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Opportunities for Digital Transformation Capital with David Roux · Masters in Business

0:02
Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
0:09
Speaker 2: This is Master's in Business with Barry red Holds on
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Speaker 2: Bloomberg Radio.
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Speaker 3: This week on the podcast, another extra special guest, David Rue,
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Speaker 3: is chairman of Baypine, a fascinating private equity firm. They
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Speaker 3: are not interested in simply flipping companies or buying firms
0:33
Speaker 3: and then quickly selling them. What they do much more
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Speaker 3: involved than a consulting firm. They are experts at digital
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Speaker 3: transformation across a wide variety of sectors in the investing world,
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Speaker 3: and they essentially take companies as varied as tire manufacturers
0:57
Speaker 3: and industrial producers and re tailors and find intelligent ways
1:04
Speaker 3: to use technology to make these companies more efficient, more productive,
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Speaker 3: more profitable. And they're not again, they're not just consultants.
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Speaker 3: They come in, they take a steak in a company.
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Speaker 3: Sometimes it's a minority state, sometimes it's a larger steak,
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Speaker 3: and they help affect this massive change with great results.
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Speaker 3: They're one of the few companies that specialize in this.
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Speaker 3: Their track record has been very impressive and the approach
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Speaker 3: they bring to transforming old industry companies is absolutely fascinating.
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Speaker 3: Previous to Baypine, David was one of the co founders
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Speaker 3: of Silver Lake Investors, a legendary firm from the nineties
1:53
Speaker 3: and two thousands. With no further ado, my conversation with
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Speaker 3: Baypines David.
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Speaker 1: Rue, Thank you pleasure to be here.
2:01
Speaker 3: It's a pleasure to have you. I've been looking forward
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Speaker 3: to this conversation for quite a while. Let's start out
2:06
Speaker 3: with your background. Bachelor's from Harvard, Masters in philosophy from Cambridge,
2:11
Speaker 3: and then an NBA from Harvard Business School. What was
2:15
Speaker 3: the career plan?
2:16
Speaker 1: You know, I originally wanted to be an architect.
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Speaker 3: Really, I've always wanted to pretend to be an architect's
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Speaker 3: That's an area I'm fascinating And why did you not
2:26
Speaker 3: go into that space?
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Speaker 1: You know, I grew up, you know, building goat karts
2:31
Speaker 1: and treehouses and the like. But I think when I
2:37
Speaker 1: got to school, I found that I could make models,
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Speaker 1: build software, maybe create organizations, and that it was as
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Speaker 1: much fun as building a building.
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Speaker 3: There's a different sense of creating a company versus creating
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Speaker 3: a certain type of space inhabited by people, no doubt
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Speaker 3: about that. So let's talk about some of those companies
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Speaker 3: that you built. You begin at a few tech startups,
3:12
Speaker 3: you found day Techs, which eventually gets acquired by Lotus.
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Speaker 3: What was the startup process? Like, this was mid nineteen eighties,
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Speaker 3: is that about right?
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Speaker 1: Yeah, early eighties. You know, in business school, I realized
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Speaker 1: this is the kind of early PC boom. And I
3:32
Speaker 1: realized from my academic work, you know, there were word processors,
3:37
Speaker 1: there were spreadsheets, but there was not very good database
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Speaker 1: technology for PCs. They didn't have what the mini computers
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Speaker 1: had and the mainframes had. So I saw an opportunity
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Speaker 1: to create some software and also to be able to
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Speaker 1: marry that up with data for people to use on
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Speaker 1: their PC. And that was the idea behind day Text.
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Speaker 3: So day Text gets acquired by Lotus, who eventually acquires Lotus.
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Speaker 1: Lotus is eventually acquired by IBM by coincidence. That was
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Speaker 1: a relationship I managed. So I had a very good
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Speaker 1: kind of ringside seat in all that. They were very
4:20
Speaker 1: interested in the company's suite of primarily communications technologies ccmail,
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Speaker 1: Lotus notes because the sort of networking boom had already
4:32
Speaker 1: started up, and they saw a world where all of
4:35
Speaker 1: these PCs would be interconnected.
4:37
Speaker 3: How did you end up at Oracle?
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Speaker 1: I had met Larry Ellison during my Lotus days I'd
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Speaker 1: done another company, which we sold to Symantec. Larry had
4:48
Speaker 1: contacted me and said, look, we've got a tiger by
4:51
Speaker 1: the tail. The business is growing like crazy. I think
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Speaker 1: there might be some M and A opportunities. We really
4:57
Speaker 1: don't have a corporate development function. Would you be interested
5:00
Speaker 1: to come here and build one. That's how it happened.
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Speaker 3: Oracle, especially in the eighties and nineties, became famous as
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Speaker 3: a serial acquirer of all sorts of pieces, spinouts, roll ups.
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Speaker 3: How long did you stay at Oracle?
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Speaker 1: How was there all through the nineties till nineteen ninety nine.
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Speaker 1: You know, it was really a terrific experience, extremely rapid growth.
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Speaker 1: I ran the venture fund, did all the investing off
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Speaker 1: the balance sheet.
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Speaker 2: I also.
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Speaker 1: Started and managed the M and A programs. So yeah,
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Speaker 1: it was fantastic.
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Speaker 3: Yeah. I can imagine Oracle in the nineties as you
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Speaker 3: were out in California and.
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Speaker 1: Assume right Silicon Valley, right in the heart of things,
5:40
Speaker 1: ground zero, and I got to think Oracle and Ellison
5:44
Speaker 1: like I cut my teeth on them.
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Speaker 3: In the nineties, he seemed to have been everywhere. Oracle
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Speaker 3: was consistently ranked best company to work, Top ten, Fast
5:53
Speaker 3: and growing companies like Oracle. I think people who just
5:56
Speaker 3: came into the market in the past ten twenty years
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Speaker 3: don't know what a powerhouse Oracle was and still is.
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Speaker 1: Yeah, it has a remarkable history, you know, a class
6:07
Speaker 1: of eighty six, meaning that's the same year as Microsoft, Sun, Apple,
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Speaker 1: and so they've been at it and doing a great
6:19
Speaker 1: job for a while. You know, Larry's often thought of
6:24
Speaker 1: as a very aggressive and astute business mind, but I
6:29
Speaker 1: don't think he gets enough credit for his technical chops
6:34
Speaker 1: if you look back, think about it. He has been
6:37
Speaker 1: fearless about betting the company on major new architecture. So
6:45
Speaker 1: you know, he made the original bet around relational databases
6:49
Speaker 1: when everyone else was doing something else. He then made
6:52
Speaker 1: a major bet on Unix when it was a kind
6:54
Speaker 1: of obscure, you know, scientific operating system. He then made
6:59
Speaker 1: a huge bet around enterprise applications, big bet around client server.
7:06
Speaker 1: And then maybe the most courageous bet was in the
7:11
Speaker 1: mid nineties when Netscape had gotten the first browsers out
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Speaker 1: the Internet boom it started. A great story came in
7:20
Speaker 1: one morning after a weekend. We all sat down at
7:24
Speaker 1: our little executive committee call and he says, look, I've
7:28
Speaker 1: been thinking, I think this Internet thing is more important
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Speaker 1: than most people understand. I would like to change one
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Speaker 1: hundred percent of what we're doing in development. I want
7:38
Speaker 1: to stop all of the client server work, and I
7:41
Speaker 1: want to replatform everything that we're doing on a web architecture.
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Speaker 1: Three thousand engineers, dozens hundreds of products, affecting you know,
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Speaker 1: thousands upon thousands of customers. And he very casually said
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Speaker 1: I'd like to do this by the end of the day.
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Speaker 3: Sounds like that's a multi year project.
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Speaker 1: He was he talking, no, no, no, he was talking about
8:02
Speaker 1: I want I want to direct to the turned to
8:05
Speaker 1: the director of engineering and said, I want this done
8:06
Speaker 1: by the end of the day. Just poured it over
8:09
Speaker 1: to its just going to stop. We're not going to
8:10
Speaker 1: write another line of client server code. It's done. This
8:13
Speaker 1: is going to be the new architecture. This is the
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Speaker 1: future of computing. This is what our customers are going
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Speaker 1: to want in two and three, in five years time,
8:20
Speaker 1: so we need to start building it now for it
8:23
Speaker 1: to be ready. Then it was really the thing I mean,
8:26
Speaker 1: I mean, just a incredibly gutsy bet, but a very
8:31
Speaker 1: good sense of his technical prowess and the confidence he
8:36
Speaker 1: had about the kind of what's coming next next part.
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Speaker 3: It sounds like Oracle was quite an experience at the
8:44
Speaker 3: end of the nineteen nineties. You co found silver Lake
8:48
Speaker 3: in nineteen ninety nine. What led to that? You were
8:51
Speaker 3: you were at Oracle. You were like a fifteen year
8:53
Speaker 3: veteran at Oracle. Is that about right?
