A $255 billion Scottish investment firm has gotten in early on Spotify, Lyft, and Airbnb — here's how it discovers hidden gems before everyone else

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Baillie Gifford, a 110-year-old Scottish investment firm that manages $255 billion, has made a name for itself by getting in early on a wide range of Silicon Valley unicorns, including Spotify, Airbnb, and Lyft.
The firm has also been an early investor in such market-dominating public companies as Facebook, Alphabet, Netflix, and Alibaba.
In an exclusive interview with Business Insider, Tom Slater — Baillie Gifford's head of US equities who also manages its flagship fund — explains what he looks for when assessing a possible early-stage investment.

If there's a hot, highly valued unicorn in Silicon Valley, chances are Baillie Gifford has invested in it.

The 110-year-old Scottish investment firm counts Lyft, Airbnb, and Dropbox among its holdings. It also owns stock in recently public household names like Spotify. And that's just scratching the surface.

The prescience involved in picking such high-upside investments is one of the reasons the firm's flagship close-ended fund — the Scottish Mortgage Investment Trust, which is in the FTSE 100 Index — has dominated benchmarks over the past decade.

But selecting companies is just half of the battle. Once a private target is identified, a firm must find a way to invest, since shares aren't available on the open market.

To that end, Baillie Gifford has made a serious effort to get acquainted with the Silicon Valley venture pipeline. At this point, the firm has developed such a strong reputation as a supportive long-term shareholder that unicorn investing opportunities are coming increasingly available.

But Baillie Gifford doesn't deal exclusively in unicorns. The firm also got in early on many of the most dominant names in the stock market, including Facebook, Alphabet, Netflix, and Alibaba.

And then there's Tesla, the holding for which Baillie Gifford is perhaps best known, since it owns a bigger chunk than any other institution. The company may be going through a turbulent time right now, but its stock is still up 24% since the start of 2017.

With all of that in mind, the $255 billion firm's recent investment success is undeniable. So how did it get to this point?

To find out, Business Insider conducted an exclusive interview with Tom Slater, the firm's head of US equities, who also comanages the SMIT and serves as a decision-maker for its long-term global growth strategy.

He's so invested in Baillie Gifford's early-stage pipeline that he relocated his family to Silicon Valley on multiple occasions to learn about the region's ecosystem.

Slater sums up the firm's investment thesis as follows: "We ask if there's a reasonable central case for a business. Could this turn out to be something spectacular? Is there a big enough opportunity? Is there something special about the culture of this business that will allow them to take advantage of that opportunity when others can't?"

Slater continued: "It's never been where we or anyone else thinks it'll end up this year. It's more — is there a broader opportunity? What are the most attractive companies? We'll own those in size, regardless of sector."

Going beyond that overarching principle, Slater also identified three distinct wrinkles that Baillie Gifford looks for when assessing which fledgling companies should be investment targets. All quotes in the sections below are attributable to him.

Corporate culture

"If you're going to own a stock for 10 years, you're interested in a totally different set of things compared to someone who's only going to own it for 10 months. First and foremost is corporate culture. Culture is not going to influence the outcome of a share price over the next year. I would argue that over 10 years, it's almost all that matters."

"If you go back to 2004, we bought Amazon and eBay around the same time. In all honesty, we thought eBay was probably more excited. If you do a retrospective looking at why Amazon has done so much better, you don't need to look further than Bezos, and his influence as the founder, setting the tone, which is: We will invest in these long-term opportunities, and we will forgo short-run profits to do it."

Imagining how great businesses can be

"So much of fund management is about critiquing ideas, finding the risks, thinking about downside. And it's really easy to sound smart criticizing someone else's idea. What we work hard to do is look at what could go right. If this company is able to achieve what they want to achieve, what are the consequences of that? How big could it be? What's the mission of this company, and what happens if they fulfill it? We're critical of companies, but always within the context of the upside."

"Most companies really don't matter to long-run stock market outcomes. There's just a small number that matter a huge amount. Our process is oriented around finding companies that could be those outliers. In order to do that, they've got to have a really big opportunity, they've got to have something unique about their ability to go after those opportunities, and it's got to be underappreciated by the market. Those are fairly rare things."

"You go after fairly rare companies, and you get it wrong most of the time. But if you can just find one or two, then it can absolutely transform the outcome for your portfolio."

The involvement of company founders

"I don't think it's a prerequisite, but you can't escape the fact that some of the most successful companies of the past decade have been run by their founders. It's telling you something."

"What's important to me is that, despite their scale, some of these business are still quite young. You can still have a founder present. It allows these companies to behave like private companies, despite being in the public markets."

"How can Amazon not make profits and invest in these long-term opportunities? It's partly Bezos, and it's partly because they've built a core of long-term shareholders who believe in that vision and accept how it's going to be."

"Zuckerberg isn't beholden to markets during quarterly earnings. You saw it in a fairly visceral way last quarter — he’ll prioritize long-term decisions. Being a founder with a controlling stake facilitates that type of decision-making."

"It's particularly important in the case of these fast-moving consumer internet businesses, because product is absolutely critical there. Consumer attention can move quite quickly. Having a product-led chief executive who's really close to that, and will make decisions accordingly, is really valuable. If you don't, you can miss big shifts."

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