November 28, 2022 – On today’s show we welcome special guest, David Friedberg, Founder and CEO of The Production Board. Dave is an entrepreneur, business leader and investor who founded The Climate Corporation, which was sold to Monsanto for $1.1 billion. He now leads The Production Board, a holding company of businesses established to solve the most fundamental problems.
On the show, Dave discusses:
- His early experiences in investment banking, Google, and what it was like working with Larry Page
- The founding, growth and sale of his first venture, the Climate Corporation
- High potential investment themes that he is focused on
- Insight into one of his latest deals: Lavoro, Brazil’s largest agricultural inputs retailer
- And more
Welcome investors to The Absolute Return Podcast. Your source for stock market analysis, global macro musings and hedge fund investment strategies, your hosts, Julian Klymochko, and Michael Kesslering aim to bring you the knowledge and analysis you need to become a more intelligent and wealthier investor. This episode is brought to you by Accelerate Financial Technologies. Accelerate because performance matters. Find out more at accelerateshares.com.
Julian Klymochko: All right, I’m welcoming Dave, CEO of The Production Board, entrepreneur, podcaster. Really excited to have you on the show today. Now, before we get into all the stuff that you’re up to currently, I did want to get into your background. Now, a common theme with respect to a lot of the podcast guests that we have on the show, generally, CEOs, business leaders, entrepreneurs, as many of them start their careers in investment banking, private equity, capital markets, things of that nature. Now, you were no different. Dave, do you mind talking about, you know, those formative years when you came out of school, your first job in investment banking, and then ultimately, I transitioned from that role to an early employee at Google?
Dave Friedberg: Yeah, so my background in college and my kind of intention from an early age was to kind of go into science, mathematics, and physics. I majored in astrophysics at UC, Berkeley. During that period of time. There was a year where I lived in upstate New York, and I worked at a pool hall, pool hall manager made me go to his house to play poker, where I gave away all the money, I made working at the pool hall, which was $4 and 25 cents an hour. So, I learned the hard lesson really early on. I bought a bunch of books on poker, learned how to play. When I went to Berkeley, I played in the card rooms around the Bay Area and made money. Did pretty well. I mean, I had the summer of my sophomore year where I made like $10,000 that’s a lot of money as a sophomore at that time, now at that time.
So I was, you know that was kind of a hobby of mine. While I was majoring in astrophysics, I was going to go to grad school, but the.com boom was happening and I had never taken a science, or sorry a finance or econ or business class. But man, I wanted to work in Silicon Valley because it was changing the world and technology was clearly having this incredible impact on every industry. And so how do I end up working in the tech industry? The hot job to get was investment banking coming out of college. I was not qualified whatsoever for an investment banking job. However, I put my poker experience as a headliner on my resume. And so, I got a bunch of interviews with investment bankers who thought it’d be cool to meet with a poker player, which was fairly novel at the time in 99-2000.
So, it was kind of the pre online poker thing. So that’s how I got the job interviews. And I ended up working at this investment bank called Broadview, which was focused on technology, the technology industry doing M&A. So, I worked on a bunch of public and private transactions, probably 20-25 deals in two years that I was there. And I got to learn everything about finance and accounting, and you know, basic kind of business from those two years of experience. And the only reason I got the job interviewed was because of my poker playing. Then I ended up working in tech. I worked at Google, started there in March of 04, and that was or April of 04. And so that was kind of my first real operational experience.
However, prior to that, I had started two tech companies on my own. And so, I had written the software, I bought all the books on programming, learned how to write in PHP and MySQL and set up my own servers and ran these sites and they made money. So that’s how I got the job interview of Google. Not because I was a computer science guy by background, but because I had this experience building these services and these sites and could speak really well to how I used AdWords and how I used Google services at the time. And so that got me the job at Google. And then I left and started my company, which became The Climate Corporation in 2006. So that’s a bit of a long-winded answer to your short question.
Julian Klymochko: Now, with respect to your time at Google, I think you’re one of the first a thousand employees and now they have, you know, tens of thousands or perhaps more than a hundred thousand. 18 years later, were you surprised that the company’s become so big and so dominant?
