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Sebastian Mallaby on How Venture Capital Made Silicon Valley · Masters in Business

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  Speaker 1: M This is Mesters in Business with Very Renaults on
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  Speaker 1: Bluebird Radio. This week on the podcast, I have an
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  Speaker 1: extra special guest. Previously, I spoke with Sebastian Mallaby when
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  Speaker 1: he released his book The Man Who Knew All about
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  Speaker 1: Alan Greenspan. I would argue that Greenspan wasn't the Man
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  Speaker 1: Who Knew. We avoided talking about anything having to do
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  Speaker 1: with the Maestro or the Federal Reserve, or interest rates
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  Speaker 1: or inflation, and instead spent the full conversation discussing Mallaby's
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  Speaker 1: new book, The Power Law, Venture Capital in the Making
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  Speaker 1: of the New Future. I was so so fan of
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  Speaker 1: the green Span book because I'm not a fan of
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  Speaker 1: green Span. I loved Mallaby's prior book, More Money than God,
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  Speaker 1: all about hedge funds, and and this book is I
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  Speaker 1: think his best yet. The History of Silicon Valley told
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  Speaker 1: from the perspective of historian. He he really brings a
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  Speaker 1: very different lens and filter uh to looking at how
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  Speaker 1: Silicon Valley developed. All the things that are so different
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  Speaker 1: relative to um traditional investing, East Coast investing versus West
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  Speaker 1: Coast invents that investing, how they embrace risk, what a
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  Speaker 1: power law is, while you're why you're not looking for diversification,
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  Speaker 1: why you expect most of your investments to fail. And
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  Speaker 1: it's just a handful of companies that are responsible, uh
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  Speaker 1: for for the vast majority of your returns, and hence
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  Speaker 1: the tendency to spread a lot around money around on
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  Speaker 1: a lot of companies and a lot of entrepreneurs and
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  Speaker 1: a lot of startups looking for that unicorn that's going
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  Speaker 1: to really be the driver of your funds returns. I
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  Speaker 1: really really like the book, and I don't just say that.
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  Speaker 1: I I thought it was tremendous. I plowed through it
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  Speaker 1: over a couple of weekends in the dead of winter.
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  Speaker 1: I think you'll not only like the book, but you'll
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  Speaker 1: enjoy the conversation. So, with no further ado, my interview
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  Speaker 1: with Sebastian Mallaby. This is Masters in Business with Very
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  Speaker 1: Results on Bluebird Radio. HI extra special guest this week
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  Speaker 1: is Sebastian Mallaby. He is the Paul Volker Senior Fellow
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  Speaker 1: for International Economics at the Council on Foreign Relations. He
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  Speaker 1: is also a two time finalist for the Pulitzer Prize
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  Speaker 1: and editorial writing. He has been a columnist at The
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  Speaker 1: Washington Post, The Financial Times, The Economist, The Atlantic. He
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  Speaker 1: is the author of multiple books, including The Man Who Knew,
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  Speaker 1: the Life and times of Alan Greenspan, More Money Than God,
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  Speaker 1: all about hedge funds, and the making of a New Elite.
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  Speaker 1: His latest book is out February one, The Power Law,
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  Speaker 1: Venture Capital and the Making of a New Future. Sebastian Mallaby,
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  Speaker 1: Welcome to Bloomberg. Great to be witty, Barry, Great to
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  Speaker 1: have you again. Last we spoke was about five years ago,
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  Speaker 1: after the Greenspan book came out, and I have to
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  Speaker 1: tell you I've really enjoyed your book on venture capital.
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  Speaker 1: But before we get to that, I want to just
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  Speaker 1: for people who may not be familiar with your career, Uh,
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  Speaker 1: just do a little background. How did how did you
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  Speaker 1: get started in journalism and what were you covering early
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  Speaker 1: in your career. Well, I joined The Economist magazine right
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  Speaker 1: out of college, and I had stints as the Africa correspondent,
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  Speaker 1: the Toke Care correspondent ben A bit later, I was
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  Speaker 1: Washington Bureau chief, had some time in London when I
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  Speaker 1: was covering sort of fund management and finance UM and
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  Speaker 1: I was in South Africa actually when Nelson Mandela walked
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  Speaker 1: out of Jailand. I always say, my career has been
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  Speaker 1: downhill ever since. Really intrigued. So so you were covering apartheide,
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  Speaker 1: you also wrote a book on that. How did you
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  Speaker 1: pivot towards markets and technology and the economy when it
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  Speaker 1: was one of those sort of unplanned, step by step journeys, um,
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  Speaker 1: as I was saying, you know, I was, I was
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  Speaker 1: covering South Africa. Mandela came out of jail. It was
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  Speaker 1: incredibly exciting, and that was the springboard for my first
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  Speaker 1: book after apartheid, which was about what would happen next
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  Speaker 1: in South Africa? And I wrote that, um, you know,
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  Speaker 1: as a sort of young man in a hurry in
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  Speaker 1: my late twenties and didn't write another book for for
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  Speaker 1: you know, maybe a dozen years or so. And then
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  Speaker 1: I wrote a book about the World Bank and development economics,
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  Speaker 1: and so there was an overlap with the previous book.
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  Speaker 1: It was, you know, had a bit of Africa in it,
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  Speaker 1: and it was about lifting countries out of poverty and development,
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  Speaker 1: and but there was also this other side to it,
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  Speaker 1: which was the economics, um and that was kind of
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  Speaker 1: the segue to then writing about finance. I don't know
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  Speaker 1: how the financial journalism, but I hadn't written books about finance,
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  Speaker 1: but I I I took on this challenge of writing
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  Speaker 1: my hedge funds, and I spent a good long time
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  Speaker 1: on that and all my books. The reason I get
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  Speaker 1: to come on your show um at these five year
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  Speaker 1: intervals is I need to speed up in the tabolism
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  Speaker 1: so I get to talk to you more often. Well,
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  Speaker 1: I will tell you. I think the reason is you
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  Speaker 1: put so much time and effort and research into the
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  Speaker 1: book that it's not the sort of thing that I'm
• 5:35
  Speaker 1: always impressed with the people who can crank out a
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  Speaker 1: book every twelve to eighteen months. It's pretty clear that
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  Speaker 1: you put a ton of heavy lifting and deep, deep background.
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  Speaker 1: And I'm looking at a advanced copy, so I see
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  Speaker 1: all the footnotes of which and end notes of which
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  Speaker 1: there are thousands, but I don't see the index. I
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  Speaker 1: have to imagine, Um, you put a ton of work,
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  Speaker 1: research work into this book. Yes, I mean my view
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  Speaker 1: is better the right a book that's really worth the
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  Speaker 1: reader's time, um, and to take my time over it
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  Speaker 1: and really get it right. I mean I'm a perfectionist
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  Speaker 1: by nature, and I indulge that side of my character
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  Speaker 1: when I'm when I'm doing these books, so, um, more
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  Speaker 1: money than God. The hand Fund book took me, you know,
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  Speaker 1: four or five years. The next book was about Alan Greenspan,
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  Speaker 1: so that was another slice of financial history instead of
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  Speaker 1: public markets in the central banking m And now I've
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  Speaker 1: taken another five years or so to to do a
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  Speaker 1: deep dive into technology investing in venture capital. Um so um.
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  Speaker 1: You know, one thing leads to the next. So let's
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  Speaker 1: start talking about the power law and we'll get to
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  Speaker 1: exactly what that is in a bit. I want to
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  Speaker 1: start just so so listeners have an idea of how
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  Speaker 1: far back your research goes to nineteen fifty seven and
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  Speaker 1: your discussion of what you call liberation capital or defection capital,
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  Speaker 1: which is really a group of folks working for a
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  Speaker 1: particular company in California and they decide they've had enough
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  Speaker 1: and they want to go out on their own. Tell
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  Speaker 1: us a little bit about the genesis of that adventure. Sure,
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  Speaker 1: I mean liberation capital is a term I used to
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  Speaker 1: capture the absolutely key thing about venture capital and what
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  Speaker 1: they were doing right at the beginning of the history
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  Speaker 1: of venture capital. So back in the nineteen fifties, it
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  Speaker 1: was the time of big business, big labor, big government,
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  Speaker 1: and so on, and and people who worked in these
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  Speaker 1: big bureaucratic institutions were famously profiled in the book of
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  Speaker 1: the Time Organization Man, and you know, the title kind
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  Speaker 1: of tos you what you need to there, all about
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  Speaker 1: loyalty to the organization. And then in along comes this, uh,
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  Speaker 1: this financier Arthur Rock, who was really the pioneer of
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  Speaker 1: West Coast Center Capital, and he shows up in the
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  Speaker 1: valley and he liberates eight scientists who were working at
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  Speaker 1: one tech company they didn't like and they want to
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  Speaker 1: leave that company, and he raised his capital for them
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  Speaker 1: so that they can set up their own company. And
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  Speaker 1: that's called Fetchild Semiconductor. And really that liberation of those
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  Speaker 1: those eight scientists, and it was such a radical thing
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  Speaker 1: to do at the time. They were known as the
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  Speaker 1: eight traitors, like leaving your former employee is a treachery um.
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  Speaker 1: And and from the time that they got that money
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  Speaker 1: from Arthur Rock and they were able to be liberated
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  Speaker 1: and to found their own company, you know, from that
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  Speaker 1: moment on the old corporate ideas about hierarchy and loyalty
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  Speaker 1: and lifetime employment and retiring with a gold watch, all
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  Speaker 1: that stuff. It was forced into the defenses, and talent
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  Speaker 1: had been liberated and the revolution had begun. So I
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  Speaker 1: want to get into some of the details of of
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  Speaker 1: exactly how this talent was liberated, but to paint the
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  Speaker 1: broader picture, there's a data point in the book that's
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  Speaker 1: really quite astonishing. So fair Child dates back to ninety seven.
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  Speaker 1: By well over half a century later, seven zero of
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  Speaker 1: the of the publicly traded companies in Silicon Valley trace
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  Speaker 1: their lineage back to fair Child. That's really an astonishing
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  Speaker 1: data point. And what happened to explain that data point
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  Speaker 1: is that once off the Rock that further adventure Capital
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  Speaker 1: had sort of liberated the eighth Scientists to set up
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  Speaker 1: fair Child. He then turned around and liberated some of
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  Speaker 1: the members of that group of eight another time. You know,
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  Speaker 1: he would spin them out, raised capital, move them to
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  Speaker 1: some other company that he had invested in. And at
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  Speaker 1: the end of the story in Um he liberated even
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  Speaker 1: the two leaders of fair Child and they set up
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  Speaker 1: Intel with capital raised by Arthur Rock. And one of
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  Speaker 1: the eight Scientists was Eugene Kleiner. And I don't want
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  Speaker 1: to jump ahead too much in the story, but an
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  Speaker 1: Incliner set up kind of Perkins, which in turn invested
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  Speaker 1: in all these other value companies. So the point is that,
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  Speaker 1: you know, one liberation led to others, and it set
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  Speaker 1: off a kind of Cambrian explosion of all these startups
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  Speaker 1: in Silicon Valley. And I think it really illustrates the
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  Speaker 1: point that if Arthur Rock had not come along and
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  Speaker 1: financed fair Child, Sunly Conductor, the valley as we know
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  Speaker 1: it today might never have developed. Huh. That that's really intriguing.
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  Speaker 1: One of one of the really fascinating observations you make
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  Speaker 1: in the book is the difference between the East Coast
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  Speaker 1: form of I don't even know if I could call
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  Speaker 1: it venture capital. It's really more private equity or asset management.
