Henry Ellenbogen - Man Versus Machine

“Over 50 years, only 20 stocks drove the performance of the New Horizons Fund. One of the fund managers told the story of meeting Sam Walton on the Walmart IPO roadshow when it had only 50 stores. The stake in Walmart, had it not been sold, would have been greater than the sum total of everything I was managing eight billion dollars.”— Henry Ellenbogen

Business & Entrepreneurship · Strategy & Decision Making · Economics & Markets

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One great decision can outweigh hundreds

“By the end of the 2010s, everyone knew if you were a product-based business, you needed to understand your China cost. That was the first derivative. I think the same thing applies to AI, but it's not product-based, it's IP-based. Every company that's IP-based needs to understand AI cost curves. If you're on one cost curve deflating at 15 to 20% per year, and your competition is flat or inflating, we wake up in 5 years and those could be power law businesses.”— Henry Ellenbogen

Technology & Engineering · Strategy & Decision Making · Economics & Markets

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AI is China cost for knowledge work

“When I spent time with Jeff Bezos, I learned the very best businesses that leverage technology use it to lower costs and drive revenue that result in them gaining 30% or more incremental market share. Then they take that unit economic advantage and reinvest it in something that is persistent, even if their competition were to wake up tomorrow and do the exact same thing with people just as good.”— Henry Ellenbogen

Strategy & Decision Making · Economics & Markets · Technology & Engineering

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Unit economics to persistent infrastructure

“Over a rolling 10-year period, about 40 stocks compound wealth at 20% a year or go up a little over 6x. About 1% of the stock market are the valedictorians. That's what we want to invest in. About 80% of those companies actually start their compounding journey as small-cap companies. That's why I love small-cap companies: 80% of these great companies start as small caps.”— Henry Ellenbogen

Business & Entrepreneurship · Strategy & Decision Making · Economics & Markets

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1% rule: 40 stocks drive market returns

“What was the best Russell 2000 growth small-cap company over that 10-year period in the 2010s? Domino's Pizza. A modest growth company, didn't average 10% growth. Why was Domino's so good? They invested in technology, built their app, created a direct relationship with customers, and used that to target them more efficiently. They improved convenience dramatically. As you do something well, improve the product, iterate on convenience, and have a direct relationship, the brand halo gets better.”— Henry Ellenbogen

Technology & Engineering · Strategy & Decision Making · Operations & Execution

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Convenience plus direct relationship built flywheel

“Somewhere between 80 and 90% of institutional flow is driven by firms that have 1-month and 3-month agency, or quants that take price signals into account. If you work at a firm that measures your risk every day, and if you have a bad 3 months you get your capital cut back or let go, you can't have a time horizon longer than your career horizon. We said, let's do less so we can do more. If we're going to accept volatility, we need to really understand the business and people.”— Henry Ellenbogen

Economics & Markets · Strategy & Decision Making · Psychology & Behavior

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Short incentives create short horizons

“Our investment memos are fundamentally written different. When we look at an early-stage growth company, we write the memo that says, as Duolingo does what we think it can do over the next 3 years, not only do we make a fair return for the risk, but at that point in time we would want to buy more at these higher prices. If we can't write the memo that we want to buy more at higher prices, we can't buy the shares. Our thesis can't be it gets bought or it'd be a great talent acquisition.”— Henry Ellenbogen

Strategy & Decision Making · Business & Entrepreneurship · Economics & Markets

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Only invest if you'd buy more later

“I did an internal teaching on man versus machine. I realized if it's a repeat actor problem based on known data, the quants are pretty good. If you're just buying an industrial company because the PMI's down and historically when PMI re-rates you make money, that's not going to work. But if you're really good at understanding people and really good at understanding change, that was advantaged. We doubled down on those two things and stopped doing what we weren't advantaged at versus machines.”— Henry Ellenbogen

Strategy & Decision Making · Technology & Engineering · Psychology & Behavior

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Machines win on patterns; humans win on people

“If you've been one before, you have a higher probability of being one again. Act II entrepreneurs: if you understand HR systems of record and you've built PeopleSoft, then you come together with cloud technology, you know how to build exception management at scale. That's an Act II team. They solved the same problem with total clarity at the beginning. If you've been successful, it allows you to align all parts of the organization exactly how you want.”— Henry Ellenbogen

Business & Entrepreneurship · Leadership & Management · Strategy & Decision Making

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Act II advantage: clarity plus alignment

