Interview with William Barnes, co-founder of In Practise (Investment Research Platform)

Special Edition #4

Co-founders William Barnes (left) and William Oliver (right) before hacking around St. Andrews Golf Club (Do you have to be called “William” to work at In Practise?)

𝕊𝕡𝕖𝕔𝕚𝕒𝕝 𝔼𝕕𝕚𝕥𝕚𝕠𝕟 #𝟜

I’ve got a treat for you today!¹

An interview with the co-founder of a very cool company that helps bridge one of the most important gaps in most investors’ research: Hearing directly from real, on-the-ground, making-stuff-happen-every-day operators.

You can spend all day reading financial statements and transcripts of high-level management, and you’ll learn a lot, but sometimes spending an hour listening to someone in the trenches will teach you more valuable things about the messy realities of business — or at least, it’ll add a lot of nuance and detail to that high-level view.

This interview is pretty exclusive stuff, since William told me it was the first time he really shared the workings of his business.

Anyway, I know I write too much, so I’ll kill the intro here and go straight to the main course (my questions in bold).

For a more accurate experience, you can read William's answer with a British accent.

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For readers who aren't familiar with In Practise, can you describe what it is?

In Practise is a research service for fundamental investors to learn about high-quality companies, with a focus on European and US midcaps. We offer a content library of hundreds of curated interviews, with senior industry executives, covering what we feel are some of the best businesses under ~$15bn market cap globally. 

We aim to add value to long-term shareholders of the companies we cover. This is a high bar to meet, given most of our clients hold or follow businesses for years if not decades. As we say internally, everything we publish has to be incremental to the conversation. If an interview doesn’t share differentiated insights beyond what is available in filings or elsewhere publicly, we don’t publish. Over time, we believe this will create a deep library of timeless material that helps investors truly understand how businesses work.  

Hosting interviews internally is the first iteration of IP. As we build trust with our audience and attract like-minded investors, IP will evolve into a learning community around studying quality companies. 

What gave you the idea to do it, the moment where you went “this needs to exist, I think I can do it”? 

We’ve been doing this type of deep primary research for a while now. I had a short stint at a family office and a failed emerging fund before meeting my cofounder who was working at an expert network, building the first content offering in the industry.

We both hit it off and shared a deep passion for understanding how the world works through the study of business. And what better way to learn about business than by spending all day speaking to the people who run them?

So from mid-2016, we spent over three years working together in the executive network world managing teams, interviewing executives and selling content subscriptions to the largest PE and hedge funds globally.

Between the two of us, we’ve conducted over 2,500 hours of executive interviews for institutional investors and we’ve certainly made every mistake possible during an interview.

Also, the interviews back then were conducted live. For example, we would interview a former CEO with portfolio managers and analysts dialled in. So on one end we had operators with decades of industry experience and, on the other, shareholders and creditors of the company. 

By design, every single day, we were the dumbest people in the room. And we do our best to keep it that way. The deliberate practice of researching companies and interviewing executives plus the direct feedback loop from shareholders proved to be a unique training ground. During those years, we developed a passion for the art of conversation in exploring how businesses work. 

So if we were ‘tap dancing to work’, why did we start IP? Well, no doubt there is a bit of owning your own destiny involved.

Building your own thing is always a big extra motivator!

But we wanted to share what we were learning with a wider audience. We deeply believe in the power of learning from operators and our mission was to make it available at a more affordable price. We wanted to build a community not just for larger funds but also smaller investors, students, and other curious individuals to learn. 

Indeed, it seems like the pricing positions you fairly differently in the industry, the classic Clay Christenssen disruptor approach.

We also say ‘we’ve had our time studying crappy businesses’. I actually started covering European high-yield and distressed credit. Scouring restructuring filings and studying another overleveraged offshore service company is fun for a while but, eventually, we gravitated towards companies that actually generated FCF.

Moving from credit to equity was definitely helpful in grasping the interplays between different parts of the capital structure but if the aim is to compound capital over decades, time is probably best spent studying Constellation Software’s culture [I see that you have good taste! -Lib] or how O’Reilly Automotive scaled their auto parts network. Bernard Baruch has a quote about failure being a better teacher than success. In our view, just as important as studying failure is also studying great success.