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  Speaker 1: It's very risk averse, it's very diversified, it's a little
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  Speaker 1: slow and and maybe I can even use the word timid,
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  Speaker 1: whereas the West Coast is much more aggressive. To what
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  Speaker 1: do you ascribe those really radical differences in risk tolerance? Well,
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  Speaker 1: I think the East Coast, um, I mean, as you're
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  Speaker 1: as you're indicating, had a whole financial tradition, um. And
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  Speaker 1: if we're thinking about the late fifties, we need to
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  Speaker 1: remember that that financial tradition were still shaped by the
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  Speaker 1: memory of the nineteen twenty nine crash from the depression
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  Speaker 1: in the you know, hadn't really quite recovered um into
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  Speaker 1: the nineteen fifties. I mean, people were you know, the
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  Speaker 1: companies were called fidelity, they were called prudential. The very
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  Speaker 1: names signaled sort of responsibility and risk aversion. And so
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  Speaker 1: although there was some venture capital around Boston, uh and
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  Speaker 1: indeed in New York, it was less risk hungry than
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  Speaker 1: than the West Coast kind. I remember speaking to one
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  Speaker 1: of the Boston one of the early Boston venture capitalists,
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  Speaker 1: and he told me kind of proudly, um that he
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  Speaker 1: had made I don't know, forty bets or something in
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  Speaker 1: his career on different forty forty different startups, and only
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  Speaker 1: one of them had lost money. And he presented this
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  Speaker 1: as a great achievement. Of course, if you said that
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  Speaker 1: to a West Coast venture capitalist, the response would be, well,
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  Speaker 1: you're a loser. I mean you you're not taking enough
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  Speaker 1: risk because only one of them fails. You're being way
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  Speaker 1: too timid. You could never really make a you know,
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  Speaker 1: ten X class return if you're not taking not sticking
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  Speaker 1: your neck out more than that. So there is a
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  Speaker 1: different financial culture. I think it began with Arthur Rock,
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  Speaker 1: as I've been saying, I think he just he just
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  Speaker 1: had a willingness to back outsiders, and he was very
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  Speaker 1: quick and very early to understand you know, the key
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  Speaker 1: point that I think the East Coast didn't didn't get
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  Speaker 1: and the West Coast did get. And that was precisely
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  Speaker 1: the parallel the idea that the way to win in
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  Speaker 1: venture capital is not to avoid losses, because startups are
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  Speaker 1: intrinsically risky and you will lose money on lots of them.
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  Speaker 1: The way to make money is to make sure that
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  Speaker 1: when you win, you win. We're really big. This is
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  Speaker 1: a home run business. This is not a business where
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  Speaker 1: you try to make you a five percent gain, a
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  Speaker 1: tempercent gain here and there. This is about swinging for
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  Speaker 1: the fences and the best kind of defenses offense. And
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  Speaker 1: Arthur Rock would would say this. I mean, I went
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  Speaker 1: back and read his speeches that he gave him the
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  Speaker 1: early sixties, um and he was pretty clear about saying,
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  Speaker 1: you know, it's not about whether I lose on some
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  Speaker 1: of my bets. I mean, you can only lose one
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  Speaker 1: times your money. What matters if the bets where you make,
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  Speaker 1: you know, ten times fifteen times, twenty times what you
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  Speaker 1: what you pretend that's the home game? Huh. And the
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  Speaker 1: other factor that I thought was really fascinating that I
• 14:23
  Speaker 1: was aware of but didn't realize how important it was.
• 14:27
  Speaker 1: But you do a nice job of explaining this in
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  Speaker 1: the book. California does not allow non compete agreements for
• 14:35
  Speaker 1: corporations relative to their employees. If you want to quit
• 14:40
  Speaker 1: McDonald's and walk across the street to Burger King, the
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  Speaker 1: lord doesn't prevent you from doing that. That was a
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  Speaker 1: very different setup then a lot of other states, especially
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  Speaker 1: back east, had to tell us what the lack or
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  Speaker 1: the illegality of non compete did to the culture in
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  Speaker 1: Silicon Valley. When I think a key insight about how
• 15:03
  Speaker 1: innovation happens and why some innovation clusters are more productive
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  Speaker 1: and creative than others is that you've got to You've
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  Speaker 1: got to circulate people inside the cluster. It's all about
• 15:18
  Speaker 1: you know, you've got You've got a certain amount of
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  Speaker 1: human talent, engineers, marketing executives, people who know it to
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  Speaker 1: make startups work. And these people are conducting experiments. Each
• 15:29
  Speaker 1: each startup is an experiment, and each is a long
• 15:31
  Speaker 1: shot experiment because the majority you are going to sail.
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  Speaker 1: And so the whole game here is that that network,
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  Speaker 1: that ecosystem needs to circulate talent rapidly UM in order
• 15:44
  Speaker 1: to move the people into the right places where they
• 15:48
  Speaker 1: can be that a talent can be best put to use. UM.
• 15:51
  Speaker 1: And if you've got a start up and it's raised
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  Speaker 1: some capital normally, um, you know the capital is enough
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  Speaker 1: runway to last say six months, nine months, and then
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  Speaker 1: you identify the talent you want to hire with that money.
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  Speaker 1: If you had to wait for six months because of
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  Speaker 1: some non compete agreement before that person joins your startup,
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  Speaker 1: well then you run out of runway before they even
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  Speaker 1: get that. And so the ability to hire people and
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  Speaker 1: have them moving quickly is key. And UM, that's what
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  Speaker 1: California law makes easier because you cannot enforce none competes
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  Speaker 1: very easy easily in California court. And that's different to
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  Speaker 1: no states in the US. And to put this into
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  Speaker 1: context about how easy it was to set up a
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  Speaker 1: company and move forward, Bud Coyle, when when the traitorous
• 16:48
  Speaker 1: eight were ready to leave and set up Fair Child,
• 16:51
  Speaker 1: he pulled out ten CRISP one dollar bills and proposed
• 16:55
  Speaker 1: that all eight men should sign each of them and
• 16:59
  Speaker 1: that will was their contract during the early days of
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  Speaker 1: liberation capital. Was it really that simple, here, all of us,
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  Speaker 1: let's sign a dollar bill and that will loosely be
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  Speaker 1: our our agreement. I mean the bud Cone after Rock's
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  Speaker 1: partner on the fair Child financing and when you're right,
• 17:19
  Speaker 1: when he and Rock reached the agreement with the eight
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  Speaker 1: fair Child scientists, they all signed dollar bill, and of
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  Speaker 1: course it was symbolic, right, this is not a real contract,
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  Speaker 1: But I thought it was a pretty vivid signal, right,
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  Speaker 1: because it's partly about the informality of venture contracts that
• 17:35
  Speaker 1: although I think they had another contract, a real contract
• 17:38
  Speaker 1: which was drawn up a bit later, in terms of
• 17:42
  Speaker 1: kind of the blood bond between them all, you know,
• 17:44
  Speaker 1: signing that dollar bill was was the sign that they
• 17:47
  Speaker 1: were all in. And so it's partly the informality and
• 17:50
  Speaker 1: partly the way that fundamentally all of the invention and
• 17:53
  Speaker 1: entrepreneurship in the valley is founded on the financing that
• 17:57
  Speaker 1: underwrites the risk. So the fact that you know, what
• 18:00
  Speaker 1: they signed was money struck me as quite a vivid
• 18:04
  Speaker 1: symbol of how Cilicensanni got going. Huh, quite quite fascinating.
• 18:09
  Speaker 1: So let's talk a little bit exactly what power laws are.
• 18:15
  Speaker 1: Most of us are familiar with the Bell curve or
• 18:18
  Speaker 1: more traditional Gaussian distribution that are kind of evenly spread out.
• 18:24
  Speaker 1: It's a nice smooth distribution. Power laws are not like that.
• 18:28
  Speaker 1: Could you explain to us what exactly our power laws
• 18:32
  Speaker 1: relative to what we're usually used to, Right, so, whether
• 18:36
  Speaker 1: Bell curve or normal distribution, nearly all the observations are
• 18:40
  Speaker 1: close to the average. So and a good example is,
• 18:43
  Speaker 1: you know, the average American man is five ft turn
• 18:47
  Speaker 1: inches tool and two thirds of American men are within
• 18:52
  Speaker 1: three inches of that. So you know there are some
• 18:55
  Speaker 1: basketball players there are way more or whatever, but it's
• 18:58
  Speaker 1: it's rare. And stock market returns are another example of
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  Speaker 1: something which isn't perfectly normal, but it's kind of approximately close,
• 19:08
  Speaker 1: and really wild market swings happen, and that's why we
• 19:12
  Speaker 1: have crashes, but they're actually statistically pretty unusual. You know,
• 19:16
  Speaker 1: most of the time the market is just oscillating a
• 19:18
  Speaker 1: little bit from day to day. But some things in
• 19:22
  Speaker 1: life absolutely do not follow anything like that. Normal distributions.
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  Speaker 1: For example, whereas the height of people is a normal distribution,
• 19:33
  Speaker 1: the wealth of people is a power law distribution, meaning, um,
• 19:39
  Speaker 1: you know, some people will be just massively richer than
• 19:44
  Speaker 1: the average, and we'll pull the average up um or
• 19:48
  Speaker 1: take academic citations, some small fraction of academic papers capture
• 19:54
  Speaker 1: the lion's share of all the sites. And these skewed
• 19:58
  Speaker 1: distributions are called power law distributions. And that's what you
• 20:03
  Speaker 1: get with with venture capital and startups. Most startups fail
• 20:09
  Speaker 1: and the investors return is zero. They lose all their money.
• 20:14
  Speaker 1: UM A few like maybe depending exctly on on you know,
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  Speaker 1: which period of time you're looking at, how strong the
• 20:23
  Speaker 1: tech market is and what have you. But if you
• 20:26
  Speaker 1: are gonna just take off into the stratosphere and have
• 20:29
  Speaker 1: this exponential rights and so that that minority, it's a
• 20:34
  Speaker 1: bit like if you think about the cinema, the the
• 20:36
  Speaker 1: analogy of the cinema, and you know, the tallest guy
• 20:39
  Speaker 1: walks out, it's not going to change the average height
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  Speaker 1: in the cinema very much. But if you're talking about
• 20:45
  Speaker 1: the wealth of the people in the cinema and Jeff
• 20:48
  Speaker 1: Bevels is in the cinema and he walks out, it's
• 20:51
  Speaker 1: going to radically change the average. And and that's what
• 20:54
  Speaker 1: you've got you're you're looking at with. With venture capital,
• 20:57
  Speaker 1: there's a few absolutely start come benese um which dominate
• 21:03
  Speaker 1: the returns that venture capitalists are going to earn. And
• 21:06
  Speaker 1: once you understand that, it means as a venture capitalist
• 21:10
  Speaker 1: you can't just invest by going for a modest return
• 21:14
  Speaker 1: while protecting your downside. The whole game is to get
• 21:18
  Speaker 1: a piece of the exponential winners. Venture capital is a
• 21:21
  Speaker 1: game of grand slams um and I think that power
• 21:25
  Speaker 1: lew is so central to the way that venture capitalists
• 21:28
  Speaker 1: have to think that that's why I took it as
• 21:30
  Speaker 1: my title. It's a parallel. So so to put some
• 21:35
  Speaker 1: numbers on this venture capital firm, Horseley Bridge ran an
• 21:39
  Speaker 1: analysis over the investments they made over the course of
• 21:43
  Speaker 1: it looks like thirty years into seven thousand startups that
• 21:48
  Speaker 1: they backed, and it turned out that only five of
• 21:54
  Speaker 1: those those startups generated of the returns over the total funds,
• 22:02
  Speaker 1: and some other people have said it's even more lopsided.
• 22:05
  Speaker 1: Peter Tiel pointed out the biggest secret and venture capital
• 22:09
  Speaker 1: is that the best investment in a successful fund usually
• 22:13
  Speaker 1: equals or outperforms the entire rest of the fund. So
• 22:17
  Speaker 1: so that sounds like that is really very skewed compared
• 22:21
  Speaker 1: to what we typically think of, at least in a
• 22:24
  Speaker 1: diversified portfolio. Yeah, I mean the whole idea of diversification
• 22:29
  Speaker 1: that something that basically got thrown out of the window
• 22:33
  Speaker 1: when venture capital was invented. UM. You know, if you
• 22:37
  Speaker 1: think about the normal idea, you make a lot of bets,
• 22:40
  Speaker 1: you try to diversify, UM, you're thinking about your risk
• 22:44
  Speaker 1: return balance. UM. That kind of public market mentality is
• 22:51
  Speaker 1: totally alien to venture capital investing, where you're making concentrated,
• 22:57
  Speaker 1: all liquid bets in actual companies that you can't exit UM,
• 23:03
  Speaker 1: and they're either gonna do incredibly well and take off
• 23:08
  Speaker 1: or they're gonna you know, run into the ground, UM
• 23:11
  Speaker 1: and so. And you know, they're all in tech. It's
• 23:13
  Speaker 1: not avert side. And in fact, a lot of venture
• 23:16
  Speaker 1: capitalists specialized personally in some subsection of tech. You know,
• 23:22
  Speaker 1: they're they're fast dcs or they are um, you know,
• 23:26
  Speaker 1: med tech, medical technology vcs or whatever it is. So
• 23:30
  Speaker 1: they are completely the opposite of diversified UM. And it's
• 23:35
  Speaker 1: kind of like, you know, it's all in boots, boots
• 23:39
  Speaker 1: on the ground, no, no no hedging at all. UM.
