Letter #166: Carl Kawaja, Henry Ellenbogen, and Mike Volpi (2021)
Chair of Capital Research and Management, Founder & CIO of Durable Capital, and Partner at Index Ventures | Shining a Light in Public Markets
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Today’s letter is a conversation with Carl Kawaja and Henry Ellenbogen, moderated by Mike Volpi. After introducing Carl and Henry, Mike asks the pair about entrepreneurship, business success and mentorship, market valuations and economic cycles, market volatility and investment advice for CEOs, raising capital, building sustainable companies, and lessons from Amazon’s success, SPACs, IPOs, and retail investors’ impact on the stock market, market trends and predictions for 2021, and economic trends and growth drivers. Mike wraps up the conversations by sharing his core takeaways from the conversation, giving us a sense of what drew his attention.
Carl M. Kawaja is Chair of Capital Research and Management Company, part of Capital Group, as well as a Trustee at the Santa Fe Institute. He is also an equity portfolio manager. Carl has 37 years of investment industry experience and has been with Capital Group for 32 years. Earlier in his career, as an equity investment analyst at Capital, he covered global household products and U.S. personal care companies, along with Canadian companies. Before joining Capital, Carl was a security analyst for Gabelli & Company in New York, as well as an equity analyst for Lévesque Beaubien in Montreal.
Henry Ellenbogen is the founder of Durable Capital, where he serves as Managing Partner and Chief Investment Officer. Prior to founding Durable, Henry was a VP at T. Rowe Price Associates, Inc., and T. Rowe Price Group Chief Investment Officer for U.S. Equity Growth. He was also the lead Portfolio Manager for the U.S. Small-Cap Growth Equity Strategy, was the Portfolio Manager for the New Horizons Fund, and a member of the U.S. Equity Steering Committee and the Corporate Governance Committee for U.S. Equity. During his tenure as Portfolio Manager, the New Horizons Fund won Investor’s Business Daily’s Best Mutual Funds 2018 Awards for the U.S. Diversified Equity Funds, Growth Funds, and Small-Cap Funds categories. The Fund was also awarded the Thomson Reuters Lipper Fund Award United States for Best Small-Cap Growth Fund over the ten-year period (2017), Best Small-Cap Growth Fund over the five-year period (2016), and Best Small-Cap Growth Fund over both the five- and ten-year periods (2013). Prior to T. Rowe Price, he served as Chief of Staff to U.S. Representative Peter Deutsch. Henry also worked as a Summer Associate with Goldman Sachs.
Mike Volpi is a Partner at Index Ventures, which he joined in 2009 to establish the firm’s San Francisco office and North American operations with Danny Rimer. Mike invests primarily in artificial intelligence, infrastructure, and open-source companies. He's currently serving on the boards of Aurora, ClickHouse, Cockroach Labs, Cohere, Confluent, Covariant.ai, Kong, Scale, Sonos, and Wealthfront. Mike was previously a director of Blue Bottle Coffee, Elastic, Hortonworks, and Zuora. Nine companies that Mike has invested in have had a successful IPO including Confluent, Elastic, Aurora, Sonos, Slack, Pure, Zuora, Arista, and Hortonworks. Prior to joining Index, Mike held several executive positions including Chief Strategy Officer and SVP/GM of Cisco's routing business. Mike managed a P&L of over $10bn in revenues, and his team was responsible for the acquisition of over 70 companies, some of which were multi-billion deals.
I hope you enjoy this conversation as much as I did!
[Transcript and any errors are mine.]