This is the foundation of In Practise. We aim to take principles from larger Constellations or Danahers to understand companies like Vitec Software or Halma. 

Now, you’re probably thinking, “How can you make this type of content much cheaper, given executives’ time is expensive?” Over the last few years, one thing that always stood in the back of our mind was the unit economics of the traditional expert network business.

The model is simple; networks recruit executives (suppliers) to connect with investors (demand). On average, a client pays ~$1,000 for a one-hour conversation with an executive that charges ~$250. However the cost of the team recruiting the executive is also ~$250. So clients are paying just as much in underlying labour recruitment costs as they are for the actual knowledge. I don’t know of any other marketplace, intermediary, or consulting firm that has a ~75% take rate.

It’s not like the networks bring additional value, such as a Bain or a McKinsey would. I wouldn’t be surprised if the contribution margin of the strategy team at McKinsey is lower than a leading expert network, given the McKinsey partner base salary.

75%! Wow..

It’s pretty interesting. One way of looking at this could be that legacy executive networks are pre-internet marketplaces, where the cost of fulfilling the order (the indirect labour costs) is equal or higher to the actual product (executive hourly fee). As we’ve seen in other industries, this usually spells disruption. For example, Upwork [UPWK] and Fiverr [FVRR] are productizing digital services in an Amazon-like fashion. Fiverr offers freelancers as SKUs on a digital shelf that employers can book on-demand. Fiverr fills vacancies 10x as fast and at a fraction of the cost of incumbent recruitment agencies.

Or in the wine industry, the cost of goods of a bottle is the same as the marketing, overheads, and distribution costs. Naked Wines’ mission is to cut expenses that don’t add value to the underlying product. By removing friction from the interaction between supply and demand, you can return more value to both sides of the network. Also, when you reduce friction, you typically drive higher volume which can increase the total size of the market. This is Nick Sleep’s scale economies shared model that gets to the heart of Amazon’s and Costco’s success. We believe the application of similar principles in the primary research world can add more value for both investors and executives. 

Kind of brilliant that you got to design a business using a lot of the knowledge that you gained studying good businesses and interviewing operators over the years. It’s clear that you’ve thought a lot about the various moving pieces in the industry and within your own business.

Yeah, although there are good reasons for friction and a high margin structure at incumbent networks. The largest players were originally built to serve consulting and private equity clients who are typically the largest users of the service. These clients require a high-touch service. At 11PM when a new deck comes across a PE Associate’s desk, the expert network better reply with executives for 7AM calls or the fund could miss out on the deal. It’s also similar for credit funds. When a HY bond gaps down to 60c, the whole market is on it. So historically, the networks were built with a high-touch, high labour cost model to serve highly inelastic and time-sensitive customers. 

This is not the market we are targeting. Most fundamental investors have a coverage list of 100 to 300 companies which they persistently follow for years, ready to pounce when Mr. Market displays an offer. For these investors, quality matters more than speed. This means the best executives, delivered at an affordable price, in a fully compliant manner. We aim to reduce friction from the primary research process, focus on quality, and put more value back in the pockets of clients and executives. 

That makes sense. You can’t optimize for everything, so you’ve tuned the dials to target this weak spot in the industry where quality matters more than time-sensitivity. I like it, very clever.

It also just closely aligns with what we believe in. So over time, our model will evolve from a content platform of IP-hosted interviews, to a service where fundamental investors can read, create, and discuss content with other like-minded investors. To be honest, it’s just the product we would want to use and one that, hopefully, reflects the workflow of an investor. As long as we keep enjoying the process, and stay passionate about learning, we’re happy for this to evolve organically. 

What’s your experience doing these types of interviews? In a previous conversation we had, I think you mentioned that you worked for an expert network in the past... I'm curious how much tradecraft there is to it — do you think it can be taught, or is it more an innate skill, and some people are just naturally good at it? It feels like you’d need similar skills to good journalists, or police interrogators..?

These are questions we’ve been thinking about for years. How do you have a great conversation? But then, more specifically, how can we best interview a former executive to learn about a business? 

