Discovering Innovative Companies with Marcelo Lima

This interview aired on May 11, 2021. You can listen to it below on your favorite podcast app. And below that, a transcript and some useful links. Enjoy!



Matthew Cochrane:

Marcelo, you've had a very interesting career path. After graduating Cornell in the '90s, you were a software engineer. How did you go from being a software engineer to founding an investment fund?


Marcelo P. Lima:

Yeah, I ask myself that as well. Sometimes I think maybe I should have stayed in software engineering. During that software engineering stint, those are the first four years of my career after college, it was right after the dot-com bust. Back then, I was just an immigrant with an H-1B visa. I was "stuck to my job" because it was very hard to find a job in technology after the bust. I had to stick it out with that company I was at.


And then what happened is 9/11 came shortly thereafter and then we had a big recession. Most of my friends were going back and doing some sort of MBA or business school degree or something like that because there were few jobs. I just thought I would do something entrepreneurial as a side hustle.


In the process of raising money for one of the projects we had, I ran into somebody who had studied engineering at Cornell as well and he was doing real estate finance and making a lot of money. I decided to join him and that was my entrée into the world of finance and investing. As soon as I started working in real estate finance, I read Warren Buffett's biography and that completely got me hooked into the whole value investing thing.


Matthew Cochrane:

That's a perfect segue to my next question because I've heard you say that you started off as a Warren Buffett style value investor, and yet that's something like following you now I would've never guessed because when I read your post today, it's usually about companies such as Amazon or Facebook, not Berkshire Hathaway. What sparked your evolution as an investor?


Marcelo P. Lima:

If you look at the history of technology, there are things that supplant other things and eventually obsolete them. One example is if you and I were doing an interview in person in, the 1700s when canals were all the rage. There was a canal mania and people were digging canals and investing in canals. It was a big thing. And all of a sudden the railroad comes along. So maybe this is a little bit later, maybe this is now the 1800s. The railroad comes along and you and I are just these really old-school value investors and we say, "Well, railroads are new technology. I don't really understand it. I think I'm just going to stick with my canals."


There were many situations where people got completely obliterated by that because now the railroad connected one city to the next and delivered the cargo directly and bypassed the canals altogether. This happens over and over again in the history of technology. There were utilities that all they did was provide city gas. In London, for example, the illumination was powered by natural gas. Then of course, electricity came along and disrupted that business because now you're stringing cables everywhere and wiring everything electrically. You see the pattern.


Warren Buffett was born in 1930. If he had been born, let's say, 70 years later, he would be a very different type of investor. He would be focusing on different types of businesses. There's the Douglas Adams quote, the guy who wrote The Hitchhiker's Guide to the Galaxy, he wrote,


“I’ve come up with a set of rules that describe our reactions to technologies. Anything that is in the world when you’re born is normal and ordinary and is just a natural part of the way the world works. Anything that’s invented between when you’re fifteen and thirty-five is new and exciting and revolutionary and you can probably get a career in it. Anything invented after you’re thirty-five is against the natural order of things.”

I think it's very important for us as investors to be constantly renewing ourselves and really looking at the world with a beginner's mentality and pushing against the tendency to think that anything that's newfangled is a joke or is a fraud.


You could see that very much getting a little bit off topic, but you could see that very much with things like cryptocurrency where Buffett calls it rat poison squared and a lot of people very early on came out saying that it was a fraud without having done the work to understand what it really is. I think if Buffett, had been born much later, he would be investing in the things that we call technology companies because they're new and exciting. But 50 years from now, Amazon and Facebook will be like railroads.


Matthew Cochrane:

Sure, sure, sure. You brought up Buffett, so let me just ask. As you know, Warren Buffett and Charlie Munger held court last weekend as they do every year and answered questions. Look, I consider Warren Buffett the greatest investor who has ever lived. I guess some people might argue that, but one of the best who's ever lived, no question. His track record, the longevity of his track record is unparalleled as far as I'm concerned. So I hate criticizing Buffett because I have so much respect for him. I think some people just always take it the wrong way. But has him missing these technological trends, with the exception of Apple, which was a killer investment, no doubt, has that tarnished his record a bit?


Marcelo P. Lima:

I agree with you. I'm a huge Buffett fan. I've been to Omaha for many, many years, I think almost every year since 2006 with a few exceptions. I've read everything he's ever written, all the way back to the partnership letters, all the Berkshire Hathaway letters. I think I've probably watched every single interview. And that frankly was a bit of a liability for me early on because... not early on, during most of my tenure at Heller House because I avoided looking at new technology precisely because of what I learned from him, which is that technology is fast-moving and difficult to understand.


