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William Janeway on What's Needed for the Innovation Economy · Masters in Business

0:02
Speaker 1: This is Master's in Business with Barry Ridholts on Bloomberg
0:06
Speaker 1: Radio this weekend. On the podcast, I have an extra
0:11
Speaker 1: special guest. His name is Bill Janeway, and he is
0:15
Speaker 1: the author of the Innovation Economy. He was an early
0:19
Speaker 1: guest where quite bluntly, I really didn't know what the
0:22
Speaker 1: hell I was doing, And I think this conversation is
0:26
Speaker 1: far more detailed than in depth if you are at
0:29
Speaker 1: all interested in venture capital, technology investing UH and the
0:35
Speaker 1: role of both the Defense and Intelligence agencies specifically and
0:41
Speaker 1: the federal government generally in impacting venture investing technology long
0:50
Speaker 1: form investing where there may not be an immediate payoff,
0:54
Speaker 1: but ultimately you end up with a really significant set
0:57
Speaker 1: of payoffs. Whether we're talking about UH, the Interstate highway system,
1:02
Speaker 1: the cross continental railroads, the space um race for the Moon,
1:09
Speaker 1: all of these things had no immediate expected payoff, but
1:12
Speaker 1: long term they've delivered a tremendous amount of value. And
1:16
Speaker 1: the intersection between technology, venture capitalism, and economics UH is
1:22
Speaker 1: something that Professor Janeway specializes in. I think you'll find
1:26
Speaker 1: this conversation absolutely fascinating. So, with no further ado my
1:31
Speaker 1: conversation with Bill Janeway, I'm Barry rit Halts. You're listening
1:39
Speaker 1: to Masters in Business on Bloomberg Radio. My special guest
1:43
Speaker 1: today is Bill Janeway. He has a storied background in
1:47
Speaker 1: both economics and venture capital. He helped to create b
1:52
Speaker 1: e A Systems, which connects software apps to database. Had
1:56
Speaker 1: you invested about fifty million dollars into b e A,
2:00
Speaker 1: UH when Bill started putting money into it, it would
2:03
Speaker 1: have become over six billion dollars in six years. He
2:08
Speaker 1: is an affiliated lecturer of Economics at the University of Cambridge,
2:13
Speaker 1: where he teaches a class venture Capital in the Innovation Economy.
2:18
Speaker 1: He's a senior advisor at Warburg Pincus, where he helped
2:21
Speaker 1: build technology investing platform there for over thirty years. He's
2:27
Speaker 1: on the board of the US Social Science Research Council,
2:31
Speaker 1: the governing board for the Institute of New Economics, the
2:34
Speaker 1: Field Institute for Research in Mathematical Sciences. UH. No less
2:39
Speaker 1: a character than Mark Andresen called him a key creator
2:43
Speaker 1: of the modern venture capital world. He is also the
2:47
Speaker 1: author of Doing Capitalism in the Innovation Economy, Markets, Speculation,
2:53
Speaker 1: and the State. Bill Janeway, Welcome back to Bloomberg. It
2:58
Speaker 1: is great to be back here, Barry, especially with you.
3:01
Speaker 1: That is quite the curriculum. Vita and I. We left
3:04
Speaker 1: a ton of it off. We'll talk a little bit
3:06
Speaker 1: about B E A systems in a bit. I want
3:09
Speaker 1: to start with your academic background in economics, your val
3:13
Speaker 1: Victorian Princeton. You get your doctorate from Cambridge and economics.
3:19
Speaker 1: How do you go from that to venture capital? Well,
3:23
Speaker 1: actually it's a closer connection than I knew at the
3:27
Speaker 1: time it would be. When I got to Cambridge, I
3:31
Speaker 1: was studying under the students, the top students who had
3:36
Speaker 1: been taught by John Maynard Kean's and I wrote my
3:39
Speaker 1: dissertation for Richard Khan, who invented the multiplier as a
3:43
Speaker 1: way of looking at the impact of government spending or
3:46
Speaker 1: taxes on the macro economy. But all of the work
3:50
Speaker 1: that I did there, everything I learned there was about
3:53
Speaker 1: decision making under conditions of uncertainty, decision making by investors, workers, consumers, businessmen,
4:03
Speaker 1: politicians who cannot know what the full consequences of their
4:07
Speaker 1: actions are gonna be. Now, isn't that effectively every actor
4:12
Speaker 1: in the economy? You got it. But by the time
4:15
Speaker 1: I finished my doctorate and was thinking I would pursue
4:19
Speaker 1: a course in economics and academic economics. It turned out
4:24
Speaker 1: that economics was converting itself for a long generation into
4:28
Speaker 1: a kind of mechanical process of cranking out the efficient
4:33
Speaker 1: outcome on the assumption that everybody knew everything that's The
4:37
Speaker 1: marketplace itself is already reflecting all the information that's available,
4:42
Speaker 1: and therefore, hey, nobody can really beat the market consistently
4:46
Speaker 1: over time, or or so Chicago, Pharma and French and
4:51
Speaker 1: right across the whole economy. The rational expectations hypothesis said,
4:55
Speaker 1: government can't have any lasting impact on the economy because
4:58
Speaker 1: people in the economy will react an offset whatever it
5:02
Speaker 1: tries to do. In any case, I decided that at
5:06
Speaker 1: the ripe old age of seven, I could not take
5:11
Speaker 1: this stuff and spend my life pumping it into the
5:14
Speaker 1: brains of innocent undergraduate. So I went on. I went
5:20
Speaker 1: on what I talk of as my my thirty five
5:23
Speaker 1: years sabbatical, where in the trenches of venture capital that
5:28
Speaker 1: I evolved in through joining an extraordinary firm whose core
5:32
Speaker 1: competence was understanding the science based industries, from chemicals to pharmaceuticals,
5:39
Speaker 1: to electronics to computing, I discovered that what I learned
5:43
Speaker 1: at Cambridge as an academic economist, was directly relevant to
5:48
Speaker 1: try and to frame the sword of decisions and the
5:51
Speaker 1: sort of ways of protecting yourself, your investors, and the
5:56
Speaker 1: entrepreneurs you are backing from the necessary ignorance of operating
6:02
Speaker 1: at the frontier of technology. So that's pretty fascinating. I
6:06
Speaker 1: want to push back on the concept that, hey, this
6:10
Speaker 1: efficient market hypothesis really doesn't get it right. A perfect
6:14
Speaker 1: example I read over the weekend while I was doing
6:17
Speaker 1: a little research for for our conversation. Some people have
6:21
Speaker 1: been wondering why the US tax cuts haven't had a
6:25
Speaker 1: larger impact on either employment or wages or R and D.
6:30
Speaker 1: And the most interesting explanation I came across was, well,
6:35
Speaker 1: everybody has already operated on the basis that they're tax havens,
6:40
Speaker 1: and this thirty corporate tax rate is no big deal anyway.
6:44
Speaker 1: We're all paying uh, eighteen percent or less. Therefore, a
6:48
Speaker 1: giant corporate tax cut has much less of an impact
6:51
Speaker 1: than you would imagine, true or false? And what does
6:54
Speaker 1: that say about your belief that, hey, maybe the market
6:57
Speaker 1: is less efficient than we think. For first, I think
7:00
Speaker 1: that's correct. I don't think the average of about eight,
7:04
Speaker 1: not thirty, and of course, particularly the digital companies that
7:08
Speaker 1: can move their cash flows and their assets around by
7:13
Speaker 1: keys on a computer. They're not manufacturing steel and build locomotives,
7:19
Speaker 1: it's just code. Very mobile, they're very mobile. Second, however,
7:23
Speaker 1: the tax cut has had a significant substantial impact unavailable
7:28
Speaker 1: accessible cash flow, not reported earnings. So that but what's
7:33
Speaker 1: happened to that cash flow? And this is something again
7:36
Speaker 1: about the nature of the stock market, That cash flow
7:39
Speaker 1: has overwhelmingly been devoted Apple being the most extreme example.
7:43
Speaker 1: Stock buybacks and dividends, that not not raising wages for workers,
7:48
Speaker 1: not investing in the new stuff, but but putting more
7:52
Speaker 1: money in the in the pockets of stockholders, which you
7:54
Speaker 1: know is a rational response of management, particularly when their stockholders,
8:01
Speaker 1: who are increasingly index funds, are necessarily very short term
8:06
Speaker 1: oriented and the executives are also short term oriented. Hey,
8:10
Speaker 1: we we eliminated the agency problem by tying their compensation
8:14
Speaker 1: to the stock price. So so you go on this
8:17
Speaker 1: thirty year walk about, and you spend some time in
8:21
Speaker 1: um Wearburg Pankis, you spent some time at Eberstaaten company.
8:26
Speaker 1: What prompted you to say, Hey, this venture capital thing,
8:29
Speaker 1: it's gonna be big one day I want to stay
8:31
Speaker 1: involved in. You know, it's funny. It was actually a
8:33
Speaker 1: crossover from being an economist to being a venture capitalist
8:37
Speaker 1: in the In the mid late seventies, when I was
8:40
Speaker 1: a kid on Wall Street, I was really interested in
8:44
Speaker 1: the kind of longer term strategic issues around the economy.
8:48
Speaker 1: There had been a big fiasco. One of the first
8:51
Speaker 1: attempts to use computers to model the economy, not just
8:55
Speaker 1: modeled the they modeled the world came out of M
8:58
Speaker 1: I T and was kind of a fiasco, was called
9:01
Speaker 1: the Limits of Growth Study for the Club of Rome,
9:04
Speaker 1: and this was referenced in your book. Absolutely absolutely. But
9:09
Speaker 1: the the the young guys at M I T who
9:11
Speaker 1: have been caught up in this, they learned a big
9:13
Speaker 1: lesson and they set out using computers to build very detailed,
9:18
Speaker 1: very granular, local models of economic behavior. And I stumbled
9:23
Speaker 1: on these guys as I was trying to find out
9:27
Speaker 1: how to think about and how to handle the consequences
9:30
Speaker 1: of the first oil crisis, which blew up all the
9:33
Speaker 1: econometric models. They were useless because all the important variables
9:38
Speaker 1: of the economy, from interest rates to exchange rates to
9:42
Speaker 1: inflation rates had just been blown out. Of the historical database.
9:46
Speaker 1: I found these young guys and I got a message.
9:48
Speaker 1: The message was, Hey, this is what computers are interesting about.
9:53
Speaker 1: It's not just being a flexible typewriter or or being
9:57
Speaker 1: a faster or more flexible adding machine. You can build
10:00
Speaker 1: simulations and explore the behavior of the world. That got
10:04
Speaker 1: me interested in computers. From there, the first wave of
10:09
Speaker 1: artificial intelligence, the first wave of the hypeer artificial intelligence
10:13
Speaker 1: that got me out to Xerox Park, the kind of
10:16
Speaker 1: the haven for the most creative people in the computing world.
10:20
Speaker 1: Thanks to a friendship with John Ceelee Brown, who was
10:23
Speaker 1: on his way to becoming director of Xerox Park, I
10:25
Speaker 1: got immersed ahead of the game, a kind of kind
10:28
Speaker 1: of unfair advantage and seeing where computing was gonna go.
10:32
Speaker 1: I want to circle back to what you said about
10:35
Speaker 1: the Xerox Research Center. Um that gave us things like
10:42
Speaker 1: the graphical user interface, the mouse. Essentially that was Steve
10:47
Speaker 1: jobs is aha moment that led to the first Macintosh.
10:51
Speaker 1: You said it gave you an unfair advantage. Expand on
10:55
Speaker 1: that it gave me the unfair advantage of seeing that
10:59
Speaker 1: can puting computers were not which were dominated by the
11:04
Speaker 1: IBM main frames with a secondary center in the digital
11:09
Speaker 1: equipment mini computers and the competitors with digital equipment. These
11:14
Speaker 1: were very centralized systems. They had dumb terminals, green screens.
11:19
Speaker 1: You couldn't do any local work. Everything went back to
11:23
Speaker 1: the main frame or the mini computer to be processed.
