WEBVTT - William Janeway on What's Needed for the Innovation Economy 0:00:02.240 --> 0:00:06.439 This is Master's in Business with Barry Ridholts on Bloomberg 0:00:06.519 --> 0:00:11.760 Radio this weekend. On the podcast, I have an extra 0:00:11.800 --> 0:00:15.600 special guest. His name is Bill Janeway, and he is 0:00:15.640 --> 0:00:19.279 the author of the Innovation Economy. He was an early 0:00:19.400 --> 0:00:22.720 guest where quite bluntly, I really didn't know what the 0:00:22.760 --> 0:00:26.080 hell I was doing, And I think this conversation is 0:00:26.280 --> 0:00:29.320 far more detailed than in depth if you are at 0:00:29.360 --> 0:00:35.280 all interested in venture capital, technology investing UH and the 0:00:35.400 --> 0:00:41.159 role of both the Defense and Intelligence agencies specifically and 0:00:41.240 --> 0:00:49.520 the federal government generally in impacting venture investing technology long 0:00:50.600 --> 0:00:53.720 form investing where there may not be an immediate payoff, 0:00:54.080 --> 0:00:57.880 but ultimately you end up with a really significant set 0:00:57.880 --> 0:01:02.320 of payoffs. Whether we're talking about UH, the Interstate highway system, 0:01:02.440 --> 0:01:08.720 the cross continental railroads, the space um race for the Moon, 0:01:09.200 --> 0:01:12.640 all of these things had no immediate expected payoff, but 0:01:12.840 --> 0:01:16.760 long term they've delivered a tremendous amount of value. And 0:01:16.800 --> 0:01:22.880 the intersection between technology, venture capitalism, and economics UH is 0:01:22.959 --> 0:01:26.759 something that Professor Janeway specializes in. I think you'll find 0:01:26.800 --> 0:01:31.200 this conversation absolutely fascinating. So, with no further ado my 0:01:31.360 --> 0:01:39.280 conversation with Bill Janeway, I'm Barry rit Halts. You're listening 0:01:39.319 --> 0:01:43.160 to Masters in Business on Bloomberg Radio. My special guest 0:01:43.240 --> 0:01:47.720 today is Bill Janeway. He has a storied background in 0:01:47.880 --> 0:01:52.160 both economics and venture capital. He helped to create b 0:01:52.320 --> 0:01:56.600 e A Systems, which connects software apps to database. Had 0:01:56.600 --> 0:01:59.840 you invested about fifty million dollars into b e A, 0:02:00.520 --> 0:02:03.840 UH when Bill started putting money into it, it would 0:02:03.880 --> 0:02:08.160 have become over six billion dollars in six years. He 0:02:08.320 --> 0:02:13.160 is an affiliated lecturer of Economics at the University of Cambridge, 0:02:13.200 --> 0:02:17.959 where he teaches a class venture Capital in the Innovation Economy. 0:02:18.000 --> 0:02:21.840 He's a senior advisor at Warburg Pincus, where he helped 0:02:21.960 --> 0:02:27.200 build technology investing platform there for over thirty years. He's 0:02:27.240 --> 0:02:31.320 on the board of the US Social Science Research Council, 0:02:31.760 --> 0:02:34.760 the governing board for the Institute of New Economics, the 0:02:34.800 --> 0:02:39.760 Field Institute for Research in Mathematical Sciences. UH. No less 0:02:39.760 --> 0:02:43.280 a character than Mark Andresen called him a key creator 0:02:43.800 --> 0:02:47.680 of the modern venture capital world. He is also the 0:02:47.720 --> 0:02:53.760 author of Doing Capitalism in the Innovation Economy, Markets, Speculation, 0:02:53.800 --> 0:02:57.960 and the State. Bill Janeway, Welcome back to Bloomberg. It 0:02:58.080 --> 0:03:00.400 is great to be back here, Barry, especially with you. 0:03:01.120 --> 0:03:04.040 That is quite the curriculum. Vita and I. We left 0:03:04.080 --> 0:03:06.480 a ton of it off. We'll talk a little bit 0:03:06.480 --> 0:03:09.000 about B E A systems in a bit. I want 0:03:09.000 --> 0:03:13.799 to start with your academic background in economics, your val 0:03:13.919 --> 0:03:19.200 Victorian Princeton. You get your doctorate from Cambridge and economics. 