Although, to give him credit, at one Berkshire Hathaway meeting, and I was there, somebody asked him, "If you could study any sector today, what would it be?" I think he said technology. And so that was the one endorsement that I heard, but it was this one thing, like this one line and that's it. And it's buried somewhere in the Berkshire Hathaway meetings. I agree with you that he is the greatest of all time. He's the GOAT, right?


Matthew Cochrane:

No question, no question. Let me say that again because people will take it the wrong way. No question. He's amazing. Yeah.


Marcelo P. Lima:

I like to poke a little bit of criticism at him on Twitter just to get reactions from people and see what people think.


Matthew Cochrane:

Right, right. Well, that's a good way to do it as I found out too.


Marcelo P. Lima:

Yeah. A part of me feels a little bit frustrated that he received the Jeff Raikes memo. Jeff Raikes is an executive at Microsoft and he read Buffett's biography in 1997. This was the Roger Lowenstein biography, which was published in 1996. He sent Buffett a very nice email saying, "Wow, I just read your book and this is how Microsoft is similar to Nebraska Furniture Mart or See's Candies or Coca-Cola." He drew all these analogies. It's a fascinating email. It's in the public record because it came out as part of a lawsuit later on the Microsoft antitrust lawsuit. Of course, Buffett avoided investing in Microsoft because he was good friends with Bill Gates and he didn't want any improprieties.


Click to read the full Jeff Raikes email to Buffett


But then a few years later, Larry Page and Sergey Brin apparently visited Buffett and told him all about Google and Buffett said, "Well, I knew how crazy the business model was," because every time you clicked on a GEICO ad, they made like eight bucks or however many dollars it was and it was zero cost to them. He got a lot of insights, I think, very early on. But it frustrates me a little bit that he didn't adapt as quickly as I would've liked.


Matthew Cochrane:

Right, right. Sure, sure. We're talking about things like bleeding edge technology. And these days, that includes things such as AI or machine learning, robotics a host of other topics. How do you research these things while differentiating yourself from other investors? It has to go beyond reading the same sell side research as everyone else, or going through the same conference calls as everyone else. What do you do to research these trends that are... well, at least speaking for myself, and I think most investors like... It's kind of unfamiliar, almost intimidating to really dig into these types of topics.


Marcelo P. Lima:

I really like to take a student's approach. If you were in college and you're studying a new topic, you would take an introductory course and you would have all the assigned readings and exercises and things like that. I'll give you an example. I'm learning about a few different industries right now. One of them is biotech and CRISPR. I bought a graduate level microbiology of the cell textbook. It's this 900-page textbook that goes over the entire microbiology of the cell. The reason I think that's important is because if you want to read a scientific paper, they'll have all the jargon of that subject. It's intimidating at first, like what's an endonuclease or what are enzymes and what do they do, or what is a protease inhibitor.


All these different pieces of jargon that once you read the background and how those things were discovered and then how the naming came about, it becomes, "Okay, well, that's trivial." For me, it really helps build the mental models that I need in that subject area for me to be able to evaluate whether something is legitimate or not. For me, that's the only way I can do it; it’s really to have a good technical understanding. With software as a service, I really have to talk to developers and attend developer conferences and try the product myself. I'm not saying it's the only approach, or I'm not saying it's the best approach, but it's the approach that I like. So I really take a student's approach to it.


Matthew Cochrane:

Got you. I know you also, like I remember, when it came to Amazon, you toured one of their logistics and fulfillment centers and you wrote about it on your blog a year or two ago, I guess before COVID, so probably like a year and a half to two years ago. I know you were just coming away, you're describing what the robots were doing at that factory. I actually have a little quote here. Near the end of that post, you wrote, "Given these advances, Amazon will soon be able to apply automation to the unpacking, picking and packing processes. This will massively improve productivity, doing it faster, and with fewer mistakes than humans, and will also allow these workers to move from repetitive low skilled jobs to higher skilled jobs."


When you go onsite to things like that, like I want to talk about Amazon, but I also want to dig into how this like visiting this factory or logistics center and just seeing how these... what they were doing with robotic technology. How does that kind of thing help you understand what's actually going on when they invest or making an acquisition of a robotics company?