11:27
Speaker 1: It was a very rigid, inflexible and of course, because
11:31
Speaker 1: each of these systems were proprietary, if you were a
11:34
Speaker 1: digital equipment customer, let alone an IBM customer, you have
11:38
Speaker 1: to buy everything from them, and believe me, they made
11:40
Speaker 1: money on that. So it was a giant centralized system
11:44
Speaker 1: as opposed to the modern between phones and laptops and iPads,
11:48
Speaker 1: we have a completely decentralized system. Although theoretically, as we
11:53
Speaker 1: moved to the cloud, we're kind of moving back a
11:55
Speaker 1: little interesting, but but in a very different way. But
11:58
Speaker 1: I'll come back. That's a good point. Let's hold that thought.
12:01
Speaker 1: What you could see at Deox Park were computers being
12:05
Speaker 1: networked together with special functions that they could be optimized for.
12:11
Speaker 1: While the machine in front of you was designed to
12:14
Speaker 1: be helpful, but you know, it was map to how
12:18
Speaker 1: people work, and it was much too expensive and Xerox
12:22
Speaker 1: management back in on the East Coast. UH couldn't get
12:25
Speaker 1: their heads around the notion of making the kind of
12:28
Speaker 1: high risk, long term investments, So companies like Adobe in
12:31
Speaker 1: three comm were founded by people who left Xerox Park.
12:35
Speaker 1: That kind of raises the question, why did they even
12:37
Speaker 1: have a Xerox Park At least with a T and
12:40
Speaker 1: T and Bell Labs later loosened, they were using their
12:44
Speaker 1: own research to build out new products or were they
12:47
Speaker 1: up to a point? There was a deal, a T
12:49
Speaker 1: and T in nineteen fifty six kind of deal with
12:52
Speaker 1: what was then an economically active government unlike where we
12:58
Speaker 1: are today, right back when it was a legitimate legal
13:02
Speaker 1: and the deal was it could keep its monopoly on
13:04
Speaker 1: long distance telephones if any technology developed at Bell Labs
13:10
Speaker 1: that was not directly used for communications would be licensed
13:15
Speaker 1: on a fair and non discriminatory basis to the world.
13:19
Speaker 1: And that's where Unix came from. That's where a whole
13:22
Speaker 1: raft of innovative technologies that had general purpose use, not
13:26
Speaker 1: just for communications, were given to the world, given to
13:30
Speaker 1: academic researchers, given to companies that were learning how to
13:34
Speaker 1: what to do with this stuff, and laying the basis
13:38
Speaker 1: for the digital revolution. That began to emerge in the
13:41
Speaker 1: early so that that government deal with A T and
13:45
Speaker 1: T was very different than what xerox parks deal was.
13:49
Speaker 1: They they just didn't know what to do with that. Well,
13:52
Speaker 1: two things one um neither today, T and T. They
13:57
Speaker 1: licensed it. They the big deal they cut with the
14:01
Speaker 1: government in where they gave up the long distance monopoly
14:07
Speaker 1: and they broke up the company in return for the
14:10
Speaker 1: opportunity to use the technology and go out and compete
14:14
Speaker 1: with IBM and Digital demonstrated that I, A, T and
14:17
Speaker 1: T had no ability to compete in commercial markets. Xerox
14:22
Speaker 1: is a different story. Xerox Is monopoly was based on patents,
14:26
Speaker 1: patents for this phenomenal ability to make copies very low cost,
14:31
Speaker 1: and it generated an enormous amount of cash. It was
14:33
Speaker 1: a different kind of innovator's dilemma. However, the existing business
14:38
Speaker 1: was so good and so certain that when one of
14:42
Speaker 1: the young guys from the park would come east and say,
14:45
Speaker 1: I got a great idea for a business plan. Just
14:47
Speaker 1: give me twenty million bucks and in five years I'm
14:50
Speaker 1: gonna have a three million dollar business and it will
14:53
Speaker 1: be profitable and it'll be worth you know, a billion
14:55
Speaker 1: dollars and they look at them and say, wait a second,
14:58
Speaker 1: that is so high risk. We could take that same
15:00
Speaker 1: twenty million bucks and we'll hire a bunch of additional
15:03
Speaker 1: engineers and salesmen. We know exactly what the return is
15:06
Speaker 1: going to be. Go back, go back to your cave.
15:09
Speaker 1: And they had they finally worked out, but it took
15:12
Speaker 1: a long time. In the late eighties, they worked out that.
15:15
Speaker 1: You know, if they just did a deal with the
15:19
Speaker 1: young entrepreneurs and took twenty percent of the company in
15:22
Speaker 1: return for giving them the intellectual property, the patents, and
15:25
Speaker 1: then let him go out and find venture capital. Xerox
15:29
Speaker 1: wasn't trying to build the business. It was a beneficiary
15:32
Speaker 1: of the work that had been done on its nickel
15:34
Speaker 1: out at Yaks Park. That actually worked in a couple
15:36
Speaker 1: of really valuable businesses. What came out of that documentum
15:40
Speaker 1: for example, Major Company, they missed a ton of stuff.
15:43
Speaker 1: They took all Adobe going down the lift. It was
15:46
Speaker 1: just the first two a's. What else came out of
15:48
Speaker 1: that Apple they never had a chance to invest in.
15:51
Speaker 1: That was That was Apple. That was Steve Jobs being
15:53
Speaker 1: the brilliant opportunist he was. And but it took him
15:58
Speaker 1: ten years. It took the corporate bureaucrats back in Stanford
16:03
Speaker 1: ten years to work out that would better to own
16:06
Speaker 1: something versus of nothing. So let's let's talk about another
16:11
Speaker 1: institution that came up with a similar idea, and that
16:15
Speaker 1: is the n S, A, C, I, A, D O D.
16:19
Speaker 1: Going back to the age of DARPA and DARPA net.
16:23
Speaker 1: Why are our national security agencies so interested in startups
16:30
Speaker 1: and technology? How much of this stuff actually finds its
16:33
Speaker 1: way into real world spy versus by usage? Well, there's
16:39
Speaker 1: no question that from speech recognition to the geographical positioning
16:43
Speaker 1: satellites and onto all of the machine learning technologies. Uh,
16:48
Speaker 1: the U S intelligence agencies have been major funders of
16:52
Speaker 1: upstream research. Um. That goes back a long way. Of course,
16:56
Speaker 1: the page rank algorithm. A couple of graduate students at
17:00
Speaker 1: Stanford got a grant from the NSF which was directly
17:03
Speaker 1: related to the n S as interest in being able
17:06
Speaker 1: to do efficient search of what people were doing and
17:08
Speaker 1: saying on the Internet. Um. So there's there's a history
17:12
Speaker 1: there that goes back to the fifties. That's that's ironic
17:14
Speaker 1: given that Google just rejected I mean, essentially they own
17:18
Speaker 1: their own existence to the intelligence agencies? Is that is that?
17:22
Speaker 1: Am I overselling that a little bit? Well? I think
17:25
Speaker 1: that that kind There was a link certainly to the NSF.
17:30
Speaker 1: I mean the funding for the research work as graduate
17:34
Speaker 1: students that produced the page rank algorithm that was the
17:36
Speaker 1: basis for Google came from the National Science Foundation. The
17:41
Speaker 1: complex history, however, of how from silicon to software and
17:46
Speaker 1: then onto the Internet, all of the fundamental building blocks
17:50
Speaker 1: of the digital revolution were initially the consequence of upstream
17:55
Speaker 1: research financed by the government, and the government as the
17:59
Speaker 1: first customer for this stuff when it was still immature,
18:03
Speaker 1: when it was too expensive and too unreliable for commercial use.
18:07
Speaker 1: That changed. That changed, Big changes took place between nineteen
18:11
Speaker 1: eight three. On the one hand, in night the PC
18:16
Speaker 1: revolution began to take off, and the commercial markets began
18:20
Speaker 1: to be bigger, whether it was for whether it was
18:22
Speaker 1: for microsop microprocessors or for software, bigger than the government market. Second,
18:29
Speaker 1: a bill was passed through Congress which said that DARPA
18:32
Speaker 1: had to justify every dollar it invested in terms of
18:36
Speaker 1: its direct military significance. It hadn't been that way before,
18:40
Speaker 1: but a much broader much. You know, there's a There's
18:43
Speaker 1: a great line from the from the play that became
18:46
Speaker 1: Hello Dolly, Dolly says, you know, money is like manure.
18:51
Speaker 1: For it to do any good, you've got to spread
18:54
Speaker 1: it around. And that's what DARPA did. DARPA was an
18:56
Speaker 1: extraordinary institution, particularly in the years from the from Sputnik,
19:02
Speaker 1: which was why it was found in nineteen fifties seven
19:04
Speaker 1: eight through the nineteen seventies. Seems kind of shortsighted to uh,
19:08
Speaker 1: to cancel it. Let's let's talk about Warburg Pinkis because
19:12
Speaker 1: you've been affiliated with them for a long time. You're
19:15
Speaker 1: a senior adviser there. You helped to build their technology,
19:19
Speaker 1: research and investing platform. Uh, tell us what brought you
19:24
Speaker 1: to Warburg back in what I've known the firm for
19:29
Speaker 1: almost a decade. Warburg Pinkers was one of the original firms.
19:32
Speaker 1: It was the largest founding member of the National Venture
19:35
Speaker 1: Capital Association. Was founded by two extraordinary men, Lionel Pinkis
19:40
Speaker 1: and John Vogelstein, who had an idea going back to
19:44
Speaker 1: the sixties that when when when the investment banking and
19:49
Speaker 1: brokerage firms in Wall Street, you know, they did deals
19:51
Speaker 1: and they do a movie deal and they do uh
19:56
Speaker 1: an oil deal and roll one off and everyone in
19:59
Speaker 1: a while they do us at a black box any
20:01
Speaker 1: gravity machine tech deal that was going to cure cancer,
20:04
Speaker 1: but it was very amateurish. Lionel and John had very
20:07
Speaker 1: simple idea, if you actually focus your attention, all of
20:11
Speaker 1: your attention on those investments, understand the context, the business issues,
20:16
Speaker 1: the business model, the competitive situation, you would likely to
20:19
Speaker 1: do a little better than just throwing money against the wall.
20:22
Speaker 1: So the firm had been when I joined, the firm
20:25
Speaker 1: was already more than twenty years old. It had not
20:28
Speaker 1: been an active investor in technology. It had followed the
20:33
Speaker 1: founding great firms like Kleiner Perkins, Asset Management, the Silicon
20:38
Speaker 1: Valley firms. But as they had raised the first billion
20:41
Speaker 1: dollar fund that anybody had raised, they decided that maybe
20:46
Speaker 1: they should try to invest in technology the way they
20:49
Speaker 1: invested everywhere else. As the lead strategic partner with management,
20:54
Speaker 1: I had spent the previous ten years building an investment
20:58
Speaker 1: practice of raising money for private companies. Sounds a little
21:03
Speaker 1: bit like unicorns, but a big difference private companies from
21:07
Speaker 1: institutional investors. Based on our our firm, the Eberstat Firm
21:12
Speaker 1: deep work in understanding the science based industries. I had
21:16
Speaker 1: come to John Vogelstein at Warburg Pinks again and again
21:20
Speaker 1: with really interesting companies, but that required passive investment, no control,
21:27
Speaker 1: no board seat. And John would again and again tell me,
21:30
Speaker 1: you know, this looks like a really interesting business, it's
21:33
Speaker 1: not an investment for Warburg Pinkers. In the mid eight
21:36
Speaker 1: we sold our firm to a British merchant bank as
21:38
Speaker 1: brokerage commissions, and our business model came under stress. And
21:43
Speaker 1: it became clear after a time that if I was
21:46
Speaker 1: going to do what I've been learning to do, I
21:49
Speaker 1: had to go someplace else. So John and I had lunch,
21:52
Speaker 1: We talked through we we just finished each other's sentences,
21:55
Speaker 1: and I landed at Warburg pink Is in AD eight
21:58
Speaker 1: at a wonderful time. Sure you're you're looking at the
22:02
Speaker 1: late eighties in the early nineties. That is the golden
22:05
Speaker 1: era of go down the list, semiconductors, software, mobile, and
22:12
Speaker 1: that's still early days of biotech and judgments and things
22:15
Speaker 1: like that, exactly right. And the technologies that I'd been
22:19
Speaker 1: exposed to a Xerox park and then I've done some
22:21
Speaker 1: investing in from Eberstat secondarily sort of supporting our institutional
22:27
Speaker 1: clients as they made the investments. Now, these were beginning
22:31
Speaker 1: to mature. So for ten years, from late eighties eighty
22:36
Speaker 1: nine right through into the heart of the Internet dot
22:40
Speaker 1: com bubble, we invested. We searched out as many ways
22:45
Speaker 1: as we could find from making a big strategic bet.