0:03:19.200 --> 0:03:23.280 How do you go from that to venture capital? Well, 0:03:23.320 --> 0:03:27.040 actually it's a closer connection than I knew at the 0:03:27.160 --> 0:03:30.960 time it would be. When I got to Cambridge, I 0:03:31.040 --> 0:03:36.040 was studying under the students, the top students who had 0:03:36.080 --> 0:03:39.640 been taught by John Maynard Kean's and I wrote my 0:03:39.800 --> 0:03:43.920 dissertation for Richard Khan, who invented the multiplier as a 0:03:43.920 --> 0:03:46.560 way of looking at the impact of government spending or 0:03:46.640 --> 0:03:50.640 taxes on the macro economy. But all of the work 0:03:50.680 --> 0:03:53.520 that I did there, everything I learned there was about 0:03:53.880 --> 0:04:02.520 decision making under conditions of uncertainty, decision making by investors, workers, consumers, businessmen, 0:04:03.280 --> 0:04:07.480 politicians who cannot know what the full consequences of their 0:04:07.520 --> 0:04:11.880 actions are gonna be. Now, isn't that effectively every actor 0:04:12.040 --> 0:04:15.280 in the economy? You got it. But by the time 0:04:15.320 --> 0:04:19.880 I finished my doctorate and was thinking I would pursue 0:04:19.920 --> 0:04:24.039 a course in economics and academic economics. It turned out 0:04:24.040 --> 0:04:28.760 that economics was converting itself for a long generation into 0:04:28.760 --> 0:04:33.320 a kind of mechanical process of cranking out the efficient 0:04:33.400 --> 0:04:37.680 outcome on the assumption that everybody knew everything that's The 0:04:37.720 --> 0:04:42.320 marketplace itself is already reflecting all the information that's available, 0:04:42.400 --> 0:04:46.280 and therefore, hey, nobody can really beat the market consistently 0:04:46.279 --> 0:04:50.760 over time, or or so Chicago, Pharma and French and 0:04:51.839 --> 0:04:55.360 right across the whole economy. The rational expectations hypothesis said, 0:04:55.640 --> 0:04:58.760 government can't have any lasting impact on the economy because 0:04:58.839 --> 0:05:02.160 people in the economy will react an offset whatever it 0:05:02.200 --> 0:05:06.120 tries to do. In any case, I decided that at 0:05:06.120 --> 0:05:11.400 the ripe old age of seven, I could not take 0:05:11.480 --> 0:05:14.359 this stuff and spend my life pumping it into the 0:05:14.400 --> 0:05:20.720 brains of innocent undergraduate. So I went on. I went 0:05:20.760 --> 0:05:23.720 on what I talk of as my my thirty five 0:05:23.800 --> 0:05:28.800 years sabbatical, where in the trenches of venture capital that 0:05:28.839 --> 0:05:32.760 I evolved in through joining an extraordinary firm whose core 0:05:32.880 --> 0:05:39.120 competence was understanding the science based industries, from chemicals to pharmaceuticals, 0:05:39.120 --> 0:05:43.240 to electronics to computing, I discovered that what I learned 0:05:43.240 --> 0:05:48.240 at Cambridge as an academic economist, was directly relevant to 0:05:48.320 --> 0:05:51.839 try and to frame the sword of decisions and the 0:05:51.960 --> 0:05:56.800 sort of ways of protecting yourself, your investors, and the 0:05:56.960 --> 0:06:01.960 entrepreneurs you are backing from the necessary ignorance of operating 0:06:02.000 --> 0:06:06.240 at the frontier of technology. So that's pretty fascinating. I 0:06:06.279 --> 0:06:10.039 want to push back on the concept that, hey, this 0:06:10.160 --> 0:06:14.560 efficient market hypothesis really doesn't get it right. A perfect 0:06:14.560 --> 0:06:17.040 example I read over the weekend while I was doing 0:06:17.040 --> 0:06:21.120 a little research for for our conversation. Some people have 0:06:21.240 --> 0:06:24.960 been wondering why the US tax cuts haven't had a 0:06:25.080 --> 0:06:29.279 larger impact on either employment or wages or R and D. 0:06:30.160 --> 0:06:35.200 And the most interesting explanation I came across was, well, 0:06:35.279 --> 0:06:40.119 everybody has already operated on the basis that they're tax havens, 0:06:40.200 --> 0:06:44.520 and this thirty corporate tax rate is no big deal anyway. 