Marcelo P. Lima:

Yeah, so I'll give you the background of that, which is a lot of this is developing insights by connecting the dots mentally. A few years before this fulfillment center tour, I visited Amazon in Seattle and I actually met with a few employees there. One of them ended up becoming a friend and he works in the robotics division of Amazon. Now, he didn't tell me anything that's not in the public record, but he pointed me towards, "This is what has been publicly said and we're working on robotics."


And then I attended several conferences that Amazon puts on, not only the cloud services one, but also one on automation and machine learning, et cetera. You could then see the advances in robotics. In one of these conferences, for example, one of the big challenges is sensing. If you have a bin that has a bunch of junk in it, and by junk, I mean, one thing is a roll of scotch tape and then a balloon and a pencil, it's very difficult for a robot to look at that, do image segmentation to separate all the objects and then have a hand or a mechanical arm that has the capability of grasping something that's hard and also grasping something that's... like the test is can I grab a grape without squishing it?


But recent advances now have made this possible or increasingly possible. You can start then connecting the dots and then you visit the fulfillment center and you see how things are done. The fulfillment center has the Kiva robots, and then you go look at what Kiva has been doing. The Kiva, it's just that yellow thing that you see in the photo. The Kiva thing is on the bottom, the yellow thing are the bins, and they use the bin to figure out where things are, but there's a human that has to unpack the bin and put the items in the box.


Let's say you ordered a book and you ordered some cookies and you ordered a roll of scotch tape. The bin will come to your station and it has several different little bins inside of that big bin. And there's a light that shines on the scotch tape. So the scotch tape is on bin number one, for example, there's a light that shines there. And then you as a human have to go take that scotch tape out of bin number one, put it in the box. Then the light shines on bin number 17, which are the cookies that you ordered, and then you have to manually pick those cookies and put it in the box. And then finally, it'll shine on the book that you bought on bin 27, let's say. I thought, "Well, that seems like it should be trivial eventually for a robot to do as well." You just connect the dots and that's what I was trying to do there.


Matthew Cochrane:

Got you. Yeah, what you just explained is amazing. But it's also like you can see where a robotic arm can't crumble the cookie when they grabs it, they can't rip a page on the book when they grabs that, all those things. I see how that's challenging. But just the technology already in place with the lights, that's totally fascinating. Amazon's obviously making so many investments in the cloud and in logistics and in retail. They've completely changed the way retail is done. But they're also like a one and a half trillion dollar company, give or take.


How do they fit in now? We're talking about technological ages and now we're in this age of disruption. Are they too big to grow from here? We can take it beyond just Amazon too, but you have these big companies like Microsoft, Amazon, Apple, go down the list, Alphabet, that are huge, multi-trillion dollar companies, $1 to $2 trillion. Are they too big to grow? How do these immense organizations, how do they grow from here?


Marcelo P. Lima:

I play tennis with... I haven't seen him in a while, but I used to play tennis with this guy from Sweden. A few years ago when Apple was a lot smaller, I remember him telling me, "How is it possible the company is bigger than Sweden's GDP?" I thought in my head, "Well, I don't know why is that so relevant, I guess." We tend to anchor on certain things. And in his case, he was thinking about his country of origin. It's very hard to fathom these numbers. What I do is I just look at what a company does and follow the company very closely. Amazon just reported earnings and guided to... I think it was 30% growth in e-commerce for the next quarter, which is insane because it's an acceleration from where they were a while back.


And of course, cloud computing is very early in the adoption curve. If you look at the penetration of cloud services as a percentage of the existing IT services industry, and of course, that IT services industry is not a fixed number, it's a very fluid number, it is growing. In addition, there's new market creation that's happening because you are enabling a number of new things to be put into cloud services that were never possible to be put in cloud services, and you're enabling a number of new applications that themselves create additional demand.


I just frankly look at the evidence. And if these companies are growing very fast and the markets appear to still be underpenetrated and e-commerce is still underpenetrated, then to me, I don't really anchor on the size of the company if it's a trillion, two trillion, whatever. I just look at my models and does the IRR from here look attractive based on various assumptions of growth and margins, et cetera, because it's super tricky. If you went back 10 or 15 years and you had been trying to invest in Amazon or Facebook or any of these companies and you had a very rigid sense of the total addressable market, you wouldn't have pulled the trigger on any of them.