8:55
Speaker 1: No, not quite. But I'd been there a while and
8:59
Speaker 1: it was, you know, a fantastic experience. I had a
9:04
Speaker 1: great job, really good relationship with Larry, rest of the team.
9:08
Speaker 1: You know, I was my late thirties. I'd kind of
9:10
Speaker 1: come to realize that it was always going to be
9:12
Speaker 1: Larry's business, rightly so, and that I was looking around
9:16
Speaker 1: and I saw what I thought of, as I've come
9:20
Speaker 1: to call it, an OIPSE, which is acronym OIPS for
9:24
Speaker 1: an opportunity and plain sight. And I couldn't understand the following.
9:29
Speaker 1: I couldn't understand why investors were pouring money into venture firms,
9:34
Speaker 1: pouring money into growth equity, and not doing anything to
9:38
Speaker 1: invest in technology using a private equity format. Didn't make
9:42
Speaker 1: sense to me. That it would be a good small company,
9:45
Speaker 1: it would be a good medium sized company, and then
9:47
Speaker 1: all of a sudden it would not be an appropriate
9:48
Speaker 1: place for fiduciary capital. That didn't make sense, and I thought, gosh,
9:52
Speaker 1: that must be a huge opportunity. You know, we were
9:55
Speaker 1: right in the middle of the Internet boom, so tech was,
10:00
Speaker 1: you know, front and center of the news, and yet
10:06
Speaker 1: there was none of the traditional firms were there. In fact,
10:12
Speaker 1: they were actively avoiding it. You know, it was sort
10:14
Speaker 1: of not considered an appropriate place to invest that kind
10:17
Speaker 1: of capital.
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Speaker 3: Why was that? Was it that people were just so
10:20
Speaker 3: distracted by the new hotness, by the dot coms and.
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Speaker 1: The Internet or I don't think so.
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Speaker 3: Well. Were the public markets there for larger companies if
10:29
Speaker 3: they needed capital.
10:30
Speaker 1: No, No, I don't think that. Here's what I think,
10:33
Speaker 1: because this is what they told us. I mean, I
10:35
Speaker 1: asked that exact question. The theory was this, you couldn't
10:39
Speaker 1: go write checks for hundreds of millions of dollars if
10:43
Speaker 1: you couldn't underwrite the technical innovation at the heart of
10:47
Speaker 1: these business models, if you didn't understand how the semiconductor worked,
10:51
Speaker 1: if you didn't understand how the software was built.
10:54
Speaker 3: One.
10:54
Speaker 2: Two.
10:55
Speaker 1: There was a theory that these businesses had volatile cash
10:58
Speaker 1: flows and therefore couldn't be leveraged, which was the you know,
11:04
Speaker 1: the whole point of leverage buyout. And finally that they
11:08
Speaker 1: were companies run by children, you young folks. I was
11:12
Speaker 1: in the business, and when I heard all that, I said,
11:15
Speaker 1: you know, those guys in New York and the skyscrapers,
11:18
Speaker 1: and the guy in London and those people in Munich
11:21
Speaker 1: and Tokyo, I don't think they really know what's going
11:23
Speaker 1: on here. These are actually really good businesses. The cash
11:27
Speaker 1: flows are unbelievable, customer franchises are very, very durable. There's
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Speaker 1: incredible organic growth here. This is a really big and
11:38
Speaker 1: attractive opportunity. I think someone's gonna make a great return
11:43
Speaker 1: by building a business here.
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Speaker 3: And you don't need to underwrite the entire underlying technology.
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Speaker 3: You're really just talking about that transition to whatever makes
11:54
Speaker 3: those companies that much more attractive. Is that a fair assessment?
11:58
Speaker 1: When you're doing what silverl does and what it was
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Speaker 1: built to do, you are making a fundamental bet technology.
12:07
Speaker 1: It's like when people buy technology or enter into an
12:12
Speaker 1: agreement with a company like an Oracle or a Microsoft.
12:15
Speaker 1: You're not buying what they're selling you today. You're buying
12:18
Speaker 1: the promise that they will continue delivering. It's like buying
12:21
Speaker 1: a lot on a river. Now you're not buying the
12:23
Speaker 1: water in front of your house, You're buying the promise
12:25
Speaker 1: that the water will continue to flow. And so you
12:29
Speaker 1: do need to have a point of view about how
12:34
Speaker 1: well positioned these companies are for the future.
12:37
Speaker 3: You co found silver Lake with this is some lineup.
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Speaker 3: Glenn Hutchins, Jim Davidson, Roger mcnamie. Tell us about your
12:46
Speaker 3: silver Lake co founders.
12:47
Speaker 1: Well, look, they're each enormously talented and capable in their
12:52
Speaker 1: own right. You know, we all live near each other,
12:55
Speaker 1: knew each other professionally beforehand. We talked extensively about this
13:01
Speaker 1: opportunity and agreed that it was the next big thing.
13:06
Speaker 1: And I think that, you know, looking back on it,
13:08
Speaker 1: I've been very fortunate at silver Lake and prior companies
13:13
Speaker 1: when I started something to do it with a group
13:15
Speaker 1: of people, and that it's always been great to have
13:19
Speaker 1: folks from different backgrounds, different styles, different professional experience. You know,
13:25
Speaker 1: it's very complimentary and you know it's not for everybody,
13:28
Speaker 1: but for me, it's it's the way I like to
13:30
Speaker 1: do business.
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Speaker 3: They weren't an oracle prior. How did the how.
13:34
Speaker 1: Do we all know each other. Yeah, Glenn and I
13:36
Speaker 1: have been college classmates, tennis partners, fly fishing buddies. He
13:42
Speaker 1: was previously at Blackstone. Jim Davidson and I are both
13:45
Speaker 1: big sports fans and shared season tickets for the Sharks
13:50
Speaker 1: and the Warriors, so we would spend a lot of
13:53
Speaker 1: time together. He was running the H and Q Investment Bank,
13:58
Speaker 1: and then Roger was my next door neighbor and very
14:03
Speaker 1: good friends with Jim. So you know, it was a
14:07
Speaker 1: group of people who already kind of knew each other,
14:10
Speaker 1: had some personal relationships to build on, and you know,
14:13
Speaker 1: came with a different set of experiences.
14:15
Speaker 3: What was silver Lake like in two thousand as the
14:19
Speaker 3: dot COM's all imploded.
14:20
Speaker 1: Well, you know, it was an interesting thing. I would
14:23
Speaker 1: jokingly tell people that we bought high, sold low and
14:27
Speaker 1: made a ton of money, and you know, it was
14:29
Speaker 1: a very challenging economic environment. The NASDAK during that period
14:33
Speaker 1: fell eighty percent right over from the front front end
14:36
Speaker 1: of the fund to the back. The fund itself, in
14:41
Speaker 1: a very fundamental way, was set up as a counterpoint
14:46
Speaker 1: to the mania around the internet. And what we would
14:49
Speaker 1: tell people pointedly, as we say, look, you're completely right
14:53
Speaker 1: to be excited about the technology sector. It's underinvested. It's
14:59
Speaker 1: underappreciated for its scale, it's underappreciated for its growth, it's
15:03
Speaker 1: underappreciated for the strategic value that it plays in the economy.
15:07
Speaker 1: But you're investing in the wrong companies at the wrong price.
15:12
Speaker 1: And I had a little chart that I would show them.
15:14
Speaker 1: So here's a thousand, approximately one thousand public company public
15:18
Speaker 1: tech companies at that time. These ten percent are what's
15:23
Speaker 1: driving the entire valuation. They're trading at ten to thirty
15:29
Speaker 1: plus times revenue, not earnings, not earnings revenue. And I said,
15:35
Speaker 1: I can just tell you that is the wrong price.
15:39
Speaker 1: Not necessarily bad companies, but that's those are the wrong prices.
15:42
Speaker 1: I said, but look at these other ninety percent. If
15:45
Speaker 1: you take the rest of the publicly traded technology companies,
15:49
Speaker 1: they're traded at one time's revenue. It's the same as
15:52
Speaker 1: the S and P at the day of.
15:53
Speaker 3: The day, pretty reasonable, more.
15:55
Speaker 1: Or very reasonable, and they grow twice as fast. So
16:00
Speaker 1: you have an opportunity to buy growth at half price.
16:06
Speaker 1: You've got this situation. There's sort of the fundamental insight
16:10
Speaker 1: at the heart of the silver l like value proposition.
16:14
Speaker 1: Is that technology, the entire tech sector was on sale,
16:19
Speaker 1: even at a time when people thought it was super expensive,
16:23
Speaker 1: because ten percent of the market was super expensive, but
16:26
Speaker 1: most of it was not.