• 23:44
  Speaker 1: And in a way. You know, That's what's partly what
• 23:46
  Speaker 1: sort of attracted me to to writing about venture capital
• 23:49
  Speaker 1: is just so different to public market investing UM in
• 23:54
  Speaker 1: in many ways, but that's one of them. So I
• 23:57
  Speaker 1: really like the way the various ages of venture capital
• 24:02
  Speaker 1: are elucided in the book. You started with Liberation Capital.
• 24:07
  Speaker 1: Let's talk a little bit about the next phase of
• 24:10
  Speaker 1: of venture investing, hands on activism and stage by stage finance.
• 24:16
  Speaker 1: Let's let's discuss each of these, right, So, after Arthur
• 24:21
  Speaker 1: Rock established the idea of Liberation Capital, the next phase
• 24:25
  Speaker 1: is the seventies, and this was marked by the founding
• 24:28
  Speaker 1: of two famous partnerships, both in Seka Capital and China Perkins.
• 24:36
  Speaker 1: And as you say, the first innovation that these guys
• 24:40
  Speaker 1: brought was really to be hands on, to be to
• 24:43
  Speaker 1: roll your sleeves up and get involved in the shaping
• 24:46
  Speaker 1: of the company. Um And one of the Coya's first
• 24:49
  Speaker 1: investments was in the pioneering video game maker Atari. They
• 24:54
  Speaker 1: had a game called Pong. It was pretty simple. You
• 24:58
  Speaker 1: pappled the you moved paddle up and down and and
• 25:02
  Speaker 1: you tried to kind of you know, hit the hit
• 25:04
  Speaker 1: that little dot on the screen that was coming towards
• 25:07
  Speaker 1: the paddle. Uh. And I think the instructions were basically
• 25:10
  Speaker 1: one line, avoid missing ball for high school. So you
• 25:15
  Speaker 1: could put this game in a bar and didn't matter
• 25:17
  Speaker 1: how drunk you were, you could still play. And and
• 25:21
  Speaker 1: so Dog Valentine, the founder of the Choir, backed Attari
• 25:27
  Speaker 1: because the games were popular and they were selling. But
• 25:30
  Speaker 1: at the same time, Attari as a company was an
• 25:33
  Speaker 1: absolute managerial disaster. I mean there were no financial controls.
• 25:38
  Speaker 1: The board meetings were held in a hot tub, and
• 25:42
  Speaker 1: it was you know, people would get paid travel expensive
• 25:45
  Speaker 1: before they traveled, and they would just make off with
• 25:48
  Speaker 1: the money and never show up again. Um. You know,
• 25:51
  Speaker 1: on Friday afternoons, people would race to the car park
• 25:53
  Speaker 1: to jump in their cars to get to the bank
• 25:55
  Speaker 1: and cash their paycheck because whoever didn't move fast enough
• 25:58
  Speaker 1: to find there was no money to collect any money
• 26:00
  Speaker 1: and no money left in the bank account. Um. So
• 26:03
  Speaker 1: you know, most investors would have looked at this mess.
• 26:06
  Speaker 1: They would have visited the factory and inhaled the marijuana
• 26:10
  Speaker 1: smith of heavy in the air and they would have said, hey,
• 26:13
  Speaker 1: and I can't do this. But Don Valentine, the founder
• 26:18
  Speaker 1: of Sequia, was not intimidated when they said the board
• 26:21
  Speaker 1: meeting will now take place in the hot tub, he
• 26:24
  Speaker 1: just took his clothes off and got right into that
• 26:26
  Speaker 1: hot tub. By the way, he was a former Navy
• 26:30
  Speaker 1: water polo player, so this business of showing off his
• 26:33
  Speaker 1: chest actually probably worked in his favor. And because of
• 26:37
  Speaker 1: his physical and intellectual force of character, he basically beat
• 26:43
  Speaker 1: the Atari guys over the head until they had a
• 26:45
  Speaker 1: company that actually did function, and it got to the
• 26:48
  Speaker 1: point where it was functional enough for a serious company,
• 26:51
  Speaker 1: Warner Brothers to buy it, and Sakia got out with
• 26:54
  Speaker 1: a great profit. So the point here is this is,
• 26:58
  Speaker 1: you know, this is not for the faint of heart.
• 27:00
  Speaker 1: This is you know, you see the glimmer of genius
• 27:04
  Speaker 1: in a creative startup that has got a good team
• 27:08
  Speaker 1: of engineers who are building, um, you know, pioneering video games.
• 27:13
  Speaker 1: You say, I can make something of that, even though
• 27:15
  Speaker 1: the rest of the company is a totally chaotic mess UM.
• 27:21
  Speaker 1: And so that was that, that was their hands on
• 27:24
  Speaker 1: And then the second thing in the seventies UM, which
• 27:28
  Speaker 1: is you know, equally important, is the idea of investing
• 27:33
  Speaker 1: stage by stage, you know, putting some money in watching
• 27:37
  Speaker 1: the progress and then if there is progress, you put
• 27:39
  Speaker 1: some more money in. And the best example here was
• 27:42
  Speaker 1: probably the company Genentech, the first biotech company which created
• 27:47
  Speaker 1: artificial incidents. And when the Genetech founders tried to raise money,
• 27:53
  Speaker 1: they went to Tom Perkins, the co founder of Kline Perkins,
• 27:57
  Speaker 1: and they asked for half a million dollars to hire scientists,
• 28:01
  Speaker 1: you know, set up a lab and get close to
• 28:03
  Speaker 1: a first product. And Tom Perkins looked at this and
• 28:07
  Speaker 1: he thought, well, look, you know, making the first ever
• 28:11
  Speaker 1: artificial incident, that is a serious technical challenge, and it's
• 28:16
  Speaker 1: just too much for me to risk half a million
• 28:19
  Speaker 1: dollars on something which is serious frontier technology. So instead
• 28:24
  Speaker 1: of betting you half a million, which would have been
• 28:26
  Speaker 1: painful to lose, he instead invested a hundred thousand bucks
• 28:31
  Speaker 1: and told Gnantech to use it to eliminate what he
• 28:34
  Speaker 1: called the white hot risks, so, in other words, the
• 28:38
  Speaker 1: most obvious things that could just kill the whole idea
• 28:41
  Speaker 1: of debt. And if they could get past the white
• 28:44
  Speaker 1: hot risks with just a hundred thousands, then he would
• 28:48
  Speaker 1: give them some more money and they could go to
• 28:51
  Speaker 1: the next set of risks. And that way, if gnantech
• 28:55
  Speaker 1: was to sail at least it would fail cheaply, and
• 28:59
  Speaker 1: that idea stage by stage financing turned a company that
• 29:03
  Speaker 1: would have just been too risky and expensive to bet
• 29:06
  Speaker 1: money on into something that actually became a very attractive investment.
• 29:10
  Speaker 1: And today we would think of that really is angel
• 29:14
  Speaker 1: and then seed and then a round, B, round C
• 29:17
  Speaker 1: round that they were inventing the playbook as they went.
• 29:22
  Speaker 1: It didn't exist the way it does today. Let's stay
• 29:25
  Speaker 1: with the concept of these new developments and talk a
• 29:29
  Speaker 1: little bit about the network effect what took place in
• 29:34
  Speaker 1: Silicon Valley as they progressed to create a network that
• 29:39
  Speaker 1: impacted the entire region. Right, So if we if we
• 29:43
  Speaker 1: think about that, the ark of the history um you know,
• 29:46
  Speaker 1: the the late fifties and sixties is about the idea
• 29:49
  Speaker 1: of liberation capital as we discussed the kind of first
• 29:52
  Speaker 1: half of the seventies is about proving these ideas of
• 29:57
  Speaker 1: UM hands on investing and stay ah by stage financing.
• 30:01
  Speaker 1: And then the next thing that happens is you've got
• 30:04
  Speaker 1: the basic tool of the basic venture capital tool kit
• 30:08
  Speaker 1: and you layer on top of that an explosion in
• 30:12
  Speaker 1: the number of centure capitalists who are out there using
• 30:16
  Speaker 1: these tools. Um and what happened is that, you know,
• 30:20
  Speaker 1: there were a couple of tax changes and regulatory changes
• 30:25
  Speaker 1: about which kinds of institution could put money into into
• 30:29
  Speaker 1: venture capital, and suddenly fundraising by these these went up massively.
• 30:36
  Speaker 1: So you know, the average in the mid seventies of
• 30:39
  Speaker 1: like forty two million dollars a year. Between seventy eight
• 30:43
  Speaker 1: and eight three, it was nine hundred and forty million
• 30:46
  Speaker 1: a year, so an enormous increase in the amount of money.
• 30:50
  Speaker 1: And that meant that one of a sudden, there are
• 30:52
  Speaker 1: enough centure capitalists running around Silicon Valley that they fundamentally
• 30:56
  Speaker 1: changed the business culture. Everything speeds up. Startups are getting
• 31:01
  Speaker 1: formed faster, there are more of them, more new technologies
• 31:05
  Speaker 1: are getting built, human talent is circulating from one startup
• 31:09
  Speaker 1: to another one at a higher rate, and all of
• 31:11
  Speaker 1: that creates this flywheel where Cilicon Family becomes just the
• 31:15
  Speaker 1: most productive and creative and inventive innovation cluster in the
• 31:20
  Speaker 1: world thanks to you. Just it's great to have a
• 31:24
  Speaker 1: few small venture capitalists using the basic tools, but when
• 31:28
  Speaker 1: you have a lot of them all running around at
• 31:31
  Speaker 1: the same time, it's more than just a few deals.
• 31:35
  Speaker 1: It's a whole culture of taking risk, having the guts
• 31:40
  Speaker 1: to start a new company. All of that becomes enabled
• 31:43
  Speaker 1: by venture capital. So there's a fascinating tale about how
• 31:49
  Speaker 1: some companies that seem to have a hard time getting
• 31:54
  Speaker 1: funded instead get passed from venture capitalist events a capitalist.
• 32:01
  Speaker 1: Rather than just say no, it seems there's this tendency
• 32:05
  Speaker 1: to say, I know somebody who you might be better
• 32:09
  Speaker 1: suited to speak to than me. Tell us a little
• 32:12
  Speaker 1: bit about that network effect and why it makes Silicon
• 32:16
  Speaker 1: valleys such an economic powerhouse. Sure, well, I think it
• 32:21
  Speaker 1: comes back to this idea. I just hinted that a
• 32:23
  Speaker 1: bit earlier as we were talking about how the key
• 32:28
  Speaker 1: to innovative experiments is to have the right people there
• 32:32
  Speaker 1: to to conduct them, and so moving people around a
• 32:36
  Speaker 1: cluster is super important. This is I mean just a
• 32:39
  Speaker 1: little digression here, but Um, one of the things I
• 32:42
  Speaker 1: was puzzling over as I was working on this book
• 32:46
  Speaker 1: is that you know, in the economics literature, which I
• 32:49
  Speaker 1: was familiar with, UM, when you when you wrote about
• 32:53
  Speaker 1: a clusters, I mean, when economists talked about clusters, they
• 32:57
  Speaker 1: are talking about you know, if you put everybody in
• 33:01
  Speaker 1: the same place who does movies in Hollywood or finance
• 33:04
  Speaker 1: in New York or what have you. This is good
• 33:07
  Speaker 1: because you know, if you want a particular special effects
• 33:10
  Speaker 1: um actor, you can find them in Hollywood, because it's
• 33:15
  Speaker 1: just like exactly the kind of person who jumps out
• 33:18
  Speaker 1: of a four story window and does a certain kind
• 33:21
  Speaker 1: of you know, somesault on the way down or whatever.
• 33:24
  Speaker 1: Whatever specialty you need in a in a deep labor
• 33:27
  Speaker 1: market which will be provided by a cluster, you can
• 33:31
  Speaker 1: find it. And so it's this kind of optimal matching
• 33:35
  Speaker 1: of skills to the needs, which is why clusters work.