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Transcript
Mike Volpi: We're delighted today to be joined by two of my absolutely favorite public market investors. Welcome to Index On Air. And my two industry expert today are Carl Kawaja and Henry Ellenbogan. Carl is the Chairman of the Capital Research and Management community. It's part of the Capital Group. And he's been there for 34 years. Capital RE has $2tn under management. So he is extraordinarily generous to take time away from his busy day to spend a minute with us. I know Carl in so many ways, not just as a wise investor. But one thing I'd love to point out is that he's also an incredibly generous philanthropist who has helped the world in many different ways. One of the big ways is the contributions he's made to UCSF, including a COVID test home kit, which I recently tried, and I was extremely impressed with. So Carl, thank you for joining us today. My other friend is Henry Ellenbogan. Henry is a Partner and Chief Investment Officer at Durable Capital Partners, which is a newly formed investment management firm. Prior to Durable, I got to know Henry when he was the vice president at T Rowe Price. There, he managed the famous New Horizons fund since March 2010. And during his tenure there, the New Horizons fund won the Lipper Fund Award in 2017 for the best small cap growth fund over the last 10 years, and over the last five years. So a phenomenal, phenomenal track record. He's busy with a new startup--Durable is a startup, even though they manage quite a bit of money already. And so it's really nice of Henry to join us as well. Okay, so I'm going to start off with a question to both of you. Kind of a lightweight question to get you warmed up. And I'd love to ask you: what you love about your business? Why is it you do what you do? Henry, let me start with you.
Henry Ellenbogen: I think there's many aspects. I really enjoy meeting entrepreneurs, and understanding the goals they have. I mean, when you spend time with small companies, you just get to see whether or not companies can really build something sustainable and durable. And the great thing about business is it does provide an absolute scoreboard. So, unlike so many other industries, where when you analyze something and you observe something, it's actually debatable what the success is. When you spend time with people and businesses, you can see, over time, whether they build something that we all know, like, in my early days of spending time with companies like Netflix and Amazon, and, more recently, Workday and Shopify, or whether or not, for some reason, doesn't succeed. And as someone who likes looking at patterns, I particularly like, with the hindsight of time, being able to go back and study, essentially, the science behind it. So it's something we put tremendous effort behind. Not only to kind of analyze it today, but go back and really study what made great companies and great people succeed. And then, the second dimension, which is probably a little bit less relevant to the listeners, is the internal joy I get from basically spending time with my internal team, watching people learn about business and solving the puzzles and spending time with the people we do, and really, seeing people develop. And so I really enjoy the mentorship part as well.
Mike Volpi: Awesome. Carl, you've been doing this for 34 years. So clearly, you like it. What do you like about it?
Carl Kawaja: I like a lot about it, Mike. 30 years at Capital, but 34 years--or no. This is my 30th year of Capital, and I guess 34 or 35 years in total. Well, when I was a kid, I used to love to read books about explorers like Captain Cook, Lewis and Clark, Ernest Shackleton. And I feel like in this job, you get to be a little bit of an explorer. You don't get--you don't do quite the acts of extreme heroism and bravery that they did, but you kind of get to see new worlds and you get to travel the world and learn new things. So, for me, it's so exciting. Henry and I have both looked at investing in companies in Brazil in the financial services sector. For me, it's like thrilling to go to Sao Paolo or Rio and visit companies and learn how they're doing things differently. And the range of things that you look at as a public markets investor is so broad. On one day, I'm looking at a company that's kind of treating, and in some cases, curing a disease like cystic fibrosis, and then the next day I'm seeing some drone delivery company, and then the next day I'm seeing a traditional TV broadcaster trying to reinvent itself to be a streaming company. And so, I like the spirit of discovery.
Mike Volpi: That's awesome. Any particular explorer book that you recommend to the audience today?
Carl Kawaja: Sure. I love Endurance. That's the book about Shackleton's journey. Maybe several people have read it. But it's great. And I've actually read Captain Cook's original diaries. And those are fun too. And, in addition to being such an incredible explorer, Captain Cook was also an incredible cartographer. So the maps are really beautiful to look at, that he made of the world. And, to me, it's so exciting to have seen some parts of the world that no one had really ever been to before, like the eastern coast of Australia--at least from this part of the world.
