Henry Ellenbogan is founder and managing partner of Durable Capital Partners, having previously led T. Rowe Price's New Horizons fund to 19% annual returns for nearly a decade. His investment philosophy centers on finding the rare 1% of public companies that become true compounders - what he calls the 'valedictorians' of capitalism.

The conversation explores Henry's systematic approach to identifying durable competitive advantages, his focus on 'Act II' management teams, and how he structures Durable to invest across both private and public markets. Henry discusses major technology shifts from internet to AI, explaining how he evaluates change and its impact on business models.

Key topics include the mathematics of compounding (only 40 out of 4,000 public companies achieve 6x returns over 10 years), the importance of physical moats and human capital advantages, and why Henry believes going public provides valuable discipline for scaling companies. The discussion covers specific investments like Duolingo, Netflix, and Workday, illustrating how great companies navigate transitions.

The 1% Rule: Finding the Valedictorians of Capitalism

Henry's foundational insight came from studying 50 years of T. Rowe Price's New Horizons fund shareholder letters, discovering that historically only about 1% of public companies (roughly 40 out of 4,000) become true compounders over rolling 10-year periods.

The Walmart example illustrated how one bad decision can mathematically wipe out multiple good decisions - the fund sold Walmart early, and that single mistake negated years of other successful picks despite managing $8 billion in small cap growth capital.

80% of compounding companies start their journey as small cap companies, which explains Henry's focus on small cap investing: 'I love them because I love the people side... that's what we're trying to maximize because we think that's what creates long-term wealth.'

Act II Entrepreneurs: The Advantage of Experience

Act II teams are entrepreneurs who take lessons from their first successful company and apply them to new frontiers - they have higher probability of creating compounders because they understand both the product and the edge cases at scale.

Workday exemplifies this concept: co-founders Aneel Bhusri and Dave Duffield had built PeopleSoft before, so they understood HR systems' complexities and could leverage cloud technology while handling exception management that first-time founders might miss.

Max Levchin represents the best of Act II entrepreneurs - from PayPal to Affirm, he 'truly understands technology and how it can be used in very complex systems to solve problems' while recruiting exceptional people and demonstrating resilience.

Durable itself is Henry's Act II company: 'I almost named Durable Act II Capital... it was such a prominent view in what I was trying to do' - applying lessons from T. Rowe Price to build a better investment organization.

AI as the Next China: Process-Based Disruption

Henry believes AI will be at least as impactful as the internet, affecting not just technology companies but 'almost every company that needs white-collar employees and IP employees to drive their work.'

The China manufacturing analogy: just as companies had to leverage Chinese manufacturing or face obsolescence, companies must now leverage AI for IP-based processes or risk being disrupted by competitors with permanent cost advantages.

Max Levchin at Affirm demonstrates AI's potential: despite regulatory requirements creating hundreds of thousands of contracts and legal costs, he believes Affirm can grow at current rates 'without adding headcount' by using AI to lean out processes.

Luis von Ahn at Duolingo achieved 20x faster content generation with AI, developing chess product with 2 people in 6 months that previously would have required '4 to 6X as many people and four times as long' - the product now has over a million users.

Physical Moats and Competitive Advantages

Henry's favorite competitive advantages are physical real estate moats because 'you can't spin those things up' - they require acquiring land, building networks, deploying capital, and creating operating culture over time.

Amazon exemplifies this approach: they leveraged 3-5% cost advantages from distribution efficiency to build physical fulfillment centers, creating a moat where competitors 'even if they put the same amount of money into this problem... have not invested in the distribution infrastructure.'

Domino's Pizza became the best Russell 2000 growth stock of the 2010s not through technology alone, but by combining app-based customer relationships with physical franchise infrastructure to dominate convenience in the pizza value equation.

Human capital advantages, like those at Danaher with their 40-year Kaizen system (DBS), create competitive moats through operating excellence and culture that can't be easily replicated by competitors.

Dollar Cost Averaging Up: The Durable Investment Approach

Durable's core principle: 'If we can't write the memo that we want to buy more at higher prices, we can't buy the shares' - they must believe in buying more as companies execute and prices rise.

For early-stage growth companies like Duolingo, they underwrite on a three-year basis where 'if it does what we think it can... we would then want to buy more' rather than viewing it as a fixed-size investment.

On durable growth companies with established competitive advantages, they typically buy more when stocks decline due to market volatility, as with Colliers during commercial real estate concerns in 2022.

Their portfolio demonstrates this approach: among their largest public positions are DoorDash, Affirm, Toast, Figma, and Warby Parker - companies where they led the last private rounds and continued buying as public companies.

The Value of Going Public: Daily Marks and Market Discipline

Henry argues against the trend toward staying private indefinitely, believing 'the path to building a compounder... through the public markets is proven' with clear methodologies for success.

Netflix's transition from DVD to streaming illustrates public market value: when the stock dropped from $280 to $70, it forced Reed Hastings to reconsider financial assumptions and raise capital, ultimately strengthening the company's strategy.

Public markets force companies to balance growth, profitability, and innovation rather than just growth: 'To run a company well, you have to be in the and business, not the or business.'

Daily marks provide valuable discipline by forcing management teams to make sharp capital allocation decisions and align internal teams around realistic scenarios rather than operating with unlimited investment horizons.

Building a Durable Investment Organization

Durable hires young people without traditional finance backgrounds and develops them internally: partner Anook Date started at 26 from a nonprofit, Corey Schull joined at 21-22 straight from Williams College.

The firm requires people who can work across both private and public markets: 'Catherine... was the same person who was at the all-hands meeting with Figma when Dylan announced' the Adobe acquisition - spanning $2 billion private to public company scale.

Performance reviews include 360 feedback on how colleagues helped each other on specific investments, not just general pleasantries: 'Anook helped me understand DoorDash because of her knowledge about Agentic Commerce on Shopify.'

The firm conducts rigorous three-year look-backs comparing original investment theses to actual outcomes: 'three years ago, we thought they would do X and now they did Y' - forcing intellectual honesty and continuous learning.