• 33:41
  Speaker 1: And that's all very well and quite persuasive, but it
• 33:43
  Speaker 1: doesn't tell you why if you have got two clusters
• 33:47
  Speaker 1: that have the same number of people in each, why
• 33:50
  Speaker 1: would one cluster do better than the other cluster. And
• 33:53
  Speaker 1: that's pretty much what was going on around when you
• 33:59
  Speaker 1: compared Silicon Valley to the Boston Tech cluster. There was
• 34:05
  Speaker 1: this route one thing. It grew out of the military
• 34:07
  Speaker 1: industrial complex. There had been these companies like Raycion and
• 34:11
  Speaker 1: Deck and and Wang and and so on, and so
• 34:14
  Speaker 1: there were these two rival tech centers in the US,
• 34:18
  Speaker 1: and Silicon Valley during the pulled ahead and absolutely crushed Boston.
• 34:25
  Speaker 1: Why was that? And the best explanation I could find
• 34:29
  Speaker 1: was from a sociologist, not an economist, at Berkeley called
• 34:35
  Speaker 1: analy Saxony and who wrote a book called Regional Advantage,
• 34:38
  Speaker 1: where had a story which I find completely persuasive, is
• 34:41
  Speaker 1: basically that you know, they were vertically integrated, hierarchical, secretive
• 34:47
  Speaker 1: companies around Boston, and if somebody in a Boston company
• 34:52
  Speaker 1: like Deck or Wang or whatever had a brilliant new
• 34:56
  Speaker 1: idea and the boss didn't like it, the idea was dead.
• 35:01
  Speaker 1: The engineer was not allowed to pursue that idea, and
• 35:03
  Speaker 1: the idea would not be leaked to a rival company
• 35:06
  Speaker 1: because everybody was secretive and there was no cross pollination
• 35:09
  Speaker 1: between these companies, whereas in Silicon Valley there was this
• 35:15
  Speaker 1: bubbling cauldron of startups and you know, people would go
• 35:19
  Speaker 1: to the there was this you know, dina kind of
• 35:22
  Speaker 1: bar players called Walker's Wagon Wheel, and all the engineers
• 35:25
  Speaker 1: would meet there after work and they would trade ideas
• 35:28
  Speaker 1: about stuff they were working on. Nobody cared about trade
• 35:31
  Speaker 1: secrets um and that meant that you had this circulation
• 35:35
  Speaker 1: of ideas going on. And as we've discussed, there were
• 35:38
  Speaker 1: no noncomplete so you could also move from one company
• 35:42
  Speaker 1: to another. And so the point is, whereas ideas were
• 35:46
  Speaker 1: sort of bottled up in these secrets hierarchies. In one
• 35:49
  Speaker 1: cluster Boston, ideas were circulating, and so we're people circulating
• 35:55
  Speaker 1: in the other cluster, Cilicon Valley. That's why Cilicon Valley one.
• 36:00
  Speaker 1: And what I'm trying to add with my book um
• 36:05
  Speaker 1: is to put on top of that good work by
• 36:08
  Speaker 1: Unily Saxonian an additional idea, which is to say, okay,
• 36:12
  Speaker 1: So it was the circulation within the cluster, the fast
• 36:17
  Speaker 1: moving of ideas, people and money until they reached their
• 36:21
  Speaker 1: optimal use. That's what made Silicon Valley work. That's what
• 36:24
  Speaker 1: made innovation turbo charged. But where did that fast circulation
• 36:30
  Speaker 1: come from? And my argument is it comes from centric
• 36:34
  Speaker 1: capitalists venture capitalist of the people who are financially incentivized
• 36:38
  Speaker 1: to get up in the morning, have breakfast with one
• 36:40
  Speaker 1: person who is an entrepreneur that they might fund, and
• 36:43
  Speaker 1: then have fourteen cups of coffee before they get to
• 36:46
  Speaker 1: bed with different people because either it's another deal they're
• 36:49
  Speaker 1: trying to do, or it is a meeting with somebody
• 36:52
  Speaker 1: that they funded last year and now they need from
• 36:54
  Speaker 1: advice or it's a company that you know, needs to
• 36:57
  Speaker 1: have five more engineers, and so they're going to interview
• 36:59
  Speaker 1: the is the VC is going to interview the engineers.
• 37:02
  Speaker 1: Dcs are like the flowers flying around the garden pollinating
• 37:05
  Speaker 1: the flowers moving or the bees, I guess, moving the
• 37:09
  Speaker 1: problems from one flower or another. And and that's what
• 37:12
  Speaker 1: connects up the cluster, the the network. And that's sort
• 37:17
  Speaker 1: of just super important for getting all the limited resources
• 37:21
  Speaker 1: of people and ideas and money into the right mixtures
• 37:24
  Speaker 1: to create really fertile experiments that make the value work.
• 37:29
  Speaker 1: And so I think, you know, you know, I'm not
• 37:33
  Speaker 1: sure I've given you quite the answer you wanted, but
• 37:34
  Speaker 1: in a general way, the key thing about venture capital
• 37:39
  Speaker 1: networks is that they connect up networks and they transform
• 37:43
  Speaker 1: their productivity really interesting. Let's let's talk about two other
• 37:48
  Speaker 1: developments in the venture world, speed and size. And let's
• 37:54
  Speaker 1: start with size talking about soft Bank, when when they
• 37:59
  Speaker 1: came to California from Japan, their approach was, we have
• 38:03
  Speaker 1: very deep pockets, and we want to give you not
• 38:06
  Speaker 1: just a few hundred thousand dollars or a few million dollars,
• 38:09
  Speaker 1: but here's a hundred million dollars and if you don't
• 38:12
  Speaker 1: take our money, we're going to go to your competitor
• 38:14
  Speaker 1: and offer them a hundred million dollars. There's only room
• 38:17
  Speaker 1: in the space for one of you. And whoever takes
• 38:20
  Speaker 1: our money wins. Tell us a little bit about the
• 38:23
  Speaker 1: impact and advantage of size, right, So that's a story
• 38:28
  Speaker 1: you're you're you're alluding to of the financing of Yahoo
• 38:33
  Speaker 1: when mass Son came and made exactly that proposal. Basically,
• 38:37
  Speaker 1: you know, you said to Jerry Yango Yahoo, Um, I'll
• 38:41
  Speaker 1: write you a check for a hundred million. And when
• 38:43
  Speaker 1: Jerry Yangford I don't want it, I don't need it.
• 38:45
  Speaker 1: He said, Jerry, everybody needs a hundred million and if
• 38:48
  Speaker 1: you don't take it, our financial competitor um. And what
• 38:52
  Speaker 1: was sort of you know, the significance of that moment
• 38:54
  Speaker 1: was partly that the VC who had funded Yahoo in
• 38:59
  Speaker 1: the Series A round was Michael Morrett's of Sequoia Capital,
• 39:04
  Speaker 1: who was just done emerging as sort of the leader
• 39:08
  Speaker 1: of Sequoia along with Doug Leone, his partner, and Morett
• 39:14
  Speaker 1: took away from that experience an absolutely firm determination that
• 39:20
  Speaker 1: he wouldn't be muscled again. He wouldn't allow somebody to
• 39:24
  Speaker 1: come in and say, you know, this is a take
• 39:26
  Speaker 1: it or leaving offer. It's an offer you can't refuse,
• 39:29
  Speaker 1: you know, Don corleone style. You know he was going
• 39:32
  Speaker 1: to avoid that. And that is why Sequoia in the
• 39:36
  Speaker 1: late nineties started to try to get its own big
• 39:41
  Speaker 1: check writing capability off the ground. In other words, a
• 39:45
  Speaker 1: growth fund which wouldn't just be doing as you say,
• 39:48
  Speaker 1: five minute ten million checks to Series A, Series B,
• 39:53
  Speaker 1: but would be writing much bigger checks series C, series
• 39:57
  Speaker 1: D two companies and allowing them to carry on growing
• 40:03
  Speaker 1: before going public. Now you can see the logic right that,
• 40:07
  Speaker 1: if if one player like Massi's son from soft Bank,
• 40:11
  Speaker 1: has that godfather likability, you know, take it or leave
• 40:15
  Speaker 1: it um, others are going to want to muscle up
• 40:19
  Speaker 1: and get that capability as well. Whether it's good for
• 40:22
  Speaker 1: the venture couple system is a different question. I'm not
• 40:25
  Speaker 1: sure it is, because I think that at a certain point,
• 40:28
  Speaker 1: going public brings transparency to tech companies, and that can
• 40:35
  Speaker 1: be healthy. I didn't think that staying private for too
• 40:38
  Speaker 1: long is necessarily the best way to govern tech companies.
• 40:44
  Speaker 1: All right, So that's the size discussion. Let's talk about speed,
• 40:48
  Speaker 1: uh and and in particular Tiger Global, who seems to
• 40:52
  Speaker 1: be investing at a record pace and and forcing the
• 40:57
  Speaker 1: rest of the VC industry to to keep up. Is
• 41:01
  Speaker 1: this a smart way to make investments and what are
• 41:04
  Speaker 1: the ramifications of this emphasis on speed? Yeah, great question.
• 41:11
  Speaker 1: I mean I I spent some time with Tiger Global
• 41:14
  Speaker 1: when I was doing the research, and I and I
• 41:17
  Speaker 1: talked to the two leaders chose Coleman and scotch Life
• 41:20
  Speaker 1: for quite quite a bit, and I was spect him
• 41:24
  Speaker 1: a lot, and I you know, they're very smart investors
• 41:26
  Speaker 1: and they've built an amazing company. And I think the
• 41:29
  Speaker 1: critics outside to say, you know, this is just purely
• 41:32
  Speaker 1: training money at the wall are exaggerating because I think,
• 41:36
  Speaker 1: you know, these guys are smarter than that. But um,
• 41:40
  Speaker 1: I actually don't think that what they're doing is particularly
• 41:43
  Speaker 1: healthy for the technology ecosystem. I think, you know, it's
• 41:49
  Speaker 1: better when capital, you know, is a bit tougher to raise.
• 41:53
  Speaker 1: Investors cannot be taken for granted, and if you want money,
• 41:58
  Speaker 1: you need to be you know, transparent, responsible and have
• 42:03
  Speaker 1: a convincing plan about how you're going to use the money.
• 42:07
  Speaker 1: And I think Tiger probably does a much better job
• 42:11
  Speaker 1: than most at being able to combine some sense of
• 42:16
  Speaker 1: what they're investing in speed right, because they've got a
• 42:20
  Speaker 1: whole machine which has figured out which kind of which
• 42:25
  Speaker 1: which sort of segments of the tech space they believe
• 42:28
  Speaker 1: they're going to do well. Who are the market leaders
• 42:31
  Speaker 1: in those spaces? I mean they do almost by a matrix, right,
• 42:35
  Speaker 1: they have this, you know, here are the here are
• 42:37
  Speaker 1: the turn technologies we think are going to thrive. Here
• 42:41
  Speaker 1: are the number one and number two players in each space.
• 42:44
  Speaker 1: We're going to back the two leaders because we think
• 42:47
  Speaker 1: that this is generally a winner takes Also, one of
• 42:48
  Speaker 1: the top two is going to win. UM. And if
• 42:52
  Speaker 1: you take those boxes, then we don't really need to
• 42:55
  Speaker 1: ask any more questions. We know we want to invest
• 42:57
  Speaker 1: in you, and we will move incredibly fast, beat the competition,
• 43:01
  Speaker 1: and we will not weigh you down. If you're the CEO,
• 43:05
  Speaker 1: we don't. We understand you don't want your investor cheering
• 43:08
  Speaker 1: up your time because you've got other stuff to do. UM.
• 43:11
  Speaker 1: So that's their playbook. It works for them, it's a
• 43:14
  Speaker 1: good competitive tool. It probably works for their investors. I
• 43:17
  Speaker 1: don't think it's healthy for the for the tech world
• 43:20
  Speaker 1: as a whole, because I think you end up forcing
• 43:23
  Speaker 1: others to be fast, which means they don't do due diligence,
• 43:26
  Speaker 1: which means there's just a kind of a race to
• 43:29
  Speaker 1: write checks. And that's not thoughtful, it's not you know,
• 43:33
  Speaker 1: discriminating as between good companies and bad companies. And I
• 43:36
  Speaker 1: think in the end that just inflates bubbles. And we
• 43:39
  Speaker 1: may be feeling that right now. So we already discussed
• 43:43
  Speaker 1: power laws, which are the non typical bulk of distribution,
• 43:49
  Speaker 1: where it's a tiny percentage of the sample set are
• 43:54
  Speaker 1: responsible for the vast majority of the performance. Let's talk
• 43:59
  Speaker 1: about some other laws that come up, starting with Moore's law.