16:27
Speaker 3: How much of what's been going on in the twenty
16:31
Speaker 3: twenties has been a focus on that same top ten
16:35
Speaker 3: percent of tech companies as being overly concentrated and wildly expensive.
16:40
Speaker 3: Do you think the same situation is starting to show
16:44
Speaker 3: up in the modern era?
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Speaker 1: Well, there are some parallels and also some important differences.
16:51
Speaker 1: The parallels are that there is a concentration of interest.
16:59
Speaker 1: The differences those companies are now huge businesses with gigantic
17:06
Speaker 1: levels of profitable unprecedented levels of profitability and growth rates
17:12
Speaker 1: that have never been achieved before by companies at that scale.
17:17
Speaker 1: So that's the part that's really different, Right. A lot
17:22
Speaker 1: of the things in Internet time was highly speculative. The
17:27
Speaker 1: other thing that's different is that today the companies with
17:32
Speaker 1: the most spectacular valuation levels are private. People aren't wrong
17:38
Speaker 1: to say they are a winner the sort of the
17:41
Speaker 1: bed of courses. Are they the only winner?
17:43
Speaker 2: Right?
17:44
Speaker 1: And so you have to believe that there won't be
17:47
Speaker 1: successful competition, you know, I would only point out that
17:52
Speaker 1: forty percent of their sales go to four big vendors,
18:00
Speaker 1: each of whom has their own chip development program. And
18:04
Speaker 1: so I'm not saying they're going to build a better chip,
18:06
Speaker 1: but they're definitely going to build a cheaper chip, and
18:09
Speaker 1: so there'll be some dampening for sure from that.
18:14
Speaker 3: And you know, I'm around long enough to remember when
18:17
Speaker 3: it looked like Intel was impregnable, that they had a
18:24
Speaker 3: position in the ecosystem that nobody could touch, and now
18:28
Speaker 3: it feels like they're and also run well.
18:30
Speaker 1: This goes back to the point that you raised earlier,
18:33
Speaker 1: which is if you're going to do tech investing, you
18:35
Speaker 1: need to have an opinion about the tech. It's not
18:39
Speaker 1: just that you can look at a series of financials
18:45
Speaker 1: and say, oh, they had a good quarter last quarter,
18:47
Speaker 1: they had good year every year numbers I like the
18:49
Speaker 1: three year trend and say fine, you have to separately
18:54
Speaker 1: underwrite the quality of the underlying architecture, what's going on
19:00
Speaker 1: in the industry, and believe that they're going to be
19:02
Speaker 1: able to keep going. And so like, if you like
19:06
Speaker 1: go to end video, let's talk about that. You can
19:09
Speaker 1: look at the financials and say this is fantastic. You know,
19:11
Speaker 1: they're doubling and trebling, and these are incredible numbers and
19:15
Speaker 1: growing blah blah blah. The way they've gotten their improvements
19:19
Speaker 1: has been to go beyond what has been possible in
19:23
Speaker 1: any other chip manufacturer. The other chip manufacturers have gotten
19:27
Speaker 1: their productivity improvements around the physical geometry by making the
19:32
Speaker 1: chip smaller and smaller, more and more transistors.
19:37
Speaker 3: Classic More's law down to ever smaller.
19:41
Speaker 1: Ever smaller. Right, these guys have got have stolen a
19:45
Speaker 1: march on the rest of the industry with their GPU
19:48
Speaker 1: chips by doing other things. They've gotten probably two or
19:53
Speaker 1: two and a half times, which is a lot of improvement.
19:57
Speaker 1: But they're talking about improvements of things that are kind
20:01
Speaker 1: of eight ten, twelve, sixteen times productivity improvement. So they're
20:06
Speaker 1: doing it other ways. They're doing it with algorithms, they're
20:09
Speaker 1: doing it with other approaches, and so you have to
20:13
Speaker 1: form an opinion as an investor about what is the
20:16
Speaker 1: likelihood they can keep doing that because it's been the
20:20
Speaker 1: key driver, and keep doing that for the next three
20:22
Speaker 1: to five years, not just the next quarter. Bingo.
20:26
Speaker 3: So let's talk a little bit about Silver Lake and
20:28
Speaker 3: how that eventually leads to Bay Pine. It feels like,
20:33
Speaker 3: and I don't know if my memory is correct. Silverlake
20:38
Speaker 3: was one of the first buyout shops built around making
20:42
Speaker 3: technology investments or investments in technology companies. Is that a
20:46
Speaker 3: fair description.
20:47
Speaker 1: Several other deals had been done, but they were occasional
20:51
Speaker 1: and they weren't the central focus for anyone.
20:54
Speaker 3: Tell us some of your memorable investments at Silverlake.
20:57
Speaker 1: Well, I think some of the investments that the firm
21:00
Speaker 1: is best known for out of the box. First was Seagate,
21:05
Speaker 1: which was a hard disk drive manufacture. It was at
21:09
Speaker 1: the time the number one producer dis drives. They had
21:13
Speaker 1: the best technology, great management team, very complex, but finally
21:18
Speaker 1: crafted extended supply chain through Asia, and Wall Street hated them.
21:24
Speaker 1: It was hardware in the age of the Internet. So
21:27
Speaker 1: the other thing that traded really really hot back then
21:31
Speaker 1: was any new telecom business, right optical this telecom That
21:35
Speaker 1: one of the insights that we had as a group,
21:39
Speaker 1: and it stemmed from the fact that we were not
21:42
Speaker 1: finance people but industry people with operating backgrounds, is we
21:46
Speaker 1: understood that the entire tech industry is an ecosystem. It
21:52
Speaker 1: operates like your body, right, All the parts sort of
21:55
Speaker 1: need to fit together and they operate inter dependently, and
21:59
Speaker 1: so everybody at that time was talking about the information
22:02
Speaker 1: super Highway and they were buying the highway, right, They're
22:05
Speaker 1: buying the telecom companies, and they were buying all these
22:08
Speaker 1: new applications that you could do on the Internet. But
22:11
Speaker 1: people forgot that you couldn't have an information super highway
22:17
Speaker 1: without parking lots. In other words, the electron the bit
22:21
Speaker 1: had to start somewhere and it needed to end somewhere.
22:24
Speaker 1: So if you believed that broadband was going to explode,
22:29
Speaker 1: then you must also believe that storage is going to explode.
22:35
Speaker 1: And so we were able to look at that kind
22:39
Speaker 1: of systemic arbitrage around the architecture and say, you know,
22:44
Speaker 1: the comm's piece is overpriced. I don't think we should
22:47
Speaker 1: pay ten and fifteen times for a pike when we
22:49
Speaker 1: can pay six times EBITDA, EBITDA. Earnings for the number
22:55
Speaker 1: one storage company in the world, Now, there was a
22:59
Speaker 1: bunch of applications around things they owned, and you know,
23:03
Speaker 1: it was a public company, so it was a leveraged
23:05
Speaker 1: buyout and all the rest of that, but that was
23:07
Speaker 1: really the fundamental insight.
23:09
Speaker 3: So it sounds like a lot of the public market
23:13
Speaker 3: investors had a fundamental misunderstanding about the entire tech sector,
23:19
Speaker 3: the ecosystem as you described it. What are the things
23:22
Speaker 3: did people just not get, not understand, overlook obvious investments
23:28
Speaker 3: in plain sight?
23:29
Speaker 1: Yeah? Well, I think in that case it was a
23:34
Speaker 1: hangover from the very real war of attrition that for
23:41
Speaker 1: the prior twenty years had preceded that moment in time
23:46
Speaker 1: where the industry went from one hundred and twenty disdrive
23:49
Speaker 1: companies to sex or seven.
23:51
Speaker 3: We had an idea who are the winners who were
23:53
Speaker 3: going to be well?
23:54
Speaker 1: And so the question was is there going to be
23:57
Speaker 1: more blood in the water or have we arrived at
24:00
Speaker 1: an industry structure where everybody is going to do okay
24:06
Speaker 1: and the number one player is probably going to do
24:09
Speaker 1: better than most. That was one. The second issue is
24:13
Speaker 1: could anyone figure out a way to At the time,
24:19
Speaker 1: Seagate owned some shares and other software companies, and it
24:23
Speaker 1: wasn't clear to the market how they could sell those
24:27
Speaker 1: in a tax efficient way. And that's one of the
24:29
Speaker 1: things that with structuring we were able to figure out.
24:32
Speaker 1: I'll give you another one where we bought a vago
24:36
Speaker 1: Eulett Packard's semiconductor division in this TI frame, the early
24:41
Speaker 1: two thousands, it was very much the fashion to be
24:46
Speaker 1: out of semi. Semis were out of fashion, right. The
24:49
Speaker 1: world was infatuated with the other end of the stack,
24:54
Speaker 1: not the you know, I didn't want to hear it.