Mike Volpi: That's awesome. I gotta get on that book. Good. Well, let's jump into the the main courses here. I'm gonna start--I wanted to get your your views on the macro, and the macro economic environment. We're in a period where despite the pandemic, markets are at an all time high. And that's especially true in the technology business. We do still have a lot of lack of clarity as to the end of the pandemic. We've got something around 7% unemployment, which is historically high. So what is going on in the market? And why are valuations seemingly, at least from a historical perspective, so lofty? Carl, let me kind of queue you up, and have you go first on this one.
Carl Kawaja: Okay, sure. And I'm--I enjoy--one pleasure of doing this, in addition to seeing you and participating, is hearing what Henry has to say, too. I've learned a lot from him. I--to me, there are two things that really feel important in terms of market valuations right now. I'd say the first one, in my view, the dominant one, is low interest rates. So you and I, Mike, are old enough to have grown up in an era when 0% interest rates were sort of unfathomable. And the idea that you would have negative rates on mortgages in Scandinavia wasn't anything that they taught me in college or business school. And that you'd have negative rates, 10 year rates, in Germany, for example. And if the cost of money is zero, then companies that can compound value, especially in the out years, really goes up tremendously. So if you run a DCF at 10%, 8%, 6%, 4%, 2% interest rates, and you look at two different companies, and Company A makes $1bn a year now, but 10 years from now, it goes into decline and gradually goes to zero over the next 20 years. And then Company B makes no money for the next 20 years, but then 20 years from now, they make $1bn a year, and then they grow that--call it 15% for 20 years and then go into perpetuity. Under those various interest rate scenarios, Company B goes from being worth less than Company A to being worth very much more. And so I think we've really sort of seen that to an extreme. And the market that I think is kind of, for me, as a useful guide, is Japan, where starting in the early 1990s. The economic growth slowed there, interest rates fell very dramatically. And initially, the market was terrible there--we did not have that here. But what we have had here is the market paying up a lot for high quality growth companies, or companies that have the prospects of growing a lot in the future. And that's kind of what I see here. And for me, I kind of--I think, Henry maybe was talking about pattern recognition--like, I've tried to apply some pattern recognition based on what I've seen in Japan. And I lived in Japan, for Capital, and worked there. And one thing the Japanese market's always done is kind of discount the value of companies with winning products quite quickly. Like they very rapidly present value the fact that Company XYZ has a successful solution for semiconductor manufacturing or a medical device or a better car, or something like that. And I feel like we're seeing that at an extreme level here. So if you came to me, Mike, and said, Got this great new company in the Index portfolio, they make polo shirts for 50 cents, and they're even more comfortable and stylish than the one you have on. Like, then I--that's hard to imagine, I know--but I would present value that very quickly and say, Oh, this is going to be a multibillion dollar market cap, just based on Mike's demand for polo shirt.
Mike Volpi: There you go. Henry, over to you. Talk about--obviously, some factors here. But also, maybe, obviously, there's economic cycles you sort of read in the public that every nine years, every eight years, there's a cycle. Doesn't feel like we've really had a cycle, or maybe we've had little ones. Where are we in the cycle? Is this a--Carl talked about how the interest rates are affecting this. Is this--are you expecting for something to change in the next couple of years? Or are we going to be in this environment?