• 44:03
  Speaker 1: Tell us a little bit about Moore's law. Well, Gordon
• 44:07
  Speaker 1: Moore was the one of the founders of fetch Our Semiconductor,
• 44:12
  Speaker 1: that company we started by discussing, and then he went
• 44:15
  Speaker 1: on to be a co founder of Intel, and he
• 44:18
  Speaker 1: made this observation which wasn't really a law, it was
• 44:20
  Speaker 1: just an empirical observation about this is how things were working,
• 44:24
  Speaker 1: is that you know, semi conductors would double empower every
• 44:28
  Speaker 1: two years. And that's sort of one example of something
• 44:34
  Speaker 1: which some venture capitalists referred to as tech beta. In
• 44:38
  Speaker 1: other words, if you can invest in a company that
• 44:43
  Speaker 1: is making something using semiconductors and you know that the
• 44:46
  Speaker 1: semi inductor is going to become twice as powerful two
• 44:50
  Speaker 1: years from now, you know that whatever you're making is
• 44:55
  Speaker 1: going to improve in performance and quality and stability to
• 45:00
  Speaker 1: delight consumers just because of Moore's law is is is
• 45:05
  Speaker 1: kind of like the wind that you're back, so you
• 45:08
  Speaker 1: can invest in things and if you're skating to where
• 45:10
  Speaker 1: the part will be um you know, you know that
• 45:15
  Speaker 1: you may be not making much of a margin on
• 45:17
  Speaker 1: the product today, but in two years time, the component
• 45:21
  Speaker 1: in your gadget will be twice as powerful and you
• 45:26
  Speaker 1: will be able to either charge more for it or
• 45:28
  Speaker 1: maybe you'll you know, use fewer of the semiconductors in
• 45:32
  Speaker 1: the gadget because each one is twice as powerful, but
• 45:36
  Speaker 1: you'll have that technological change in your favor. And it's
• 45:40
  Speaker 1: just you know, that's one of the reasons why venture
• 45:43
  Speaker 1: investing can generate these incredible returns of thirty x you know,
• 45:48
  Speaker 1: your money, because there is this technological progress driving the
• 45:55
  Speaker 1: exponential takeoff of your returns. So if Moore's law is
• 45:59
  Speaker 1: the beta is just the background increase in capability let's
• 46:04
  Speaker 1: talk about Metcalf's law and the value of networks. Tell
• 46:07
  Speaker 1: us about that. So, Bob Metcalfe was an engineer who
• 46:12
  Speaker 1: invented the ethernet cable to link up computers to devices,
• 46:19
  Speaker 1: or link up computers to each other. And this was
• 46:22
  Speaker 1: the start of local area networks, which came before the Internet.
• 46:26
  Speaker 1: And he in fact started a company called three com
• 46:28
  Speaker 1: to to market his ethernet invention. And that's one of
• 46:32
  Speaker 1: the story I had in my book that illustrates very
• 46:35
  Speaker 1: nicely the way that you know he he bust his
• 46:39
  Speaker 1: proverbial trying to raise money from East Coast venture capitalists
• 46:44
  Speaker 1: because he came from Boston and he didn't like the
• 46:46
  Speaker 1: West Coast gang. And he ended up coming back with
• 46:49
  Speaker 1: his turtle between his legs and raising West Coast venture
• 46:51
  Speaker 1: capital because they were the guys who really understood risk
• 46:55
  Speaker 1: and you're willing to back him. Um, But he Bob
• 46:59
  Speaker 1: Metcalfe had the observation as he was building um ethernet
• 47:03
  Speaker 1: cables that created networks of computers, that the value of
• 47:08
  Speaker 1: the network would rise as the square of the number
• 47:13
  Speaker 1: of users. So um, if you think about um, you know,
• 47:19
  Speaker 1: I I've got a computer and I'm linked up to
• 47:22
  Speaker 1: one other computer like coworkers computer. Now there are two
• 47:26
  Speaker 1: of us on the network. Let's say my value as
• 47:28
  Speaker 1: a square of two, it's four. Now, if you put
• 47:32
  Speaker 1: two more people into our network, that we've got four
• 47:34
  Speaker 1: people we didn't. That's doubling the number of computers on
• 47:38
  Speaker 1: the network. But actually the value to me um now
• 47:41
  Speaker 1: that I can talk to three other computers and they
• 47:44
  Speaker 1: can talk to each other is actually sixteen. It's gone,
• 47:47
  Speaker 1: it's squared, It hasn't doubled. And that's a story that
• 47:52
  Speaker 1: you know, applies to any kind of network. So when
• 47:55
  Speaker 1: you get to the Internet and you're building any kind
• 47:59
  Speaker 1: of social media a net company, or or a platform
• 48:03
  Speaker 1: like eBay to do auctions or anything that you're building
• 48:07
  Speaker 1: on top of the Internet, where you're recruiting more and
• 48:10
  Speaker 1: more users, you get these network effects where the more
• 48:13
  Speaker 1: people sign up, the more valuable it is to everybody
• 48:17
  Speaker 1: else on the network. And it's just an enormous tail wind.
• 48:21
  Speaker 1: I mean, it's like More's law, but even more dramatic.
• 48:24
  Speaker 1: And of course, the key thing here is that it
• 48:26
  Speaker 1: wasn't an either or for venture capitalists who are backing
• 48:32
  Speaker 1: companies like eBay. This was both, and you know, you
• 48:36
  Speaker 1: had the advantages More's law, which meant that the hardware
• 48:39
  Speaker 1: that you were using was becoming twice as powerful every
• 48:42
  Speaker 1: a couple of years. And you had the power of
• 48:45
  Speaker 1: metcast law, which said that as you grew the network,
• 48:48
  Speaker 1: the value of the network was rising as the square
• 48:52
  Speaker 1: of the number of people you recruited. And so these,
• 48:55
  Speaker 1: you know, I called this sort of turbo power law. Companies,
• 48:58
  Speaker 1: companies like eBay that just did extraordinarily well in the
• 49:02
  Speaker 1: nineties and made enormous amounts of money for Benchmark, which
• 49:07
  Speaker 1: was the VC partnership that backed eBay. And one of
• 49:10
  Speaker 1: the laws we didn't talk about is Perkins law. Tell
• 49:14
  Speaker 1: us about I believe that's the Perkin of Kleiner Perkins.
• 49:18
  Speaker 1: What is Perkins law? Yes, so the co founder of
• 49:21
  Speaker 1: Klina Perkins, Tom Perkins, who was a wonderfully flamboyant figure,
• 49:27
  Speaker 1: you know, who would be criticized occasionally for his unbelievable
• 49:31
  Speaker 1: extravagance um and he would say things like, you know, hey,
• 49:35
  Speaker 1: I'm the king of Silicon Valley, why can't I have
• 49:37
  Speaker 1: the biggest fantas in San Francisco or equivalent comments like that,
• 49:42
  Speaker 1: And he was he was unashamed about, you know, roaring
• 49:45
  Speaker 1: up in his ferrari outside some cremins startup. He just foundered,
• 49:49
  Speaker 1: and yeah he'd screamed into every dollar on the deal,
• 49:51
  Speaker 1: but there he wasn't a Ferrari. And anyway, Perkins's law
• 49:55
  Speaker 1: stated a very simple idea that it's quite profound, which
• 49:59
  Speaker 1: is that technical risk is inversely proportional to business risk,
• 50:06
  Speaker 1: because if you solve a really hard technical problem, you're
• 50:10
  Speaker 1: not going to face much competition from business competitors because
• 50:15
  Speaker 1: they don't know how to solve your problem. So if
• 50:17
  Speaker 1: you've got a company where you know, let's say it's
• 50:20
  Speaker 1: genet Tech, and they're gonna they're saying, where the first
• 50:22
  Speaker 1: biotech company we're going to solve for this challenge of
• 50:27
  Speaker 1: building artificial insulin. No one's ever done anything like this before.
• 50:31
  Speaker 1: It's super difficult. So that's a huge technical challenge, so
• 50:34
  Speaker 1: it's very risky to fund it. But if you manage
• 50:38
  Speaker 1: to make the artificial insulin, you're going to have a
• 50:41
  Speaker 1: big competitive mode. People will not be able to come
• 50:43
  Speaker 1: after you and compete because you know you've done something
• 50:47
  Speaker 1: technically hard and therefore you can charge a big margin
• 50:51
  Speaker 1: on that product. On the other hand, if you've got
• 50:53
  Speaker 1: something which is simple to build, it's just an app um.
• 50:58
  Speaker 1: Then the busines this risk is going to be much
• 51:01
  Speaker 1: more intense. The competition from people coming into your space,
• 51:05
  Speaker 1: it's going to be much higher. And to do a
• 51:08
  Speaker 1: little compare and contrast. Obviously, any sort of DNA manipulation
• 51:14
  Speaker 1: when Genentech first began was unprecedented. On the other hand,
• 51:20
  Speaker 1: what did Yahoo own. They essentially were just a little
• 51:23
  Speaker 1: early to to manually telling people what they might want
• 51:29
  Speaker 1: to look at on the Internet. But there was no
• 51:32
  Speaker 1: technological mote there, that's right. I mean it was two
• 51:36
  Speaker 1: PhD students who actually, we're not doing something particularly technical.
• 51:40
  Speaker 1: They were just compiling lists of wacky websites that they
• 51:45
  Speaker 1: found amusing and growing and growing that list and doing it,
• 51:49
  Speaker 1: as you say, mostly by hand. So there was, you know,
• 51:52
  Speaker 1: to to a climb Perkins's law to that there was
• 51:56
  Speaker 1: not much technical risk. Who obviously manual company the website
• 52:00
  Speaker 1: list is easy, but there was a huge amount of
• 52:04
  Speaker 1: business and commercial risk because other people could compete. So
• 52:08
  Speaker 1: let's talk about some other people who compete with the Yahoo.
• 52:13
  Speaker 1: I love the story of angel investors, typically described as
• 52:18
  Speaker 1: successful executives or entrepreneurs who have already had their exit
• 52:24
  Speaker 1: from their their first company or second company and their board,
• 52:29
  Speaker 1: and they have a big check books, and they want
• 52:31
  Speaker 1: to keep their fingers in the pie. They want to
• 52:33
  Speaker 1: stay involved in technology, and so they'll write checks to
• 52:38
  Speaker 1: startups to really be give them their very beginning. Who
• 52:42
  Speaker 1: wrote the hundred thousand dollar check to Google where the
• 52:46
  Speaker 1: Google founders said, Hey, this check is men out to
• 52:50
  Speaker 1: Google link. We're not even incorporated, we don't have a
• 52:53
  Speaker 1: bank account yet. Yeah, that was the funny story. So
• 52:58
  Speaker 1: Andy Bestel Time, the legendary Valley engineer who was one
• 53:03
  Speaker 1: of the co founders of Sun Microsystems back in the
• 53:07
  Speaker 1: in the nineties and had done you know, pretty well,
• 53:10
  Speaker 1: he'd done Son, he'd done another company after that. He
• 53:14
  Speaker 1: had plenty of money. He wasn't bored by the way
• 53:16
  Speaker 1: because he he was still running a company, but he
• 53:19
  Speaker 1: was fascinated by up and coming technologies and young entrepreneurs
• 53:25
  Speaker 1: who kind of reminded himself, reminded him of himself when
• 53:29
  Speaker 1: he had been starting fun And so he heard about uh,
• 53:34
  Speaker 1: you know, Harry and Sergey, the two Google founders, and
• 53:39
  Speaker 1: he came over to meet them one day, and you know,
• 53:42
  Speaker 1: this as this was described to me. You know, he
• 53:45
  Speaker 1: rolls up in his silver Porsche, you know, jumps out,
• 53:49
  Speaker 1: watches a demo of how Google can search for results
• 53:54
  Speaker 1: much better than any other product on the market at
• 53:57
  Speaker 1: the time, and he says, wow, that's cool, right. You know,
• 54:00
  Speaker 1: he has a hundred thousand dollar check and he just
• 54:02
  Speaker 1: writes it right there, just runs to his porsche, you know,
• 54:05
  Speaker 1: gets the gets the checkbook out, rushes back, says Google link,
• 54:09
  Speaker 1: hundred thousand bucks. There you go. And you know, as
• 54:12
  Speaker 1: you say, Larry and Serge, the founders of them, we
• 54:14
  Speaker 1: don't have a bank account. He just fine, you know,
• 54:17
  Speaker 1: stick the check in there when you do have a
• 54:18
  Speaker 1: bank account. Whatever, it doesn't matter. And then he leaves.