Matthew Cochrane:

That's so true and it's something I try to incorporate too. I call that optionality, where a company... Again, like you pointed out, you go back 15 years, who had AWS figured in for Amazon's financial models and the margins and revenue? How do you account for that optionality though? This is something I struggle with because these tech companies are amazing, they are innovative. A lot of times they're still led by their founders who have this vision in their head of where they want to take the company, which is almost always well beyond what the company is currently doing. Amazon, that's a great example. We can stick with that. Started as an online bookstore in the '90s. At what point do you think it's too optimistic to start accounting for all this optionality, but at what point do you think it's like you're not being realistic to not account for any of it?


Marcelo P. Lima:

That's a fine balance. Markets typically don't like to pay for unseen optionality for too long. What I mean by that is let's suppose you have a model of a company and your model says there's a 12% IRR from here. That is usually too low for us to invest in, but you could... Let's say you were optimistic and you would say something like, "Well, it's 12% IRR, but it's based on the businesses that the company has, and the company is inventing new things. So maybe it'll go up from here and that'll turn out to be a much higher number." Then a few months go by and markets really like to worry. There's always something that worries the market.


Recently, it's been... The 10 year yield has gone up. Oh, Janet Yellen said this or that. And then you're stock gets crushed. Now, instead of a 12% IRR, it's now a 16% or 17% IRR. Nothing has changed. The same optionality is still there. It's just that now the company is priced for a 17% IRR. That’s something I could live with. Markets tend to sometimes give it credit and sometimes not. You want to take advantage of those moments where price is more attractive based on what you can see.


Now to your second point is I think it's very important to invest in companies where the founder has a vision to do something much bigger. Why? Because if the company is going to be a very static type of business and it's only going to have that core product, then sure, you might have attractive returns, but you're not going to have great returns over a long period of time. In order to have great returns over a long period of time, the company needs to find new products and services; that horizon two, horizon three and onwards. A company that has invention in its DNA and has exploration and R&D into new areas, I think is very, very important.


Matthew Cochrane:

You're talking about these founders and visionaries. I've heard you divide leadership of companies into missionaries and mercenaries. What is that difference? Can you explain that?


Marcelo P. Lima:

The mercenary… take an old industrial company, for example, an old-school company, one that was founded 100 years ago and it's mature, it's growing maybe half a percent a year, or maybe it's not growing at all. All the founders are gone. The culture of the company is very transactional. The employees are not super motivated because there's no great vision. The board of directors hires this new CEO, gives the CEO a compensation package that says, "If you raise earnings per share a certain amount every year, you get a bonus. And then if you were to retire after a certain number of years, you get a golden parachute that depends on the earnings per share in your tenure or whatever." What's your incentive. Incentives are super powerful. We know this from life and Charlie Munger talks about this a lot how he consistently underestimates the power of incentives.


If your incentive at that point is really not to rock the boat, you're not going to go out and have this incredible visionary zeal to change the company. That requires investing a lot. And that would burden your earnings per share during your tenure. So why would you do it?


Meanwhile, you have here a missionary leader who is... The company is a startup. They have a completely different mentality. They want to change the world and they're doing something that's going to disrupt you.

So they're able to hire the best and brightest because the best and brightest get really excited about a missionary type of company with an incredible founder who's technically capable. They're going to work really hard to disrupt you. They don't really care about profits in the short-term because they're focused on a much bigger prize. The irony is that the missionary ends up making a lot more money than the mercenary over time because the missionary frequently wins and disrupts the incumbent. I think it's very important to understand when you're investing, what type of company it is. I'm not saying it's wrong to invest in the mercenary, but you just have to understand that dichotomy and make sure you don't fall into a trap.


Matthew Cochrane:

Jeff Bezos, in my mind, one of the greatest CEOs or founders or entrepreneurs ever just stepped down from his role as CEO of Amazon and Andy Jassy is taking over, who by all accounts is extremely competent and capable. If you were holding Amazon, I don't know if you have a position, but how do you judge a transition like that? That's huge. Bezos was there since Amazon's founding 20-something years ago and lead it from being an online bookstore to the juggernaut it is today. How do you judge a transition like that? How do you know if they've gone from being a missionary mindset to a mercenary mindset?


Marcelo P. Lima:

We've seen a few of those transitions recently. You had Ballmer succeed Bill Gates. That didn't work out so well; Ballmer was making some moves that were really head-scratching at the time. Then Satya Nadella took over and it's been phenomenal for Microsoft shareholders. Bill Gates has been on the board of directors during that whole period and somewhat involved or very involved. You've also seen it happen with Alphabet. Sergey Brin and Larry Page are no longer involved in the management of the company and it's worked out pretty well. You've seen it happen with Apple, where the founder passed away, Steve Jobs, and somebody who was very close to the founder, Tim Cook, took over and has managed the company extremely well.