22:48
Speaker 1: And the bet was IBM dominance of commercial computing was vulnerable, exposed,
22:55
Speaker 1: and we can help them lose their monopoly control. And
22:59
Speaker 1: so we invested at the level of the the underlying
23:02
Speaker 1: the infrastructure software that's b e A, in Veritas Enterprise Applications,
23:07
Speaker 1: three or four companies, and we I think got a
23:12
Speaker 1: major shift in the most important industry that now exists.
23:17
Speaker 1: We got it right at the right time. So did
23:19
Speaker 1: I get the numbers about b e A correct, because
23:22
Speaker 1: they're just astonishing. Fifty four million dollars invested into b
23:27
Speaker 1: A six years later become six point five billion. Is
23:31
Speaker 1: that about right? Well, it is right, But there's a
23:34
Speaker 1: there's a PostScript. Because John Voglostein was a great student
23:39
Speaker 1: of markets, and he studied He knew bubbles come, bubbles
23:43
Speaker 1: go when's when it's too good to be true, it's
23:46
Speaker 1: too good to be true. I had actually written my
23:48
Speaker 1: doctoral dissertation on nine to thirty one, so in a sense,
23:54
Speaker 1: i'd seen the movie before two. So beginning in about
23:59
Speaker 1: we had this portfolio that represented something like two million invested,
24:04
Speaker 1: and we just started liquidating everything we could into the bubble.
24:08
Speaker 1: We owned so much of b A that we only
24:12
Speaker 1: got five percent out all right before the bubble ended.
24:15
Speaker 1: But there was still another five six million that came
24:18
Speaker 1: out later, so it actually with more than seven billion
24:20
Speaker 1: on the on the five but a little longer time.
24:23
Speaker 1: That's just astonishing. My guest today is Bill Janeway. He
24:27
Speaker 1: is the author of The Innovation Economy, which there is
24:32
Speaker 1: a new edition of and and let's talk about the
24:35
Speaker 1: differences between the original edition, which came out five six
24:39
Speaker 1: years ago exactly right, and the new edition. Given what's
24:43
Speaker 1: been going on in the modern world of social networks Facebook, Twitter, LinkedIn,
24:49
Speaker 1: go down the whole list, how has the universe of
24:53
Speaker 1: digital companies changed versus what you were looking at back
24:58
Speaker 1: in the nineties or the well, the first edition of
25:02
Speaker 1: the book was, frankly a kind of celebration of this
25:05
Speaker 1: extraordinarily constructive partnership between the public sector and particularly the
25:10
Speaker 1: Defense Department and with DARPA as this point of the
25:14
Speaker 1: spear and the private sector including the entrepreneurs and venture
25:18
Speaker 1: capitalists like me. But looking looking back from the last
25:26
Speaker 1: six to twelve months, something really fundamental has changed. The
25:31
Speaker 1: digital revolution, which began to reach maturity thanks to the
25:35
Speaker 1: extraordinary speculative funding of the late nineties the end of
25:40
Speaker 1: the twentieth century. By the way, Dan Gross has an
25:43
Speaker 1: amusing book called pop White, bubbles are eventually good for
25:46
Speaker 1: the economy. That's exactly what you're referring to. Is if
25:50
Speaker 1: you're laying fiber optic at some ungodly amount per mile
25:55
Speaker 1: and then that company goes bust, well, at least we
25:58
Speaker 1: still have the cable laid and somebody buys a cheap
26:00
Speaker 1: out of bankruptcy. Just like the railroads a hundred years before,
26:04
Speaker 1: or computers or televisions or automobiles, every new industry seems
26:08
Speaker 1: to go through that boom and bus phase. A lot,
26:10
Speaker 1: you know, a lot of bubbles leave you with nothing
26:12
Speaker 1: but ranch houses in the in the Nevada Desert. Financial
26:17
Speaker 1: bubbles don't leave you with the same, not quite the
26:20
Speaker 1: same as technology. When the banking system, the credit system,
26:25
Speaker 1: when they when they pop. The consequences are horrible. When
26:28
Speaker 1: it's just in the public market, in the stock market
26:30
Speaker 1: and it pops, there's no leverage, so so the But
26:33
Speaker 1: in any case, in any case, what's happened. What's clear
26:36
Speaker 1: over the last five years, the digital revolution has taken
26:40
Speaker 1: on a momentum of its own. It's running out of control,
26:43
Speaker 1: no longer needs support and subsidy from the public sector.
26:48
Speaker 1: On the contrary, it's attacking the authority of the state
26:53
Speaker 1: at every level from the most Is it the companies
26:57
Speaker 1: and the platforms themselves or is it the end users
27:00
Speaker 1: who have found ways to manipulate these platforms, perhaps for
27:04
Speaker 1: the occasional nefarious uh objective, As Johnny Cash famously said,
27:09
Speaker 1: why do I have to choose? Of course, it's both.
27:12
Speaker 1: It's both the disruption of micro markets like the New
27:17
Speaker 1: York market for transportation or accommodation. But on the other hand,
27:20
Speaker 1: it was this i T revolution, this digital revolution, that
27:24
Speaker 1: enabled the second Great globalization, the integration of financial markets,
27:28
Speaker 1: critical to the financial crisis of two thousand and eight,
27:31
Speaker 1: just by the way as the telegraph and the steamship
27:34
Speaker 1: produced the first Great globalization at the end of the
27:37
Speaker 1: nineteenth century, But this is happening at a very special time.
27:42
Speaker 1: It's happening when the hard work over a long generation
27:47
Speaker 1: of some very smart, committed people who knew they were
27:51
Speaker 1: doing the right thing by their light to render the
27:55
Speaker 1: government illegitimate as an economic agent. But has in that so,
28:00
Speaker 1: let me push back on you at least a little bit,
28:04
Speaker 1: hasn't There always been a group of people who and
28:10
Speaker 1: and perhaps we know them more intimately these days, because
28:13
Speaker 1: nothing is a secret. But there were always survivalists, and
28:16
Speaker 1: there were always radical anarchists, and there were always people,
28:20
Speaker 1: you know, I grew up with the moon landing when
28:23
Speaker 1: I was in grammar school, and it seemed almost like
28:27
Speaker 1: immediately it was, oh, that wasn't real. That was fake.
28:30
Speaker 1: There's always been, but they've been disparate and not organized
28:35
Speaker 1: that in nineteen Another thing that happened in nineteen two,
28:40
Speaker 1: Ronald Reagan said, government isn't the solution. Government is the problem.
28:45
Speaker 1: That view sat down with the entrepreneurs of Silicon Valley.
28:50
Speaker 1: Intel wouldn't have existed without the government. Was the solution
28:55
Speaker 1: to how do you do a startup into a capital intensive,
28:59
Speaker 1: massively strategic industry that nonetheless needs time and support from
29:04
Speaker 1: a collaborative customer as well as the benefit of the
29:08
Speaker 1: upstream research funding and silicon processing and all that stuff.
29:14
Speaker 1: The flip side we had, you know, in two thousand
29:18
Speaker 1: and eight, when the world came to an end, for
29:20
Speaker 1: about three months, the government was there around the world,
29:25
Speaker 1: from from London to Beijing to New York to Wall Street.
29:28
Speaker 1: If you if you remember in October o eight when
29:30
Speaker 1: the TARP was first proposed on a Monday in Congress
29:34
Speaker 1: and some of the Libertarians shot it down. Markets collapse,
29:39
Speaker 1: and by that Friday it's scared Senators, fed chiefs, congressmen
29:44
Speaker 1: enough that by Friday that said, all right, dollars. But
29:49
Speaker 1: as soon as there was a floor under the financial
29:53
Speaker 1: crisis and its economic collapse, then we were back to
29:57
Speaker 1: the world in which the govern meant exists only to
30:01
Speaker 1: screw up markets that otherwise give you the efficient outcome.
30:05
Speaker 1: And that misses the point, the whole point of the
30:08
Speaker 1: economics of innovation. The whole point is that you need
30:12
Speaker 1: sources of funding that are not focused on immediate economic value,
30:18
Speaker 1: that have a long term strategic purpose. And what we've
30:22
Speaker 1: lost now it's two things from the rendering the government
30:25
Speaker 1: and legitimate one very limited if any ability to respond
30:31
Speaker 1: to the forces of globalization in a way that which
30:35
Speaker 1: is damaging the constituents. Many of them don't know that
30:39
Speaker 1: there's no other source of support. That's looking backwards, but
30:43
Speaker 1: it's also there's a problem looking forward if we're going
30:47
Speaker 1: to organize globally any kind of coherent response to climate change,
30:52
Speaker 1: which may I stipulate is real. It's not a Chinese hoax.
30:55
Speaker 1: I saw a tweet that said, it's just a Chinese house.
31:00
Speaker 1: If we're gonna for we need exactly the same kind
31:03
Speaker 1: of upstream funding, upstream commitment to research, to technology development,
31:09
Speaker 1: to support of the deployment that we got with the
31:12
Speaker 1: digital revolution. We're not doing it. We've we've abdicated. The
31:17
Speaker 1: Chinese are doing it. And that's why the biggest message
31:20
Speaker 1: from where my book stands today is that we may,
31:25
Speaker 1: looking forward over the next generation, have the opportunity to
31:28
Speaker 1: see only the second, only the second passage of leadership
31:33
Speaker 1: of the innovation economy from the incumbent dominant nation now
31:38
Speaker 1: the United States a hundred years ago, hundred and twenty
31:41
Speaker 1: years ago Britain, to a new leader. So let's talk.
31:44
Speaker 1: Let's delve into that, because there you raised two really
31:47
Speaker 1: interesting issues about China, climate change and technology. I would
31:53
Speaker 1: be remiss if I did not address the first is
31:56
Speaker 1: you talk about having a government entity that can think
32:00
Speaker 1: long term and make these long investments. That is not
32:03
Speaker 1: the description of the United States. That is the description
32:06
Speaker 1: of China. Whether it's their science funding, whether it's their
32:09
Speaker 1: infrastructure there, high speed rail, go down the list. It
32:14
Speaker 1: looks like China has said, hey, I'll be happy to
32:18
Speaker 1: jump into the void that the United States is leaving leaving,
32:22
Speaker 1: whether it's technology, politics, you name it. They're stepping up.
32:26
Speaker 1: And this is not something they've done previously other than
32:29
Speaker 1: that little genghis content. But short of that, China has
32:33
Speaker 1: been very happy to be isolationist. These roles seem to
32:37
Speaker 1: be reversing. Is that Is that a fair assess? I
32:39
Speaker 1: think it is. I I see it in the work
32:43
Speaker 1: that is being done to understand the strategic investments China's making.
32:48
Speaker 1: And not just in China. They're bringing yeah, exactly in Africa,
32:52
Speaker 1: in in Southern Europe, they're making major investments in transforming
32:57
Speaker 1: the energy infrastructure of those parts of the world. Um,
33:00
Speaker 1: the you do get some people saying, you know, the
33:03
Speaker 1: Chinese are almost embarrassed because they thought it was going
33:05
Speaker 1: to take another twenty or thirty years before they could
33:08
Speaker 1: challenge us. Who knew we were gonna just see that
33:10
Speaker 1: leadership mantlet. The second issue I have to bring up is,
33:15
Speaker 1: so let's stipulate climate change is real. It mankind causes it.