Henry Ellenbogen: Mike, every time I think about macroeconomics, I just think about the humility associated with predicting them. Probably a year ago we would have been talking about COVID had we gotten together, but, most likely 14 months ago, we would have never predicted the events of 2020. Unlikely talk about Coronavirus. And I think in addition, we could have never imagined the time frame that happened after that, which, like, if you look at last year, you had a second quarter GDP down 30%. And then the same quarter, you saw the combine same store sales of Home Depot and Lowe's up 30. And you actually think about GDP down 30 and home improvement, same store sales up 30... if I had said to someone, What's the likelihood of either one of those happening, people would have said: Doesn't happen. And if I would have said, What's the probability they both happen in the same quarter? People would have said to me: Martians are going to land from out of space before that happens. Now, obviously, we can explain what happened because of the extreme Fed intervention in markets and then the unlock that that basically happened in terms of consumer demand, where you could actually have that happen. So every time I think about predicting cycles--with all that said, I think it is always wise to basically be prepared for a wide range of scenarios. Both when you--if you're an investor, or you're basically managing companies. Because I think that we live in a very volatile world. And I think that's the key message I would give people. I think there's three levels of volatility when you look at our financial markets. The first one is just the underlying volatility of the socio-political environment we live in. The developed world has become very unstable because of underlying issues in inequality. And our traditional institutions really aren't strong enough to deal with the--what some people might say is democratization, or some of the unlock that's been driven by social media platforms. In addition, we live in a period of really dramatic business change. The rate that companies are changing is very fast. I mean, we at Durable estimate that more than a third of the S&P 500 companies are under significant business model transition, because of what's gone on with--what started with TMT has now obviously gone to financial services and healthcare and education. And then the last thing is just really market structure. The the number of passives in the market, quants. And then, recently, the size of retail investors has meant very few investors, really do deep fundamental analysis and have a long term holding period. And so when you add up all three, I think you end up with very volatile markets. And the proof point of that, obviously, was last year? Q2 was technically a bear market. And it was actually the shortest bear market--in the modern era. Even though I would argue the Flash Crash of '87. By definition, you would think Flash Crash versus what happened with our pandemic, a true recession should have been faster. But actually, one last time for one month, and the other one lasted for three. And if you look within markets, the market I spent a lot of time on, which makes up the vast majority of companies, albeit small companies, the Russell 2000, it had it's best quarter in history in Q4 following the worst quarter in its history in Q1. And so that, I think, just speaks to the volatility. And so I think, if you think about public markets, you think about financing your company, you think about preparing your employees, you just need to accept that we kind of live in volatile times.
Mike Volpi: Now, both of you are standout investors because you don't just do the math, but you also talk to the CEOs, and you become, in many cases, their advisors. So faced with this kind of a market dynamic with the interest rates and volatility that you talked about, what advice are you giving your CEOs about how they should think about their business? And this is particularly--obviously, people are listening to us today because they're mostly in the startup universe. So they're early, they're doing venture stuff--so they're raising money. And faced with this kind of a climate, should they be raising as much money as they can? Or do they feel like, Look, don't worry about it. This is gonna be like this for a little while. And the other question is, of course, deployment of that cash. Should they be aggressively investing in the expansion of their business? Or should they be a little bit cautious? Because who knows what's going to happen in three months or six months? Carl, let me let me start you on that.
Carl Kawaja: Okay, but I feel like Henry is a real expert here, so I'm gonna defer to his advice. One thing I would say, though, is, it seems really easy to raise money right now. But if I were a founder, or a CEO, entrepreneur with a company, I think I'd be a little careful about how much money I raise. I think it's tempting to say, Gosh, it's easy to raise money right now, let me raise a lot of it, save it for a rainy day. But sometimes I think you can kind of drown in too much money, and you get a little soft if you raise too much money, and you start doing things in a sloppy way. And I think sometimes there's some element of hunger and feeling like you need to economize, and I think it's really easy in this environment to lose that discipline. So I guess that's one piece of advice I would have for some of the companies. I guess another piece of advice I would have for them--it's something that I feel like I've seen Shopify and Amazon do particularly, notably, is kind of rely on yourself and build as much for yourself as you possibly can. It's kind of easy sometimes to put together a company by relying on other people and kind of--you end up, I think, running the risk of outsourcing something that's a core competency because there's something that's kind of easily available out there and you don't want to take the time to build it yourself. And I think you had sent us--Index, Mike--you guys had sent us a list of kind of things to say, What kind of companies are you interested in investing in? I think your questions were great markets, great founders, disruptive technologies, best of breed metrics. Yeah, of course. All of those. Another thing I would add to that is, I'm interested in companies that do things that are hard to replicate. Like, some companies do really cool things, there's a there's a giant TAM, and the founder is a great guy, and it is a disruptive technology. But over the broad swath of time, it's not going to be that hard to do. Other people will come and copy it. And I think everything you can do to sort of ensure that what you do is very hard to replicate--it's kind of a fundamental source of value. And the more you can invest in your moat that way, I think the better it is. Henry, you want to--I'd love to hear your view on this one.