24:55
Speaker 1: People didn't want to hear about semis. They didn't want
24:58
Speaker 1: to hear about subassemblies, they didn't want to hear about components.
25:00
Speaker 1: They didn't want to hear about computers. They wanted to
25:03
Speaker 1: hear about all the sexy, high margin, no cost of goods,
25:07
Speaker 1: no capital equipment, software services, internet applications sounded wonderful. You know,
25:15
Speaker 1: this is the age of pets, dot com, that thing.
25:17
Speaker 1: And so it wasn't wrong to say that software was good,
25:21
Speaker 1: but it didn't automatically follow that hardware's bad. And so
25:25
Speaker 1: people had this idea, almost like a dialectic, which is
25:29
Speaker 1: that you couldn't believe in something that you like, that
25:32
Speaker 1: the other must be bad. And so semis were completely
25:35
Speaker 1: out of fashion. Semens spun theirs off, HP, spun theirs off, IBM,
25:42
Speaker 1: either closed or spun theirs off. You know, just all
25:46
Speaker 1: these peoplehood who had very significant capabilities and fabs that
25:51
Speaker 1: today would be worth fortunes leave aside the intellectual property
25:55
Speaker 1: and the skill sets and the trained labor force you know,
25:59
Speaker 1: you know, all went off the back of the truck.
26:02
Speaker 1: So we bought this from HP, hired a great manager
26:08
Speaker 1: CEO named hot Tan, and built this up into a
26:12
Speaker 1: kind of highly specialized and others. We didn't buy it
26:15
Speaker 1: with the idea that we're going to go compete with
26:17
Speaker 1: Intel and try to dis lodge them from the PC market,
26:21
Speaker 1: but rather with the idea that everything was going to
26:26
Speaker 1: have a processor, cars, kids, toys, you know, your kitchen appliances,
26:33
Speaker 1: and that somebody was going to have to make all
26:35
Speaker 1: those processors. And so there was an exploding rest of
26:40
Speaker 1: market opportunity that Intel wasn't focused on that people like Evago.
26:47
Speaker 3: Could be Today. I think automobiles are the second biggest
26:50
Speaker 3: consumer of semiconductors. I don't know if that's still true,
26:52
Speaker 3: that was true a few years ago.
26:54
Speaker 1: I think that's right. In fact, the Stata i Avn'
26:58
Speaker 1: quote for people is that the semiconductor content in a
27:03
Speaker 1: car is more valuable than all of the metal, than
27:07
Speaker 1: the all the steel and all the aluminum. And maybe
27:10
Speaker 1: more importantly, it is increasingly the case that what the
27:15
Speaker 1: semiconductors enable the navigation, the.
27:20
Speaker 3: Abs, departure worn, All the features that really give a
27:26
Speaker 3: car kind of its identity are increasingly denominated by the
27:32
Speaker 3: digital capabilities. What about the rest of the world outside
27:37
Speaker 3: of PCs and automobiles. It was incredibly for looking to
27:43
Speaker 3: say in the early two thousands, by the way, they're
27:46
Speaker 3: going to be chips in everything, not just dishwashers and refrigerators,
27:50
Speaker 3: but toys and electric bikes and you name it. It's
27:54
Speaker 3: going to need a chip that was a decade ahead
27:57
Speaker 3: of its time.
27:57
Speaker 1: You would have been very immune. Is when we raised
28:01
Speaker 1: our first fund You may remember the Ferbie doll, sure,
28:05
Speaker 1: of course, which was a hot hot productry hot kids product,
28:10
Speaker 1: little furry thing, eyes bad and it had in it
28:14
Speaker 1: a digital signal processing chip. They would allow it to
28:18
Speaker 1: make a little noise, cuddly noises, and you know, whittle
28:21
Speaker 1: its legs. And I used to bring it with me
28:23
Speaker 1: to all of our fundraising meetings. I wouldn't say a
28:27
Speaker 1: word about it. I'd simply take it out of my
28:28
Speaker 1: briefcase and I would put it on the desk between
28:31
Speaker 1: myself and the prospective investor, and I wouldn't say a
28:34
Speaker 1: word about it. You know, I'd launch into my talk
28:37
Speaker 1: about semiconductors and hardware and the evolution of the sector
28:42
Speaker 1: and so forth. And finally, sometimes it would be five minutes,
28:44
Speaker 1: sometimes ten, but it was never more than thirty minutes.
28:48
Speaker 1: Right the investor would say, David, what is that doll?
28:51
Speaker 1: Why do you have that doll there? I go, oh,
28:53
Speaker 1: I'm so sorry. I forgot to mention it. That's a
28:55
Speaker 1: Ferbie doll. And I brought that for you because I
29:00
Speaker 1: wanted to illustrate in a simple way how the march
29:04
Speaker 1: of technology is going to go. I said that Ferbie
29:08
Speaker 1: doll has more processing power than the lunar land.
29:12
Speaker 3: I knew you're going to go that way.
29:14
Speaker 1: And I said, we're looking at a world where all
29:17
Speaker 1: of music is going to be digital, all of film
29:19
Speaker 1: is going to be digital, Television is going to be digital.
29:23
Speaker 1: The way you do your phone is going to be digital.
29:25
Speaker 1: I said, So all of these analog things, as they
29:28
Speaker 1: become more digital, need this technology. And if you understand
29:34
Speaker 1: how the technology works, you will not because you're kind
29:39
Speaker 1: of a big brain genius, but because you've played the
29:42
Speaker 1: game before and you understand what all the pieces do,
29:46
Speaker 1: you'll be in a really good position to identify those
29:49
Speaker 1: opportunities going forward. I'll give you another great example. The
29:53
Speaker 1: part that and the little wrinkle that I think gave
29:56
Speaker 1: us a lot of credibility, and by the way, gives
29:58
Speaker 1: us credibility now is to say, let's own the right technology,
30:03
Speaker 1: put it in the right companies, and the key part
30:05
Speaker 1: is at the right price. It is bringing an investment
30:10
Speaker 1: sensibility and financial discipline to the work that we do. Right.
30:16
Speaker 1: We're not like technology zealots and I want to just
30:20
Speaker 1: own it. To own it right. It's not a prize,
30:22
Speaker 1: it's not a trophy. It's you know, would this be
30:26
Speaker 1: useful and would somebody else be interested. I'll give another example.
30:30
Speaker 1: eBay came out of the blocks super hot. They bought PayPal,
30:34
Speaker 1: and then they bought this thing called Skype, and Skype
30:37
Speaker 1: was the first software based peer to peer video conferencing capability,
30:44
Speaker 1: so long before Zoom. Twenty thirty million people on at
30:48
Speaker 1: the same time, which was an amazing technical feat. Wasn't
30:51
Speaker 1: exactly here what it had to do with auctions, even
30:54
Speaker 1: less clear what it had to do with PayPal. But
30:57
Speaker 1: eBay bought Skype and it kind of noodled along in
31:02
Speaker 1: the Skype portfolio in the early two thousands for a year.
31:06
Speaker 1: Two years, no one paid any attention to it at all.
31:11
Speaker 1: We said, my gosh, look they've had three CEOs in
31:14
Speaker 1: two years, they're spread out all over the place, they
31:17
Speaker 1: haven't upgraded the product in two years. Maybe they'd be
31:20
Speaker 1: willing to sell it. Contact with them once, contact them twice.
31:24
Speaker 1: Eventually they said, yeah, we'd be willing to talk to
31:26
Speaker 1: you about that, because we had a point of view
31:28
Speaker 1: about this is a really exciting market, but no one's
31:33
Speaker 1: paying any attention. So if we could carve that out,
31:35
Speaker 1: we want to. Eban said, keep it as much of
31:38
Speaker 1: this as you want. We'll buy the rest of it
31:40
Speaker 1: at a full valuation, which we did. And it was
31:44
Speaker 1: a business that had nice growth despite really being a
31:49
Speaker 1: feral child, right and we said, look, get paid twice.
31:53
Speaker 1: We'll pay you once what it's worth, and we're going
31:56
Speaker 1: to make this way more valuable than you possibly could
31:59
Speaker 1: because we can focus on it and make a bunch
32:01
Speaker 1: of changes. And it was. It was sort of a troubled,
32:04
Speaker 1: was complicated asset where you know, there was so much
32:07
Speaker 1: staying in litigation. They hadn't upgraded it for a long time.
32:11
Speaker 1: Apple had just announced that they were going to be
32:14
Speaker 1: offering a you know, video video face time FaceTime. So
32:19
Speaker 1: there was you know, Microsoft said they wanted to be
32:21
Speaker 1: in the business.
32:21
Speaker 3: So there was a lot of companies.
32:23
Speaker 1: There was competition from very credible large players.