• 54:21
  Speaker 1: So he hasn't asked, you know what, how many shares
• 54:24
  Speaker 1: he just bought in the company, what the terms of
• 54:27
  Speaker 1: the deal were. Nothing. He just writes the check and
• 54:30
  Speaker 1: he drives off, and you know, a hundred thousand dollars
• 54:33
  Speaker 1: to any better side. You know, you've done two successful companies.
• 54:36
  Speaker 1: That wasn't a big bite out of his bank balance.
• 54:39
  Speaker 1: But you know you just spread the money and um,
• 54:44
  Speaker 1: that didn't happen. Of course, in the early period of
• 54:47
  Speaker 1: Civicken Valley because there wasn't enough entrepreneurs who had made
• 54:50
  Speaker 1: the cash to be able to do that. But as
• 54:53
  Speaker 1: you get into the nineties and even more later on
• 54:56
  Speaker 1: UM there were people who could write those checks and
• 54:59
  Speaker 1: then enjoy doing it. And you know, typically what would
• 55:02
  Speaker 1: happen is nobody would have a clue, you know what
• 55:05
  Speaker 1: shared the company Andy Battels time at board. But when
• 55:09
  Speaker 1: the more serious, more deliberative next investment ran took place,
• 55:13
  Speaker 1: somebody would sit down and say, well, what do we
• 55:15
  Speaker 1: think that that's worse and they would kind of awards
• 55:18
  Speaker 1: some number of shares to the Battles Tim and he,
• 55:21
  Speaker 1: you know, he wasn't really counting, but no doubt he
• 55:23
  Speaker 1: made you know, more money on whatever number of shares
• 55:28
  Speaker 1: he'd got in Google and let's probably end up being
• 55:30
  Speaker 1: worth more to him than some microsystems had been. Yeah,
• 55:33
  Speaker 1: and he did, Okay, it turned out. So a lot
• 55:36
  Speaker 1: of the famed venture capitalists who who really put together
• 55:39
  Speaker 1: a string of astounding performance in the nineties, eighties and nineties,
• 55:43
  Speaker 1: they haven't done as well since. What are your thoughts
• 55:47
  Speaker 1: as to why the the star funds from from the
• 55:51
  Speaker 1: early days of VC have been lagging over the past
• 55:54
  Speaker 1: decade or two. Not only of them are lacking, but
• 55:58
  Speaker 1: you're right that some do. And think there's a couple
• 56:01
  Speaker 1: of problems that come up. You know, one of the
• 56:03
  Speaker 1: succession problem, where um, there isn't a good mechanism for
• 56:09
  Speaker 1: handing control from the senior partners who maybe you know,
• 56:16
  Speaker 1: getting to a point where they might think about retiring,
• 56:18
  Speaker 1: but they don't really want to retire yet. The younger
• 56:21
  Speaker 1: people that maybe plugged into the new technology, the young entrepreneurs,
• 56:25
  Speaker 1: and they really ought to be taking over of control,
• 56:29
  Speaker 1: but the senior people don't want to see that control,
• 56:32
  Speaker 1: and then there's a fight about who gets what and
• 56:35
  Speaker 1: and that that can wind up causing a partnership to
• 56:39
  Speaker 1: break up. Another kind of issue, there is actually a
• 56:44
  Speaker 1: problem of success. Where a partnership does really well, all
• 56:49
  Speaker 1: the general partners who have a share of the carry
• 56:53
  Speaker 1: are suddenly wealthy enough to go off and start their
• 56:57
  Speaker 1: own venture partnerships by themselves as they want to, and
• 57:01
  Speaker 1: they're kind of sick of putting up with each other,
• 57:04
  Speaker 1: and they split up. And you know, a good illustration
• 57:08
  Speaker 1: of this um is kind of Perkins, which was absolutely
• 57:13
  Speaker 1: the top venture partnership. You know, Circuit two thousands. You know,
• 57:18
  Speaker 1: the UM top money maker at kind Of Perkins in
• 57:21
  Speaker 1: two thousand one was you know, Coostler, who was the
• 57:25
  Speaker 1: number one on the Fobs Mindus list, and then there
• 57:28
  Speaker 1: was John Door, who was the number three on the
• 57:31
  Speaker 1: Forbes Midus list if I called correctly UM that year.
• 57:36
  Speaker 1: So you have the number one and the number three
• 57:38
  Speaker 1: VC in the whole world, and they're at the same partnership.
• 57:41
  Speaker 1: They are an absolute dream team. And then there's a
• 57:42
  Speaker 1: bunch of people around them who are also good and
• 57:45
  Speaker 1: who have been them with them, you know, for for
• 57:48
  Speaker 1: a decade or so, and they know each other well
• 57:52
  Speaker 1: enough that they can kind of challenge each other and
• 57:55
  Speaker 1: beat the check and the balance. If somebody is getting
• 57:58
  Speaker 1: too enthusiastic and over there he is about a potential investment,
• 58:02
  Speaker 1: the other people in the partnership have the standing and
• 58:05
  Speaker 1: the stature to say, wait a second, you know, just
• 58:07
  Speaker 1: just take a deep breath here and and think hard
• 58:09
  Speaker 1: before you do that, because I'm not sure I agree
• 58:11
  Speaker 1: with you. And just kind of Perkins got to a
• 58:15
  Speaker 1: point where around two thousand three, two thousand four, so
• 58:19
  Speaker 1: just a couple of years after their peak, UM people
• 58:23
  Speaker 1: started to leave and they made so much money that
• 58:26
  Speaker 1: they could go off and do their own fund and
• 58:29
  Speaker 1: the note Coastal left and started um Coastal Adventures his
• 58:33
  Speaker 1: own company, and a few other people left and started
• 58:36
  Speaker 1: their own company, and John Doe was sort of left
• 58:40
  Speaker 1: standing and there was nobody around him with quite the
• 58:42
  Speaker 1: stature to challenge him. And at that point he fastened
• 58:47
  Speaker 1: onto the idea of clean tech, the investing in clean technologies.
• 58:51
  Speaker 1: And I think if he had had the right culture
• 58:53
  Speaker 1: around him, of a proper partnership where people could challenge him,
• 58:57
  Speaker 1: he might have been a bit more cautious about the
• 58:59
  Speaker 1: way he went into at but he didn't. At that point.
• 59:02
  Speaker 1: He was head and shoulders the most prestigious and successful
• 59:07
  Speaker 1: investor in the partnership, and he just ran with it
• 59:10
  Speaker 1: too far, too fast. Um. And he did the same thing,
• 59:14
  Speaker 1: by the way, in another good cause. I mean, clean
• 59:16
  Speaker 1: tech is a good cause in terms of saving the planet.
• 59:20
  Speaker 1: He also wanted to advance women, and he perted women
• 59:24
  Speaker 1: and that was a good thing, and in fact, some
• 59:26
  Speaker 1: of the women you know went on to be extraordinarily
• 59:29
  Speaker 1: good investors. You know. Aileen Lee comes to mind. She's
• 59:34
  Speaker 1: the one who invented the term unicorn. Um, but they
• 59:38
  Speaker 1: didn't become successful investors very much internally within kind of Perkins,
• 59:43
  Speaker 1: because although John Doe was good at promoting women, he
• 59:47
  Speaker 1: was not good at creating a culture amongst the rest
• 59:50
  Speaker 1: of his partners that would really make it possible for
• 59:52
  Speaker 1: those women to thrive. So kind Of Perkins wound up
• 59:56
  Speaker 1: with a sexual harassment suit, wound up with you know,
• 1:00:01
  Speaker 1: I mean I should say that, um, they they I
• 1:00:05
  Speaker 1: think they got the upper hand in the verdict on
• 1:00:08
  Speaker 1: that trial, though it was a bit of a messy one.
• 1:00:10
  Speaker 1: But um so, you know, stipulating that in their favor.
• 1:00:15
  Speaker 1: But they but it turned out to be difficult to
• 1:00:18
  Speaker 1: build the culture in a new way that allowed women
• 1:00:21
  Speaker 1: to thrive. And it also turned out to be hard
• 1:00:24
  Speaker 1: to make money off clean tech in the first iteration
• 1:00:26
  Speaker 1: of clean tech, and so kind Of Perkins went from
• 1:00:29
  Speaker 1: being you know, consistently ranked number one to being not
• 1:00:33
  Speaker 1: even in the top ten. It was really quite a
• 1:00:36
  Speaker 1: precipitous decline. And I think that that has to do with,
• 1:00:40
  Speaker 1: you know, you need to pay attention to the to
• 1:00:42
  Speaker 1: the glue within the partnership. You can't just be out
• 1:00:45
  Speaker 1: investing in other companies and making sure that they have
• 1:00:47
  Speaker 1: good governments. You need to look at your own company
• 1:00:51
  Speaker 1: and your own internal governments. Really really interesting. Let's let's
• 1:00:55
  Speaker 1: talk about a venture funds that has probably, since the
• 1:01:00
  Speaker 1: the decline of Klana Perkins, become the hardest VC in
• 1:01:04
  Speaker 1: Silicon Valley, and that would be A sixteen Z and
• 1:01:08
  Speaker 1: Andrews and Horowitz. Tell us a little bit about your
• 1:01:10
  Speaker 1: thoughts on them the past few years. They seem to
• 1:01:13
  Speaker 1: be very focused on crypto and blockchain. What are your
• 1:01:17
  Speaker 1: thoughts on on Mark and Reason and Ben Horowitz and
• 1:01:21
  Speaker 1: what they've built. Yeah, it's funny when you were saying,
• 1:01:23
  Speaker 1: you know, the hottest partnership in Silicon Valley, I thought
• 1:01:27
  Speaker 1: you were about to introduce Sikoria Capital. I think they
• 1:01:32
  Speaker 1: are probably got the best returns and they've also scaled globally.
• 1:01:37
  Speaker 1: They've got Skoya goes all the way back to the eighties. Right, Yes,
• 1:01:44
  Speaker 1: so they're not that's right. So if you're talking about
• 1:01:46
  Speaker 1: the hottest new entrance, then I agree with you. Anyway,
• 1:01:50
  Speaker 1: let's talk about A sixteen Z and Reason herrowitz Um.
• 1:01:54
  Speaker 1: I just wanted to give a mention, Uh, the ka
• 1:01:58
  Speaker 1: um and Us horrods Um I think you know started
• 1:02:03
  Speaker 1: out in two thousand nine, they had a bunch of
• 1:02:06
  Speaker 1: public relations around what was going to make them distinctive.
• 1:02:09
  Speaker 1: I'm not sure that that anything they said there was
• 1:02:12
  Speaker 1: really the key to why they did well. I think
• 1:02:15
  Speaker 1: they did well because both Mark Andrewson, who of course
• 1:02:19
  Speaker 1: was the one of the key engineers or maybe the
• 1:02:23
  Speaker 1: key engineer behind Netscape uh and and the first graphical
• 1:02:29
  Speaker 1: um web browser. Ah. So he was a towering computer scientist.
• 1:02:36
  Speaker 1: And then Ben Horowitz, who himself was a terrific computer scientist,
• 1:02:41
  Speaker 1: had also founded a company and despite the two thousand
• 1:02:45
  Speaker 1: tech rash, has solded through that and made it, you know,
• 1:02:48
  Speaker 1: into a successful exit. So you had to really really
• 1:02:52
  Speaker 1: strong founding partners in Andrews and Horrods, and they were
• 1:02:57
  Speaker 1: both computer scientists, and they found it in two thousand nine,
• 1:03:01
  Speaker 1: right about the time when you know, the iPhone had
• 1:03:04
  Speaker 1: come on stream, cloud computing was taking off, and software,
• 1:03:11
  Speaker 1: to quote and recent famous phrase, was about to eat
• 1:03:15
  Speaker 1: the world. In other words, software was just going to
• 1:03:17
  Speaker 1: displace all kinds of other technologies as the way to
• 1:03:23
  Speaker 1: build value UM. And so you have these two founders.
• 1:03:28
  Speaker 1: They really understand dn They know which coders are the best.