Henry Ellenbogen: Yeah, I agree on a lot of what Carl said. So, in many ways, it may be among the best times to raise capital. And we may look back with hindsight and realize it was among the hardest time to build a company. And so, everyone on this call remembers, well, the TMT cycle. And if you look at it, some great companies really did come out of all that capital. I think about Amazon--they did come out of that. And actually Priceline, although it had to be reborn under Jeff Boyd and Bob Mylod, came out of that. And then if people remember, actually, Google and PayPal actually came out of the aftermath of it, when capital became scarce and those two companies actually were really focused on fundamentals, and then attracted a lot of human capital in a time when, actually, there was kind of a mourning after the the parties of the TMT bubble in Silicon Valley. And I think that's pretty instructive to think about. So if--what I would think about, and what I tell founders is, you're raising capital, is, the goal is not to raise capital, the goal is to build something sustainable and durable. And I think in order to do that, the formulas are really the same. You got to basically solve a customer's need, drive product market fit, have initial management team that can scale, and have solid unit economics so you can basically support your own growth. And then you basically have to basically use that, while you basically drive market share, and then invest in your second act, not only in terms of business, but also in terms of the people, process, systems that can scale the business. And I think that when you have times like this, it's very easy to basically skip steps, or basically to Carl's point, not use the discipline that capital markets at times, or historically have provided. And I spend a lot of time talking to people about the true lesson of Amazon, which, Carl knows Jeff Bezos very well. As an early investor, it was one of my investments in--when I worked at T Rowe, we were their largest outside shareholder for many years after the TMT bubble. And many people like to think that the story of Amazon is really aggressively spending and not driving profits. And actually, the true story is, after the TMT bubble, the company became very focused on getting the retail business to solid profitability, bringing in a team of people who could really--were excellent operators, having incredible rigor in the operations are the company, monitoring them with an incredible focus on KPIs and discipline, and then using that self-generated cash flow to drive new initiatives. Some of them extended and expanded the retail moat, and others were more adjacent like AWS. And then among those, also held those accountable to different metrics. And I think that mental model is really a good one. Because here you have a company that basically did survive a period of speculation, and then really focused on driving fundamentals. And obviously, it's built in a very valuable business. And then the other thing that I think about with these markets, just to kind of touch on it quickly, is I do think there is a lot of noise around the transition from being private to being public. The traditional process among--the traditional IPO process, which, I'm far junior to Carl--I've only been in this business for 20 years. But the IPO process that I got so used to for 20 years is obviously going through rapid change. And I have my own view as to what might happen in a couple of years, but I think the thing that I tell people when they call me up and say, Henry, should I do a traditional IPO, or should I do a direct listing, or what do you think about a SPAC? I always say, at the end of the day, there may be multiple avenues, but the goal of an IPO I don't think has changed. And if you oversimplify it, the goal is to get the company public, find a handful of long term shareholders that will both hold the company accountable, and be willing to standby in tough times so that the company can basically build a durable and sustainable business. And basically provide capital to it, assuming it kind of stays on track if it needs it, as well as transition, in an efficient and fair way, from private to public, the people who would basically need to exit, and basically the employees who want to exit, as long as basically re-incentivize the new employees who are signed up for the next journey of the company. And I think if you look at the goal as that, as opposed to all the [gamesmanship] in between, it really makes it much easier to kind of navigate the choices people have there as well.