Dave Friedberg: 170,000. So, we always used to say, or Eric Schmidt did a good job of articulating this. He was the CEO at the time when I was there. That, you know, Google’s total addressable market, and I think it’s a really important kind of reading for a lot of investors. It wasn’t online advertising. Online advertising at the time was a very small market relatively speaking. It was, you know, people said, hey, it’s only, you know, couple billion dollars a year. Eric’s point was like, if we’re really good at matching consumers with producers or sellers, and we can get a percentage of doing that matching our market is actually a percentage of total commerce. And a percentage of total commerce is trillions. You know, it’s a multi-trillion-dollar market that you’re grabbing a few percentage points of. So that makes us a very big business.
And that’s exactly what happened. I don’t remember who it was, I think it might have been Mark Mahaney who said shortly after the IPO, Google could be a $2,000 stock one day, and the IPO price was 35 or traded up to 80 and then it was like at a hundred dollars on the first day of trading. So, 2000 on a split adjusted basis is like a thousand or $500, actually, sorry, I shouldn’t because they split again. But basically, Google exceeded, and everyone said he was crazy for this prediction. Like, there is no way Google is going to be 20 times this market cap. How could they ever be a multi hundred-billion-dollar market cap company? And obviously they eclipsed it. It’s really, really impressive and incredible and amazing to see, but not out of the scope of the intention of the business at that time when I worked there, which was to be the most efficient and effective way to match buyers and sellers across all commerce categories and capture a piece of commerce. And that’s what advertising effectively is their personalized advertising is really to give you the internet user something that you will actually find value in. You know, ads that are personally matched to you that you find value in, don’t feel intrusive or annoying, they actually feel valuable. And Google’s done a better job of that than you know, any other company in history.
Julian Klymochko: Yeah, it’s a really useful insight. And your timing could not have been better there than in 2006. You left Google to start your first company, The Climate Corporation. What were some of the biggest challenges you faced as a new entrepreneur there?
Dave Friedberg: I mean, what weren’t the challenges? You go into building a business and you have an assumption about what you’re going to build and what you’re going to do. And you’re very quickly knocked about by the gusts of wind [laugh] or the rocking of the ocean or whatever it is, whatever analogy you want to use that best describes a Brownian field [laugh] meaning like, there are these vectors that are pushing at you from many different angles. Some of them are very big vectors, some of them are small, but none of them push you in the direction that you expected you were going. And what I mean by that is you’ll try something, and it doesn’t work, and then you’ll try something else, and it doesn’t work, and you end up kind of exploring this very big space.
When we started the business, the idea was 70% of businesses lose money due to the weather. Let’s make weather insurance available online. And when we started to do that work, we didn’t know what markets, we didn’t know how to sell, we didn’t know what the value prop would be. We didn’t know what customers were really looking for. I’ve been to every convention for every industry you can think of. I’ve been to the National Golf Course Owners Association, the Car Wash Owners Association, The International Travel Agencies Convention, and we sold our Weather Insurance Product idea into all these industries and figure out how to build products that were useful to each of these industries. Ultimately, we actually focused on agriculture of all markets and agriculture was scalable and farmers put their entire net worth on the line every year. They invest their entire net worth, typically in their seed and their fertilizer and their crop protection products. And then the biggest driver of outcome is the weather. And they’re working on very thin operating margins. So, a farmer can get completely wiped out if the weather is bad. So that ended up being a perfect fit for us. And then we have to iterate and iterate and iterate to make a product that works. So, the biggest lesson really was that you don’t know what you don’t know until you know it, you really have to go out there and explore this vast unknown, the rate at which you can explore, and the rate at which you can iterate your business and your product is the highest predictor of success. Because whatever you’re thinking, going into building a new business, meaning no one’s ever done it before, is likely going to be flawed. And the real question is, how quickly can you explore all the options that haven’t been explored yet to figure out what will work?
And I think that’s one thing I would commend my younger self for doing a good enough job of was to, you know, kind of drive the team to iterate very quickly and explore lots of different options and eliminate the ones that weren’t working and continue to pursue the path of those that did and keep iterating to success. Because if you don’t do it fast enough, if you’re too analytical, meaning you have to figure out what’s going to happen before you take action you typically end up running out of money. So, if you are willing to take action before you know what the answer will be, then you have a better shot at not running out of money. And that’s what I see being very hard for people I worked with at Google, or people that come from a background where you’ve had a history of success of repeated success or a history of analytical work where you want to make sure you analyze all the angles before you make a decision.