I think when there's a very close nexus to the founder and even better when the founder continues to be on the board of directors of the company, I think it has a very high chance of working out well. Andy Jassy is amazing. You can read about him in The Everything Store. He used to shadow Jeff Bezos early in his career, and he was an early employee at Amazon. He came up with a bunch of interesting ideas, like the whole music business. He's been doing a fantastic job at Amazon Web Services. He's a known quantity, he's a very competent guy, he's very well-liked. Bezos is still very much involved with Amazon.


I'm super confident that will be a great transition. You can see that Andy is a missionary type of guy. Perhaps you go watch his AWS keynotes, perhaps you go read up on him, but he's definitely not a mercenary. I would be worried, let's say, if Bezos passed away and there was no deep bench at the company. But typically the missionary types of companies attract really high quality people, and they usually have a deep bench.


Matthew Cochrane:

I'm playing around with a theory I have. Let me get your opinion on it. I don't think it applies to Amazon because like you said Bezos is still there and very involved with the founding. But maybe it applies to Apple, where Steve Jobs passed away and so now he's... I mean, tragically at a younger age. And now, you have Tim Cook who is an amazing CEO. Steve Jobs left behind a vision and Tim cook has been carrying out that vision. But once he gets to the end of Steve Jobs' vision, I wonder if there's like... Does he have his own vision to go beyond that? I think it can lead for a long time, like a good decade or so for a company like Apple to play out the founder's vision. But when you get to the end of that playbook, I always worry. I don't think it's anything you have to worry about in the short-term, but I always worry like is there going to be a vision beyond that?


Marcelo P. Lima:

Yeah, absolutely. It's a great question. When Steve Jobs passed away, a lot of people, including me, were skeptical that Apple could perpetuate its success into a new management team. I was wrong. Tim Cook has done a phenomenal job. They've created new products under Tim cook. They've created the entire services business. Apple has been executing incredibly well. And frankly, they've resurrected the computer business, the Macintosh business; the shift to the M1 chip is incredible. I got a MacBook Pro for the first time in about 17 years.


It's the best computer I've ever had because the battery lasts forever. It's super powerful. There's never a fan noise or anything like that. It turns on instantly. It's just way ahead of anything you can get in the Windows ecosystem, even though I'm a huge fan of the Windows ecosystem, because of that tight integration between software and hardware and Apple building its own silicon. If Apple continues to really fulfill the desires of customers and surprise them and delight them, I think, frankly, the sky's the limit for Apple, even beyond Tim Cook. The question is, do they have a deep bench? I think they do. I don't know who would be the –


Matthew Cochrane:

I'm sure they do. Yeah, yeah.


Marcelo P. Lima:

Yeah, because again, it's a company that attracts a lot of talented people.


Matthew Cochrane:

100%.


Marcelo P. Lima:

They probably will be able to carry the torch into new product lines. Maybe we'll have an Apple car in the future, I don't know. But if they continue to delight customers, I think they'll be in excellent shape.


Matthew Cochrane:

Let's shift gears a little bit and talk about another... I guess a controversial tech figure, more controversial, but also in his own way a visionary. Let's talk about Facebook and Mark Zuckerberg. There's a few things I want to talk about Facebook with you because I've seen your posts and I know you tweet about it sometimes. Mark Zuckerberg believes the Oculus can be the next great computing platform. A few years ago, I know you attended an Oculus conference where one of the speakers said that VR/AR, which is virtual reality and augmented reality, like mainstream adoption of that technology was inevitable. Do you think it's inevitable? And if it is, can Facebook be a winner from that?


Marcelo P. Lima:

I tried the Oculus virtual reality goggles about four years ago for the first time. The experience was so visceral; you put it on and there's an onboarding that you do. The onboarding today is a little bit different from the one I did. They're both delightful. Your brain reconstructs whatever is missing. Even though you're not looking at necessarily the highest resolution photorealistic thing you've ever seen, it doesn't really matter. It's not something that you watch on a screen. It's something that you feel. It's very visceral. It's hard to describe. It's an experience. That feeling, you cannot get with any other computing platform. You can't get it on a computer, on a phone. It just doesn't exist. That's why I think it's something fundamentally different.