Mike Volpi: Yeah. I want to stay on the subject for a second, Carl. I'd love to get your views. Henry's brought up the subject of going public. So, two things, Carl, it'd be great to kind of hear your views on. With a ebullient market and multiple pathways to go public, more companies right now are considering life as a publicly traded entity. I guess the first question is, Is the bar lower now? Should companies more readily go public because they can? And the second question is, There's the traditional IPO vs direct listing conversation, which has been around for a while, but the SPAC theme is definitely somewhat unusual. And I'd love to just get you to broadly talk about these SPACs and how you feel about them.
Carl Kawaja: Okay, sure. I mean, in terms of going public, I do think--I think in some cases, people kind of underestimate the kind of time commitment and distraction that being a public company represents. I mean, it's in my incentive, it's in my interest, to have all companies be public, because I want to increase my opportunity set, as primarily a public markets investor. But I think if you are in a good situation in terms of your balance sheet, and you feel like you're not ready to go public, I would not rush it right now, just to sort of take advantage of this window. I don't think it's going to disappear forever, or anything like that. Even though it is particularly good right now. On SPACs, like everyone else, we're seeing more and more of them. SPACs are complicated. And we sometimes find them a little hard to wrap our arms around. And I think some people are kind of rushing SPACs. And particularly if you're kind of towards the end of a two year window of the SPAC then, those are deals that I'd be more cautious about. And one thing that we sort of scrutinize with the SPACs is, what is the kind of underlying dilution that you're going to run into because of the warrants? I sometimes feel like there hasn't been enough disclosure around that. So as a public markets investor myself, I guess, if I were to choose whether I'd rather invest in some promising company that you guys have at Index Ventures in the form of a SPAC or an IPO, I'd be more interested in an IPO. I understand why a SPAC might work for a company, but all else being equal, I'd prefer the IPO route as an investor. And I--you have to be convinced that the folks that you're getting kind of in business with in the SPAC are reputable, trustworthy, credible, and aren't taking too much of the gains for themselves. Because in a way, the SPAC--whoever set up the SPAC in the first place has tremendous kind of economic incentive that isn't always 100% aligned, I think, with the interests of the investors or the entrepreneurs who go public via this backroute. So I'd be careful about them. What do you think, Henry, about SPACs?
Henry Ellenbogen: I believe that we're going to learn a lot about SPACs kind of once we see the other end of this cycle. I think intuition would tell you that when there's incentive to basically go find companies--so you look at the simple incentives of the SPAC sponsor, where if something doesn't get done, they lose money, and if something gets done, and everyone else breaks even, they still make money, that's not good incentives. And we know that the bankers basically make multiples more through a SPAC than they do through a traditional IPO. And then, I think the incentives of companies themselves are, I would say, can be obscured, where, on one hand, I would think the incentives of companies going public is really to basically properly set up its shareholder base and basically have a fair transfer value, and focus on compounding. But there are people around companies that are much more focused on a first day price, or basically, some type of certainty. And I'll just say, deeply, practically, when you look at the quantity of SPACs that are in the market, relative to the long term shareholders to consume them, it's hard to imagine how there's not a cycle that has to get kind of flushed out. The other thing I think about when I think about what's going on here is the risk to the SPAC CEO and the employees in the--when, it's not a question of if, there's a market downturn. And investors who short stocks, which obviously, neither Durable nor Capital does, are likely to basically really focus on SPACs. Because they basically skipped a step to going public. And for the most part, the category of those companies are viewed as lower quality. And I think they'll basically attract tremendous stress from a weak public market. And so, if there's a market where certain companies go down 20-25%, you could see the category of SPACs going down 35-50%. And that just puts tremendous stress on companies, not only employee bases, but partners, and especially if a company really doesn't have--hasn't, built a core business model at that point in time. So I think that we'll see the result of this cycle with the fullness of time, but I think that the risk to companies is relatively high who go through this route.