0:06:44.600 --> 0:06:48.320 We're all paying uh, eighteen percent or less. Therefore, a 0:06:48.400 --> 0:06:51.440 giant corporate tax cut has much less of an impact 0:06:51.440 --> 0:06:54.080 than you would imagine, true or false? And what does 0:06:54.080 --> 0:06:57.920 that say about your belief that, hey, maybe the market 0:06:57.960 --> 0:07:00.920 is less efficient than we think. For first, I think 0:07:00.960 --> 0:07:04.000 that's correct. I don't think the average of about eight, 0:07:04.600 --> 0:07:08.640 not thirty, and of course, particularly the digital companies that 0:07:08.680 --> 0:07:13.600 can move their cash flows and their assets around by 0:07:13.960 --> 0:07:18.840 keys on a computer. They're not manufacturing steel and build locomotives, 0:07:19.000 --> 0:07:23.160 it's just code. Very mobile, they're very mobile. Second, however, 0:07:23.800 --> 0:07:28.920 the tax cut has had a significant substantial impact unavailable 0:07:28.960 --> 0:07:33.880 accessible cash flow, not reported earnings. So that but what's 0:07:33.920 --> 0:07:36.440 happened to that cash flow? And this is something again 0:07:36.480 --> 0:07:39.360 about the nature of the stock market, That cash flow 0:07:39.400 --> 0:07:43.520 has overwhelmingly been devoted Apple being the most extreme example. 0:07:43.800 --> 0:07:48.040 Stock buybacks and dividends, that not not raising wages for workers, 0:07:48.040 --> 0:07:52.000 not investing in the new stuff, but but putting more 0:07:52.000 --> 0:07:54.920 money in the in the pockets of stockholders, which you 0:07:54.960 --> 0:08:01.000 know is a rational response of management, particularly when their stockholders, 0:08:01.040 --> 0:08:05.960 who are increasingly index funds, are necessarily very short term 0:08:06.000 --> 0:08:10.120 oriented and the executives are also short term oriented. Hey, 0:08:10.120 --> 0:08:14.400 we we eliminated the agency problem by tying their compensation 0:08:14.800 --> 0:08:17.040 to the stock price. So so you go on this 0:08:17.160 --> 0:08:20.400 thirty year walk about, and you spend some time in 0:08:21.360 --> 0:08:26.160 um Wearburg Pankis, you spent some time at Eberstaaten company. 0:08:26.200 --> 0:08:29.440 What prompted you to say, Hey, this venture capital thing, 0:08:29.920 --> 0:08:31.920 it's gonna be big one day I want to stay 0:08:31.920 --> 0:08:33.760 involved in. You know, it's funny. It was actually a 0:08:33.760 --> 0:08:37.120 crossover from being an economist to being a venture capitalist 0:08:37.400 --> 0:08:40.120 in the In the mid late seventies, when I was 0:08:40.160 --> 0:08:44.319 a kid on Wall Street, I was really interested in 0:08:44.880 --> 0:08:48.319 the kind of longer term strategic issues around the economy. 0:08:48.480 --> 0:08:51.439 There had been a big fiasco. One of the first 0:08:51.480 --> 0:08:55.240 attempts to use computers to model the economy, not just 0:08:55.400 --> 0:08:58.679 modeled the they modeled the world came out of M 0:08:58.760 --> 0:09:01.400 I T and was kind of a fiasco, was called 0:09:01.400 --> 0:09:04.120 the Limits of Growth Study for the Club of Rome, 0:09:04.400 --> 0:09:08.880 and this was referenced in your book. Absolutely absolutely. But 0:09:09.000 --> 0:09:11.160 the the the young guys at M I T who 0:09:11.160 --> 0:09:13.280 have been caught up in this, they learned a big 0:09:13.360 --> 0:09:18.479 lesson and they set out using computers to build very detailed, 0:09:18.640 --> 0:09:23.600 very granular, local models of economic behavior. And I stumbled 0:09:23.600 --> 0:09:27.079 on these guys as I was trying to find out 0:09:27.240 --> 0:09:30.800 how to think about and how to handle the consequences 0:09:30.840 --> 0:09:33.920 of the first oil crisis, which blew up all the 0:09:33.920 --> 0:09:38.880 econometric models. They were useless because all the important variables 0:09:38.920 --> 0:09:41.640 of the economy, from interest rates to exchange rates to 0:09:42.160 --> 0:09:45.559 inflation rates had just been blown out. Of the historical database. 0:09:46.040 --> 0:09:48.240 I found these young guys and I got a message. 0:09:48.280 --> 0:09:52.520 The message was, Hey, this is what computers are interesting about. 0:09:53.160 --> 0:09:57.000 It's not just being a flexible typewriter or or being 0:09:57.040 --> 0:10:00.520 a faster or more flexible adding machine. You can build 0:10:00.640 --> 0:10:04.800 simulations and explore the behavior of the world. That got 0:10:04.800 --> 0:10:08.840 me interested in computers. From there, the first wave of 0:10:09.000 --> 0:10:12.920 artificial intelligence, the first wave of the hypeer artificial intelligence 0:10:13.240 --> 0:10:16.160 that got me out to Xerox Park, the kind of 0:10:16.440 --> 0:10:19.840 the haven for the most creative people in the computing world. 