And if you do that, you take too long, and the business dies because there’s so many decisions that need to be made. Let’s say you have to walk a thousand steps before you figure it out. If it takes you a year to walk the first 20 steps, you’re not going to get there. So, I don’t know, that was the biggest lesson for me that I still really think about as a framing for whether or not an entrepreneur or a business will be successful. It’s less about the core thesis, it’s more about the team’s orientation in that sense, how culturally attune they are to being able to do that.
Julian Klymochko: And that’s useful because from a cursory view, people will say, oh, Dave started Climate Corporation in 2006, several years later, exited to Monsanto for more than 1 billion. It must have been, you know, an overnight success that easy. But it’s helpful to get a sense of, you know, the iterating, the pivoting and, you know, trying to find that product market fit. Now with respect to the end of that process, the exit, what spurred that sale? And, you know, what was some of the thoughts behind your decision to sell the company?
Dave Friedberg: Okay, I’ll tell you guys, I mean, there’s a couple ways I can kind of tell this part of the story, but we were not intending to sell the company. But we had this series of conversations with Monsanto, and I knew nothing about Monsanto at the time. I only knew the name as being evil. So, I’m like, oh, that’s a bad company. They’re evil, they’re going to destroy the planet. Why the hell would we meet with them? Well, it turns out they’re the biggest seed company and one of the biggest crop protection companies in the world. And they sell all these products to farmers. And you know, as you go deeper, you really get to understand that the ag inputs market, the crop inputs market, meaning the products that farmers buy that they use to grow their crop is an incredibly sophisticated and technology-oriented market.
And it’s not technology in the digital sense. We often use the term technology, and everyone thinks, oh, digital software, internet. Technology goes back to mechanical engineering, chemical engineering, biochemical engineering lately, gene editing, precision gene editing, in the therapeutic space, there’s many different kinds of technology that are not software. So, when you really get into it, and you come from a digital age like I do, you don’t have a strong appreciation for the history and the importance of chemical engineering, biochemical engineering, mechanical engineering on the transition of the human species over the centuries past, and particularly when we were facing peril, right? Like agriculture is the engineering solution to running out of food because we weren’t getting enough food from the trees and from dead animals lying on the ground. So, humans learnt to engineer the world around us and put crops in the ground and grow them and water them and eat them.
And over time, our ability to kind of engineer the earth to make the things that we want to consume got better and better. As our toolkit expanded and our toolkit expanded into mechanical tools, eventually the plow and then the tractor allowed one person to do the work that it previously took a hundred people to do. And then chemical engineering, the Haber Bosch process at the beginning of the 20th century really transformed the arc of humanity because we were going to run out of food because we didn’t have enough fertilizer. We were mining fertilizer from the guano fields off of the coast of South America and at the Atacama Desert. And the nitrate that we were mining was running out, and that’s how we made fertilizer. And you need fertilizer else, the crops won’t grow, you need nitrogen, or they won’t grow.
And so, when we were running out of fertilizer, there was this meeting of all the chemical engineers and they said, my god, the world’s going to run out of food. We’re all going to die. And then they figured out this Haber Bosch process and the engineered ammonia from atmospheric nitrogen, and boom, it took the world from a billion people to 7 billion people. I mean, really, we could now grow food anywhere we wanted by just putting fertilizer on the ground that could be made using electricity. And today, 2 to 6% of the world’s electricity is used to make that fertilizer. So, Monsanto for me, I got to understand that history and I didn’t know it before. And I got to understand the history of farmers using herbicides and insecticides and fungicides and pesticides, seed, and plant breeding, and how plant breeding went from being ad hoc and random to looking at the phenotype or the shape of a plant.
And then, you know, running the breeding lines and plant breeding goes back over a hundred years, 150 years, 200 years in terms of being a commercial enterprise. And Monsanto had the best plant breeding organization and then they had also been the first to really commercialize gene editing tools as a way to transform plants and do things that were very novel and advantageous for farmers. So, I got really excited about what they were doing and the opportunity for digital to transform agriculture. And it really became clear to me that agriculture, like many other industries, have historically operated in a very analog sense. You know, we kind of make decisions using gut and intuition in the physical world, things change and we make physical decisions in the physical world based on some history or some understanding of what might happen. But digital technology gives us the ability to, number one, sense or digitize what’s happened historically.