Mike Volpi: Yeah, yeah. Thank you. Let me switch subjects for a second. There's been, especially in the last few weeks, there's been a lot of talk about retail investors, democratized access to the financial markets, Robin Hood, which is one of our favorite portfolio companies at Index, GameStop, etc. As you look at this scenario unfold--Henry maybe I'll start with you on this one--what is--does retail really affect the way stocks have, and will behave, in the future more so now than in the past? Or there's just a little blip that Reddit readers constructed for us? Like, what's going on with this retail thing?
Henry Ellenbogen: Well, I think part of it is not only retail, it's just overall market structure. So, I think before retail really picked up, which was, call it, two years ago or so. Mike, I know with your involvement in Robinhood, you probably have more precise data than I have, over 80-90% of trading was basically being done by quants. And so as we know with market structure, you have a huge percentage of owners who are index funds, who basically hold--they don't [race it], basically trade. And then you have a big group of quants, which are basically powered by machine learning that basically aggressively trade. And then you really have, call it, 15-20% that, say, two years ago, that was really investors who basically evaluated companies on fundamentals. Now, over time, that--assets get priced and the market sorts themselves out. And so now, obviously, you have a significant percentage of volume, I think, over recent periods, has been more like 20%, being driven by the Robinhood phenomenon? And so, you did this against a market structure that was inherently volatile. Because one of the factors of quants is momentum. And these signals from alternative datasets and price momentum, which is one of the reasons Citadel buys Robinhood's trades, to basically get that into their quant models so they can make decisions based on it. So it's a long way away of saying that the market itself is set up for short term volatility by this factor. And I think we saw it--I talked about how volatile Q1 was, and how volatile on the other side of Q4 was, in an environment that I don't think should have made the Russell the best and worst quarter in history. And so, I think you're seeing that phenomenon. My personal view is over time, assets in markets tend to get properly valued. The old adage that the market's basically driven by sentiment in the short term and a weighing machine over time. And the other thing is, when you have bear markets, and basically, speculation goes away, then you usually see assets end up in their rightful hands. You've seen this through the course of market history, so it will basically get washed out over time. But certainly, over short periods of time, market trading really does drive asset prices. And I think we saw that in January.
Mike Volpi: Carl, we're gonna run short on time, so I'm gonna give you one minute for this one. And then I want to ask you guys one more question. What do you think of the retail impact on on on your business right now?
Carl Kawaja: I think it's sort of has a pretty tangential impact on the institutional investor right now, I would say. GameStop is fascinating and interesting to read about, but not that big a deal yet. And for our firm, we have over 35mn individual shareholder accounts and 55mn plus total accounts. Like, I would say we do represent the small retail investor, but just as an aggregated entity.
Mike Volpi: Great, listen, I want to close out with one question for you guys, which is prediction time. Tell me what you think the market will look like at the end of 2021? We won't hold you to it, I don't think, but prediction time. It's prediction time. So Carl, starting with you.
Carl Kawaja: Well your question said trends we should keep an eye on. That was a prediction one that I had prepared for.
Mike Volpi: Alright, go for the trend. It's good, it's good. Go for the trend.
Carl Kawaja: Where will the market end from here? I have zero idea. And if I did, I'd take advantage of it. And it'd be super easy. One thing that I'm watching, and maybe I'm sensitized to it, Mike, and I--but I know it's an Index Ventures area of focus as well, is autonomous vehicles. I feel like we're getting kind of closer and closer to it, and moreso than people realize. Like I really think the capability of AVs has improved tremendously. And I think there are a lot of skeptics who think it's never going to come and it's never going to arrive. Of course, Waymo has it, to some extent, in Chandler right now. But I think we're gonna wake up one day, and I think that day gets a lot closer at the end of this year, where AV seems like a real phenomenon. And I also know, Mike, that you personally are a little bit of a Bitcoin believer. And the move in bitcoin's been kind of startling this year. But another thing that I would be watching is central bank digital currencies. The Chinese government's looking very seriously at it. And I think we're not that far away from a future where all of our financial transactions, other than kind of in a distributed platform like Bitcoin, are traced by the central bank, and so when you get paid, your taxes get deducted automatically and you don't send the government a check at the end of the year. I think that'll seem antiquated to us, and that might drive demand for Bitcoin because people will want to have transactions that aren't necessarily overseen by the government.