You can start thinking about all the different use cases that enables: collaboration, gaming, education, social. It's going to be incredible once the technology is fulfilled, and fulfilled means the form factor has to work. It's got to be something that's comfortable, that you can wear, that doesn't give you a headache, perhaps, that adjusts to whatever kind of prescription you may have. It's got to be something lightweight with a long-lasting battery life. If you listen to Schrep, Facebook's chief technology officer, and Mark as well, they admit that it's going to take a while for us to get there. But they are investing heavily. They're trying to make it happen sooner. I do think that it has a chance of becoming the next computing platform in Facebook's hands. I do think it's going to be probably at least a duopoly between Facebook and Apple because I also think Apple has a very good shot at doing this.


Matthew Cochrane:

That's interesting. I do need to try the Oculus because I keep hearing too many people talk about it and now I'm just more and more feeling left out.


Marcelo P. Lima:

I highly recommended it. Get yourself a little area that you can try it on and then put it on and go through the onboarding experience. If it's the same one that I tried with the Oculus Quest, which is the most recent device, you'll be dancing holding hands with a robot. When you take the thing off, you'd be like, "What the heck was I doing? I can't believe I was dancing holding hands with a robot." It's just incredible.


Matthew Cochrane:

Does Facebook need the Oculus to succeed? They've obviously run into... I don't know, like if you want to call it roadblocks or whatever. Apple's implementing new privacy policies on its new operating system, which will limit Facebook's ability to track users across different apps and things like that. Does Facebook need to own a hardware platform to succeed in the long run?


Marcelo P. Lima:

You're referring to IDFA. And if you look at what's happened, for example, when GDPR was enacted, there was also fear that Facebook was going to be impaired. And at the time-


Matthew Cochrane:

No, just real quick, explain what GDPR is real quickly to listeners.


Marcelo P. Lima:

GDPR is General Data Protection Regulation and it was something enacted by the European Union, where if you are a European citizen anywhere in the world and you are interacting with Facebook services... or not Facebook, but any digital service-


Matthew Cochrane:

Anyone, right. Yup.


Marcelo P. Lima:

Yup. That digital service provider would have to comply with all the different rules. There's a bunch of things that you can and cannot do. You have to control the data, you have to make sure you protect the user's private data, et cetera. And for Facebook, I think they spent something like hundreds of millions of dollars in legal fees. They had the lawyers installed at the offices of the regulators for months to be able to understand the implementation of this. So imagine, a huge leg up. Now, if you are a small developer, a small, let's say, social media platform that's trying to grow, you don't have that advantage. And so the irony of GDPR... Well, there's two things. One is it hurts Facebook, but it hurts everybody else much more because it's harder for them to comply.


So the European Union in its zeal to protect privacy, and I have strong thoughts about that because I've never felt my... I've been a very, very early Facebook user and never ever felt my privacy invaded or anything like that. In fact, I love targeted ads. I love ads that are relevant to me. I don't like watching the pharmaceutical ad or the weight loss ad that I'm like, "Why am I seeing this thing?" The European Union in its zeal to protect privacy ended up creating a very uneven competitive landscape where Facebook is advantaged and everybody else is disadvantaged.


In addition to that, Sheryl Sandberg pointed out... This is before GDPR was actually enacted. She said, "Look, yes, it's going to be worse for us, but on a relative basis, we're going to be doing better off than others. And that's really what's going to matter because if you're a small business who's advertising, you get more signal by advertising on Facebook than on the smaller platforms that are now further disadvantaged because of GDPR." And that's in fact what happened. Now with IDFA, at first, everybody was scared and then Mark came out. He actually did this on Clubhouse. He said, "I think we might actually come out stronger because of this." Because again, same story, they have a lot of first party data inside the Facebook ecosystem that allows... If you have first party data, you're not subject to the restrictions of IDFA.


Matthew Cochrane:

IDFA, for listeners, it affects Facebook's ability to track your activity on other apps. But everything you do within that Facebook ecosystem, whether it's Facebook, Instagram, WhatsApp, messenger, it still owns that.


Marcelo P. Lima:

That's exactly right. I don't think that that's going to be an issue for Facebook. And now, Facebook reported earnings, they said it's going to be manageable. I even joked, I put this chart of Facebook's revenue per user over the last several years. It looks like it's on railroad tracks. It just goes up despite all the things that have happened with GDPR and all the media panics. And the media, of course, is heavily incentivized to hate on Facebook because they perceive Facebook as a good scapegoat for what the internet caused, which is the unbundling of the media ecosystem.



