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Garov Chapati, founder of investment firm XN, emphasizes the importance of balancing kindness and rigor in the investment world. He believes that being kind doesn't mean being unrigorous, and being rigorous doesn't mean being unkind. By maintaining a culture that promotes both kindness and rigor, investment organizations can differentiate themselves and achieve ongoing success. Kindness in investing includes telling the truth and being honest with stakeholders, while rigor encompasses the ability to ask incisive questions and think critically. By finding investments that are obvious in retrospect and focusing on both business insights and valuation asymmetry, investors can identify truly remarkable businesses.
Chapati highlights the principal-agent issues that exist in the investment industry. These issues arise from conflicting interests between different stakeholders, such as analysts and portfolio managers, founders and investors, and even investors themselves. Principal-agent issues can lead to a lack of alignment, compromised decision-making, and overall complexity in the investment process. To mitigate these issues, Chapati emphasizes the need for a founder or compounding mentality in investment organizations, where the long-term objective of achieving high returns takes precedence over short-term fee-based interests.
Chapati considers hotel and sea corps businesses as remarkable examples. In the hotel industry, companies like Marriott and Hilton exhibit exceptional business models by acting as royalty stream managers for various brands under their umbrellas. They generate high-margin returns by providing branding and management expertise while external parties provide capital. These companies demonstrate the power of durable franchises and the ability to compound capital over the long term. Additionally, Chapati highlights the intersection of physical and digital businesses, where technological advancements enable solutions to complex problems, such as garbage sorting using machine learning and machine vision.
Chapati shares lessons learned from working with operating partners in XN. It is essential for the partnerships to be authentic, focusing on insight and access. The trust and alignment between the investment team and operating partners are crucial for success. The involvement of operating partners provides mentorship opportunities for the team, giving them a deeper understanding of investing through an operator's lens. Furthermore, founders and entrepreneurs benefit from the guidance and expertise of operating partners who have gone through similar journeys. The relationships between investment organizations and operating partners create a mutually beneficial ecosystem of mentorship and access to valuable resources.
The speaker expresses disappointment with the lack of diversity in the investment industry, particularly in terms of gender and ethnicity. They emphasize the importance of an authentic commitment to diversity rather than simply checking boxes. The speaker believes that diversity of opinions can lead to superior returns and tie it to their mission. They discuss initiatives aimed at addressing diversity, such as seeking out diverse candidates and requesting potential partners' commitment to diversity.
The speaker highlights several areas that inspire optimism, including investment in infrastructure, increasing capacity and reducing supply chain vulnerabilities, and harnessing software and productivity tools. They also mention the desire for people to have fun again after the challenges of the pandemic. Additionally, the speaker expresses gratitude for mentors and emphasizes the importance of mentorship in the challenging field of investing. They value mentorship as a way of believing in someone when they don't believe in themselves, sharing personal stories of individuals who have been instrumental in their career journey.
My guest today is Gaurav Kapadia, founder of investment firm XN. Gaurav is a veteran of the investing arena. We cover his lessons while rising to partner at TPG Axon, co-founding Soroban Capital, and his decision to launch XN in 2020. We then discuss his approach to building XN around a culture of rigor and kindness, the importance of relationships in investing, and finding investments that are obvious in retrospect. Please enjoy my great conversation with Gaurav Kapadia.
For the full show notes, transcript, and links to mentioned content, check out the episode page here.
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Invest Like the Best is a property of Colossus, LLC. For more episodes of Invest Like the Best, visit joincolossus.com/episodes.
Past guests include Tobi Lutke, Kevin Systrom, Mike Krieger, John Collison, Kat Cole, Marc Andreessen, Matthew Ball, Bill Gurley, Anu Hariharan, Ben Thompson, and many more.
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Show Notes
[00:03:05] - [First question] - What lead to kindness and rigor becoming pillars in XN’s company culture
[00:05:30] - The types of situations where it’s hardest to be kind or rigorous
[00:07:58] - Asking one question that can stump a founder can be a display of rigor
[00:08:58] - An example of looking at a situation and reducing the problem to a single variable
[00:12:51] - How he trains investors and team members to consider outcomes that would be obvious in hindsight
[00:14:28] - Developing the art of interacting with company management
[00:17:54] - Dimensions that typically find their way into his presentations and what tends to create complexity
[00:21:13] - Whether or not rigor has declined in public markets over the years
[00:21:55] - Why fewer talented people are going into public markets
[00:23:01] - What it felt like when he first started XN and being successful at a young age
[00:28:58] - Being impressed with his peers and rooting for each other
[00:30:33] - The nature of public versus private investing today writ large
[00:32:32] - How he gets to know a company when he’s never heard of them before
[00:35:20] - Reasons he won’t invest from a personal policy standpoint
[00:36:01] - Common problems he encounters that companies are dealing with
[00:37:32] - Defining the strike zone of companies to invest in where he can be best-in-class
[00:39:10] - The insane valuations of public markets in recent years especially in tech
[00:40:42] - Why there are so few great businesses and common attributes of the great ones
[00:44:12] - Biggest problems in the investment industry writ large
[00:45:48] - The most remarkable business he’s ever seen
[00:49:22] - How he would teach investors to deploy XN’s operating partner model
[00:51:32] - His perspective and thoughts on diversity in the investing industry
[00:56:58] - A business or institution he would own outright personally
[00:57:37] - What outside of investing most has his attention lately
[00:59:50] - Key touchpoints of coming from Queens and going to Hunter
[01:02:15] - What stands out looking back on his relationship with his parents and how hard they worked to build a better life for their family
[01:04:10] - Two things that manifest in a system that is seemingly rigged towards the wealthy and the problem with generational wealth
[01:05:29] - What has him most excited and optimistic about the future in the investing landscape today
[01:08:16] - Investing mentors deserve gratitude for believing in their pupils
[01:09:12] - The kindest thing anyone has ever done for him
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