33:21
Speaker 1: You look at the history of the industrial evolution forward,
33:23
Speaker 1: we're spewing out all this carbon. And yet when we
33:26
Speaker 1: look at technology, the ability to move to wind, solar, geothermal, title,
33:33
Speaker 1: they're just the sources of energy seemed to be um
33:37
Speaker 1: the cost differential versus cheap carbon based is going from.
33:41
Speaker 1: It used to be hugely expensive and only a handful
33:44
Speaker 1: of of zealots did it. Then it became a little
33:47
Speaker 1: more competitive, and now why would you use coal when
33:51
Speaker 1: alternatives are just are cheaper and cleaner. But we still
33:54
Speaker 1: need we need some really innovative new technology, particularly energy
33:59
Speaker 1: storage for sources of energy that are intermittent. Did you
34:04
Speaker 1: did you read recently about the UM I think it
34:08
Speaker 1: was the professor at M I T who came up
34:10
Speaker 1: with a methodology of pulling carbon out of the atmosphere.
34:14
Speaker 1: And actually it's more of a chemical than a technology.
34:18
Speaker 1: Now if that proves, But let's let's let's roll things
34:23
Speaker 1: back to Okay, the transistor has been invented the night.
34:28
Speaker 1: The notion that you can use solid devices with particular properties,
34:33
Speaker 1: not vacuum tubes, to douce to switch signals, is that
34:37
Speaker 1: our idea is out there. Nobody knows how to actually
34:41
Speaker 1: turn that into working machines that can function at scale.
34:46
Speaker 1: IBM makes a bet. BET's on a material called germanium.
34:50
Speaker 1: Physicists will tell you germanium from a purely theoretical perspective's right,
34:55
Speaker 1: because the electrons moved through it better than silicon exactly.
34:58
Speaker 1: But absolute bear to produce at scale, and silicon is
35:03
Speaker 1: easy to and and and the guys in Washington put
35:08
Speaker 1: out a whole bunch of experiments. And it turns out
35:10
Speaker 1: that this little, this little oil field instrument company in Houston,
35:15
Speaker 1: Texas Instruments, works out how to process silicon. It's not
35:21
Speaker 1: quite as good theoretically, but practically it's much better. Scales
35:25
Speaker 1: up tremendously, and it scales up in response to government
35:29
Speaker 1: orders when the government doesn't care that it's really expensive
35:33
Speaker 1: because it's putting, you know, it's building the memory systems
35:36
Speaker 1: for the guidance systems for the Minuteman missile. But then
35:39
Speaker 1: they do something else they actually broke or a deal
35:42
Speaker 1: between IBM and t I. The technology gets transferred to
35:45
Speaker 1: IBM and return for IBM, giving t I a big order.
35:49
Speaker 1: It's the kind of active intervention based on intelligent experimentation
35:55
Speaker 1: we should be doing. R p E, which has got
35:58
Speaker 1: barely two hundred and fIF the million dollars of funding
36:01
Speaker 1: Darpen today still has over three billions. If we were
36:05
Speaker 1: doing this seriously, and we had somebody at the Department
36:08
Speaker 1: of Energy with a mission not to protect the coal
36:11
Speaker 1: industry with all of its fifty employees, UM, we would
36:16
Speaker 1: be doing the same kind of experimentation every imaginable form
36:20
Speaker 1: of battery technology, the science of energy chemical conversion. We
36:26
Speaker 1: need a new Manhattan project for this sort of thing.
36:29
Speaker 1: We have been speaking with Bill Janeway. He is the
36:31
Speaker 1: author of Doing Venture Capital in the Innovation Economy. We
36:37
Speaker 1: love your comments, feedback and suggestions right to us at
36:41
Speaker 1: m IB podcast at Bloomberg dot net. Be sure and
36:45
Speaker 1: check out my daily column on Bloomberg dot com. You
36:47
Speaker 1: can follow me on Twitter at rit Holts. I'm Barry
36:51
Speaker 1: rit Holts. You're listening to Master's in Business on Bloomberg Radio.
37:08
Speaker 1: Welcome to the podcast. Bill, Thank you so much for
37:11
Speaker 1: doing this, UM I have I'm so glad the run
37:15
Speaker 1: of questions I had you and I didn't get to
37:18
Speaker 1: any of them, which is always a good sign of
37:21
Speaker 1: a good conversation because you say something and it sends
37:24
Speaker 1: me off in a different direction. So I I appreciate
37:28
Speaker 1: your ability to UM to help guide where where this
37:32
Speaker 1: conversation UH is going. And you certainly have a illustrious
37:37
Speaker 1: enough career. There's not a lot of stuff that you
37:40
Speaker 1: haven't seen. I know you're not big into biotech, but
37:44
Speaker 1: pretty much anything involving software, electronics, semiconductors. You were right
37:51
Speaker 1: there in the middle of that throughout the whole UH,
37:54
Speaker 1: the whole run, well it was. It was a great
37:56
Speaker 1: time to get engaged in the as as. Wait a second,
38:00
Speaker 1: I have to stop you. What is that watch? Oh?
38:03
Speaker 1: That is a yellow time X. I think it costs
38:05
Speaker 1: eleven dollars by When I first saw it on your wrist,
38:10
Speaker 1: I assumed, oh, that's an Apple watch, and then you
38:12
Speaker 1: flipped it over and I'm like, wait a second, an
38:15
Speaker 1: Apple watch forty one years ago. Yeah, I traded an
38:19
Speaker 1: addiction to nicotine for an obsessive compulsion for running. Okay,
38:25
Speaker 1: and so my default is a running watch, and I
38:30
Speaker 1: have a good watch. I have a couple of decent watches.
38:32
Speaker 1: But this is sort of what I put on in
38:34
Speaker 1: the morning and take off if I'm going to a
38:36
Speaker 1: fancy dinner party in the evening. And you know what
38:39
Speaker 1: if I if I drop it off the side of
38:41
Speaker 1: a rowboat, can you still replace it? Are they still
38:45
Speaker 1: making Yeah? They still. You go into any running store
38:47
Speaker 1: and you'll find something like this. Just go for the
38:49
Speaker 1: bottom end. I don't have the bus. Yeah. If I
38:51
Speaker 1: want to know how my heart's doing, you know, I
38:52
Speaker 1: just take my pulse. I don't need a two hundred
38:55
Speaker 1: and fifty dollars five hundred dollar, thousand dollar. Let's see
39:00
Speaker 1: what my pulse is. So my pulse, I'm all excited.
39:03
Speaker 1: My pulse is eighty three centing. He are talking. It's
39:05
Speaker 1: been an exciting conversation. If I concentrate, I could get
39:08
Speaker 1: it down to the low sixties. But I really have
39:10
Speaker 1: to bore the audience and just ll out. But here,
39:16
Speaker 1: let's see what what that just got it down to? Um? No,
39:19
Speaker 1: still there you go. So you take your pulse. You
39:24
Speaker 1: literally just count Yeah, all right, but analog, you know, analog.
39:29
Speaker 1: Sometimes it's adequate, but truly analog. That's the first digital
39:33
Speaker 1: watch that's truly analysts holding your fingers on your on
39:39
Speaker 1: your wrist, that's an analog readout. So so you you
39:43
Speaker 1: started really full born too. The VC side in the
39:48
Speaker 1: late eighties, was it in my imagination. It's hard today
39:53
Speaker 1: and it was easy then throw a dart. You're gonna
39:56
Speaker 1: find a company that's gonna make money. You know. I'll
39:58
Speaker 1: tell you what's really interesting, because this is now I'm
40:01
Speaker 1: gonna put on my academic hat. There there's been a
40:04
Speaker 1: lot of academic research on venture capital, and I'm a
40:07
Speaker 1: student of it, and I've contributed to it and i
40:09
Speaker 1: teach it. So I'm really I really know this data
40:12
Speaker 1: and I know the analysis of the data. There are
40:14
Speaker 1: two overwhelming what they call statistical stylized facts about the
40:22
Speaker 1: history of venture capital. It's about since nineteen eighty that's
40:25
Speaker 1: when we can start to have real data. The first
40:27
Speaker 1: is there's incredible skew in the returns, meaning that it's
40:32
Speaker 1: a fat head and a long tail, a handful of
40:34
Speaker 1: giant winners. Now are you talking about the companies You're
40:37
Speaker 1: talking about the venture funds. First, I'm talking about the
40:40
Speaker 1: venture funds. If you take all the venture funds that
40:44
Speaker 1: have ever been raised and invested since nineteen eighty, a
40:47
Speaker 1: ridiculously small number of those funds have delivered all of
40:52
Speaker 1: the excess return versus the Natstack index. But here's the
40:57
Speaker 1: second fact, and this is distinctive, if not unique, to
41:00
Speaker 1: venture capital. There is what they call the academics called
41:04
Speaker 1: persistence in the returns. In other words, firm X raises
41:09
Speaker 1: for fund one, and the performance of fund one predicts
41:15
Speaker 1: the performance of fund too. And let me flesh that
41:18
Speaker 1: out a little bit. So fun one does well, so
41:21
Speaker 1: a institutions throw money at them. They're not wasting a
41:24
Speaker 1: lot of time, energy resources trying to raise money because
41:27
Speaker 1: people want part of that. But more importantly, the deal
41:32
Speaker 1: flow that they get to look at it. They get
41:35
Speaker 1: first choice everywhere exactly. So that's Kleiner Perkins. Let's go
41:39
Speaker 1: down the list. Well, it evolves over time. It evolves
41:42
Speaker 1: over time, andres and Horowitz was not on that list,
41:46
Speaker 1: didn't um and and firms go through changes. I will
41:50
Speaker 1: give uh. You know in the in the nineties, Benchmark
41:56
Speaker 1: was founded and they've generated the twenty year record now
41:59
Speaker 1: pretty good, really consistent partners. One well, Sequoia goes way back.
42:05
Speaker 1: They've now expanded there were you know, they've really increased
42:08
Speaker 1: the scale of the firm and the fund, and they're
42:11
Speaker 1: investing globally, so we'll have to seek and they maintain
42:14
Speaker 1: with a somewhat different profile the kind of outstanding results
42:18
Speaker 1: they've had for a generation. Firms also go through generational
42:22
Speaker 1: shifts and leadership, but by and large, the point about
42:25
Speaker 1: this is if you're if you're if you're trustee of
42:29
Speaker 1: a pension fund, and the and the consultants come and
42:32
Speaker 1: tell you, you know, you've got to play venture capital.
42:35
Speaker 1: Over time, you're gonna add incremental return to the portfolio.
42:39
Speaker 1: The answer is, if you can get into the venture
42:43
Speaker 1: funds that don't need your money, do it the best funds,
42:50
Speaker 1: but don't just have a you know, three percent allocation
42:53
Speaker 1: for a twenty billion dollar fund that has to be
42:56
Speaker 1: invested in venture capital because there's a you know, there's
42:59
Speaker 1: some really good stuff. In economics, there's a concept called
43:02
Speaker 1: adverse selection sure which means if they need your money,
43:06
Speaker 1: you don't want to give it to them. You don't
43:07
Speaker 1: want to be a member of any club that will
43:09
Speaker 1: have you. So by the way that data set, both
43:13
Speaker 1: the persistency side and the fat headlong tail side is
43:18
Speaker 1: true for the hedge fund world, it's true for the
43:20
Speaker 1: private equity world, and arguably it's true for the world
43:25
Speaker 1: of public companies if you're not indexing but buying individual
43:30
Speaker 1: stocks of We used to think a disproportionate amount of
43:34
Speaker 1: returns came from a small number of companies. The most
43:37
Speaker 1: recent data, and I wrote about this some time ago
43:41
Speaker 1: based on somebody else's study, it's even narrower than we thought.