We believe quality dialogue is an art that stems from awareness. By being aware of our own desires and opinions we are better able to observe, listen, and objectively comprehend what someone is saying. The more we detach ourselves from judgement, the more we can actively listen during a conversation. If I look back at my worst interviews, they usually occur when I have an opinion about a company that I defend. By being defensive, I’m not actually listening to what the executive is saying.

That’s a very wise insight, and I think it applies to life in general. If you already think you know what a thing is going in, you won’t listen and may miss the things that would make a more open-minded person change their mind.

My cofounder often repeats one quote: “The truth awaits eyes unclouded by longing”. We internalize this by focusing on putting our ego aside and not judging what the executive says. We find the more we judge, the greater our motivation for a certain outcome. If we really want to love a company, we’ll bend our perception of the world to believe it can be a ten bagger. The stronger our desire for an outcome, the more we manipulate the conversation to confirm our beliefs. This can be dangerous for anyone, especially investors. This is why I believe Munger’s quote about Darwin seeking disconfirming evidence is so powerful. We can bend our world view so easily that actively arguing for the other side can help drive objective thinking.  

What makes investing and primary research so fun is that it’s a particular kind of paradox. Investors need strong opinions about their stocks. But ideally, it’s strong opinions, loosely held. This is difficult because any great investor will be completely immersed in the companies they own yet must not be attached. It’s similar for us interviewing executives. We have to know the companies to a certain level to understand what drives the business, yet we must detach our opinion of those drivers to truly listen to the executive. It’s naturally easier for us to detach ourselves from judgement as we don’t need strong opinions like shareholders. This is actually why some hedge funds commission us to interview executives for them. They trust us to understand the business and interview executives without any biases they may have. 

It was interesting to see a huge spike in subscribers last year after we published the Transdigm [TDG] interview. We had various long-term shareholders reach out saying they learned a lot from the interview, even after following TDG for over 10 years. The interview also found its way to Mark Leonard of Constellation Software who replied with 2 pages of notes of what he learned which I thought was pretty cool and very Mark Leonard!! [That’s amazing! -Lib] We could add value obviously not because we know more about TDG than shareholders, but the lack of bias and a fresh pair of eyes allowed us to approach the interview differently. 

One of the big questions around TDG is how they price parts post-acquisition to drive EBITDA. The Former VP had acquired and integrated many smaller businesses so he was very familiar with how such earnings growth was possible. By making space for him to tell stories, we learned not only why pre-acq EBITDA margins were so low but also how operationally effective TDG are at managing inventory. This is crucial for aerospace parts, given the complex supply chain and products that combine castings, housings, and electronics. So not only do Transdigm increase price and take the aftermarket back from the OEM, but they also optimise the placement of inventory and finished goods closest to the customer. This drives inventory turnover which contributes to the great EBITDA expansion TDG enjoys post-acq. This is just one example where, because we can approach the interview in a slightly different way, it can lead to differentiated insight.

How much research do you do on the specific company or industry you're covering, versus how much is general knowledge that is transferable from one vertical to the next?

We currently aim for two to three interviews per week, and aim for 10 hours of research on companies we know and probably triple that for new companies. But the type of research we do now is very different from what it used to be. 

In my previous role, we had targets of five interviews per week which were typically on five different companies. So I spent a few years reading a 10-K a day just to make sure I didn’t look completely stupid in a live interview. I started in credit, then covered most of the major European LBOs, before moving to listed companies.

That’s quite the number of reps in a short period!

This was a very peculiar way to build general business knowledge. For example, as an independent research upstart, we didn’t have access to the financials of private companies during a LBO transaction. So we would attempt to build really basic hypothetical financial statements to visualise the core drivers of the business. Then when I interviewed the executive and spoke to the PE or credit PM I would realise how far out my gross margin or working capital estimate actually was. After repeating this hundreds of times (and looking silly in front of numerous PMs), it proved quite an effective way to learn. 

It really is amazing how knowledge compounds. I couldn’t imagine doing the work we do without thousands of reps under our belt. However, just as important is the artful side of interviewing that brings out stories to share differentiated insights.

Does it help not to know too much going in, to better ask the questions that an outsider/beginner would ask?