32:27
Speaker 3: And if I recall correctly, around that time, all of
32:31
Speaker 3: the fat pipes and broad bandwidth that had come public
32:36
Speaker 3: in the late nineties early two thousands were coming back
32:40
Speaker 3: up around pennies on the dollar. I recall Global Crossing,
32:43
Speaker 3: a Mentro Media, Fiber and all these companies. So the
32:46
Speaker 3: bandwidth was coming a line at a cheap price that
32:49
Speaker 3: didn't exist that way in the nineties, which is very
32:52
Speaker 3: much right into the sweet spot of Skype.
32:55
Speaker 1: Yeah, and by the way, not so just similar from
32:58
Speaker 1: the AI process sink crunch that we have today, where
33:01
Speaker 1: people are pouring a huge amount of super expensive stuff
33:05
Speaker 1: which you do need, but which will be available three
33:08
Speaker 1: years and five years and ten years from now.
33:11
Speaker 3: Mut's really really different pricing you end up buying them,
33:14
Speaker 3: if I recall directly, not much long after that did
33:18
Speaker 3: Microsoft come along and scoop them up from you.
33:20
Speaker 1: Well, what happened is is that we bought it, completely,
33:24
Speaker 1: upgraded the software, changed out the entire management team, developed
33:30
Speaker 1: a series of partnerships, built a business side of it
33:34
Speaker 1: because it had been very much kind of B two
33:36
Speaker 1: C phenomenon, try to really opened up a product line
33:40
Speaker 1: around B to B and it ended up being very
33:43
Speaker 1: attractive for Microsoft sold it to them, you know, one
33:47
Speaker 1: of the foundation elements in what his teams today, and
33:50
Speaker 1: really helped them. I think it was a great It
33:52
Speaker 1: turned out to be a good deal for silver Lake,
33:54
Speaker 1: but it also I think, as all deals should be
33:57
Speaker 1: a very good deal for the acquirers.
33:59
Speaker 3: Any other any other memorable civil like deals.
34:02
Speaker 1: Were oftentimes you know, I think the maybe two others
34:06
Speaker 1: that we are well known for. We're the largest investor
34:10
Speaker 1: in Ali.
34:10
Speaker 3: Baba before it went really before it.
34:13
Speaker 1: Went public, and that was a you know, explosive that
34:17
Speaker 1: was that was explosive, but it was a scary investment.
34:19
Speaker 1: It was a minority investment in a Chinese e commerce company,
34:24
Speaker 1: you know, located on the other side of the world.
34:27
Speaker 3: Who's also your co your co investor is the People's
34:31
Speaker 3: Republic of China, right they own ultimate regulator for sure
34:37
Speaker 3: owner slash regulator.
34:38
Speaker 1: And you know, Massason and soft Bank are already large investors.
34:43
Speaker 1: But we liked the management team we love the story,
34:48
Speaker 1: and that turned out to be a you know, very
34:50
Speaker 1: good that was a very very good investment. And then
34:53
Speaker 1: the last one and really still very much in the
34:56
Speaker 1: news was Dell, big well known public company, you know,
35:03
Speaker 1: eponymously named for its CEO who'd left kind of like
35:08
Speaker 1: you know, Charles Schultz left, came back first, went private
35:12
Speaker 1: where Michael rolled essentially all of his ownership into it.
35:18
Speaker 1: Made a very large personal bet. So it was a
35:21
Speaker 1: gutsy bet because it was at a time again, this
35:24
Speaker 1: is a place where the conventional wisdom was the PC
35:27
Speaker 1: was going away, we were going to use our phones,
35:30
Speaker 1: We're going to use iPads. Somehow it was going to
35:34
Speaker 1: go away. We didn't think it was going to go away.
35:36
Speaker 1: And we thought that the market hadn't really appreciated how
35:43
Speaker 1: much work Michael had done building up a store of
35:49
Speaker 1: intellectual property around next generation computing, whether it's cyber cloud computing,
35:58
Speaker 1: and you know, maybe it's like maybe a basketball franchise
36:02
Speaker 1: that has a bunch of draft picks, you know what
36:05
Speaker 1: I'm saying, kind of young talent, which we thought was
36:08
Speaker 1: going to be very valuable because we had a point
36:11
Speaker 1: of view about the importance of cloud. We had a
36:13
Speaker 1: point of view about the importance of cyber and we
36:16
Speaker 1: thought that those assets were undervalued because the whole of
36:21
Speaker 1: the company was getting valued like it was a commodity
36:23
Speaker 1: PC vendor.
36:24
Speaker 3: So let's talk about what did you do post silver
36:28
Speaker 3: Lake in the twenty tens.
36:30
Speaker 1: I'm a starter and a builder. I like backing social
36:33
Speaker 1: entrepreneurs and feel particularly passionate about conservation, biomedical research and education.
36:41
Speaker 1: We took our foundation resources and focused it first on
36:46
Speaker 1: a thing out in Seattle called the Institute for Health
36:49
Speaker 1: Metrics and Evaluation. Stood that up. Bill Gates blessedly is
36:54
Speaker 1: doing most of the support now, but that's now you know,
36:57
Speaker 1: five hundred researchers, and they focus on understanding in detail
37:04
Speaker 1: the global burden of disease, so that we know how
37:08
Speaker 1: healthy or sick you know every country is, and you
37:11
Speaker 1: know where to allocate our healthcare dollars. On the biomedical
37:15
Speaker 1: research side, became very active as the chairman of Jackson Laboratories,
37:20
Speaker 1: one of the largest independent institutes in the country, focused
37:25
Speaker 1: on kind of the genetic causes of rare diseases. We
37:28
Speaker 1: were able to double the size of that quadruple that endowment,
37:32
Speaker 1: and then more recently in the education space. I had
37:37
Speaker 1: this view that we were not appreciating how big artificial
37:43
Speaker 1: intelligence was going to be, and that as a consequence,
37:47
Speaker 1: as a nation, we are underinvested in advanced computer science
37:52
Speaker 1: and others. We've got programs at all the best universities,
37:57
Speaker 1: but they graduating hundreds of people, tens of thousands, maybe
38:00
Speaker 1: even hundreds of thousands that we need. Really yeah, because
38:03
Speaker 1: what's happened is that the academics are focused on building
38:07
Speaker 1: the new platform, the so called large language models. When
38:11
Speaker 1: think about that, like it's a nuclear power plant, you know,
38:15
Speaker 1: complicated high science, but we now it now works, and
38:20
Speaker 1: it'll work a little better, and they'll keep refining it
38:22
Speaker 1: and so forth, but it works, and that what we
38:25
Speaker 1: need next are application engineers. We need electricians. We need
38:29
Speaker 1: people to design appliances. We need to run wires, we
38:32
Speaker 1: need to change from steam to electricity, and we don't
38:36
Speaker 1: have those people. And so we already know what we need.
38:41
Speaker 1: It's going to by the way, it'll be twenty or
38:42
Speaker 1: thirty years of implementation ahead of us. So these will
38:47
Speaker 1: be great jobs for a lot of people. So we've
38:50
Speaker 1: built the first school. We've spent a few years getting
38:53
Speaker 1: that organized, opened it in twenty we're now, I guess
38:58
Speaker 1: four years in we've got a thousands to two hundred
39:01
Speaker 1: corporate partners and started or accelerated ninety four companies, four
39:08
Speaker 1: hundred jobs. You know, really exciting.
39:11
Speaker 3: You're doing this for a couple of years. You're standing up.
39:13
Speaker 1: I'm happy as a clam. Right, I'm making things, I'm
39:17
Speaker 1: helping people.
39:18
Speaker 3: Right, you're running the Rue Family Foundation, the Ru Institute.
39:22
Speaker 1: You're basically I was not looking to start a new business,
39:28
Speaker 1: much less an investment firm. Right. What happened is is
39:33
Speaker 1: that my very good friend Anjin Mukherjee, we were talking
39:37
Speaker 1: about the future of private equity. During that conversation, we're saying,
39:40
Speaker 1: you know, this next generation of private act needs to
39:43
Speaker 1: do something different if we want to continue producing the
39:49
Speaker 1: super normal levels of profit that we've seen from the
39:52
Speaker 1: asset class. Because there's more competition, prices are higher, credits
39:58
Speaker 1: more difficult. You can't count a multiple expansion, So you're
40:03
Speaker 1: going to have to make the business you buy better
40:06
Speaker 1: during the pendency of your ownership. There's only so much
40:09
Speaker 1: procurement improvements available. You can only upgrade management so far.
40:14
Speaker 1: My observation was this, which is that I said, you
40:17
Speaker 1: know this tech thing, it's only ten percent of the economy.