43:45
Speaker 1: It's a tiny percentage of companies delivering more than half
43:48
Speaker 1: of the returns. It's it's amazing. Well go that goes
43:51
Speaker 1: with this, this institutional change in the market, the rise
43:55
Speaker 1: of people managing other people's money, right where if don't
44:00
Speaker 1: do at least as well as the index guess what
44:03
Speaker 1: their clients their investors take their money away. And then,
44:07
Speaker 1: of course, when more and more of that institutional money
44:10
Speaker 1: is passive index funds, you're, by charter, by contract, you
44:14
Speaker 1: can't be a contrarian. So what it means is, you know, cumulatively,
44:19
Speaker 1: you get more momentum investing, more hurting behavior. At the
44:23
Speaker 1: same time, we've had this extraordinary phenomenon since two thousand,
44:27
Speaker 1: the number of public companies in the United States, as
44:29
Speaker 1: you know, it's half of what it was thousand is about,
44:35
Speaker 1: which is that's kind of kind of hilarious. There was
44:37
Speaker 1: a wonderful book in the mid nineties by a I
44:40
Speaker 1: want to say, Cornell professor Robert Frank. I'm sure I
44:44
Speaker 1: can find it if I just if I just clicked.
44:47
Speaker 1: But it was called The Winner Take All Society, and
44:51
Speaker 1: it looks at things like UM athletes and movies and
44:57
Speaker 1: just how you end up with this just unbelievable concentration
45:03
Speaker 1: UM yep, Johnson School of Management at Cordell Robert H. Frank. Now,
45:09
Speaker 1: remember the columnist Robert Frank is a different, different person.
45:13
Speaker 1: But we see that across Overville, these alternative investment platforms.
45:18
Speaker 1: If you're not in the top let's call a ten,
45:21
Speaker 1: you're you're you're more or less spending a lot of
45:25
Speaker 1: money for a very low probability of retire. But now
45:28
Speaker 1: that feeds into one of the phenomena that actually got
45:34
Speaker 1: me back into looking at this whole process, that intersection
45:40
Speaker 1: of government and the stock market and the market economy,
45:43
Speaker 1: which what I call the three player game and in
45:45
Speaker 1: my in my books and my lectures. It got me
45:48
Speaker 1: going back into it was this amazing phenomenon, the unicorns,
45:52
Speaker 1: the unicorn bubble, the Airbnb, the Ubers, the parin nos,
45:56
Speaker 1: go down the list, the the well what to those?
46:00
Speaker 1: Just are Uber? We know is private? Airbnb they haven't
46:04
Speaker 1: their private, They're still private. Who else is on that list? There? Actually?
46:08
Speaker 1: If you, if you, if you actually were to go
46:10
Speaker 1: to Google, huh and type in unicorns tech unicorns just
46:16
Speaker 1: unicorns just just straight up well Airbnb, you know they
46:19
Speaker 1: in the in the data. Airbnb is usually counted in
46:22
Speaker 1: accommodation and not as a tech company. But it's something
46:26
Speaker 1: like two hundred and fifty globally. So the first first
46:30
Speaker 1: one that comes up is unicorn, Wikipedia about the um
46:35
Speaker 1: the mythological unicorn. With the second one is Fortune list
46:42
Speaker 1: of uh unicorns and it's Uber, Ziomi, Airbnb, Palantier, Well,
46:49
Speaker 1: Snapchat is no longer private, China, Internet plus SpaceX Pinterest.
46:56
Speaker 1: Let's see the full list. This is already a little dated.
46:58
Speaker 1: I've seen one that we were i I. It's something
47:03
Speaker 1: over two hundred globally private companies valued at more than
47:09
Speaker 1: a billion dollars. There the tons so that raises a
47:13
Speaker 1: really interesting question, Um, and it goes back to you
47:18
Speaker 1: mentioned the DARPA VC funds is barely three billion dollars.
47:23
Speaker 1: It's not a VC funds, but it's a research fund
47:26
Speaker 1: that that sort of looks and it's now much more
47:28
Speaker 1: heavily towards military technology, not the general purpose investing that
47:33
Speaker 1: used to be. Exactly, But what do you make of
47:35
Speaker 1: the funds? Like soft bank has a hundred billion dollar funds,
47:40
Speaker 1: that seems like a lot of capital. There are two things.
47:44
Speaker 1: What one is they used a substantial hunk of that
47:48
Speaker 1: money to help buy ARM not exactly a venture investment,
47:52
Speaker 1: a huge ARM holding as a semiconductor it's really it's
47:56
Speaker 1: it's an intellectual property company that licenses architectures for the
48:00
Speaker 1: devices that dominate the mobile phone business, along with qualcom Um.
48:05
Speaker 1: But they also they put five hundred million dollars into
48:09
Speaker 1: a no revenue start up that is a game proposals
48:15
Speaker 1: to deliver a platform for computer games called Remarkably enough,
48:22
Speaker 1: the company is called Improbable. I didn't make it up.
48:27
Speaker 1: Five hundred million dollars half a billion dollars. Do you
48:32
Speaker 1: have any idea what you can do the kind of
48:34
Speaker 1: party you can have with half a billion dollars. Well,
48:36
Speaker 1: if you're doing ten million dollar deals, where you're taking
48:40
Speaker 1: depending whether you're early stage or late stage, whether you're
48:43
Speaker 1: taking ten percent or you could. You know, I would
48:47
Speaker 1: rather roll the dice with fifty companies than one. Exactly,
48:50
Speaker 1: that's the point given given the again that fat headlong tail.
48:55
Speaker 1: To get one of the winners, you have to, you know,
48:58
Speaker 1: you have to. There's a pony in here somewhere, right,
49:01
Speaker 1: but you gotta. That's why they call it spray and
49:04
Speaker 1: pray to A Couple of different things have gone have
49:06
Speaker 1: gone on pray and prey. So one is the cost
49:10
Speaker 1: of launching a startup has dropped like a stone. Two guys,
49:14
Speaker 1: a laptop and an internet connection is for someone else.
49:16
Speaker 1: Destroy software, open source software, rent your computer cycles and
49:20
Speaker 1: your storage from Amazon. You only pay as you use it.
49:24
Speaker 1: So getting something out and onto the net cost nothing.
49:28
Speaker 1: So that the old days of ten or twenty million
49:30
Speaker 1: dollars just to set up a firm, that's right gone.
49:33
Speaker 1: So lots and lots of startups. But the cost of
49:37
Speaker 1: building a business, the cost of getting to scale, and
49:41
Speaker 1: the way these companies are doing it by not by
49:44
Speaker 1: generating cash, by selling services and products to customers, but
49:49
Speaker 1: by issuing securities to investors while they give away free
49:53
Speaker 1: in order to get users. So that's Spotify, and that's
49:58
Speaker 1: exactly right. You know, it's Airbnb had a business model
50:01
Speaker 1: pretty much from the beginning, and Uber lost a billion
50:05
Speaker 1: dollars last quarter in cash now, but they're making it
50:09
Speaker 1: up in volume, so it all wokes out. When I
50:12
Speaker 1: was growing up in the business, my mentor was a
50:15
Speaker 1: guy called Fred Adler. Nobody remembers Fred anymore. He was
50:18
Speaker 1: first generation investment venture capitalist, a lawyer who knew how
50:22
Speaker 1: to turn around companies, and he had a He had
50:24
Speaker 1: a motto. It was corporate happiness is positive cash flow. Right.
50:29
Speaker 1: What it means is if if, if, if, what you're
50:32
Speaker 1: getting paid by your customers generates more cash than the
50:36
Speaker 1: cost to deliver the goods or service. Two things happen.
50:39
Speaker 1: One you have a validation that what you're doing is
50:42
Speaker 1: economically worthwhile, and two you're liberated from dependence on the
50:47
Speaker 1: capital markets, which are there when they're there, and when
50:50
Speaker 1: they're not there you start. Now, what's weird about this
50:53
Speaker 1: unicorn bubble is that it's institutional investors who are used
50:58
Speaker 1: to buying liquidity in the market, who are on the
51:03
Speaker 1: one hand, prepared to accept so much more risk to
51:07
Speaker 1: get a return in the zero real risk free rate
51:10
Speaker 1: environment would you've had for almost ten years, and on
51:13
Speaker 1: the other hand, are paying premium values relative to the
51:17
Speaker 1: existing public companies, you know, the Googles and the facebooks
51:21
Speaker 1: to get access for What they say is you know,
51:23
Speaker 1: fomo fear of missing out because as you this goes
51:27
Speaker 1: all the way back to saying that the returns are
51:30
Speaker 1: so concentrated. But instead of saying, well, I'm gonna put
51:34
Speaker 1: you know, a million bucks into fifty startups and hope
51:37
Speaker 1: that two or three or four of them blow out,
51:39
Speaker 1: and I write a million, but the five million gets
51:42
Speaker 1: me big, big returns. They're writing checks that are fifty
51:46
Speaker 1: five million to play that game and and and a
51:51
Speaker 1: rich valuations. Not they're not early stage in that tree ridge,
51:55
Speaker 1: and so they're exposed to I mean, the the unicorn bubble,
51:58
Speaker 1: like all bubbles, will end. That's the law of bubbles.
52:01
Speaker 1: Bubbles end um. And you can see two different ways
52:05
Speaker 1: it can end. One is that the FED indeed normalizes rates,
52:13
Speaker 1: which they seem to be in the process of credit
52:17
Speaker 1: spreads open up and it becomes possible to get, you know,
52:21
Speaker 1: a real return of five, six seven percent as an
52:24
Speaker 1: institution investing in you know, TRIPLEB bonds um which will
52:30
Speaker 1: take a lot of money shift money within the financial system.
52:34
Speaker 1: The other is that you have you know, a fraud
52:37
Speaker 1: like thearas. You have the genius, the incredible genius and
52:43
Speaker 1: energy of Elon Musk. Now, let's say, subject to some
52:48
Speaker 1: closer scrutiny, SpaceX, Boring Company or Tesla or whatever he's
52:54
Speaker 1: cranking them out. And if there's a cumulative drumbeat a
53:00
Speaker 1: companies that promised unbelievable transformational technology to the world failing
53:07
Speaker 1: to meet those expectations, that changes you know how you
53:12
Speaker 1: know better than I how market psychology, how investors shift
53:17
Speaker 1: the frame and the lens through which they're looking at investments.
53:20
Speaker 1: So so let's let's explore that a little bit because
53:22
Speaker 1: my pet thesis is there's just so much damn money
53:26
Speaker 1: slashing around that it's always looking for a home. And
53:30
Speaker 1: when you say to somebody, hey, tenure, I could get you,
53:33
Speaker 1: you know, two point two percent or wherever it will
53:36
Speaker 1: be by the time this broadcast. I don't want two percent.
53:39
Speaker 1: I'm looking for a six, seven, ten whatever. So first
53:44
Speaker 1: is all this capital the reason a fraud like Tharakhous
53:49
Speaker 1: could get was it nine million dollars in funding? I'm
53:52
Speaker 1: doing that off the top. I think it was a
53:54
Speaker 1: bit like it was still huge and you know whatever,
53:58
Speaker 1: it was reality distortion fee old. It certainly is the
54:01
Speaker 1: fact that there is a huge amount of money around now.
54:03
Speaker 1: The two things to say about that. One is the
54:07
Speaker 1: thing about liquidity is the more you needed, the less
54:11
Speaker 1: there is liquidity comes there. Remember with the liquidity in
54:15
Speaker 1: the buyout market in two thousand and six, Remember that
54:19
Speaker 1: buy out of the Texas Utility Company Electric Utility Company?