And so longer-term, which was your question, does Facebook need Oculus to succeed? I don't think it needs Oculus to succeed, but I think Mark, very intelligently, understands that it's inevitable. Somebody will build a killer AR/VR ecosystem. There's a memo that he wrote when he acquired Oculus. He wrote a memo talking about possibly acquiring Unity. That memo is a masterclass in strategic thinking. Mark is extraordinarily underrated.


Matthew Cochrane:

100%. He's so underestimated and he's still in his 30s. People continually underestimate this guy. They still have this image of this like a guy in his dorm room making a crude social media app and continually, continually underestimated, 100%.


Marcelo P. Lima:

Yeah. Mark is one of the greatest generational leaders of our time. And the fact that he's so young it makes me even more excited because there's so much runway ahead for him. I think he correctly sees that this is inevitable. And if it's inevitable, does he want to remain under the control of the app stores because now access to Facebook's users is done through mobile and mobile is controlled by Android and Apple and Apple is really an antagonist here? He doesn't want that to extend to the next computing platform. So, he's making a very concerted effort into developing that computing platform himself. Imagine now a world where instead of buying whatever VR/AR glasses from Apple, you do it from Facebook and it's completely unfettered, you don't have the tollbooth of the Apple app store, you don't have any sort of issues with Apple creating new rules for advertisers, et cetera. So that would be a huge game changer for Facebook.


Matthew Cochrane:

Let me ask you a question, longer-term, is Facebook a greater threat to Apple than Apple is to Facebook?


Marcelo P. Lima:

That's a great question. By the way, I just wanted to clarify something. I'm not saying that AR/VR will supplant mobile. I think it will augment it the same way mobile augmented the desktop PC. PCs haven't gone away, right?


Matthew Cochrane:

Right, yeah. Phones won't go away. Yeah, I agree with that.


Marcelo P. Lima:

I don't think phones will go away at all. It's a phenomenal form factor. It's in your pocket. You don't have to keep it on your face the whole time. I'm just saying I think the face thing will be a thing and it will augment mobile. I don't really see it as Facebook being a threat to Apple or Apple being a threat to Facebook. I think both can be extremely successful in their respective paths. I think it'll be healthy for this new technology platform to arrive because some of that antagonism can... We won't be talking about it as much because then Apple will have its own product roadmap and Facebook will have its product roadmap and they won't necessarily be butting heads. There is an argument to be made that Apple will have significant market share in AR/VR. Let's say we all have-


Matthew Cochrane:

I think that's a very safe assumption. Yes.


Marcelo P. Lima:

Right. And then if you're experiencing Facebook inside Apple's AR/VR, you're still going to be subject to Apple's rules. So you're going to have very different experiences, whether you're using the Facebook AR/VR or the Apple AR/VR. So does that create a schism? We don't know yet, right?


Matthew Cochrane:

Right, right. We touched on this earlier, but I feel like I'm... We talked about size and market caps, but I should have talked about this at the time. But how do you weigh valuations? We've seen this sell off in recent months of some of these tech names that skyrocketed last year. How do you weigh a company when you have a potential category killer that's just going to take out a whole... could disrupt an entire industry, high margins, robust growth, a lot of things to like about it, and yet then it starts selling at 40, 50, or higher time sales? How do you weigh valuations when you look at these types of companies? That might be the next Facebook, Amazon, et cetera.


Marcelo P. Lima:

The thing I like to say is using a multiple is not doing valuation work. You'll learn that... I'm not saying you, I'm saying-


Matthew Cochrane:

No, of course. Yeah, no, no.


Marcelo P. Lima:

One learns that when you start doing detailed work into the company and understanding the economic fundamentals of the company, the unit economics, margins, what can margins look like in the future. A lot of this has to do with the different business lines of the company, what the flow-through margin is on an incremental user. Typically for digital companies, it's extremely high margin for that incremental user. And so you start then seeing what do the different expense line items look like at maturity, is this company going to have 80% of its revenues going to sales and marketing when it scales up? Of course not. And so you start to figure out what margins look like in the future.


And when you build a discounted cash flow model, you get a very different result. When I wrote my blog post on Slack, for example, in early 2020, I sent it out to my email list and I got a few replies from people. And by the way, I wrote the Slack blog post and I had a very detailed model on Slack and I had attended a few Slack events. I thought I understood the company and the mission, the founder, the DNA of the company, and economics very well. I thought it was going to be a home run over the long-term. I got a reply from somebody who said... More than one person said, "Well, a nice post, but how do you justify paying 25 times sales?"


