Investing early in a transcendent company

What is Transcendence?

Transcendence is the act of manifesting beyond set limits. It occurs when an entity’s influence reaches beyond its place of origin. In the business world, transcendent companies are those which transcend their industry and geographic boundaries, becoming role models for others. These companies have the power to significantly impact people's socio-cultural behavior on a large scale.  In short, they single handedly change the world for the better.

We view transcendent companies’ lower probability of capital impairment as their most compelling characteristic. We believe the probability of impairment of capital in a transcendent company is lower than any other investing alternative. Their unique qualities make them incredibly robust and in control of their own destinies. While many companies can perform well under favorable industry tailwinds, transcendent companies differentiate themselves with their ability to turn on their powerful engines even when conditions are less favorable. We rolled the first few versions of this paper before going deep into Tesla. As you will be able to tell, Tesla has since influenced our thoughts.

This paper is organized into ten short sections, each of which focuses on a different characteristic we typically find in transcendent companies. These sections include Shift in Paradigm, ‘Special Army Forces’ Mentality, a Mission the World Needs Badly, Capacity to Navigate Uncharted Territory, Being Seven Years Ahead, Misunderstood Essence, Continuous Wowing, Can’t Live Without it, 'Unlimited' Total Addressable Market (TAM) and Pinnacle. It is important to note that failing to fully check any of these sections should not be taken as an automatic disqualification. Instead, careful judgment should be used.

Shift in Paradigm

The world is an ever-evolving system. Every once in a while, a significant paradigm shift takes place. These shifts occur when a prevailing theory or set of ideas is replaced by a new and different framework that better applies to existing challenges. These shifts often result in business opportunities that have different units of economics, costs, profits, opportunities, and skill sets.

These shifts naturally attract the most brilliant minds who want to have a strong impact in their lives. They develop a superior skillset uniquely suited to the evolving world. These skillsets represent far more than a mere improvement from previous versions; they are fundamentally different. A good example is Amazon’s expertise in managing customer data and web services vs Wall Mart expertise in real estate and logistics (which Amazon also mastered).

Special Forces of the Army Mentality

Elon Musk is known for telling new employees, “You are not joining the army.  You are joining rather the special forces of the army".  One only must remember that Elon Musk often sleeps at the factory to understand what he means. We find this mentality characteristic of most transcendent companies in early stages (early meaning first 20 years).

Transcendent companies are characterized by a team of highly skilled individuals willing to tolerate the extreme amount of work necessary to create something that will change the world. This culture of extreme levels of effort attracts only the very best. We are of the belief that only smart people with exceptional character can persevere in these environments. This type of culture fosters a sense of determination among employees, leading to superior quality outputs. Reaching transcendence is hard, to say the least. 

Elon Musk articulated this concept clearly in Tesla’s 2023 Shareholder Meeting - “At the end of the day, a company’s competitiveness is a function of the capability of its people. Whoever attracts the best talent wins”. Tesla received 3.6 million applications in 2022, and hired 29 thousand new employees. An acceptance rate lower than 1%, four times lower than Harvard and Stanford. 

We agree that having the best people is the single most important factor in a companies’ infinite journey.  Since the journey is infinite, there is no big enough moat that can fend off competition indefinitely. Elon Musk says he doesn't believe in competitive moats, just a higher rate of innovation than competitors, achieved by the best talent.

A Mission the World Needs Badly:

A mission the world needs badly goes beyond profit or dominance. It guides a companies’ strategy for years and resonate deeply with employees, customers, and society. These visions are bold, tend to challenge the status quo and inspire people.

These kind of missions boosts a company's robustness. It fosters a deeper connection that goes beyond transactions, enhancing loyalty, trust, and advocacy. People invest more in what inspires them - money, work, time, effort, etc. An inspirational mission is an added assurance on many key aspects such as employee motivation, lack of complacency, customer loyalty and strategic decisions being made with transcendence as the end goal.

Customers often form strong emotional connections with mission-driven companies, enhancing their robustness. This bond transcends transactions, it’s about being part of something bigger. When customers believe in a company's mission, they see their purchases as contributing to a valuable cause. For instance, by purchasing a Tesla, customers receive more than a car; they're participating in environmental stewardship. Shopping with Amazon, they do more than seek convenience; they are contributing to Amazon's mission to be “Earth's most customer- centric company”. Using Google, their searches help further increase universally accessible information for everyone in the future.

A mission the world needs badly galvanizes not only customers, but all stakeholders. Tesla and SpaceX are examples of companies which benefited from having truly inspirational missions. They might not exist today without them. During the 2008 crisis, both companies were at the brink of bankruptcy. Due to their grand and “philanthropic” objectives, many investors came in at the hardest times. Some were willing to mortgage their homes. Elon Musk’s brother sold his Apple stock, something he swore he would never do. Moreover, employees were and continue to be motivated to work at an unmatched intensity. It’s hard to imagine them putting up this great effort if they were not doing it for a mission the world needs badly.