54:23
Speaker 1: But was it forty billion dollars? Some ungodly number? And
54:27
Speaker 1: in September two thousand and eight you couldn't scrape two
54:31
Speaker 1: nickels together. So the perception of it is this sort
54:37
Speaker 1: of self validating process. There's so much money around today
54:42
Speaker 1: that we can exsume it will always be around until
54:45
Speaker 1: guess what it's not. That's where I think the real
54:49
Speaker 1: challenge for the entrepreneurs and the core investors in these unicorns,
54:55
Speaker 1: because the process of learning how to generate to pay
55:00
Speaker 1: your bills because your customers are giving you more money
55:03
Speaker 1: than you're paying out to serve them. That is a
55:07
Speaker 1: really hard discipline to learn. And if you're being able
55:10
Speaker 1: to raise one billion, two billion, three billion a year,
55:14
Speaker 1: giving up almost no control, giving up minimal amounts of ownership,
55:20
Speaker 1: minimal dilution, boy, that's that's that's the best heroin you
55:24
Speaker 1: could ever have. So when you look at let's hold
55:27
Speaker 1: thereinos aside, because clearly it was a fraud, right, I mean,
55:30
Speaker 1: I don't believe it started as a fraud. And if
55:32
Speaker 1: you haven't read the book Bad Blood, it was delfe
55:34
Speaker 1: I read the newspaper columns in real time. Um, but
55:38
Speaker 1: the book reveals stuff about it that the columns did
55:42
Speaker 1: not like. The board of directors was a did you
55:45
Speaker 1: know they had no voting shares that she had, Elizabeth,
55:49
Speaker 1: and that you know there were no people from a
55:52
Speaker 1: medical device biotech healthcare background on the board, at least
55:56
Speaker 1: at first. With all respect to too great public service
56:00
Speaker 1: Henry Kissinger and George Sultz, if you're ever given an
56:04
Speaker 1: investment opportunity, we have two members of the board who
56:07
Speaker 1: are former secretaries of State in their nineties, politely say
56:12
Speaker 1: thank you and pass on by. There were people have
56:16
Speaker 1: accused me of um having hindsight bias in this, but
56:21
Speaker 1: there were some fairly obvious red flags, that being one
56:25
Speaker 1: of them. Nobody, every single VC that specialized in medtech, healthcare,
56:31
Speaker 1: biosciences took a hard pass. That's a screaming red flag.
56:37
Speaker 1: Talk to any humatologists in the world and they will
56:39
Speaker 1: tell you. And I'm not a humatologist, and I don't
56:41
Speaker 1: play one on television, but I do know some very
56:43
Speaker 1: good academic ones. You cannot run the full panel of
56:49
Speaker 1: bloods that they do when they put that needle in
56:52
Speaker 1: your take it a full vial of that blood. You
56:55
Speaker 1: can't get that out of a drop of capillary blood
56:57
Speaker 1: from your face. The process of ricking your finger um
57:02
Speaker 1: introduces interstitial tissue and liquids and contaminants, So even if
57:08
Speaker 1: you had enough blood, it's contaminated blood. But let's the
57:13
Speaker 1: what I'm more interested in, and what I think is
57:15
Speaker 1: much more significant, is that these digital platforms and marketplaces,
57:21
Speaker 1: they are disruptive. They are creating opportunities for commerce on
57:26
Speaker 1: a radically different basis. So we're talking about Airbnb and
57:30
Speaker 1: Uber and lift and anything that is using the digital,
57:35
Speaker 1: especially mobile interface that's a giant computer in your pocket
57:39
Speaker 1: to turn things into a different um economic value proposition.
57:45
Speaker 1: That's a fascinating an It also brings up, however, another
57:49
Speaker 1: aspect of where the digital revolution is. I said it
57:53
Speaker 1: was attacking the authority of the statement. Of course, a
57:55
Speaker 1: lot of that's happening at the local level. It's not
57:57
Speaker 1: and I'm not now talking about grand strategy and or
58:01
Speaker 1: or the you know, the future of the planet and
58:03
Speaker 1: climate change and all that. The problem here, and this
58:07
Speaker 1: is a problem for investors, is that too many of
58:11
Speaker 1: the genius entrepreneurs who know that they are creating a
58:15
Speaker 1: new world have zero interest in understanding how we got
58:21
Speaker 1: to this world that they're disrupting. And what that means
58:25
Speaker 1: is that again and again and again they pay no
58:29
Speaker 1: attention or they dismiss the existing ecosystem, which includes regulatory
58:35
Speaker 1: but not just political and state regulations, practices, culture. A
58:40
Speaker 1: black cab driver in London is not the same thing
58:46
Speaker 1: as a cab driver in San Francisco operating a totally
58:49
Speaker 1: different environment, meaning that that's highly regulated. They have to
58:53
Speaker 1: pass the tests to be a cab driver. They're incredibly knowledgeable,
58:57
Speaker 1: and they have a standing in the culture that's just
59:00
Speaker 1: different in kind. So what happens when these disruptive which
59:05
Speaker 1: which are much more efficient economically, no question about that,
59:09
Speaker 1: and much more efficient technologically, but they run into these frictions,
59:13
Speaker 1: these political and regulatory frictions. It slows things down. Now,
59:18
Speaker 1: if you're promising to change the world and you have
59:21
Speaker 1: investors investing in you in pursuit of that rate of
59:26
Speaker 1: return that comes from a successful revolution, and you get
59:30
Speaker 1: delayed by a year or two year, but that it
59:33
Speaker 1: just kills the present value of that hope for home
59:38
Speaker 1: run future. So it feeds back into the investment proposition
59:44
Speaker 1: that you're looking at today and you're trying to value today.
59:47
Speaker 1: So let me let me get more specific, because I
59:49
Speaker 1: want to make sure I understand that. So you have
59:53
Speaker 1: a set of a regulatory environment and a set of
59:57
Speaker 1: cultural background in a place like London, and that doesn't
1:00:01
Speaker 1: necessarily make it all that vulnerable to an outfit like Uber,
1:00:07
Speaker 1: because their cab drivers are valued members of society who
1:00:13
Speaker 1: contribute more than mere transportation. There an active part of
1:00:18
Speaker 1: the history and the lore of London. Compare and contrast
1:00:21
Speaker 1: with New York City, where I've made the case and
1:00:25
Speaker 1: I don't think it's a stretch that you had a
1:00:29
Speaker 1: artificially created monopoly, the number of medallions kept low, the
1:00:33
Speaker 1: serve quality service terrible. Good luck funding cab in the
1:00:37
Speaker 1: rain at rush hour. The first moment anything happens, there
1:00:40
Speaker 1: are no cabs. I I kind of have gotten the
1:00:44
Speaker 1: sense that the New York City Council and the medallion
1:00:48
Speaker 1: owners conspired to create to artificially constrained market forces, and
1:00:54
Speaker 1: as soon as Uber came along, it exploded because at
1:00:57
Speaker 1: a certain point the market will not be denied. Exactly right, Barry,
1:01:01
Speaker 1: I think you're absolutely right. But the point is exactly
1:01:03
Speaker 1: that you need and it took Uber has an Airbnb
1:01:07
Speaker 1: has been doing a better job of understanding that these
1:01:11
Speaker 1: each local market that they go into has to be
1:01:14
Speaker 1: evaluated its own terms, with its own history, and adapt
1:01:17
Speaker 1: there too. And not all the regulations A lot of
1:01:20
Speaker 1: them are, but not all the regulations are monopolists. Rents seeking.
1:01:24
Speaker 1: You know, there's a reason why if you're having people
1:01:27
Speaker 1: stay in your apartment, you want to have a fire
1:01:29
Speaker 1: extinguisher and something like if your neighbors are living there,
1:01:35
Speaker 1: they board an apartment, they weren't buying into a hotel.
1:01:38
Speaker 1: That's a completely legiti exactly right. So my my point
1:01:41
Speaker 1: here is only that, in addition to all the stem
1:01:46
Speaker 1: discipline science, technology, engineering, mathematics that we all focus on,
1:01:50
Speaker 1: is the secret for the future. A little more teaching
1:01:54
Speaker 1: in history, a little more even reading relevant historical novels,
1:02:00
Speaker 1: a little learning about the political the evolution of regulations
1:02:06
Speaker 1: in particular domains, particular regimes. It could be very helpful
1:02:11
Speaker 1: for the entrepreneur, or at least their financial investor, who's
1:02:14
Speaker 1: trying to give them a strategic sense of where to
1:02:17
Speaker 1: bob and where do weave and how to maximize the
1:02:21
Speaker 1: likelihood that their transformational technology will convert into long term
1:02:26
Speaker 1: economic value. So when when you're looking at a possible
1:02:30
Speaker 1: investment in a startup and you're looking at the entrepreneurs,
1:02:34
Speaker 1: do you find that a lot of these folks are
1:02:36
Speaker 1: one dimensional. They have their tech skills, they've come up
1:02:39
Speaker 1: with something that seems interesting, but they're lacking a broader
1:02:43
Speaker 1: world view. Well, you know, I'm I'm I'm at more
1:02:46
Speaker 1: than one remove away from this. I'm not running the
1:02:49
Speaker 1: portfolio and I have it for years, um, but I
1:02:53
Speaker 1: do stay tuned in. In particular, you mentioned in introducing me, Uh,
1:02:58
Speaker 1: you know, I'm Tim o'ry. He's outside director at O'Reilly media,
1:03:02
Speaker 1: Tim is just which is you Oley Media has and
1:03:06
Speaker 1: certainly the throw weight in terms of insight foresight that
1:03:11
Speaker 1: Tim has demonstrated over a long generation. And by the way,
1:03:14
Speaker 1: let me just fleck his book with the amusing title
1:03:18
Speaker 1: w t F What's the Future? Uh? Is a great
1:03:21
Speaker 1: guide to reading the digital revolution as it has unwound,
1:03:27
Speaker 1: as it has evolved over the last couple of years,
1:03:30
Speaker 1: last twenty years, um, Tim, Tim has the exactly what
1:03:35
Speaker 1: I'm talking about, a deep interest in the history and
1:03:40
Speaker 1: not just the technical history, but the cultural and political
1:03:43
Speaker 1: history of that we are transforming. UH. And you know,
1:03:49
Speaker 1: this is not the first time that there's been a
1:03:52
Speaker 1: political backlash from new technology. William Jennings Bryan, the populist
1:03:57
Speaker 1: movement at the end of the nineteenth century. Was there
1:04:00
Speaker 1: sponsor the railroads? How about the Mathusians. Isn't that a
1:04:03
Speaker 1: giant rush back against you know, we'll never be able
1:04:06
Speaker 1: to feed ourselves, so the there is now a giant
1:04:11
Speaker 1: political pushback. You know, big tech is a target. UH.
1:04:15
Speaker 1: Some of it has been invited by a kind of
1:04:19
Speaker 1: arrogance that goes with it. I say, it goes with
1:04:22
Speaker 1: the territory of being the source, the leader, the manager,
1:04:26
Speaker 1: the driver of transformational technology into the economy. But it
1:04:33
Speaker 1: will be best for everyone if there's a more deeper
1:04:37
Speaker 1: understanding of the world that is being disrupted, not just
1:04:42
Speaker 1: understanding of the forces of disruption. And you know, frankly,
1:04:46
Speaker 1: let me let me chew that over a sec Better
1:04:49
Speaker 1: to have a more complete understanding of the world being
1:04:53
Speaker 1: disrupted than just the disruptive forces themselves, right, exactly right,
1:04:59
Speaker 1: that's and that's what this new edition of my book
1:05:02
Speaker 1: is really trying to deliver, and to deliver to audiences
1:05:07
Speaker 1: that include those disruptors. It will be better for our
1:05:11
Speaker 1: whole system and will certainly be better for us to
1:05:13
Speaker 1: have a you know, a better chance of responding to
1:05:16
Speaker 1: the Chinese challenge, which ain't going away. Um, of course
1:05:21
Speaker 1: this comes at a peculiar moment in American history and
1:05:24
Speaker 1: American politics, and peculiar to say the least. I mean,
1:05:28
Speaker 1: that's and and you know how long this persists, how
1:05:32
Speaker 1: long we have I've got to I got to share
1:05:36
Speaker 1: with you because I know you know how to read
1:05:39
Speaker 1: the net one of the more maybe most frustrating things
1:05:46
Speaker 1: you can do. Right now, Let's go to Google type
1:05:49
Speaker 1: in the letters o s t P that stands for
1:05:52
Speaker 1: Office of Science and Technology Policy, and you'll see white
1:05:58
Speaker 1: House dot OSTP dot gov. Right, if you bring that up, well,
1:06:05
Speaker 1: I'll ask you to just let it sit there on
1:06:07
Speaker 1: the Google screen. White white House dot gov is the
1:06:10
Speaker 1: first thing that comes up. Right. Now, look down the
1:06:13
Speaker 1: list and you'll find something that says OSTP dot Obama archive.