We often say that the line of questioning matters more than the question. The insight lies in the story, not the answer. Stories are crucial to help us learn because they are easier to remember. In our world, the art is crafting a line of questioning that tells a story about what matters for the company. 

Opinion is useless without context and narrative. For example, I’m working on Grainger right now. We all know Fastenal [FAST] has greater returns than Grainger [GWW] so we don’t need to know they are more efficient. For us to truly understand what makes the difference, we need stories. Typically it wouldn't be useful to ask why FAST’s gross margins are 10pts higher than Grainger’s. You would get a standard answer such as differences in product or end market mix. FAST probably sells more fasteners with higher mark-ups to smaller / retail customers compared to Grainger. This can be true but doesn’t give us too much insight into why it’s different or what could lead to a change in the margin structure. 

We aim to share stories that explain what really matters to an investment case on every company we cover. Preparation is key here. The more we prepare, the better the interview. So we have to understand what drives the intrinsic value, make the executive comfortable, detach ourselves from judgement, and construct an effective line of questioning to educe the story. It’s really difficult and we haven’t truly figured it out yet, but I guess it’s not a bad lifelong mission!

I’m curious what are some things you’ve learned along the way to get the most out of your interviewees?

Creating a safe and trusted place to exchange ideas is hugely underrated. There are large egos and high sensitivities when discussing former companies with senior execs who are usually still under NDA. We spend a lot of time with them beforehand to build trust. One simple thing we focus on is recognition. Recognising executives for their achievements and experience is crucial to building a relationship. We all enjoy talking with others who understand what we do. So by being genuinely interested in their experience, you can build a lot of trust. And this human connection is key to sharing great stories. 

This is actually where we feel we have an edge in producing unique content. We can interact and engage with executives in ways that make them comfortable in exchanging ideas that wouldn’t be possible elsewhere. Fundamentally, we spend a lot of time with execs, building a safe and trusted place to have a great conversation.

Are you also interested in investing? Having done so many interviews, you must have a personal knowledge base that is pretty unique and varied.

Of course. I’ve always been fascinated with games. As a kid, I was very competitive and played for pro football clubs (the real football played with your feet, not hands!) until I joined university. I then played poker non-stop during uni before becoming interested in investing. It fascinates me because it’s a technical, behavioural, and psychological game that can never be completed.

I also see businesses as living organisms where there must be a win/win long-term outcome for all stakeholders, in order for you to win. Playing a game, where you allocate capital to businesses that have to add huge value to the world to win, is fascinating to me. 

I also feel lucky that my unusual experience has made me a generalist. I find studying many different industries and businesses builds a fragmented set of ideas that can suddenly crystallise into a real insight that wouldn’t have been possible if I only studied one industry. 

An understanding of the distribution moat of the big beer companies helped build an appreciation of Naked Wines’ US value proposition. Or by studying how Amazon eclipsed eBay’s marketplace network effects, I can better understand the positioning of Zillow. No doubt a certain technical understanding of some industries is required but I believe it’s the creative insight beyond technical understanding which matters in investing.

Investing is definitely a passion of mine. There is a saying that ‘you can either mine for gold or sell pickaxes to gold miners’. In a way, today we’re selling pickaxes (knowledge) to gold miners (investors). 

If we can also think like gold miners, we will align ourselves closer with our customers and sell the best pickaxes in the world. And then with deliberate practice, we’re in an interesting position to potentially mine for gold ourselves in the future. I feel incredibly lucky to be able to study how the world works for a living. And we’re really excited about the community we can gather to come on this journey with us. Glad to have you onboard Lib!! :) 

You can check out In Practise here.

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If you enjoyed this and want more 𝕤𝕡𝕖𝕔𝕚𝕒𝕝 𝕖𝕕𝕚𝕥𝕚𝕠𝕟𝕤, you can support the project here. It takes 20 seconds and means a lot to me:

And if you want more from William, friend-of-the-show and supporter (💚) Andrew Walker recently did an interview with him that goes into his background a bit. The bulk of the conversation is about the company Naked Wines in the UK.

🍪🍪🍪🍪🍪🍪🍪🍪🍪

1. And for me too, as it’s my birthday 🥳