Number two, to build predictive models about what will change in the future if you do different things. And then number three is to create a prescription to do different things. So, what seed to plant, when to plant it, how many seeds per acre, how much fertilizer to use, et cetera. All of those digital capabilities improve the productivity of farming and productivity is defined as getting more or less. So, can you put less fertilizer in the ground? Can you get more food per acre? Can you get more food per unit of carbon or water, or dollar spent? And so, productivity is not just more profitable, it’s actually more sustainable. It means you can get more food with less of a carbon footprint, you get more food without using persistent chemicals. You can get more food without using as much water. And so digital tools allow us to model better decisions on the farm.
And now digital tooling is embedded in nearly every piece of farm equipment. Everyone has an iPad, everyone has an iPhone, and all of this data is being generated about what’s going on the farm, and prescriptions can be delivered and driven back on the farm to drive better outcomes. So, I got really excited about the prospect of working with these guys. And they had the biggest data set that existed in agriculture at the time, all these field trials of what crops were planted and what happened and so on. Our concept was we could use that data and then build our predictive models, which is what our business was, was kind of analytics for farmers, helping them make better decisions and that could drive better outcomes. And the scale that they operated at was significant. When we sold the business to Monsanto, we had about 10 million acres that used our product. Within the first year we had grown to a hundred million acres after the acquisition. And just to give you a sense of scale, the whole US corn belt, the entire Midwest corn belt, about 160 million acres.
Julian Klymochko: Wow.
Dave Friedberg: So really tremendous growth very quickly. And so that’s a little history of kind of why that got exciting. And then obviously there was a whole negotiation around, guys, look, we just raised a bunch of money. The deal needs to be at least three times the last rounds price for our invest to be willing to share itself. They were like, well, it’s not worth it. We’re like, yes, it is. Okay, it is. I mean, back and forth. Okay, that’s it, it’s done. So, I mean that’s, you know, there was a whole negotiation process that made that happen.
Julian Klymochko: Now fast forward to your current role, CEO of The Production Board, and you aim to reimagine the earth and create a better home for everyone. And I imagine that a lot of these technical concepts that you just discussed, really a focus of what you’re up to there. Now in terms of what you’re trying to accomplish at The Production Board. Like what sort of activities do you get up to there in support of that objective?
Dave Friedberg: Yeah, so we operate as an investment holding company. So, we use cash off our balance sheet to start new businesses to fund businesses kind of in the venture stage, and then in the case of our SPAC to do a big transaction that can be supported by some of our technology businesses. So, our technology businesses really extend some of the things I talked about earlier. So genome engineering you know, 10 years ago CRISPR was discovered and in the years that followed, CRISPR tools and related tools have allowed humans to progress from doing very ad hoc changes to the genome of an organism, meaning change the DNA to be very precise about how you change the DNA of that organism to turning genes on or off, to taking genes out of the organism, to putting genes in, to being specifically to cross certain genes together from the same species to make new traits in the plant.
So, gene editing is not just unlocking opportunities in agriculture, it’s also unlocking opportunities in personalized medicine in human health. Cell and gene therapies are going to completely transform nearly every disease vector that that face humans. And then digital tools. So, more and more is being digitized. So, we’ve started a number of businesses. One is in the soil microbiome, so we do soil microbiome engineering. We take samples of farmers’ fields, and we sequence the DNA and then make recommendations to farmers about what to do to change outcomes in their farm in a way that changes the microbiome. These are little microbes that exist in the soil that have a huge influence on the crop. We have a human gut health business that changes the gut microbiome. We have a plant gene editing business where we’re building very novel plant species using new approaches to gene editing.
We have a business that does high throughput cell engineering for creating new microbes that can make animal proteins or antibodies that have never been seen before, that are much cheaper than using the traditional source. So, by changing the genome very rapidly and evolving it on a chip, you can actually you know, create a significant cost reduction and suddenly make all these products much, much cheaper using a microbe. So, microbes are the factories of the future is a key part of that thesis. And so, because again, you can change the genome specifically, you can recode a microorganism, like a yeast cell or bacterial cell to make stuff for you. So those are the businesses that we’ve started and built at The Production Board. And so, you know, we’ll sometimes be kind of an investor in someone else’s business, sometimes we’ll start the business ourselves and then we’ll bring in other investors to join us later as the business hits certain milestones. And so, we have about 12 different businesses that we’re investors in today. And that’s kind of how we operate on a you know, on a baseline.
Michael Kesslering: And so, someone that helped with the initial financing of The Production Board was Larry Page. And you’ve worked quite closely with him over the years, whether it be with The Production Board and Google. What are some of your biggest takeaways from working with him over these years?