1:06:18
Speaker 1: That's the third thing. So the second thing is Wikipedia. Okay,
1:06:23
Speaker 1: Now go and click on the OSTP dot Obama archive, right,
1:06:28
Speaker 1: John Holden, Director, and you'll see that that's how it
1:06:32
Speaker 1: what it looked like on January telling me this has
1:06:36
Speaker 1: not been updated. No, I'm telling you that this is
1:06:38
Speaker 1: frozen because that's the way it was and that's why
1:06:40
Speaker 1: it's in the Obama archive. But if you go through it,
1:06:43
Speaker 1: you'll see that there's program after program, people and initiatives
1:06:47
Speaker 1: and conferences and all that. Now, after looking at that,
1:06:52
Speaker 1: now go and look at here's a November one article
1:06:57
Speaker 1: Donald Trumps Science Office is a ghost town. So go
1:07:01
Speaker 1: and look at OSTP dout gub white House dot OSTP
1:07:04
Speaker 1: dot gov. Al Right, just click the original. Just click
1:07:07
Speaker 1: the original, uh engagement at it's a one pager. That's
1:07:12
Speaker 1: that's it, there's no there's no there's no links. There
1:07:15
Speaker 1: are no links. That's all there is. That's it. So
1:07:18
Speaker 1: another word science and technology not not exciting to this group,
1:07:22
Speaker 1: doesn't exist. You know, if you look at the list
1:07:26
Speaker 1: of unfilled positions. And I'm not sure if if my
1:07:30
Speaker 1: original viewpoint on this is correct. I used to think
1:07:33
Speaker 1: he was running just for a branding exercise. He made
1:07:37
Speaker 1: most of his money, read him Um O'Brien's book, Trump Nation.
1:07:42
Speaker 1: Most of his wealth came from the t and forward
1:07:47
Speaker 1: election where there was a ton of branding opportunities. What
1:07:51
Speaker 1: have you. I suspected that he was an interest in winning,
1:07:55
Speaker 1: that this was just a great gift from the media
1:07:59
Speaker 1: and pub listening machine. And because most people run have
1:08:03
Speaker 1: their list of here's everyone we're gonna put in. The
1:08:05
Speaker 1: fact it's a year later and they still have all
1:08:07
Speaker 1: these unfilled roles kind of makes me think that he
1:08:11
Speaker 1: wasn't expecting to win. That said, now that you're there,
1:08:16
Speaker 1: perhaps you may want to fill some of these slots. Well,
1:08:18
Speaker 1: you know what's going on at the E p A.
1:08:23
Speaker 1: And by the way, we're recording this in between the
1:08:26
Speaker 1: weekend of the G seven events and the right before
1:08:30
Speaker 1: the summit with North Korea. So if there has subsequently
1:08:34
Speaker 1: been a nuclear war, that by the time this broadcast,
1:08:38
Speaker 1: neither of us anticipated that correct or or or the
1:08:42
Speaker 1: other thing, a complete nu de nuclearization. I don't think
1:08:45
Speaker 1: either of us are expected that. I'll tell you I'm
1:08:48
Speaker 1: I'm I'm not. I'm not born to be. I go
1:08:51
Speaker 1: practice as a political prognosticator. You read all about that
1:08:55
Speaker 1: in so many different places. I have those I respect,
1:08:57
Speaker 1: those I don't respect, But I will this and this.
1:09:00
Speaker 1: I think I have some expertise. And if you're going
1:09:03
Speaker 1: to maintain if a nation is going to maintain leadership
1:09:07
Speaker 1: in taking science, deriving from it working technology, and converting
1:09:14
Speaker 1: that technology into job creating, profit generating real business, then
1:09:22
Speaker 1: one player in that game has to be a legitimate, honest,
1:09:27
Speaker 1: functioning government. Without there you go, you know, but that
1:09:34
Speaker 1: some people legitimately that's the idiotic pushback, I know, And
1:09:38
Speaker 1: that's why going back into that using winners and losers.
1:09:42
Speaker 1: But you know, that's what going back into that history
1:09:44
Speaker 1: of the Defense Department in DARPA and silicon and software
1:09:48
Speaker 1: and microprocessors and the Internet. That's why it's so important
1:09:52
Speaker 1: going back to the history of how we tied the
1:09:55
Speaker 1: nation together with Transcontinental Railroads by taking nine of the
1:10:00
Speaker 1: land area of the lower forty eight states and giving
1:10:04
Speaker 1: it as a gift to subsidize the building of the
1:10:07
Speaker 1: Transcontinental Railroads. We built the interstate highway system. We built
1:10:13
Speaker 1: it under a Republican president. By the way, the legislation
1:10:17
Speaker 1: was called the National Defense Transportation Act. It was legitimate
1:10:22
Speaker 1: because they designed it so that every bridge was high
1:10:25
Speaker 1: enough that a transporter carrying an Atlas first generation intercontinental
1:10:31
Speaker 1: ballistic missile could be driven along the interstate. And that
1:10:35
Speaker 1: made the investment in the public transportation network for the country,
1:10:41
Speaker 1: made it politically legitimate. And am I misremembering this or
1:10:44
Speaker 1: is this just the myth? Every fifth mile of the
1:10:47
Speaker 1: interstate highway system how to be a straight mile that
1:10:50
Speaker 1: could double as a runway in an emergency. You know,
1:10:53
Speaker 1: I don't know that. As a fact. I liked the concept.
1:10:56
Speaker 1: It certainly was. There was a sense there that public
1:11:01
Speaker 1: investment for the public good was legitimate, appropriate and what
1:11:06
Speaker 1: do you call it? You didn't have to call it socialism,
1:11:08
Speaker 1: was just it was for the public good. The multiplier
1:11:11
Speaker 1: effect of the interstate highway system is still being effected.
1:11:14
Speaker 1: This felt to this day. All right, so I only
1:11:16
Speaker 1: have you for a finite amount of time. Let me
1:11:18
Speaker 1: jump to some of my favorite questions that we ask
1:11:22
Speaker 1: all our guests. Tell us the most important thing we
1:11:25
Speaker 1: don't know about you. Well, let's see, I guess the
1:11:34
Speaker 1: most important thing that you probably don't know is that
1:11:38
Speaker 1: when I was forty five, I ran a one nineteen
1:11:41
Speaker 1: half marathon in the fifty nine minute ten miler. And
1:11:45
Speaker 1: then that was the summer fifty in a ten mile.
1:11:48
Speaker 1: That's pretty good. That's under six minutes. Not bad for
1:11:51
Speaker 1: at five year old. Oh that's damn good. And ex smoker.
1:11:55
Speaker 1: And and then I made this fundamental decision because on
1:12:01
Speaker 1: the one hand, I was joining Warburg pain Kiss after
1:12:04
Speaker 1: I've been serving out my contract after we sold the
1:12:07
Speaker 1: Upper stat firm, and I knew that was gonna be
1:12:09
Speaker 1: a full time job. And on the other hand, my
1:12:13
Speaker 1: wife was running a consulting business, and I had worked
1:12:16
Speaker 1: out that if we really wanted to have a kid,
1:12:18
Speaker 1: staying in the same city as her her doctor suggested
1:12:21
Speaker 1: was probably a useful enabling friend. And so we were
1:12:26
Speaker 1: gonna have a kid. And I decided that you could
1:12:30
Speaker 1: have a full time job, you could try to be
1:12:32
Speaker 1: a decent parent, and you could run competitively at the
1:12:37
Speaker 1: club level of New York two out of three. That
1:12:42
Speaker 1: at the end of the matter, that's very funny. You
1:12:44
Speaker 1: mentioned one of your mentors earlier. Tell us repeat their name,
1:12:48
Speaker 1: and what other folks influence your perspective? Critical influence on
1:12:53
Speaker 1: my perspective, as I say, was Fred Adler. Uh. Fred
1:12:59
Speaker 1: Fred came from backstreets of Brooklyn, got went went from
1:13:02
Speaker 1: Brooklyn College to Harvard Law School, joined actually one of
1:13:07
Speaker 1: the leading Catholic law firms in New York, and discovered
1:13:10
Speaker 1: he was a terrific turnaround artist and put together the
1:13:14
Speaker 1: financing for the second successful mini computer company, Data General,
1:13:19
Speaker 1: back you know now forty five years ago. He and
1:13:22
Speaker 1: I connected. We collaborated effectively a lot about that in
1:13:26
Speaker 1: my book. Uh. He was a tough guy, and uh,
1:13:30
Speaker 1: I used to He used to tell me that I
1:13:32
Speaker 1: was really good at admitting my mistakes. And I used
1:13:34
Speaker 1: to tell him that the only compliment he ever gave
1:13:36
Speaker 1: me was he never offered me a job. But then
1:13:40
Speaker 1: then in the mid eighties, when I was really engaged
1:13:43
Speaker 1: in this new swinging world of information technology through through
1:13:48
Speaker 1: my my cousin who was out in St. Louis. He'd
1:13:51
Speaker 1: been at Monsanto. I met one of the most remarkable
1:13:54
Speaker 1: figures in the second half of the twentieth century, Himan Minsky. Oh,
1:13:58
Speaker 1: of course, Hi Menski was a Maverick renegade. He'd gotten
1:14:02
Speaker 1: his his doctorated at Harvard under the great Joseph Shampeter.
1:14:07
Speaker 1: But he he didn't follow. He refused to follow the
1:14:10
Speaker 1: new line of efficient markets and stability right, and he
1:14:17
Speaker 1: never put it into math, which made it hard for
1:14:19
Speaker 1: him to be expected accepted. But in all of us
1:14:22
Speaker 1: by the mainstream economists, who all suffer from a horrible
1:14:27
Speaker 1: sense of physics penis envy, it's it's that I think
1:14:31
Speaker 1: they've over mathsized economics. But I got to know, I
1:14:35
Speaker 1: got to know and right right. And he came east.
1:14:39
Speaker 1: He wound up at Leon Levy's Institute at Bard College,
1:14:42
Speaker 1: and I used to go there in the late eighties
1:14:45
Speaker 1: and sort of play hookey from venture capital. But it
1:14:48
Speaker 1: made me, gave me the chance to think and to
1:14:51
Speaker 1: interact with somebody who was deeply engaged in understanding the
1:14:57
Speaker 1: dynamics of the financial system. And as you say, how
1:15:01
Speaker 1: stability breeds instability, how confidence becomes overconfidence becomes overlending and
1:15:07
Speaker 1: leads to a crisis, and that that is going to
1:15:10
Speaker 1: have an impact on the real economy. It's not just
1:15:12
Speaker 1: happening off there on the markets. And that was a huge,
1:15:16
Speaker 1: huge benefit of course, going into the world of the
1:15:20
Speaker 1: last fifteen years. It's unfortunate he didn't live long enough
1:15:23
Speaker 1: to see his his research and his writings all come true.
1:15:28
Speaker 1: Just just amazing. UM. Any venture capitalists influenced the way
1:15:32
Speaker 1: you look at the world of VC investing, I meaning
1:15:37
Speaker 1: back in the day when oh yeah, sure. In addition
1:15:41
Speaker 1: to fred Um, one of the most phenomenally successful venture
1:15:44
Speaker 1: capitalists ever was Arthur Rock, who was the early investor
1:15:49
Speaker 1: into Intel, if I'm remembering correctly. Intel, he put the
1:15:53
Speaker 1: financing together originally for fair Child Semikin, which was the predecessor,
1:15:57
Speaker 1: Which was the predecessor. He was investor in Scientific Data Systems,
1:16:02
Speaker 1: which was another one of the the first generation many
1:16:06
Speaker 1: computer companies, was brought by Xerox, the first It was
1:16:09
Speaker 1: the first billion dollar exit in the history of the
1:16:11
Speaker 1: venture capital industry. UM and of course he was along
1:16:15
Speaker 1: with the venture arm of the Rockefeller family, he was
1:16:18
Speaker 1: the original investors in Apple. UM. So I hope you
1:16:23
Speaker 1: still invested. Um that that that's a that's a fascinating run.