• 1:03:31
  Speaker 1: The coders respect them and so they're happy to take
• 1:03:35
  Speaker 1: their capital and that I think explains how they got
• 1:03:39
  Speaker 1: into companies like Nissira, UM, Octa, UM, some of the
• 1:03:45
  Speaker 1: you know, they did a great turnaround deal with Skype,
• 1:03:49
  Speaker 1: UM the the voice over IP telephony company, UM, so
• 1:03:54
  Speaker 1: they I think I think it was about having these
• 1:03:56
  Speaker 1: these two strong individuals who were who were really strong
• 1:04:00
  Speaker 1: on the hottest technology of all, namely coding. They're now
• 1:04:04
  Speaker 1: moving and innovating, and I think that's impressive. They're moving.
• 1:04:08
  Speaker 1: They moved strongly into crypto and and blockchain and and
• 1:04:13
  Speaker 1: Web three, and I think what's fascinating to watch there
• 1:04:16
  Speaker 1: is that, you know, Web three is kind of at
• 1:04:19
  Speaker 1: its its moment in terms of Internet time, where you know,
• 1:04:26
  Speaker 1: the Internet was something that um, you know a few
• 1:04:29
  Speaker 1: early adopters were really passionate about and excited by, but
• 1:04:33
  Speaker 1: you haven't got to the killer app, namely Netscape, the
• 1:04:40
  Speaker 1: graphical browser, which turned the Internet into something that mainstream
• 1:04:45
  Speaker 1: consumers would actually want. And now with Web three, you're
• 1:04:49
  Speaker 1: at the same point. I would say, you know, you've
• 1:04:51
  Speaker 1: got some gaming stuff that's that's that's breaking out, but
• 1:04:55
  Speaker 1: it's still in the world where it hasn't quite gone
• 1:04:58
  Speaker 1: mainstream and despite all the US and I think we're
• 1:05:02
  Speaker 1: looking for the Kinder app that really establishes this as
• 1:05:05
  Speaker 1: as you know, a totally mainstream product. And what Andrews
• 1:05:10
  Speaker 1: and Herowits are doing is that they've put enough capital
• 1:05:14
  Speaker 1: into a crypto blockchain Web three focused part of money
• 1:05:20
  Speaker 1: that they can really experiment with, backing lots of you know,
• 1:05:25
  Speaker 1: lots of ventures, one of which would probably be the
• 1:05:28
  Speaker 1: Netscape as it were for web three. I didn't think
• 1:05:32
  Speaker 1: they found it, or we don't know if they have
• 1:05:34
  Speaker 1: found it. Sometimes you can only see the things in retrospect.
• 1:05:37
  Speaker 1: But it's one of the most interesting stories going on
• 1:05:40
  Speaker 1: right now in sort of company, really really interesting. Um So,
• 1:05:45
  Speaker 1: we we talk a lot about the VCS successes, and
• 1:05:49
  Speaker 1: we talked about the power law distribution. But one of
• 1:05:52
  Speaker 1: the things we haven't really discussed weren't just the companies
• 1:05:56
  Speaker 1: that didn't make it. You know, we could look at
• 1:05:59
  Speaker 1: a movie Pass or Quimby or pets dot Com or whatever,
• 1:06:03
  Speaker 1: but the ones that just blow up spectacularly. And and
• 1:06:07
  Speaker 1: I'm not so much looking at uber or we work
• 1:06:10
  Speaker 1: as I am Farinos, which really appears to be a
• 1:06:17
  Speaker 1: a fraud. How do you draw the distinction between an
• 1:06:22
  Speaker 1: idea that just doesn't catch fire the way it was
• 1:06:25
  Speaker 1: hoped with outright you know, deception and hey, you know
• 1:06:30
  Speaker 1: Elizabeth Holmes was you know, just convicted on four accounts
• 1:06:33
  Speaker 1: of of the frauding investors. How does one make that distinction? Yeah,
• 1:06:40
  Speaker 1: I think freud is pretty clearly different from just not
• 1:06:42
  Speaker 1: making money, right. I mean, when you actually misrepresent your product,
• 1:06:47
  Speaker 1: you claim that your blood tests done with your machine,
• 1:06:50
  Speaker 1: but actually you're using the modern machine you brought from
• 1:06:53
  Speaker 1: another company the results of Ferny. I mean, that is
• 1:06:59
  Speaker 1: just cross thing a line. Um. I mean, people sometimes
• 1:07:03
  Speaker 1: when they're criticizing Citic and Valley and trying to use
• 1:07:06
  Speaker 1: their enough there's a way of um saying it's, you know,
• 1:07:10
  Speaker 1: this is just a sign of how corrupt Cicnvoudy is.
• 1:07:14
  Speaker 1: They kind of blur that distinction between outright fraud and
• 1:07:18
  Speaker 1: simply business failure. But I think it's a you know,
• 1:07:22
  Speaker 1: actually it's a pretty clear difference between On the one hand,
• 1:07:26
  Speaker 1: you know, you set out to make a product and
• 1:07:28
  Speaker 1: the product either can't be built because it's too technically difficult,
• 1:07:32
  Speaker 1: or you build up and theybody wants it so you
• 1:07:34
  Speaker 1: don't get any revenue. Those are just business failures. But
• 1:07:37
  Speaker 1: but if you lie, you're crossing a line. And that
• 1:07:41
  Speaker 1: was just not more than just an occasional lie, that
• 1:07:45
  Speaker 1: was a consistent pattern of fraud and misrepresentation. And I
• 1:07:51
  Speaker 1: completely agree with you. You can't lump the two together,
• 1:07:55
  Speaker 1: regular business failure and fraud. So so before we get
• 1:08:00
  Speaker 1: to our favorite questions, I have I have one last
• 1:08:02
  Speaker 1: curveball I have to throw at you, which is something
• 1:08:07
  Speaker 1: pretty fascinating. I learned about you when I was doing
• 1:08:09
  Speaker 1: a little homework when you were in your twenties. Your
• 1:08:13
  Speaker 1: your father was the UK ambassador to Germany and uh
• 1:08:17
  Speaker 1: for for five years, and then his next gig was
• 1:08:22
  Speaker 1: UK an ambassador to France. Tell us about that experience.
• 1:08:27
  Speaker 1: How did that shape your view of history? I know
• 1:08:30
  Speaker 1: you studied history at Oxford. What was being the son
• 1:08:35
  Speaker 1: of an ambassador like for someone who is you know,
• 1:08:39
  Speaker 1: delving into that space. Well, by the time my dad
• 1:08:44
  Speaker 1: became an ambassador, you know, I was in my twenties
• 1:08:48
  Speaker 1: and I was being a fern curvednded in Africa. And
• 1:08:52
  Speaker 1: in fact, that the funny story, because you know, I
• 1:08:55
  Speaker 1: actually litten in Babwe. I made that my base and
• 1:08:57
  Speaker 1: I roamed around different African countries and um in November
• 1:09:04
  Speaker 1: there was the election in Namibia to elect the first
• 1:09:10
  Speaker 1: majority rule government. So that was the end of white
• 1:09:14
  Speaker 1: minority rule and the start of majority rule. And this
• 1:09:20
  Speaker 1: election was being oversee by the United Nations. That was
• 1:09:23
  Speaker 1: absolutely massive, you know, foreign presence, the historic occasion, the
• 1:09:28
  Speaker 1: end of colonial the colonial political set up, and all
• 1:09:32
  Speaker 1: of the press pack that was covering this election Namibia,
• 1:09:37
  Speaker 1: me included thought great, you know where Africa correspondents normally
• 1:09:41
  Speaker 1: we get onto page fifteen of the newspaper for a
• 1:09:44
  Speaker 1: lucky but now finally we're going to be on the
• 1:09:46
  Speaker 1: front page. And on the day that the Namibian election
• 1:09:51
  Speaker 1: result was announced, in war came down and you know,
• 1:09:57
  Speaker 1: all of these Africa correspondents were on page fifteen, game
• 1:10:00
  Speaker 1: if they were lucky. And so it was funny for
• 1:10:03
  Speaker 1: me because there I was, you know, my story had
• 1:10:06
  Speaker 1: been killed. But whatever my dad's story, you know, he
• 1:10:09
  Speaker 1: was the UK and BATHTD in Germany. That was the
• 1:10:11
  Speaker 1: story that the whole wide world was talking about. And
• 1:10:16
  Speaker 1: you know, he told me afterwards that he flew straight
• 1:10:19
  Speaker 1: into Berlin where the war was coming down, and she
• 1:10:22
  Speaker 1: realized that you know that was the end of the
• 1:10:25
  Speaker 1: Cold War, and and and that was, you know, super
• 1:10:28
  Speaker 1: exciting moment for him. So I didn't know if it
• 1:10:31
  Speaker 1: shaped my view of history directly, but it did make
• 1:10:35
  Speaker 1: for a funny family story, yeah, to say, to say
• 1:10:38
  Speaker 1: the very least. So let's jump in our last few
• 1:10:40
  Speaker 1: minutes to our favorite questions that we asked all of
• 1:10:44
  Speaker 1: our guests, Uh, starting with what have you been streaming
• 1:10:48
  Speaker 1: these days? What has kept you entertained during lockdown when
• 1:10:53
  Speaker 1: you weren't researching or writing the book? So I think,
• 1:10:58
  Speaker 1: like probably a lot of people who listened to your
• 1:11:00
  Speaker 1: show where I love Succession UM the kind of you know,
• 1:11:05
  Speaker 1: Quazi Murdoch family drama. And I also have quite enjoyed
• 1:11:11
  Speaker 1: a couple of French UM series My My my mother
• 1:11:16
  Speaker 1: was French and maybe that's why. But there's cool My Agent,
• 1:11:20
  Speaker 1: which about Yeah, that's funny, it's about UM movie Agency.
• 1:11:28
  Speaker 1: By the way, I always have to tell my American
• 1:11:32
  Speaker 1: friends that I recommend that too, that the people who
• 1:11:36
  Speaker 1: play the actors on that show are actually very famous
• 1:11:41
  Speaker 1: French actors, but to an American they just look like
• 1:11:45
  Speaker 1: another French person in the show. Right. I mean, if
• 1:11:53
  Speaker 1: you don't know that you know, for us, if we
• 1:11:55
  Speaker 1: would have a Brad Pitt or a Matt Damon show
• 1:11:59
  Speaker 1: up on a show about you know, talent agents, everyone
• 1:12:03
  Speaker 1: in America would know who they are when when you
• 1:12:05
  Speaker 1: watch and I think the French version is called ten percent,
• 1:12:09
  Speaker 1: but when you watch that show, um, and it's how
• 1:12:12
  Speaker 1: my wife and I keep our French uh passable. Um.
• 1:12:18
  Speaker 1: It's always interesting to see the actual actors who show up.
• 1:12:21
  Speaker 1: But I interrupted you who what what else have you
• 1:12:24
  Speaker 1: been streaming besides Succession? Did the other? The other French
• 1:12:27
  Speaker 1: when I enjoyed for a while is a kind of
• 1:12:31
  Speaker 1: It's called Le Bux and it's about the French secret
• 1:12:35
  Speaker 1: uh service like the CIA and the French d I A.
• 1:12:38
  Speaker 1: And they're fighting all kinds of wars all over the
• 1:12:41
  Speaker 1: Middle Eastern sort of exciting. My My wife likes it
• 1:12:46
  Speaker 1: because the French secret agents, you know, devastatingly good looking.
• 1:12:51
  Speaker 1: And I tolerate that because the female leads are quite
• 1:12:55
  Speaker 1: good too. But you know, it has a lot of
• 1:12:58
  Speaker 1: good French suspense and we've enjoyed that as well. Very interesting.
• 1:13:03
  Speaker 1: Tell us about your early mentors who helped to shape
• 1:13:06
  Speaker 1: your career well. I joined the Economist as I was
• 1:13:10
  Speaker 1: saying at the beginning, right out of college, and there
• 1:13:13
  Speaker 1: were just a terrific group of talented people there who
• 1:13:18
  Speaker 1: helped me. And I remember, you know, there was Neil Harmon,
• 1:13:22
  Speaker 1: who was one of the older journalists who was incredibly
• 1:13:28
  Speaker 1: good mentor. And I would fire copy and he would say,
• 1:13:32
  Speaker 1: you know, he would tip his his his halfmoon spectacles
• 1:13:36
  Speaker 1: down his nose, look look over them at me and
• 1:13:39
  Speaker 1: say just just just come sit here for a minute.