Dave Friedberg: You know, one of the biggest impressions Larry always made on me is you know, asking yourself, are you really thinking big enough? You know, a lot of people don’t really give Larry full credit for his ability to drive outcomes at Google by really pushing the envelope on what’s possible. When I was working at Google, there was this very crazy project at the time to scan all the world’s books and people thought it was nuts, but Google set up a frigging warehouse, multiple warehouses, and they built optical scanners and robots that turned the pages of books and scanned them and then did optical character recognition and digitized them and made them searchable. People thought it was nuts at the time, but I think that was a good project to demonstrate how he and Sergey think in terms of, are you thinking big enough?
If we want to digitize all the world’s information, it’s not just the stuff that’s online. The whole world can and should be digitized, and then that should provide insights back to people to drive human progress. It’s a really profound mission if you think about it. And he really tried to articulate it in some of the ways that he drove the teams to think bigger. And then, you know, even some simple stuff. I was at Google when we launched Gmail. It was April 1st, 2004, and when we launched Gmail, everyone thought it was an April fool, prank because you got a gigabyte of email storage for free. We don’t even talk about email storage anymore, but if you guys remember back in the day, Yahoo Mail and Hotmail, it was like $19 a month for a hundred megabytes of email. Because you know, data was so expensive to store, you had to pay money to have an email service because it cost money to put your emails on someone else’s computer.
So, Google launched Gmail with a gigabyte of storage for free, which was just so profoundly crazy. And the reason Larry did it, and the reason he pushed the team to do it was because if you looked out on the progress that was being made on storage costs, on hard drive storage costs, and solid-state storage at the time was very nascent. But you could see an arc that demonstrated that the cost of storage was dropping faster than Moore’s Law, meaning it would’ve cost only a few cents to store gigabyte of data in a few years. And so, by the time you get to a huge scale where it might actually cost you some amount of money, the cost is going to get so cheap. You’ve now basically bought the whole market; you’re getting the whole market of users on email for free.
And there’s a distribution curve that you could assume maybe 10% of people will use a gigabyte to data, but 90% of people are probably using less than 20 megabytes. And so, you know, then you kind of start to think at first principles on like, what does it mean to give a gigabit? It doesn’t mean you’re giving everyone a gigabyte of storage; it means you’re promising everyone up to a gigabyte and by the time they actually start using it, and by the time you get to a lot of users, it’s going to be so much cheaper anyway. It does make economic sense to do this because then we capture the whole market for mail, and we can put advertisements on it. We know we can make 30 cents CPM or whatever it is. So, this will actually be very profitable. And so, thinking in terms of first principles and asking yourself the question, are you really thinking big enough? Is a common trend that I’ve seen with Larry, Sergei, Elon Musk, even Bill Gates, folks that I think have really moved the needle and helped kind of to some degree affect the arc of progress of humanity is because they are very similar in those notions. Like, you know, how big can you really think? How big can this really get? And, you know, can you take it back to first principles to justify perhaps a path to getting there?
Julian Klymochko: Now in terms of applying that to the current environment, thinking big enough, what would you say is the highest potential investment theme that you’re focused on these days?
Dave Friedberg: So, we’re spending a lot of time on improving the production of agriculture. Because you know, I’ll just give you guys some interesting statistics. The average yield per acre for US corn farmers was around 174 bushel per acre. There’s a guy in Georgia who regularly gets over 500 bushel an acre.
Julian Klymochko: Wow.
Dave Friedberg: There’s plenty of farmers who get over 300 bushel an acre, okay? Big distribution curve. So, the mean in the US is 174. The mean in Brazil is half of that. The mean in Africa is about a fifth of that or a 10th of that. These are areas where the land, the physical land that you’re growing that crop is the same roughly in all of those geographies. Same kind of soil, same amount of water, same kind of sunlight. So, the plants could grow. The difference is what are the farmers using? What products are they using and how are they using them? And so, if we just brought the rest of the world up to the mean of the US or if we brought the mean of the US up to the top decile of the US, the amount of calorie production that we would realize the amount of call it sustainability, that we would realize the impact it would have would be so extraordinary. This year, the UN estimates that we’re seeing an incremental 300 million people marching towards starvation, that’s coming off of a baseline of roughly six to 800 million. And that number’s been declining for the last three decades. But because of Russia, Ukraine, and the Lockdowns, we’re seeing this number spike again, because all the commodity prices are expensive, people can’t farm as much. Supply chains are being disrupted; the rich nations are buying all the food.