1:16:29
Speaker 1: Let's talk about books, because you mentioned a few. Um,
1:16:34
Speaker 1: this is everybody's favorite question. Tell us your favorite books VC, economics, fiction, nonfiction.
1:16:41
Speaker 1: I don't care. What do you read and what do
1:16:43
Speaker 1: you think other people should read? Well, I I mentioned
1:16:45
Speaker 1: Tim O'Reilly's WTF, WTF what's the future there? They know?
1:16:52
Speaker 1: I've been. I read a lot of history. I read
1:16:54
Speaker 1: a lot of history. I've been just stumbled on an
1:16:57
Speaker 1: extraordinary book that I should have and existed, and I
1:17:00
Speaker 1: wish I had because I sure would have used it
1:17:02
Speaker 1: in my book and I will be using it in
1:17:04
Speaker 1: my economics course at Cambridge. It's called Funding a Revolution.
1:17:09
Speaker 1: It was published in at the peak of the Internet
1:17:13
Speaker 1: bubble by the National Academies of Sciences. It's a detailed,
1:17:20
Speaker 1: granular report on each program through which the United States
1:17:26
Speaker 1: government created the digital revolution. It's you know, it's not
1:17:30
Speaker 1: for everybody. Perhaps I found it riveting because you had
1:17:33
Speaker 1: the people, the names, the programs, where they came from,
1:17:36
Speaker 1: where they went. Um. But then on the other hand, UM,
1:17:41
Speaker 1: I read the Harvard historian then Beckert wrote a book
1:17:48
Speaker 1: on the cotton industry that the cotton textile industry, which
1:17:55
Speaker 1: came out about five years ago or so. It is
1:17:58
Speaker 1: an amazing examination of the first global industry, again, an
1:18:04
Speaker 1: industry which critically depended on the power of states two
1:18:12
Speaker 1: create the sources, the the the raw cotton coming in,
1:18:17
Speaker 1: and the dynamism of entrepreneurs and speculative capital. Let me
1:18:23
Speaker 1: ask you about a couple of books, because you you
1:18:25
Speaker 1: made me think about a few. Not Andy Groves, only
1:18:29
Speaker 1: the paranoids survived, But there was a book on the
1:18:33
Speaker 1: history of Intel along with Rock and Fairchild Semi is
1:18:41
Speaker 1: it inside Intel? Could have been. I think that's the
1:18:44
Speaker 1: book that really tracks the history. I thought that was fascinating.
1:18:48
Speaker 1: I don't know if you you read that. I don't
1:18:50
Speaker 1: know that one. I do know the you know, the
1:18:52
Speaker 1: Fumbling the Future at Xerox, which tells the story. It's
1:18:57
Speaker 1: pretty um, it's pretty tough. And then what about have
1:19:01
Speaker 1: you read Scott Galloway's The Four Google, Apple, Facebook, and Amazon?
1:19:06
Speaker 1: You know? I read. I read a lot of academic
1:19:10
Speaker 1: papers and I and that's one of the reasons I
1:19:13
Speaker 1: uh teach the course in a way. It forces me
1:19:15
Speaker 1: to stay up with the literature. And you know something
1:19:18
Speaker 1: we haven't talked about, but this is a message I
1:19:20
Speaker 1: wanted to deliver. UM two thousand and eight was a crisis.
1:19:25
Speaker 1: It was shocking, and it almost brought the world economy down.
1:19:28
Speaker 1: But for economics as a discipline, for finance as a discipline,
1:19:33
Speaker 1: it was the gift that keeps on giving. It has
1:19:36
Speaker 1: shocked those disciplines out of a kind of complacent assumption
1:19:41
Speaker 1: that the market will always deliver the right answer, reliably
1:19:45
Speaker 1: and with resilience, and it is generated a body of
1:19:50
Speaker 1: growing body, a much more realistic and relevant academic work
1:19:55
Speaker 1: based on a shift of focus from pure theory towards
1:19:59
Speaker 1: impure goal analysis. Economics gets its own Minsky moment. Yeah,
1:20:04
Speaker 1: that's exactly right, quite quite fascinating. Tell us about a
1:20:07
Speaker 1: time you failed and what you learned from these ah,
1:20:12
Speaker 1: more than one learning by failing? Um, Well, i'll tell
1:20:16
Speaker 1: you the stories in the book. UM. When we were
1:20:19
Speaker 1: working how to win, one of the passages towards investing
1:20:24
Speaker 1: and helping IBM ceased to be a monopoly came through
1:20:28
Speaker 1: a company that we started. Right around this was when
1:20:34
Speaker 1: the European Community, the Single Market was created, and we
1:20:38
Speaker 1: we we hooked up with a couple of American entrepreneurs
1:20:42
Speaker 1: who knew the European computer commercial computing industry really well,
1:20:46
Speaker 1: and they have perceived it was a kind of a
1:20:48
Speaker 1: hole in the market. In the US, you had a
1:20:51
Speaker 1: host of new companies, software companies that were delivering tools
1:20:56
Speaker 1: for making it easier and more efficient and more productive
1:21:00
Speaker 1: to use a big IBM machine, and that their technology,
1:21:05
Speaker 1: their products didn't get to Europe because they were too
1:21:07
Speaker 1: small to build a European channel. So the idea was
1:21:12
Speaker 1: we would get together. We would buy a set of
1:21:15
Speaker 1: service companies that provided people to the IBM data centers
1:21:20
Speaker 1: and spread across all of industrial Europe, just the way
1:21:24
Speaker 1: it was in the US, and then we would bring
1:21:27
Speaker 1: into them products that we licensed from those American companies,
1:21:31
Speaker 1: and that way we would build a pen European business.
1:21:36
Speaker 1: It was called easy soft Um. There were three entirely separate,
1:21:42
Speaker 1: independent reasons why this was a really bad idea. The
1:21:47
Speaker 1: first was between doing a project as a service company
1:21:53
Speaker 1: and walking away and selling a product that you are
1:21:57
Speaker 1: responsible for and you have to support is talk and
1:22:00
Speaker 1: cheese and very different, totally different. Second, those companies in
1:22:05
Speaker 1: the US, there were three things that could happen to them.
1:22:07
Speaker 1: The people we were licensing product from one. They could
1:22:11
Speaker 1: grow up and succeed and get big and want to
1:22:13
Speaker 1: take their products back too. They could fail completely and
1:22:18
Speaker 1: we were well and but we were stuck supporting the
1:22:20
Speaker 1: product without the tech the techies who had built it,
1:22:24
Speaker 1: or three halfway in between. They could be bought by
1:22:27
Speaker 1: Computer Associates, a really big, ugly company at that time,
1:22:31
Speaker 1: and that was the worst of all. And one of each,
1:22:33
Speaker 1: at least one of each happened. And then the final
1:22:36
Speaker 1: reason was it turned out that the IBM data center
1:22:41
Speaker 1: was no longer a rich, vibrant, growing market. It was stagnating,
1:22:46
Speaker 1: it was declining. That lesson was worth all the money
1:22:50
Speaker 1: we wrote off in easy Soft because it said, now's
1:22:53
Speaker 1: the time, Now we can go at IBM. What sort
1:22:58
Speaker 1: of advice would you give to a millennial or someone
1:23:00
Speaker 1: just beginning their career who is thinking about technology, venture capital, etcetera. Well,
1:23:07
Speaker 1: you know, in a way I've already given it. Um.
1:23:10
Speaker 1: You know, half of all the male undergraduates at Stanford
1:23:14
Speaker 1: are taking computer science, I think more than that of
1:23:17
Speaker 1: the m I t. You don't have to tell him
1:23:19
Speaker 1: to take computer science. What I would say is, along
1:23:23
Speaker 1: with your computer science, along with your double a read history,
1:23:28
Speaker 1: read the history of economics, but also politics, broadened their
1:23:33
Speaker 1: outlook for in your outlook and look for you know,
1:23:36
Speaker 1: the great novels. I'll tell you if more people had
1:23:39
Speaker 1: read Trollops the Way we Live now, which is about
1:23:42
Speaker 1: a fraud ster operating in the context of technology financial
1:23:47
Speaker 1: speculation about technology a hundred and fifty years ago, you know,
1:23:51
Speaker 1: we might not have had Fewer people would have followed
1:23:54
Speaker 1: Bernie made off right right, And and our final question,
1:24:00
Speaker 1: what do you know about the world's of venture investing
1:24:03
Speaker 1: today that you wish you knew thirty or forty years
1:24:06
Speaker 1: ago when you first started exploring this space? Well, I
1:24:09
Speaker 1: guess when I first started, I didn't perhaps have enough
1:24:15
Speaker 1: appreciation that the terms of the relationship with the entrepreneur
1:24:21
Speaker 1: matters so so much. And one of the things I
1:24:24
Speaker 1: worry about now. You know, you can see that there's
1:24:28
Speaker 1: been this sort of shift in the terms of trade.
1:24:30
Speaker 1: They used to say the golden rule is he who
1:24:32
Speaker 1: has the gold rules makes the rule. Right, Yeah, but
1:24:35
Speaker 1: that's not the case when you're talking about the founders.
1:24:38
Speaker 1: You know, whether it's Elizabeth Holmes, the voting share, there's
1:24:44
Speaker 1: some there can be you know, you can see that
1:24:46
Speaker 1: a Google and a Facebook with all that's going on
1:24:49
Speaker 1: in Facebook, because they're exempt from real governance by stockholders
1:24:55
Speaker 1: because of the ownership stake of the controlling stock by
1:25:00
Speaker 1: Facebook or with Page and Bryan at Google, right they
1:25:06
Speaker 1: can they can't afford to make upstream investments in science
1:25:09
Speaker 1: that other companies are not able to. They're supposed to
1:25:14
Speaker 1: take their cash, any extra cash they have, and use
1:25:16
Speaker 1: it to buy backstock. So I think that there's a
1:25:21
Speaker 1: challenge here because by and large, I actually do think
1:25:27
Speaker 1: that Serge Brand and Larry Page have done a pretty
1:25:29
Speaker 1: damn good job, certainly of building a great company and
1:25:33
Speaker 1: of exploring where they can invest this cash flow for
1:25:37
Speaker 1: the future. They've been brilliant acquirers of relevant technology. Look
1:25:41
Speaker 1: at YouTube Spectacular or or for that matter, all of
1:25:45
Speaker 1: the all of the mobile technology Android another home run
1:25:50
Speaker 1: Maps was brought unbelievable. The person behind Google Maps actually
1:25:54
Speaker 1: just has a book coming out, Yeah, Never Lost Again
1:25:58
Speaker 1: or something along those Just Win. So, you know, but
1:26:00
Speaker 1: I think that that is something I had to learn
1:26:03
Speaker 1: by doing learn the hard way in the job. We
1:26:09
Speaker 1: have been speaking with Bill Janeway. The Innovation Economy New
1:26:13
Speaker 1: edition is out with a whole digital um. Addition, if
1:26:18
Speaker 1: you enjoy this conversation, we'll be sure and look up
1:26:20
Speaker 1: an inch or down an inch on Apple iTunes, Bloomberg
1:26:24
Speaker 1: dot com, Stitcher, overcast, wherever finer podcasts are sold, and
1:26:29
Speaker 1: you could see any of the other two hundred or
1:26:31
Speaker 1: so such conversations that we've had previously. We love your comments, feedback,
1:26:37
Speaker 1: end suggestions right to us at m IB podcast at
1:26:41
Speaker 1: Bloomberg dot net. Check out my daily column on Bloomberg
1:26:44
Speaker 1: dot com. Follow me on Twitter at rid Holtz. I
1:26:47
Speaker 1: would be remiss if I did not thank the crack
1:26:49
Speaker 1: staff that helps put together these podcasts each week. Taylor
1:26:53
Speaker 1: Riggs is our booker slash producer. Medina Parwana is my
1:26:58
Speaker 1: audio engineer. Michael ad Nick is our head of research.
1:27:02
Speaker 1: I'm Barry Retolts. You've been listening to Master's in Business
1:27:06
Speaker 1: on Bloomberg Radio.