Mike Volpi: Yeah. And Henry, same question to you, then. Trends for 2021 that you're paying attention to. And if you have a prediction, you don't have to give one. If you have a prediction, we'll take it.
Henry Ellenbogen: I'll defer to Carl. He's better at predicting markets, short cycle, than I am.
Carl Kawaja: No, I'm gonna write down your prediction, if you have one. I have my pen out. I'm ready.
Henry Ellenbogen: I'll give you a trend that we're watching, Carl, and Mike. And I think one of the things that we have talked a lot about, internally, is the way we work, live. And we're focused on where we live is just fundamentally changed, because of COVID. So one of the things that may interest people is if you go back and you study American history, we started to suburbanize, or spread out, in 1810, with the ferry boats. And if you study American history, we're what I would argue, just entering the fifth wave of suburbanization. And generally, it's been driven by technology, but sparked by a war, or a significant event, like COVID. And these cycles tend to be long cycles, and they're very important for a couple of reasons. First of all, in this cycle, I think you have two going on at the same time. You have knowledge workers and asset owners believing that opportunity and geography are spread out. So people are going to the Sunbelt as well as previously more resort or what were viewed as secondary cities. And then the second thing is, as companies make statements about long term, couple of days a week work from home, people go to suburbs. And then the services that surround these employees basically also spread out. And this is important because it basically unlocks productivity in America. As we monetize the richness of the American continent, which is very unique--most other developed markets, as we know, [or countries or countries], we're a continent. And many of the other big ones really don't have great, rich land. That allows people to go to lower cost locations. And basically, that's a productivity loop. The other thing is, the innovation to basically provide things like financial services, health care, even mundane things like accounting--we're investors in Intuit--as an example of this, all of a sudden can be done more remotely. And this kind of taps into another strength of America, which is our entrepreneurial nature. And I think the combination of the two, combined with this--these ends up being long cycles, has an ability to be really powerful for this country. As we know, ultimately, GDP growth is a function of population and productivity. And I think that if we get a couple things right, from a societal standpoint and political standpoint, we could be entering a significant positive period of productivity in America. And so I think as investors, we would all benefit from that. But if you can really get on the front end of that, these tend to be long cycles.
Mike Volpi: Well guys, we're unfortunately out of time. It's always such a pleasure to talk to you because I really do walk away with fascinating insights. I'll take the liberty of just doing a quick summary of six takeaways that I had from this. First, that low interest rates are here to stay, and they're gonna drive valuations, and they will drive businesses that trend towards growth, effectively. Two is: volatility, for a variety of reasons, is likely to continue. Shorter mini cycles, ups and downs, and swings, which will become a fact of life. Three: For SPACs: caveat emptor. Four: hard to predict where we are in the cycle, but a general sentiment towards optimism. Five is focus on building great businesses over the long period, not on valuations over the short term. And then in terms of trends, both of you essentially talked about the movement of people. Carl, you talked about AV, which is the movement of people in the near proximity. Henry, you talked about movement of people. But both of those fundamentally unlocking some very, very interesting productivity trends, which should be pretty optimistic for our economy overall. So with that summary, I just want to thank you both. Please come back again. We'll try to do another one of these sometime. And best of luck to you.
Carl Kawaja: Thanks, Mike. Thanks, Henry. Good seeing you.
Henry Ellenbogen: Thank you, Mike. Thank you, Carl. Bye.
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Interesting conversation, is there a link to the original video?