0:10:20.240 --> 0:10:23.120 Thanks to a friendship with John Ceelee Brown, who was 0:10:23.160 --> 0:10:25.560 on his way to becoming director of Xerox Park, I 0:10:25.600 --> 0:10:28.360 got immersed ahead of the game, a kind of kind 0:10:28.400 --> 0:10:31.840 of unfair advantage and seeing where computing was gonna go. 0:10:32.480 --> 0:10:35.600 I want to circle back to what you said about 0:10:35.720 --> 0:10:41.960 the Xerox Research Center. Um that gave us things like 0:10:42.040 --> 0:10:47.000 the graphical user interface, the mouse. Essentially that was Steve 0:10:47.160 --> 0:10:51.360 jobs is aha moment that led to the first Macintosh. 0:10:51.600 --> 0:10:55.080 You said it gave you an unfair advantage. Expand on 0:10:55.160 --> 0:10:59.120 that it gave me the unfair advantage of seeing that 0:10:59.720 --> 0:11:04.400 can puting computers were not which were dominated by the 0:11:04.480 --> 0:11:09.640 IBM main frames with a secondary center in the digital 0:11:09.679 --> 0:11:14.440 equipment mini computers and the competitors with digital equipment. These 0:11:14.440 --> 0:11:19.360 were very centralized systems. They had dumb terminals, green screens. 0:11:19.720 --> 0:11:23.320 You couldn't do any local work. Everything went back to 0:11:23.360 --> 0:11:26.800 the main frame or the mini computer to be processed. 0:11:27.240 --> 0:11:31.520 It was a very rigid, inflexible and of course, because 0:11:31.800 --> 0:11:34.920 each of these systems were proprietary, if you were a 0:11:34.960 --> 0:11:38.120 digital equipment customer, let alone an IBM customer, you have 0:11:38.200 --> 0:11:40.360 to buy everything from them, and believe me, they made 0:11:40.400 --> 0:11:44.040 money on that. So it was a giant centralized system 0:11:44.200 --> 0:11:48.400 as opposed to the modern between phones and laptops and iPads, 0:11:48.440 --> 0:11:52.960 we have a completely decentralized system. Although theoretically, as we 0:11:53.000 --> 0:11:55.000 moved to the cloud, we're kind of moving back a 0:11:55.000 --> 0:11:58.280 little interesting, but but in a very different way. But 0:11:58.320 --> 0:12:01.200 I'll come back. That's a good point. Let's hold that thought. 0:12:01.840 --> 0:12:05.880 What you could see at Deox Park were computers being 0:12:05.960 --> 0:12:11.320 networked together with special functions that they could be optimized for. 0:12:11.720 --> 0:12:14.640 While the machine in front of you was designed to 0:12:14.800 --> 0:12:18.360 be helpful, but you know, it was map to how 0:12:18.440 --> 0:12:22.400 people work, and it was much too expensive and Xerox 0:12:22.440 --> 0:12:25.800 management back in on the East Coast. UH couldn't get 0:12:25.800 --> 0:12:28.120 their heads around the notion of making the kind of 0:12:28.200 --> 0:12:31.760 high risk, long term investments, So companies like Adobe in 0:12:31.880 --> 0:12:35.320 three comm were founded by people who left Xerox Park. 0:12:35.480 --> 0:12:37.439 That kind of raises the question, why did they even 0:12:37.520 --> 0:12:40.640 have a Xerox Park At least with a T and 0:12:40.720 --> 0:12:44.400 T and Bell Labs later loosened, they were using their 0:12:44.400 --> 0:12:47.199 own research to build out new products or were they 0:12:47.320 --> 0:12:49.760 up to a point? There was a deal, a T 0:12:49.920 --> 0:12:52.440 and T in nineteen fifty six kind of deal with 0:12:52.520 --> 0:12:58.000 what was then an economically active government unlike where we 0:12:58.040 --> 0:13:00.760 are today, right back when it was a legitimate legal 0:13:02.000 --> 0:13:04.640 and the deal was it could keep its monopoly on 0:13:04.720 --> 0:13:10.600 long distance telephones if any technology developed at Bell Labs 0:13:10.640 --> 0:13:15.319 that was not directly used for communications would be licensed 0:13:15.320 --> 0:13:18.680 on a fair and non discriminatory basis to the world. 