40:21
Speaker 1: When you take all of GDP, When you take all
40:23
Speaker 1: of semis, all of computing, all of networking, all of software,
40:27
Speaker 1: all of social media, it's ten percent of GDP. I said,
40:31
Speaker 1: what's going on right now is the other ninety percent
40:34
Speaker 1: of the economy is being digitized. Huge opportunity. Now, big
40:39
Speaker 1: difference is that now the nature of technology is that
40:44
Speaker 1: it's the only capital good that really kind of decreases
40:48
Speaker 1: in price and makes itself smaller. Right, So you think
40:50
Speaker 1: about what's the difference between now and twenty years ago.
40:53
Speaker 1: Now the technology is much smaller, it's much more ubiquitous,
40:58
Speaker 1: it's much less expensive, and it's much easier to use.
41:01
Speaker 1: All of those things. Mean, it's going to go everywhere.
41:05
Speaker 1: So we're talking about this and we're getting ourselves lathered
41:08
Speaker 1: up about the fact that all of these analog companies,
41:13
Speaker 1: industrial firms, consumer firms, healthcare firms, services companies, they all
41:18
Speaker 1: need to adopt more technology, but none of them know
41:22
Speaker 1: how opportunity. In plain sight, it's dead obvious that they're
41:25
Speaker 1: going to do this, Right, you think about the companies
41:29
Speaker 1: that you know in those kind of sectors, that are
41:33
Speaker 1: doing well are almost always those that have adopted the
41:37
Speaker 1: technology earlier, right, you know, JP Morgan and Finance, or
41:41
Speaker 1: Walmart in retail. You know, those companies that get there
41:44
Speaker 1: early get a big leg up on their analog competitors.
41:48
Speaker 1: We said we could do. We could build an investment
41:53
Speaker 1: firm that not only could write a check, but could
41:58
Speaker 1: be your technology part partner in helping you architect a
42:02
Speaker 1: business model future that would allow you to grow your
42:08
Speaker 1: company faster, perform better, you know, produce more profits you know,
42:12
Speaker 1: and drive value.
42:13
Speaker 3: So let me push back again against one thing you said,
42:16
Speaker 3: just a little bit. Please, this opportunity in plain sight.
42:20
Speaker 3: If it was really in such plain sight, everybody would
42:23
Speaker 3: be doing it. But instead it takes a couple of
42:26
Speaker 3: guys with a lot of technology experience, a lot of
42:28
Speaker 3: operational experience, and financial experience to make this real.
42:34
Speaker 1: I partially agree. Okay, all right, here's the partial part.
42:38
Speaker 1: The partial part is is that I think the opportunity
42:42
Speaker 1: is easy to see. I think the execution is hard
42:46
Speaker 1: is the challenge. So the way I oftentimes say it
42:49
Speaker 1: is that it's easy to describe. It's just really hard
42:53
Speaker 1: to do. And it's hard to do because you need
42:56
Speaker 1: to understand the technology itself. You need to know the vendors,
43:02
Speaker 1: you need to be able to set priorities, you need
43:06
Speaker 1: to have a realistic sense of time, and you need
43:09
Speaker 1: to know how to weave this new technology into the
43:14
Speaker 1: processes that already exists. It's not like these companies have
43:18
Speaker 1: no tech. Everyone, any company of any scale, has an
43:22
Speaker 1: ERP system. They have a bunch of databases. There's compliance issues,
43:27
Speaker 1: there's cyber there's all kinds of things, so that you
43:32
Speaker 1: have to integrate into what's already there.
43:34
Speaker 3: So when I think of private equity, at least from
43:38
Speaker 3: the nineties, two thousands, even the twenty tens, I think
43:42
Speaker 3: of them as a form of financial engineering to unlock value.
43:47
Speaker 3: What you're really describing is digital transformative capital, to steal
43:53
Speaker 3: a phrase from your website. So this insight is, hey,
43:56
Speaker 3: we don't need to just do financial engineering. You get
44:00
Speaker 3: these companies to adapt the latest greatest tech in a
44:03
Speaker 3: way that's useful and productive, we can really unlock a
44:07
Speaker 3: lot of value. Is that what led to bapine getting
44:11
Speaker 3: launched and you kind of coming out of retirement to
44:15
Speaker 3: try it again.
44:16
Speaker 1: Yes, I mean that was sort of engine calling for
44:19
Speaker 1: the lefty from the bull ten.
44:21
Speaker 3: Right, right, let's get the lefty.
44:23
Speaker 1: Yeah. So it started innocently enough where it was really
44:28
Speaker 1: a conversation between two friends with a lot of mutual
44:32
Speaker 1: express you know respect where we had a similar you know,
44:37
Speaker 1: fifteen twenty year runs in private equity. So we were
44:40
Speaker 1: very current, highly topical understanding of what was going on,
44:47
Speaker 1: and we realized that we could take and put in
44:53
Speaker 1: one place. Really, it's like a binary weapon, right where
44:58
Speaker 1: a mooker g quality, world class private equity firm with
45:07
Speaker 1: fabulous diligence, great structuring, really thoughtful modeling, you know, great
45:14
Speaker 1: financial engineering. We don't want to throw that away. You know,
45:18
Speaker 1: those are all valuable lessons. But compline it with the
45:22
Speaker 1: operating prowess, tech insight, and extended personal network of relationships
45:29
Speaker 1: that would allow us to do things for and on
45:34
Speaker 1: behalf of our portfolio companies that simply wouldn't be possible, practical,
45:39
Speaker 1: or maybe even imagined by our competitors.
45:43
Speaker 3: It sounds like your competitors are the consulting firms who
45:49
Speaker 3: come in and you know, kind of seagull an event.
45:52
Speaker 3: They come in and they eat everything, they grap all everything,
45:55
Speaker 3: they fly away as opposed to you guys not only
45:58
Speaker 3: coming in with technology experts, these operational consperitse, but capital
46:03
Speaker 3: writing a check. That's a very different relationship than paying
46:07
Speaker 3: a consultant.
46:08
Speaker 1: Yeah, you know, it's interesting. The consultants actually play a
46:12
Speaker 1: very important role, and I wouldn't want to diminish it. Okay,
46:18
Speaker 1: around awareness building, and when we go into talk to
46:25
Speaker 1: a management team, they almost always have had a consulting encounter, right,
46:34
Speaker 1: and they'll have a stack of PowerPoint slides which they'll
46:38
Speaker 1: kind of run to their office to show us. That
46:41
Speaker 1: says the consultant told me, there are sixteen things that
46:44
Speaker 1: I can do with technology, but I don't know which
46:51
Speaker 1: one I should do. I don't know what I should
46:54
Speaker 1: do first. I don't know who should do it for me.
46:56
Speaker 1: I don't know how much should it should cost that
46:59
Speaker 1: to take, I don't know how it integrates with what
47:02
Speaker 1: I've already got, and I particularly don't know what to
47:04
Speaker 1: do if anything goes wrong. Right, And so it's the
47:07
Speaker 1: it goes back to the implementation part. And so what
47:10
Speaker 1: we like to see is a management team that has
47:14
Speaker 1: self awareness and enthusiasm but are not themselves technically fluent.
47:23
Speaker 1: Where you know, we can bring that to the party
47:27
Speaker 1: in a way that can be catalytic for the management
47:36
Speaker 1: team to give them confidence because they have a willingness
47:40
Speaker 1: to act. They're just not sure what to do and
47:43
Speaker 1: they don't want to do any harmful. They want to
47:44
Speaker 1: do something harmful, and so having somebody who's done it before,
47:48
Speaker 1: been there, you know, is super useful.
47:51
Speaker 3: So, so let's talk about some of your portfolio companies
47:54
Speaker 3: and how they're engaging in digital transformation. We're talking about
48:00
Speaker 3: AI earlier. How are you guys looking at AI to
48:05
Speaker 3: facilitate taking some existing companies and making them more productive.
48:10
Speaker 1: Yeah, well, first thing, we could spend a whole session
48:16
Speaker 1: on AI. But here's what I would say. First, we
48:21
Speaker 1: believe it is actually, despite all the height and notwithstanding
48:27
Speaker 1: all the attention, it's already received bigger than most people think.
48:31
Speaker 3: Yeah, I'm with you on that. I'll give you a
48:35
Speaker 3: funny example please. So I'm in the midst of putting
48:37
Speaker 3: together a manuscript and the publisher they're not keen on
48:42
Speaker 3: doing an index. Takes a couple of months. You're paying
48:45
Speaker 3: a person all this time to look up every name, everything,
48:48
Speaker 3: every that for a couple of hundred bucks. There's an
48:51
Speaker 3: AI pdf indexer that will identify every proper name in
48:58
Speaker 3: four hundred pages and creating an deck relative to and
49:02
Speaker 3: I'm just imagining reproducing that sort of dumb mechanical work
49:08
Speaker 3: over and over and over again. And I know I'm
49:10
Speaker 3: just scratching the surface here.