• 1:13:42
  Speaker 1: And he I would watch him edit my words on
• 1:13:46
  Speaker 1: the screen and just add top spin more and more
• 1:13:50
  Speaker 1: top spin. You know, he just had this knack for
• 1:13:53
  Speaker 1: for turning a reasonable phrase into a good phrase, and
• 1:13:57
  Speaker 1: that that gave me a kind of special appreciation for
• 1:14:01
  Speaker 1: the magic of of really you know, the craftsmanship of
• 1:14:05
  Speaker 1: writing um. And but you know, in other ways too,
• 1:14:09
  Speaker 1: there were there were colleagues who just thought globally um.
• 1:14:13
  Speaker 1: They thought across finance and politics and economics. They could
• 1:14:21
  Speaker 1: handle the ideas without getting um sort of bogged down
• 1:14:25
  Speaker 1: in detail. But they were also serious about being accurate it.
• 1:14:30
  Speaker 1: I would say that the whole experience of spending twelve
• 1:14:32
  Speaker 1: years or thirteen years on the staff of the Economists
• 1:14:36
  Speaker 1: was was my formative experience. Let's talk about books besides
• 1:14:41
  Speaker 1: your own. What are some of your favorites and what
• 1:14:44
  Speaker 1: are you reading right now? Well, the no favorite which
• 1:14:47
  Speaker 1: I often mentioned is um is The Money Game. Have
• 1:14:51
  Speaker 1: you read that, Adam Smith? Sure, yeah, of course I
• 1:14:55
  Speaker 1: thought you would have done. And I mean it's just
• 1:14:58
  Speaker 1: you know, full of laugh out loud caricatures with these
• 1:15:01
  Speaker 1: people in the nineties sixties go go Bullmarket, when side
• 1:15:06
  Speaker 1: burned gun slingers were ramping stocks, and and and it's
• 1:15:11
  Speaker 1: it's just a it's kind of you know, financial writing
• 1:15:15
  Speaker 1: of comedy, and I always enjoyed that. Um. More recently,
• 1:15:20
  Speaker 1: I've been really a novel called A Little Life by
• 1:15:23
  Speaker 1: Hanya Yanagi Hara san noting that right, Um, you that
• 1:15:29
  Speaker 1: you know that? So it's it's I'm not a great
• 1:15:33
  Speaker 1: novel reader, but this one is so well done. It's captivating.
• 1:15:37
  Speaker 1: It's a long saga of um for New Yorkers who
• 1:15:43
  Speaker 1: graduate at college together, they come to the city and
• 1:15:45
  Speaker 1: they they make their lives in different professions, and there's
• 1:15:49
  Speaker 1: a sort of a bit of as a really engrossing
• 1:15:53
  Speaker 1: tragedy at the center of the life of the main character.
• 1:15:57
  Speaker 1: That's a novel, But in terms of non Si shan Um.
• 1:16:01
  Speaker 1: A bit late I read Um Sheila called hot Cars
• 1:16:07
  Speaker 1: Black Edge about s AC. I thought that was incredibly
• 1:16:12
  Speaker 1: well done, sort of suspense story about a hedge fund
• 1:16:16
  Speaker 1: that goes wrong. Um. And I enjoyed Black Gold. I
• 1:16:25
  Speaker 1: think it's I'm getting right digital gold. Maybe it's cooled. Sorry. Um.
• 1:16:31
  Speaker 1: And that's Nathaniel Popper's book about bitcoin, and was already right, yeah,
• 1:16:39
  Speaker 1: that's right. Again. I was a bit late to that,
• 1:16:41
  Speaker 1: but I it basically, it tells the story of how
• 1:16:44
  Speaker 1: bitcoin got traction because different ways of enthusiasts got on board.
• 1:16:51
  Speaker 1: So there were the coders who loved the code because
• 1:16:52
  Speaker 1: it was elegant. There were the libertarians who liked it
• 1:16:55
  Speaker 1: for political reasons. There were the people who wanted to
• 1:16:59
  Speaker 1: do to an ordeals in drugs and um and guns
• 1:17:04
  Speaker 1: and so forth. That was the sort of road thing.
• 1:17:07
  Speaker 1: There were Latin Americans who wanted to remit money back
• 1:17:09
  Speaker 1: to Argentina. Um. Then there were the entrepreneurs who showed
• 1:17:14
  Speaker 1: up and said, hey, we could do a wallet or
• 1:17:15
  Speaker 1: build some some business on top of all this. And
• 1:17:19
  Speaker 1: I don't think, frankly my own perspective, I don't think
• 1:17:22
  Speaker 1: any of these individual groups had a killer argument as
• 1:17:26
  Speaker 1: to why the world really needed bitcoin, but cumulatively they
• 1:17:31
  Speaker 1: created enough momentum that it's stuck, and I think it's
• 1:17:35
  Speaker 1: now here to stay. Huh. Really really intriguing. And in
• 1:17:39
  Speaker 1: our final two questions, what sort of advice would you
• 1:17:43
  Speaker 1: give to a recent college graduate who was interested in
• 1:17:46
  Speaker 1: a career in either finance, investment or journalism and book writing. Yeah,
• 1:17:54
  Speaker 1: so on the journalism and book writing. I have a
• 1:17:57
  Speaker 1: standard line which which I role out because people ask me.
• 1:18:01
  Speaker 1: There's quite a bit, and essentially I try to dissuade
• 1:18:05
  Speaker 1: people because I think you've got to really really want
• 1:18:09
  Speaker 1: to do it, um if you're going to go in
• 1:18:12
  Speaker 1: that direction. And you know, if people listen to what
• 1:18:14
  Speaker 1: I say and then they do it anyway, I delighted.
• 1:18:17
  Speaker 1: But I think there's kind of a thing where, you know,
• 1:18:20
  Speaker 1: people go to college, they enjoy their work in college,
• 1:18:24
  Speaker 1: they write papers in college, and I think, how can
• 1:18:27
  Speaker 1: I extend this and just do more of the same,
• 1:18:30
  Speaker 1: And they don't necessarily look left and right and think
• 1:18:33
  Speaker 1: about other things they could be doing with their talent.
• 1:18:36
  Speaker 1: And I think it's good to experiment and and and
• 1:18:39
  Speaker 1: and do other stuff. And then if you decide that
• 1:18:42
  Speaker 1: you actually really do want to write because you like
• 1:18:44
  Speaker 1: the process of writing, even though it's solitary, even though
• 1:18:48
  Speaker 1: it's you know, a huge amount of time to produce
• 1:18:52
  Speaker 1: something of value. I mean, my books do take me
• 1:18:54
  Speaker 1: five years, and it's it's a lot of rejection when
• 1:18:57
  Speaker 1: you're beginning a new project and people think, why would
• 1:18:59
  Speaker 1: I talk to some book writer who you know, who
• 1:19:03
  Speaker 1: knows if this book will even come out? And I
• 1:19:05
  Speaker 1: have to try to let work my way in and
• 1:19:07
  Speaker 1: you know, by the end of course, the same flips,
• 1:19:10
  Speaker 1: and you know you've got enough momentum that people that
• 1:19:13
  Speaker 1: you didn't call are now calling you because they want
• 1:19:15
  Speaker 1: to talk to you, because they understand your book is
• 1:19:18
  Speaker 1: going to be serious and make an impact. But you
• 1:19:21
  Speaker 1: know that's it's it's it's not all plane sailing, um
• 1:19:25
  Speaker 1: and um. So I try and dissuade people, but then
• 1:19:29
  Speaker 1: I'm happy, I say if they do it. Anyway, if
• 1:19:32
  Speaker 1: someone would ask you about a a job on Wall Street,
• 1:19:36
  Speaker 1: what would you say to them? I think Wall Street CHOI.
• 1:19:38
  Speaker 1: Wall Street is a bit you know, is regulated, is
• 1:19:42
  Speaker 1: the main feature of it. So if you're a lawyer,
• 1:19:45
  Speaker 1: that's great. If you're an investor, or an entrepreneur, it's
• 1:19:49
  Speaker 1: not great, UM, you might want to go to a
• 1:19:51
  Speaker 1: fintech instead, or go to a hedge fund which is
• 1:19:57
  Speaker 1: still a bit less regulated, and where know you can
• 1:20:01
  Speaker 1: you can really try to apply original thinking to markets UM. Yeah,
• 1:20:06
  Speaker 1: and our final question, what do you know about the
• 1:20:09
  Speaker 1: world of finance, journalism, markets investing today that you wish
• 1:20:15
  Speaker 1: you knew thirty or forty years ago when you were
• 1:20:18
  Speaker 1: first starting out. I think what I've learned is that
• 1:20:24
  Speaker 1: the way investors think UM is actually quite useful for life.
• 1:20:29
  Speaker 1: And you know, when I was writing my book about
• 1:20:31
  Speaker 1: hedge funds, the central I guess if epistemological the serfect
• 1:20:39
  Speaker 1: discovery was this idea of asymmetric pairs that you know,
• 1:20:43
  Speaker 1: sometimes you don't know if you're right, or you don't
• 1:20:45
  Speaker 1: know if you're wrong about it's that col But what
• 1:20:49
  Speaker 1: you should look at is if you were to be right,
• 1:20:53
  Speaker 1: would the pay out be bigger than the loss would
• 1:20:57
  Speaker 1: be if you were wrong. So there are things where
• 1:21:00
  Speaker 1: you know, you don't know if this is the right
• 1:21:03
  Speaker 1: direction to go in, but but you should give it
• 1:21:06
  Speaker 1: a shot because because if it works, it's going to
• 1:21:09
  Speaker 1: be big. And that's you know, a basic thing about
• 1:21:14
  Speaker 1: a lot of macro investing in hedge funds is the
• 1:21:16
  Speaker 1: best basically about you know, you bet against the currency peg.
• 1:21:19
  Speaker 1: If you're wrong, the peg isn't going to move because
• 1:21:22
  Speaker 1: the peg won't break, so you won't lose much from
• 1:21:24
  Speaker 1: your position. But if you're right, the peg collapses, is
• 1:21:27
  Speaker 1: going to move twenty percent, You're going to make a
• 1:21:29
  Speaker 1: huge killing. So this is a This is a basic
• 1:21:32
  Speaker 1: macro investing hedge fund strategy, but it's also a useful
• 1:21:36
  Speaker 1: thing for life, about life decisions. And in the same
• 1:21:40
  Speaker 1: way you know with venture capital, I think the power
• 1:21:42
  Speaker 1: lower idea that you know, sometimes low probability but high
• 1:21:49
  Speaker 1: consequence bets are worth trying. That you know, rather than
• 1:21:55
  Speaker 1: following the pack, you should try and do something different.
• 1:22:00
  Speaker 1: Maybe I like this argument because when I go off
• 1:22:03
  Speaker 1: and bury myself in some specialized corner of finance for
• 1:22:07
  Speaker 1: five years, you know, I feel a bit like I'm
• 1:22:09
  Speaker 1: taking myself away from mainstream debate to really get specialized
• 1:22:12
  Speaker 1: in deep on one niche um. But I think I
• 1:22:16
  Speaker 1: think it is healthy too to have those ideas in
• 1:22:19
  Speaker 1: mind and think about how to differentiate yourself, how to
• 1:22:23
  Speaker 1: do something risky but that might have a really good
• 1:22:26
  Speaker 1: outcome if you get it right, really intriguing. Sebastian, thank
• 1:22:30
  Speaker 1: you for being so generous with your time. We have
• 1:22:34
  Speaker 1: been speaking with Sebastian Malby, author of The Power Law
• 1:22:39
  Speaker 1: of Venture Capital and the Making of the New Future.
• 1:22:43
  Speaker 1: If you enjoy this conversation, well, be sure and check
• 1:22:46
  Speaker 1: out any of our previous I keep saying four hundred,
• 1:22:49
  Speaker 1: We probably crossed that already. Four hundred or so prior
• 1:22:52
  Speaker 1: interviews where UH we discuss all things finance related. You
• 1:22:58
  Speaker 1: can find those at un Spotify, Bloomberg, wherever you get
• 1:23:02
  Speaker 1: your UH podcast from. We love your comments, feedback, end
• 1:23:06
  Speaker 1: suggestions right to us at m IB podcast at Bloomberg
• 1:23:10
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• 1:23:19
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• 1:23:21
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• 1:23:25
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• 1:23:40
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