The poor nations are being left without food. It’s a real humanitarian crisis of epic proportions. So really the question is, can we increase global calorie production? And we have all the tools we need to do it available to US today. Those technologies exist and editing the genome of organisms, creating novel biological solutions, meaning microbes instead of synthetic chemicals that have historically been used as pesticides and fertilizers. There are so many tools available to us today that are more sustainable and will increase the productivity and profitability of farming and will feed more people and make the world you know, a kind of much more secure place. because by the way, when people don’t get food that’s when really bad governments kind of step in and really bad actors start to step in. And it’s a real global social problem, not just a geopolitical problem, not just a kind of a social problem. So, I’m spending a lot of time on new technologies and agriculture that can very quickly accelerate productivity gains in the US and around the world. And we think that this spans the gamut from microbiome engineering to genome engineering to digital tools. And, you know, all of these are kind of, you know, in the vein of sustainability and have a real fundamental market force, which is it can make products cheaper for consumers and it can make the businesses, the farmers more profitable. So, just to be clear, I’m also like a very big free market proponent [laugh]. So, I think, if you don’t have a product that the customer wants that’s better for them, that’s cheaper, that has some improvement or in a B2B case that’s making the B2B partner more money it’s not going to work. You know, there’s no such thing as sustainability if it doesn’t have a sustainable business model behind it. So, for me, all of this agriculture work is incredible because it’s both more sustainable. It’s got this humanitarian effect and the technology’s awesome and it’s going to make everyone a lot more money.
Julian Klymochko: And one way you’re pursuing this, solving this problem is through your special purpose acquisition company. TPB Acquisition 1 recently announced a business combination with Lavoro, Brazil’s largest agricultural inputs retailer. Now, could you talk about the thesis behind that deal and what made Lavoro the ideal merger partner for your SPAC?
Dave Friedberg: Yeah, so we set up the SPAC, not because we’re in the asset management business or you know, kind of traditional SPAC sponsor. We actually wanted to have a SPAC vehicle because look, I mean, at the time when we set it up, it was obviously fairly easy to set one up. You know, nowadays SPAC are a four-letter word and none of them are getting set up anymore. And obviously the s SEC’s having a heartache over some really challenged SPACs. But we took advantage of the market at the time because we wanted a strategic vehicle that we could use to get access to an industrial scale asset that we believed could be significantly affected by some of the technologies I just talked about. So, we looked across several markets, including biomanufacturing, broadly of the life sciences, food, and agriculture.
And so, we were looking for a business of scale that was, you know, we mentioned this in our IPO prospectus and in our IPO presentations that we were looking for a business that was profitable, that had a significant scaled footprint, but where technology, a business investment or access to or expertise in could enhance the margin profile or the growth rate of that underlying industrial asset. And so, we found, you know, again, I won’t, you can read our F-4 perspectives to see all of the different areas we looked at, but obviously we know agriculture fairly well. We have a number of investments in activities in agriculture, and for a long time we’ve known that Latin America is as large as the US in terms of row crop production. It’s about 80 to 85% the scale, the size and the farmers down there we would say underearning, the yield that they’re getting out of the farm is much lower than what we’re getting in the US on average. And the market is already realizing that. So those farmers are coming up with the technology, adoption curve coming up, the yield curve coming up, the profitability curve. And the way that you kind of share in that value creation with farmers is at the retail point, the retailer is more like a service provider. Think about them as like a financial advisor. It’s not like a store where the farmer goes in and picks stuff off the shelf. It’s a trusted relationship. Every farmer makes decisions on what to buy, what to use based on their relationship with the agronomist at their retail store, who meets with them typically weekly. And then that agronomist sells them their products and earns a margin for selling them those products. So, the way you drive new technology and agriculture is through retail. So, these guys are the largest retailer in Brazil, ag retailer in Brazil, and they now have a footprint in six countries across Latin America.
Latin America as a whole is the largest ag export market in the world, larger than the US. Brazil is the second largest ag export market as a country after the US and many projected in a few years, Brazil will be larger than the US. So Latin America is already the biggest exporter of calories to the rest of the world. All these countries around the world that need to import food to feed their populations are buying predominantly from Latin America. And the market is growing, the inputs market is growing 16% over the last five years per year. So, we were really excited because we saw Lavoro as you know, a real opportunity to help drive the adoption of new technology to participate in the utilization of that technology. And it’s a great business.