49:12
Speaker 1: It's a great it's a great example. I think that
49:16
Speaker 1: right now, most people's experience of AI maybe is a chatbot, right,
49:24
Speaker 1: you know, chat GPT or you know.
49:26
Speaker 3: Or any any go to any car company, you get
49:30
Speaker 3: that pop up and you know that's not a live
49:32
Speaker 3: person until the morning.
49:34
Speaker 1: What I always say is, just imagine all the best
49:38
Speaker 1: AI current ones today. And by the way, the ones
49:42
Speaker 1: that you're seeing today are the worst that you will.
49:44
Speaker 3: Ever see a little better every day.
49:47
Speaker 1: Worst you will ever see. They they read, they write,
49:52
Speaker 1: they hear, they see, They can compose poetry, music, in
49:59
Speaker 1: any job, photorealistic images, they can create video. All of
50:06
Speaker 1: this today, right right, this is all available today. They
50:12
Speaker 1: also write computer code as well or better than most programmers.
50:20
Speaker 1: They can do complex mathematics, they can solve puzzles, they
50:22
Speaker 1: can play games, they can run factories, they can drive cars.
50:27
Speaker 1: It is really hard to overestimate what's possible, and we
50:37
Speaker 1: are standing really for the first time after decades of
50:41
Speaker 1: discussion about it on a you know, on the brink
50:45
Speaker 1: of real white collar dramatic white collar productivity games, really dramatic.
50:53
Speaker 1: Best example that I would use for you to to
50:55
Speaker 1: kind of give you a framework for it, is that
50:59
Speaker 1: you're going to see a lot of AI show up
51:01
Speaker 1: as features in products that you already use, like you know,
51:05
Speaker 1: all your Apple products, right, will have it soon. The
51:09
Speaker 1: first thing you get with is probably a product. It
51:11
Speaker 1: will be agents, you know, something that works with you,
51:14
Speaker 1: like a partner, right, like a writing partner that you
51:16
Speaker 1: would use right, sort of a you know, think about
51:18
Speaker 1: it's a more advanced version of what you were just describing.
51:22
Speaker 1: The best thing out there right now. To illustrate that
51:25
Speaker 1: as a product called Copilot from Microsoft, which works with
51:32
Speaker 1: a software engineer. You have it running on your machine
51:35
Speaker 1: and it's basically a programming buddy that will help you
51:39
Speaker 1: write code, suggest different options, you know, help you debug
51:44
Speaker 1: track blah blah blah, and it typically improves productivity twenty
51:49
Speaker 1: five to fifty percent out of the box, amazing and
51:52
Speaker 1: then just and can be up to one hundred percent.
51:54
Speaker 3: Right.
51:56
Speaker 1: It all by itself has dampen the demand for computer
52:02
Speaker 1: programmers really because it's made the ones that we have
52:06
Speaker 1: so much better.
52:07
Speaker 3: You've just done you've you've doubled the effective productivity up to.
52:12
Speaker 1: But think about it as very dramatic, right, you know,
52:16
Speaker 1: if you had five, maybe you need four if you
52:19
Speaker 1: you know, it's just a really significant, uh improvement, which
52:27
Speaker 1: makes it practical to imagine that you're going to be
52:32
Speaker 1: able to do this in law firms and accounting firms
52:35
Speaker 1: and consulting firms, where you take your average employee and
52:38
Speaker 1: make them as good as your best.
52:40
Speaker 3: So let's take an old economy company that's not traditionally
52:44
Speaker 3: tech oriented. You guys own Mavis Tire Express Services. How
52:50
Speaker 3: does a consumer service business like that get digitally transformed?
52:55
Speaker 1: How do you model? Walks into our office and said,
52:59
Speaker 1: I know everything in the world about tires. I know
53:02
Speaker 1: where to buy them, not to store them, not to
53:05
Speaker 1: put them on, how to rotate them, I know how
53:08
Speaker 1: to balance them, I know how to align them nothing.
53:11
Speaker 1: I know everything about tires. I know anything about technology.
53:14
Speaker 1: But I have a very strong opinion that technology could
53:18
Speaker 1: help my business, and I just don't know where to start.
53:21
Speaker 1: I've got He had talked to a bunch of consultants.
53:23
Speaker 1: He had lots and lots of ideas, and.
53:25
Speaker 3: There were hundreds of these Mayavis stores right.
53:28
Speaker 1: On thousands, thousands. There were a thousand Mayvis stores when
53:31
Speaker 1: we first started chatting three years ago. So it's a
53:36
Speaker 1: you know, it's a good size, it's a good size business,
53:41
Speaker 1: very well run, nice growth, profitable. So it wasn't not
53:44
Speaker 1: a business that's broken, but a business where the management
53:48
Speaker 1: team had a felt need around the opportunity to make
53:55
Speaker 1: it better and and and really steal a march on
53:58
Speaker 1: their competitors. And so what we did is sit down
54:01
Speaker 1: with them and say, look, here are six different use
54:03
Speaker 1: cases that you know you might want to think about.
54:07
Speaker 1: Here's a way around you know, digital marketing. Here's a
54:12
Speaker 1: better customer experience. Here's what you can do around inventory management.
54:17
Speaker 1: Here's labor productivity and capacity utilization planning, here's dynamic pricing.
54:26
Speaker 1: And we went through an entire kind of you know,
54:30
Speaker 1: brainstorming session around that produced a whole plan. So you know,
54:35
Speaker 1: usually when you do a new investment, you'll do an underwriting,
54:39
Speaker 1: and we do a normal financial underwrite, and like everyone else,
54:41
Speaker 1: what's different is we also do in addition a separate
54:45
Speaker 1: digital underwriting where we talk with the management team to create,
54:49
Speaker 1: you know, a technology roadmap for the enterprise that integrates
54:54
Speaker 1: with their business model and extends it to create performance improvements.
54:59
Speaker 1: And what we did with them sat down. We got
55:02
Speaker 1: better digital marketing so that the search engines optimized for
55:06
Speaker 1: if you're calling and writing in I've got I got
55:09
Speaker 1: a flat tire and I'm in Poughkeepsie, then here's where
55:12
Speaker 1: you go. Improve the customer experience so you know, you
55:18
Speaker 1: know when to bring your car in, limit weight times,
55:22
Speaker 1: Accurate estimates of how long it is going to take,
55:27
Speaker 1: what it's going to cost, what your options are. Dramatically
55:31
Speaker 1: improved kind of labor utilization in the shops, capacity utilization,
55:39
Speaker 1: got the pricing right so that we manage margins and
55:43
Speaker 1: customer expectations appropriately. All of that, some of it we
55:49
Speaker 1: could we could get done in two days or two weeks,
55:51
Speaker 1: but some of those things has taken us two years
55:54
Speaker 1: to put up. The end result, though, is that the
55:58
Speaker 1: business is now more than twice as big huh, roughly
56:03
Speaker 1: twice as profitable. And that's not all due to the digital,
56:10
Speaker 1: but the digital is very fundamentally enabling of that growth
56:13
Speaker 1: as you might imagine if you're opening new stores, it's
56:15
Speaker 1: a lot easier to do if you do the same
56:17
Speaker 1: thing in every single store.
56:18
Speaker 3: So let's do it. Talk about another portfolio company, Pollywood
56:23
Speaker 3: I Density Palathene outdoor furniture. How can technology improve that?
56:30
Speaker 1: You know, it's an interesting business. It's a specialty manufacturing
56:34
Speaker 1: company that builds kind of very high quality. It feels
56:42
Speaker 1: like wood outdoor furniture, very durable, colorful, but doesn't chip,
56:50
Speaker 1: doesn't fade, doesn't need to be painted, doesn't need to
56:52
Speaker 1: be painted, you have to take it in during the winter,
56:54
Speaker 1: any of those things. So that's sort of the fundamental
56:56
Speaker 1: value proposition of the thing. But here's the difference, which
57:01
Speaker 1: is that we said, look, you guys are manufacturing guys
57:05
Speaker 1: people who built it, and they're really good at that
57:07
Speaker 1: because they use recycled plastics, so it's incredibly sustainable. You know,
57:12
Speaker 1: they drill the holes, they do the trimming, they just
57:14
Speaker 1: take the plastic waste put it back on the top.
57:16
Speaker 1: So it's a zero waste, highly sustainable, fantastic story. During COVID,
57:22
Speaker 1: they grew their online business a lot. They're not marketing people, right,
57:26
Speaker 1: so we're able to show them how to significantly improve
57:31
Speaker 1: yield on their online the e commerce side of the
57:37
Speaker 1: business we're to and we're able to do that, by
57:40
Speaker 1: the way, very quickly, almost instantly around that, able to
57:45
Speaker 1: see how to get to new adjacent market areas based
57:49
Speaker 1: on finding more people like the ones who are you
57:52
Speaker 1: know already buying.