Peter Thiel was quoted in Walter Isaacson’s recent biography. He said - “Elon (Musk) understands something about risk that everybody else doesn’t”. We won’t presume to know what that is. We suspect, however, that it has something to do with combining an incredibly inspiring mission – something the world needs badly such as accelerating the world’s transition to sustainable energy – with some of the absolute best talent in the world.

Capacity to Navigate Uncharted Territory

Transcendent companies are those that push boundaries and explore new, untraveled waters in order to make a significant impact in the world. These companies take risks and innovate in ways that others do not dare to do so.

Many successful companies offer improved existing solutions and add value to the world.  However, the limited impact of an improved solution on the world falls short of the high standards required for transcendence. These companies are navigating a few miles from the shore, while still seeing their known territory.

Navigating uncharted territory demands complete mastery of the typical business skills and then some. Only a handful of companies possess what it takes to undertake this challenge. For the rest, it would be imprudent to attempt it. We believe two characteristics are key for a company to successfully navigated uncharted waters: first principles thinking and a clear north star. 

First principles thinking is, as Elon Musk puts it, “Boiling things down to fundamental truths... and then reasoning up from there.” Peter Thiel is also a big believer that first principles thinking is critical:

Creating value through an original approach is extremely hard; you must resist the temptation to look around and be influenced by others. Focusing on first principles results in a greater importance being placed in processes, rather than output comparisons, which then leads to greater originality. 

The second trait successful transcendent companies tend to have is a "north star". A north star in navigation works as a fixed point in the sky used to find true north, particularly useful in high uncertainty moments when other reference points are unavailable. In businesses, it works as a clear and compelling vision of what the company aims to achieve, and a constant reference point for the company's decisions, actions, and strategies. A north star helps to align and focus everyone’s efforts in the company, providing a sense of purpose and direction.  

For example, Amazon’s founder, Jeff Bezos, has stated that he believes that three things about customers will remain constant, even as the world changes: their desire for low prices, their desire for fast delivery, and their desire for a wide selection of products. By focusing on these core needs, Amazon was able to navigate uncharted territories without getting lost in the way.

Navigating unchartered territory requires being comfortable recognizing mistakes - and doing so fast!  When underwriting potential transcendence, we focus on how good people are at recognizing mistakes, learning from them, and turning the page incredibly fast.  In fact, the previously mentioned attributes tend to be some of the most distinctives characteristic of these captains.  They have a well-developed visceral ability to navigate.  Moreover, as Tim Grover explained in his book Relentless, they tend to be very comfortable with their dark side.

Being Seven Years Ahead

Everyone who is seven years ahead is navigating uncharted territory but not everyone navigating uncharted territory is seven years ahead.  Being able to successfully navigate uncharted territories for seven years requires a unique combination of technical ability and emotional capacity.  This exhibits not only the ability to set ambitious goals and achieve them, but also their ability to deal with uncertainty and take risks. 

The seven years ahead term was coined by Jeff Bezos who famously said that Amazon had a seven-year head start when building AWS. Tesla is a great example of this trait. They were the first electric car producer, launched their Superchargers back in 2012, and built the machine that builds the machine (the Gigafactory) many years – and counting – before competition. We believe that pulling all this off is strong evidence of Tesla’s technical capabilities. The constant engineering feats displayed by the company were/are unheard of, constantly pushing beyond what it was thought possible. Case in point, Tesla launched their Model S in 2012. Up until 2019 there was nothing that could even compare to it, and probably it is still the best available EV anyone can get. In 2014 Giga Nevada was founded. By 2018 it became the biggest battery factory in the world with an annual output of 20GWh and in 2023 they announced their plans to invest $3.6 billion and expand its capacity to +140GWh annually.

The company’s journey, however, wasn't a smooth ride. Exceptional emotional capacity was exhibited multiple times. The 2018 Model 3 production hell is a case in point. Evidence of them overcoming this extreme adversity further increases our confidence on their ability to execute even when pressure is borderline unbearable.

Misunderstood Essence

According to Cambridge, essence is defined as "the basic or most important idea or quality of something." In business, we believe that essence refers to the outcome of an interaction between parties. It encompasses the decision-making process, the moment of exchange, and the internal experience of the consumer. It contemplates the question of what is given and what is received, as well as the motivation behind the transaction. 

Transcendent businesses offer products or services that are dramatically different from any predecessor and therefore almost everyone underestimates their potential value. Human nature often leads individuals to draw comparisons and seek out analogues, causing them to view their products or services through the lens of past experiences.  Even those who have the best understanding of the offering at hand, such as early adopters, do not fully grasp their essence. The essence of their product or service is so different and evolves so quickly that the human mind simply does not have enough time to digest it.  

For example, people may have thought of Amazon as a way to shop from the comfort of their homes, an iPhone as a computer in their pocket, or a Tesla as a zero-emission, fast car.  These are all valid definitions but far from nailing the essence of each of their services/products.  If you think carefully about it, the iPhone has been around for more than 14 years and we are still assessing the impact this technology is having in our lives. Tesla provides another useful example to illustrate the concept of misunderstood essence. The company is often thought of as "just a car company".  Nothing could be further from the truth.  Moreover, the essence of the Tesla car is clearly misunderstood.  Elon Musk said it best on the Autonomy Day 2019: “To buy a car without FSD capability is like buying a horse.”  