I mean, you know, last fiscal year they did a billion and six top line. Projected to do just under 280 million in adjusted Ebitda in calendar year 23. Just under 200 million in adjusted calendar year 22. So, you know, it’s a profitable business. It’s a growing business. And it’s a business where we identified and understand where Brazilian farmers are not using technology that US farmers are using. And we have several technology businesses that we’ve already announced partnership, one of which we’ve announced a partnership with Lavoro to help you know, improve the technology availability in that market. As that technology gets utilized, you’ll see an increment. We believe you will see an increment in yield, in profitability, in spend, and this company will be a primary beneficiary of that. So, that’s why we got so excited about it.
We’re investing a hundred million dollars off our balance sheet you know, in a ten dollar share common equity pipe as part of the deal. And you know, we intend to be very active. We’re going to be nominating three of the seven board seats. Again, we’ve announced one commercial deal already with them in one of our businesses. And I think it’s a market that we know well. And I’m just so excited about the upside. Just to give you guys a few more stats, the average American farmer in the US is 59 years old, in Brazil they’re 40 years old, so they’re already much more technology savvy. The average American farmer’s operating margin is under 5%. In Brazil, it’s over 45%.
Julian Klymochko: Wow.
Dave Friedberg: Yeah, crazy statistics. In the US the average American farmer has a credit to revenue ratio, meaning the amount of debt they have divided by their annual top line revenue of 1.3 x in Brazil, it’s 0.3 x. So, this is a market that’s significantly more profitable, much younger, much savvier in terms of technology utilization, in terms of the ability to adopt and understand software and the internet tools which is critical to this you know, digital revolution happening in agriculture and they’re under levered. So as capital becomes available, you see them invest more and you’re already seeing those profits being reinvested, the inputs market growing 16% like I mentioned in the last five years. So, this is a market in a significant upswing. The macro demands are significant. We think it’s the best management team that we’ve seen operating that market. And so yeah, we’re going to become close partners with them in this deal.
Michael Kesslering: Certainly, sounds like Lavoro has a lot of promise as a deal. When you look back to your investing career, both with The Production Board your experience with the SPAC or even angel investing, do you have any misses that come to mind and what did you learn from any of those?
Dave Friedberg: Yeah, so I think there’s a couple of key lessons I’ve had historically, which is number one, you really have to make sure that you’re building a business with you know, really aligned partners that have real ownership with you. You know, we set up a number of businesses over the years, we’ve made investments over the years, we’ve seen a lot of different flavors of people getting hired. To me, I always say everyone is a founder, meaning you have to make sure that there’s a culture of ownership. And that’s one of the key traits and attributes we look for. It either has to be inherent in the organization already when you come in as a builder or as an investor or you know, it has to be built in or you have to have a plan for how you’re going to build it in.
And so that’s something that I think when I look back, I’ve really gotten a sense for what is and isn’t working can tie back to this, you know, as a foundation, an ownership mentality. And then again, I think investments where I’ve missed, meaning I didn’t invest but regret doing. I’ve got a long list of these, but I’ve historically missed on investments because they almost seemed too hyped up or too hot or the valuation was too high. But where all those things that I mentioned earlier, you know, the opportunity for the TAM is much more than what the current TAM is. The management team fits that criteria of having bias to action, what I call grit and what a narrative. Those are the three key traits for me in entrepreneurism. And they have all three of those traits very strongly. Like you know, I say that none of those traits are, they’re raising money at a cheap price [laugh]. And so, you know that’s not a trait of successful entrepreneurism. And if the TAM opportunity is big enough and it’s the right person with the right traits and you know, there’s some durable technology advantage that can be built or some durable network advantage that can be built into the business, meaning as it’s scales, it becomes more valuable when the margins improved. Then I think the opportunity, I shouldn’t be missed. I’ll just speak a little more broadly. A lot of people talk about businesses pricing power. I think if a business can’t lower over time, it’s a lot less advantage than it may appear to be.