“The closed system of media was predicated on only showing you the product you most want when they could make the most money. Even in linear TV, the worst shows showed up on Sunday night because people spent money on weekends. Best shows on Thursday night. In movies, there was windowing. The TMT bubble laid the seeds of the end of durability of that industry because broadband enabled YouTube and Netflix, which broke down this oligopoly closed system.”— Henry Ellenbogen

Economics & Markets · Strategy & Decision Making · Technology & Engineering

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Closed system vulnerability to open distribution

“I almost named Durable Act II Capital. With a clean sheet of paper, if we were going to purpose-build an investment vehicle, how would it be structured? The percent of capital in public and private markets is aligned against that. The same person who worked with me when we underwrote Figma at two billion dollars in 2020 was at the all-hands when Dylan announced they were going public and still looks at the company when they announce public earnings. That's just different.”— Henry Ellenbogen

Business & Entrepreneurship · Leadership & Management · Strategy & Decision Making

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Same analyst from private to public

“I love physical real estate. Amazon or Carvana reconditioning centers: you can't spin those things up. Super messy, acquire land, put it in the right place, build the right network, stand it up with right CapEx and systems, and the right operating culture. If you put real estate in the wrong place, cost of transport's more expensive.”— Henry Ellenbogen

Strategy & Decision Making · Operations & Execution · Leadership & Management

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Hard physical assets and soft culture moats

“Netflix transitioned from DVD mail to streaming. A little messy: tried to split the company into Netflix and Flixster, violated customer trust, churn spiked. Reed was buying back stock at 280 dollars and it went to 70 dollars. I called him on Saturday saying there's a scenario where you have to raise money. He hadn't thought about it. What does the public market do? It sends a signal you're under real transition. If you work there, you saw stock go from 280 to 70.”— Henry Ellenbogen

Business & Entrepreneurship · Strategy & Decision Making · Leadership & Management

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Public markets force alignment in transitions

“I started to think about investing based on principles I learned in biology. In order to have organisms that sustain over a long period of time and persist, they have to be in balance with their ecosystem. Children go through certain curves: child, adolescence, teenager, adult, and they have to be in balance. If they are, they can thrive. Why shouldn't investing follow the same rules?”— Henry Ellenbogen

Philosophy & Reasoning · Biology, Ecology & Systems · Strategy & Decision Making

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Ecosystem balance as investing first principle

“To build a great company, you have to balance growth, profitability, and innovation. The and business, not the or business. You have to drive growth measured by market share in short term, drive innovation to position better for the future, and drive profitability. Profitability forces efficiency and discipline through the organization and makes sharp decisions on capital. Think about your CFO not as a policeman but as someone who sets standards that forces sharp decisions.”— Henry Ellenbogen

Business & Entrepreneurship · Strategy & Decision Making · Leadership & Management

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And not or: growth, profit, innovation

“We have lunches as an investment team and talk about insights. You don't prepare for this meeting. Hey, I had an interesting conversation with a CEO. I listened to OpenAI Dev Day and this is what I thought was interesting. We're trying to look for lateral insights to learn from each other. We do investment reviews where multiple people look. We do KPIs where we go through the whole portfolio and every colleague reports how they did.”— Henry Ellenbogen

Leadership & Management · Business & Entrepreneurship

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Structured informal learning sessions

“My mom said if that's what you really want to do, dropping out of Harvard to be chief of staff, it sounds very thoughtful. If you're going to do that, I'm always here for you, I love you, I'll always be your mother. But what it practically means is you need to be responsible for paying for your education. You say you want to go back. I'll take you at your word. You gotta do this now as an adult.”— Henry Ellenbogen

Psychology & Behavior · Leadership & Management

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Support plus accountability equals growth

“We look for deep intellectual curiosity. If you don't want to constantly learn, that's not who we are. We want people who compete but as a team sport. We have a lot of athletes, people who worked their way through school. We want resilient people. You have to live with the fact that sometimes your performance isn't going to be good. When people think about being excellent at Durable, they have to think about being excellent in what they do and making their colleagues better. It's gotta be both.”— Henry Ellenbogen

Leadership & Management · Business & Entrepreneurship

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Excellence AND making others better

“There's two types of competitive greatness. Michael Jordan: such a fierce competitor that if you didn't rise to his level, he drove you out. It works. Then there are people who say this game is great, we want to have fun, elevate the game, and win. The people who compete with us, we think they're great and we're rooting for them. When we're gonna play them, we're competitive and we're gonna win. But we want to have fun. We believe everyone can win. That's durable.”— Henry Ellenbogen

Leadership & Management · Psychology & Behavior · Culture & Society

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Compete with joy not fear