And that's just not how I think. If life was that easy, that you could just pull up the price to sales and make a decision, it's not that simple. This is, I think, lazy thinking, and you're just trying to reduce a very complex set of assumptions into a simple number. I think you're entitled to use that number after you've done the valuation work. Maybe I'll do the valuation work and then I'll say, "Oh, it sells at X time sales." But at that point, the multiple of sales is irrelevant because I already have the output of my DCF. And just to be clear, I know my DCF is wrong. But it gives me guardrails to think about the company.


When Slack was acquired by Salesforce, we had a very good return. I think it was like up 70% from that blog post in one year. And so you might say, "Oh, well, but Salesforce overpaid for Slack." When they acquired Slack, they had to publish Slack's internal forecast for where they would see their sales in the future. It turns out that their forecast was about within 15% of my internal forecast. I'm like, "Okay, well, I guess Slack and I were thinking the same way about the future." If that number is achievable, you calculate the IRR to Salesforce, the acquirer, and that's a 12% IRR.



So even though Salesforce paid 70% more than I did, they're still getting a pretty decent IRR because, Slack did better than I expected. Salesforce can probably accelerate that because Salesforce has distribution. So the synergy between Slack and Salesforce means that that 12% IRR is probably a floor. I think it's a very safe bet and they really got a bargain. But if you had been looking at multiples, you would have engineered yourself out of a great investment just because you're not thinking about it from the bottom up.


Matthew Cochrane:

Sure. That's really interesting. It's something that helped me first understand that it was like Pat Dorsey. He's talking about like when Mastercard and Visa first went public and they looked expensive. I don't know what the multiples were when they went public. But he said they looked expensive, but when you modeled it out, each incremental transaction on their platforms was so profitable. If you just modeled out like growth of ecommerce which encouraged the use of Mastercard/Visa, like the death of cash, a slow death of cash, but just over time, those macro trends could drive so much potential growth for these companies. And that how profitable each of those transactions were that like they weren't... He said they weren't expensive at all, which is something you would completely miss if you had just looked at their multiples when they first went public back '08, '09, or whenever they went public.


Marcelo P. Lima:

Yeah, so two points there real quick is, one, you're absolutely right. And that's true about all digital companies where serving that incremental user has frequently close to zero marginal costs. So you see very high flow through margins. The second thing that's interesting is Visa/Mastercard have been around before the IPO. They were around for decades.


Matthew Cochrane:

Since the '50s, yeah.


Marcelo P. Lima:

Exactly. So they had this war on cash for decades and you look at cash and it's just gone up. That shows you how crazy these markets are because they're much bigger than we expect. Another example is: IBM sells mainframes and you can go into IBM's website right now and you can pull up their investor relations deck and you'll see... They call it MIPS, which is millions of instructions per second. It's the installed base of mainframes. And even though you have powerful computers and Amazon Web Services, Azure, GCP, et cetera, MIPS are going up, which is mind-blowing to me.


Matthew Cochrane:

That is mind-blowing.


Marcelo P. Lima:

These industries are much bigger than people think. And when they die, it's not like the Thanksgiving Turkey, where it just falls off. It's either a slow death, or frankly, it just keeps going up for whatever reason, like old technology cash and old technology mainframes. There's inertia there.


Matthew Cochrane:

Sure. A lot of inertia. Right. I don't want to take up too much of your time today, but I have to ask you like you moved to Miami at a young age from Brazil. I've lived in South Florida almost my entire life. We were talking about that a little before we came on. I've seen you tweet about this and I try to encourage it whenever I see it on Twitter. But on Twitter and other social media platforms, the Miami Mayor, Francis Suarez, has been a very vocal and proactive about, for lack of a better term, recruiting entrepreneurs from tech hubs such as San Francisco and Boston and other states to Miami. Can Miami become the next tech hub? What's Miami's future?


Marcelo P. Lima:

It was a complete accident that I ended up here rather than somewhere else. It was out of college I came here. Looking back, I almost moved to the Bay Area recently because I really wanted to be close to my companies and all the conferences that I attend, et cetera. And what happened was all the schools are closed because of the teachers' unions. You have a very far... I think, a far left wing government now in California, which is a pity because it's a phenomenal state with incredible landscape and people and businesses. But the government really took a turn there, and you see some of the things that, for example, the City of San Francisco is trying to do.