57:54
Speaker 3: Once you identify a customer you want to be able
57:56
Speaker 3: to identify.
57:57
Speaker 1: Once you identify them electronically, then it's a lot easier
57:59
Speaker 1: to find that electronic signature similar people and go look
58:03
Speaker 1: for it online rather than waiting for people to find you.
58:08
Speaker 1: The other thing that we're doing there is that we
58:11
Speaker 1: have highly automated manufacturing and so that we can we
58:17
Speaker 1: can take the manufacturing and instead of manufacturing twenty or
58:22
Speaker 1: two hundred chairs, putting them in a warehouse, sending them
58:25
Speaker 1: to a distribution center a store, and hoping somebody buys them,
58:29
Speaker 1: we can instead take an order, build the chair, send
58:32
Speaker 1: it to them. So it's not just just in time,
58:37
Speaker 1: but it's real time. That creates pulls, so that dramatic
58:41
Speaker 1: improvements and efficiency, but it also makes it hard easier
58:45
Speaker 1: to do custom things. Improves turnaround time, you get your
58:48
Speaker 1: furniture much faster. Those would be good examples.
58:51
Speaker 3: Huh, really interesting. I only have you for a few
58:54
Speaker 3: more minutes, so before I get to my favorite questions,
58:57
Speaker 3: let me just ask you one last question. We talked
58:59
Speaker 3: about the Real Family Foundation and institute. Briefly, tell us
59:04
Speaker 3: a little bit about what you focus on with the
59:06
Speaker 3: Real Family Foundation.
59:09
Speaker 1: What we like to do is find social entrepreneurs, folks
59:14
Speaker 1: who are looking to make scale impact in education, particularly
59:24
Speaker 1: educational access, conservation, you know, kind of environmental things, biomedical research,
59:32
Speaker 1: and then a particular focus of mind is around helping
59:36
Speaker 1: support veterans in their families.
59:38
Speaker 3: Really really good stuff. All right, So this will be
59:41
Speaker 3: our speed round. I have about four minutes five minutes
59:44
Speaker 3: to get through five questions. Let's just do this quickly.
59:48
Speaker 3: What's keeping you entertained these days? What are you watching
59:51
Speaker 3: or listening to?
59:54
Speaker 1: Right now? My wife and I are watching The Lioness
59:57
Speaker 1: and The Diplomat.
1:00:00
Speaker 3: We're about halfway through The Diplomat, so no spoilers. Season
1:00:03
Speaker 3: two good.
1:00:05
Speaker 1: We loved The Crown, and I am waiting anxiously for
1:00:11
Speaker 1: season two of wolf Hall. The Henry the Eighth and
1:00:16
Speaker 1: Thomas Cromwell story. In podcast land, my current favorite is
1:00:22
Speaker 1: Fall of Civilizations by Paul Cooper.
1:00:26
Speaker 3: Interesting. Tell us about your mentors who helped to shape
1:00:29
Speaker 3: your career.
1:00:31
Speaker 1: You know, I've had a couple. I've been very fortunate.
1:00:34
Speaker 1: Early guy was a guy named Chuck Glover is a
1:00:36
Speaker 1: newspaper guy who ended up running Cox Enterprises, the media
1:00:41
Speaker 1: company he funded my Cox funded my first company. He
1:00:48
Speaker 1: was a newspaper guy, and the key lesson from him was, look,
1:00:53
Speaker 1: I had to put out a product every day, and
1:00:55
Speaker 1: so just getting in the habit of putting one foot
1:00:59
Speaker 1: in front of the other, making a little bit of
1:01:02
Speaker 1: progress every day and just keep going was really valuable.
1:01:06
Speaker 1: The other guy who was great for me was doctor
1:01:09
Speaker 1: Frank King. What I learned from Frank he was the
1:01:14
Speaker 1: head of engineering at Lotus and it had a similar
1:01:17
Speaker 1: job at IBM before that. What I learned from him
1:01:20
Speaker 1: was that the people were more important than the.
1:01:22
Speaker 2: Products, and that building your organization primacy of people and
1:01:30
Speaker 2: particularly always being recruit you know, always recruiting, being kind
1:01:35
Speaker 2: of on the pro all the time was super valuable.
1:01:39
Speaker 3: Let's talk about books. What are some of your favorites
1:01:41
Speaker 3: and what are you reading? Carl.
1:01:44
Speaker 1: I'm a Mark Halpern fan. I loved Paris in the
1:01:49
Speaker 1: present tense. I like Don Winslow. City on Fire is
1:01:55
Speaker 1: one of my favorite books, first in a trilogy with
1:01:59
Speaker 1: City of Design, City of City in Ruins. I like
1:02:03
Speaker 1: Anything by Dennis Lahane, Anything by Elizabeth Strout, and I'm
1:02:10
Speaker 1: currently just finished The Magician by Edmundavaal Just Reading The
1:02:16
Speaker 1: Hair with amberis also by Edmund de vaud Interesting.
1:02:20
Speaker 3: Our final two questions what sort of advice would you
1:02:23
Speaker 3: give a recent college grad interested in a career in
1:02:26
Speaker 3: either private equity or technology.
1:02:30
Speaker 1: You know, I always tell them the same thing. I
1:02:32
Speaker 1: always tell them to do something else first. And I
1:02:37
Speaker 1: say that because I'm a great believer in domain expertise,
1:02:43
Speaker 1: and so I usually counsel younger folks coming out of
1:02:46
Speaker 1: school to go learn an industry and or learn a craft.
1:02:52
Speaker 1: Learn a skill, you know, be good at marketing, be
1:02:54
Speaker 1: good at sales, you know, be good at finance. Pick
1:02:59
Speaker 1: something where you're really good at it, because it gives
1:03:02
Speaker 1: you a cachet and a standing that you don't otherwise have.
1:03:07
Speaker 3: H And our final question, what do you know about
1:03:10
Speaker 3: the world of private equity investing today that might have
1:03:13
Speaker 3: been helpful back in nineteen ninety nine when you were
1:03:15
Speaker 3: first standing up Silver.
1:03:17
Speaker 1: Lake I wish I knew how important it was to
1:03:23
Speaker 1: be first.
1:03:25
Speaker 3: Really, huh, that was interesting.
1:03:28
Speaker 1: I think as an operating person, I probably intuited it
1:03:35
Speaker 1: and understood it because I kind of saw it around me.
1:03:38
Speaker 1: The advantages that a crew to a you know, a
1:03:41
Speaker 1: category leader, you just don't need to be as good,
1:03:45
Speaker 1: you know, think about think about Elon Musk. You know,
1:03:50
Speaker 1: his first electric car was a bundle of borrowed parts
1:03:54
Speaker 1: and components. It barely worked, It was hugely expensive.
1:04:00
Speaker 3: Literally a lotus alon with laptop batteries.
1:04:02
Speaker 1: With laptop batteries in it, wired together with you know,
1:04:06
Speaker 1: with soldering wire, cost of fortune, incredibly uncomfortable to drive,
1:04:10
Speaker 1: totally unreliable.
1:04:13
Speaker 3: Got to start somewhere.
1:04:14
Speaker 1: But he was able to do that for years and
1:04:17
Speaker 1: years and years and learn and learn and develop, you know,
1:04:21
Speaker 1: and expertise and some skills. Same thing's true for if
1:04:25
Speaker 1: you think about it, Jeff Bezos right, selling books that
1:04:28
Speaker 1: no one wanted, losing money hand over fist for a decade,
1:04:34
Speaker 1: but building infrastructure, building experience, learning lessons, you know, creating
1:04:40
Speaker 1: a team that became the basis for you know, both
1:04:44
Speaker 1: of those things didn't work until they did, and boy,
1:04:47
Speaker 1: when they worked, They really worked great.
1:04:48
Speaker 3: They really were. Thank you, David for being so generous
1:04:52
Speaker 3: with your time. We have been speaking with David Route.
1:04:55
Speaker 3: He is the executive chairman of Baypine, a private equity
1:04:59
Speaker 3: firm focused on digital transformation. If you enjoy this conversation,
1:05:04
Speaker 3: well check out any of the five hundred plus discussions
1:05:07
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1:05:10
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1:05:15
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1:05:20
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1:05:30
Speaker 3: At the Money, wherever you find your favorite podcasts, and
1:05:34
Speaker 3: in the Masters in Business feed I would be romiss
1:05:38
Speaker 3: if I do not thank the crack team that helps
1:05:39
Speaker 3: with these conversations together each week. Anna Luke is my producer,
1:05:43
Speaker 3: Sean Russo is my researcher. Sage Bauman is the head
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Speaker 3: of podcasts here at Bloomberg. I'm Barry Retults. You've been
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Speaker 3: listening to Masters and Business on Bloomberg Radio