We believe that the situation Tesla cars are in today fits this misunderstood essence frameworks extremely well.  Just like it took some time for everyone to recognize and use the full potential of the iPhone; it is taking time for people to fully grasp the potential of EVs, FSDs, and other AI related enhancements that Tesla is likely to deliver.  In hindsight, it is clear today that the iPhone and App Store’s successful evolution from that moment in time was pretty much inevitable.  Likewise, we believe the successful evolution of Tesla cars and FSD today is pretty much inevitable.

Continuous Wowing

To be wowed is to experience admiration, excitement, and great pleasure. This is often the result of an unexpected success. Transcendent companies tend to amaze their customers and continue to do so again and again throughout their journey. 

Transcendent companies understand the importance of eliciting emotions in their customers. People may forget facts, but it is much harder to forget emotions. Being a "me-too" product comes with a high cost, as it opens the door for competition. We see transcendent companies constantly focused on wowing their clients.  This experience sticks with customers and makes them irreplaceable. 

While many companies may be able to wow their customers at some point in their lifetime, we believe that transcendent companies also have a greenfield of opportunities that allows them to continue wowing customers for decades.  Take, for instance, Google. Its search function was a revolutionary solution that saved users time and provided them with quick, accurate results. Searching stopped being a problem. The company continued innovating and providing new features that made users' lives easier, such as email, shareable documents, and live scores of their favorite sports team. Making reservations at a restaurant and linking it to your calendar stopped being a problem.

Another way to think about it is that search was a meaningful and challenging enough endeavor to keep a large group of exceptionally skilled engineers deliver more and more value for decades.

Can’t Live Without It

Transcendent companies are masters in the art of becoming not just a choice, but a necessity for their customers. Their offerings become indispensable elements of their users' lives. This indispensability can be a result of adoration, dependence, and/or a deep-seated attachment. Customers simply cannot live without them.

Consider the phenomenon surrounding brands like Apple and Nike, which have cultivated a near cult-like devotion among their followers. Apple fans camp out for days to be among the first to buy the latest devices. Their products are embedded into their very identity. The thought of substituting an iPhone with another brand's offering would feel like living an alien life. Similarly, Nike fanatics perceive wearing another brand as walking in someone else's shoes—pun intended.

Microsoft redefined productivity, making its Office Suite an indispensable tool in the corporate world. The mere suggestion of navigating a workday without these tools is met with terror by corporate America, as the inefficiency and additional workload would be overwhelming.

Facebook developed one of the most addictive digital experiences globally. Despite vows to quit and detox from social media, users find themselves irresistibly drawn back, often within hours or days. In today's interconnected world, abstaining from these platforms feels like cutting off one's social lifeline.

Transcendent companies don't just sell products or services; they sell experiences that become deeply integrated into the user's personal and/or professional identity. Removing them would significantly alter their daily lives, underscoring the critical role transcendent companies play in shaping modern lifestyles.

‘Unlimited’ TAM

Total Addressable Market (TAM) refers to the maximum size of the opportunity for a particular product or solution. In other words, if every single person who could potentially find value in a product or solution purchased it and the company had 100% market share, what would the resulting revenue be? ‘Unlimited’ TAM is used figuratively. No market is truly unlimited. However, a few markets are so large that in practice they feel that way.

Transcendent companies can be seen as "non-stop growing machines," constantly seeking out new opportunities to expand and increase their market share.  This growth helps in a number of ways, including attracting the best talent.  Also, size often makes for a formidable “moat”.  For instance, a business is less likely to suffer lethal unexpected blows if diversified among different geographies, demographic populations, and regulations.  Size often comes combined with additional resources to react to both threats and opportunities.  

While no market is truly unlimited, businesses with the potential to be among the largest in the world have a greater opportunity for growth and success. By constantly seeking out new opportunities and expanding their reach, these businesses can cross all barriers, achieve significant milestones, impact people's socio-cultural behavior on a large scale, and transcend.

Pinnacle

We believe the best candidates for transcendence are found at the pinnacle of different activities.  Moreover, in our view, a company must remain at the pinnacle of the business world for quite some time before transcending.  Using a parallel from the sports world, Roger Federer took years and years of dominating tennis to reach people who are not typically interested in tennis.  Other examples could be Messi today or Jordan back in the day.  They became legends after many years of dominating their respective sports.

The same happens with businesses.  They need to remain at the very top of their specific business for quite some time before transcending that world.  This leads us to the question, are companies investible before they do that?  We think so, but of course we would only a allocate a small fraction of what we think it is prudent to allocate in a company that has already transcended.  

We are convinced the journey itself is a critical element in brewing transcendence.  Federer, Messi, Jordan, Bezos, Musk, Jobs needed time and a lot of work to become legends.  Moreover, just like great athletes prove their status of legends by winning major championships, we think businesses prove they transcended by crossing unimaginable milestones (i.e. creating iPhone, Gigafactory/Production Hell, AWS). 

We believe using a high bar is crucial and that a transcendent business should be able to pass it with flying colors.  We always keep in mind that transcendent businesses, just like sports legends, are few and far between.