If the business can only grow by raising prices over time, then at some point it’s likely going to be disrupted. So, technology is meant to be deflationary. And so, you know, or there’s some network effect that allows the cost model of the business to be deflationary. If you can find a business that can do that, meaning the bigger they get, the more of an install base they have, the more product they make, the more people they service, the longer the time that goes by, the cheaper they’re offering cogs get, therefore the cheaper they’re offering can get to maintain a durable competitive advantage. I think that business is a lot stronger than a business that just happens to have lock in value with some degree of stickiness and they can keep charging people more and more every year. That business ultimately will get disrupted by the startup that takes advantage of whatever technology its trend has allowed them to enter the market with a lower cog, disrupt them with a lower price and win.
Because there’s only so much stickiness. At some point the price point breaks the stickiness. And so, I think that’s another key point for me. I’ve been an investor in held investments for a long time. In retrospect, I think the business was really just taking advantage of a stickiness factor. You know, and by the way, a good example of this is a lot of social networks that we’ve seen over the last couple years get disrupted one after another after another. And everyone thought the stickiness was so high. But ultimately, I think the business has to be able to offer something that’s better and cheaper. And then it needs to find other ways to add on additional value to grow its top line or to grow its number of users or customers. So, I don’t know, that was very high-level philosophical response to your statement. I hope it was okay.
Julian Klymochko: No, that was great insight and just keep being mindful of the time here. Just one last quick one before we let you go. Dave, CEO, entrepreneur, investor, you obviously got to manage your time efficiently and effectively. What would you say is your favorite productivity hack?
Dave Friedberg: My favorite productivity hack? I don’t know. I really encourage people to think, I was just talking about this morning to make sure that [laugh] every meeting that gets scheduled, you have a sense of what the agenda items are. And those agenda items are either you’re trying to drive to a decision, you’re asking for an opinion, or you’re just informing. A lot of the stuff that you’re informing on nowadays can be, oh, here, I’ll give you guys a good one because this fits with that mode to delete what I just said.
Julian Klymochko: [Laugh].
Dave Friedberg: It’s a similar answer. A year ago, or a couple years ago, we started encouraging all of our boards and our CEOs and management teams to use Loom where you can actually record a video of someone giving a presentation with the presentation side by side. So, a lot of us go to meetings and we’re presented to, it’s a total frigging waste of time because everyone’s sitting in a room getting this presentation synchronously. By recording a presentation of someone giving the presentation side by side with the presentation itself, sending it out ahead of time and letting people watch it at two x speed or skip ahead or whatever.
It allows them to get all the content that they need ahead of the meeting. And then the meeting can really be organized around the idea of what are you trying to decide, what opinions are you trying to gather and is there any informing left to be done? Typically, all the informing then gets moved out of the meeting. You save all that time; all of the informing of a meeting gets done asynchronously and then a meeting can really be focused around what are the decisions and the opinions we’re trying to get out of this meeting. And so, we’ve encouraged all of our CEOs to do this across our boards and we now get board meetings down from four hours to two hours. And those two hours are far more engaging and far more productive, and you have really deeply engaged strategic conversations versus just the management team presenting a bunch of numbers that the board could have and should have consumed as their homework ahead of time. I also think it gives people something to do in the evenings because a lot of people don’t have meetings in the evenings, but they got plenty of time to do work. So having those presentations happen to them you know, off of the normal course of business hours, I think is also a good productivity hack.
Julian Klymochko: And who doesn’t like more efficient meetings? Right.
Dave Friedberg: Totally.
Julian Klymochko: [Laugh]. Well thanks so much Dave for coming on the show today. A lot of interesting stuff happening at The Production Board. You got the SPAC as well, TPP Acquisition and the Lavoro deal looks to be on track and the insight into Brazil’s or the potential of Brazil’s agriculture is just pretty exceptional. So, thank you for sharing everything today and wish you the best of luck.
Dave Friedberg: Thanks for having me, guys.
Julian Klymochko: All right, take care. Bye everybody.
Dave Friedberg: Bye.
Thanks for tuning in to the Absolute Return Podcast. This episode was brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.AccelerateShares.com. The views expressed in this podcast to the personal views of the participants and do not reflect the views of Accelerate. No aspect of this podcast constitutes investment legal or tax advice. Opinions expressed in this podcast should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information and opinions in this podcast are based on current market conditions and may fluctuate and change in the future. No representation or warranty expressed or implied is made on behalf of Accelerate as to the accuracy or completeness of the information contained in this podcast. Accelerate does not accept any liability for any direct indirect or consequential loss or damage suffered by any person as a result relying on all or any part of this podcast and any liability is expressly disclaimed.
