amazing work. Thank you for this, Kevin!