0:13:19.200 --> 0:13:22.320 And that's where Unix came from. That's where a whole 0:13:22.440 --> 0:13:26.760 raft of innovative technologies that had general purpose use, not 0:13:26.800 --> 0:13:30.280 just for communications, were given to the world, given to 0:13:30.400 --> 0:13:34.520 academic researchers, given to companies that were learning how to 0:13:34.640 --> 0:13:37.520 what to do with this stuff, and laying the basis 0:13:38.040 --> 0:13:41.360 for the digital revolution. That began to emerge in the 0:13:41.520 --> 0:13:45.599 early so that that government deal with A T and 0:13:45.679 --> 0:13:49.360 T was very different than what xerox parks deal was. 0:13:49.400 --> 0:13:51.960 They they just didn't know what to do with that. Well, 0:13:52.800 --> 0:13:57.560 two things one um neither today, T and T. They 0:13:57.600 --> 0:14:01.760 licensed it. They the big deal they cut with the 0:14:01.800 --> 0:14:07.040 government in where they gave up the long distance monopoly 0:14:07.720 --> 0:14:10.200 and they broke up the company in return for the 0:14:10.240 --> 0:14:14.080 opportunity to use the technology and go out and compete 0:14:14.080 --> 0:14:17.199 with IBM and Digital demonstrated that I, A, T and 0:14:17.240 --> 0:14:22.120 T had no ability to compete in commercial markets. Xerox 0:14:22.200 --> 0:14:25.520 is a different story. Xerox Is monopoly was based on patents, 0:14:26.200 --> 0:14:30.160 patents for this phenomenal ability to make copies very low cost, 0:14:31.400 --> 0:14:33.880 and it generated an enormous amount of cash. It was 0:14:33.880 --> 0:14:38.240 a different kind of innovator's dilemma. However, the existing business 0:14:38.680 --> 0:14:42.360 was so good and so certain that when one of 0:14:42.400 --> 0:14:45.200 the young guys from the park would come east and say, 0:14:45.360 --> 0:14:47.400 I got a great idea for a business plan. Just 0:14:47.440 --> 0:14:50.360 give me twenty million bucks and in five years I'm 0:14:50.400 --> 0:14:53.000 gonna have a three million dollar business and it will 0:14:53.040 --> 0:14:55.680 be profitable and it'll be worth you know, a billion 0:14:55.720 --> 0:14:57.960 dollars and they look at them and say, wait a second, 0:14:58.120 --> 0:15:00.520 that is so high risk. We could take that same 0:15:00.520 --> 0:15:03.240 twenty million bucks and we'll hire a bunch of additional 0:15:03.280 --> 0:15:06.360 engineers and salesmen. We know exactly what the return is 0:15:06.360 --> 0:15:09.080 going to be. Go back, go back to your cave. 0:15:09.840 --> 0:15:12.640 And they had they finally worked out, but it took 0:15:12.640 --> 0:15:15.360 a long time. In the late eighties, they worked out that. 0:15:15.520 --> 0:15:18.920 You know, if they just did a deal with the 0:15:19.120 --> 0:15:22.240 young entrepreneurs and took twenty percent of the company in 0:15:22.280 --> 0:15:25.720 return for giving them the intellectual property, the patents, and 0:15:25.760 --> 0:15:28.920 then let him go out and find venture capital. Xerox 0:15:29.200 --> 0:15:32.120 wasn't trying to build the business. It was a beneficiary 0:15:32.200 --> 0:15:34.160 of the work that had been done on its nickel 0:15:34.640 --> 0:15:36.840 out at Yaks Park. That actually worked in a couple 0:15:36.880 --> 0:15:40.200 of really valuable businesses. What came out of that documentum 0:15:40.200 --> 0:15:43.920 for example, Major Company, they missed a ton of stuff. 0:15:43.960 --> 0:15:46.720 They took all Adobe going down the lift. It was 0:15:46.800 --> 0:15:48.840 just the first two a's. What else came out of 0:15:48.880 --> 0:15:51.120 that Apple they never had a chance to invest in. 0:15:51.240 --> 0:15:53.600 That was That was Apple. That was Steve Jobs being 0:15:53.640 --> 0:15:58.920 the brilliant opportunist he was. And but it took him 0:15:58.960 --> 0:16:03.200 ten years. It took the corporate bureaucrats back in Stanford 0:16:03.240 --> 0:16:05.680 ten years to work out that would better to own 0:16:06.760 --> 0:16:11.000 something versus of nothing. So let's let's talk about another 0:16:11.040 --> 0:16:15.000 institution that came up with a similar idea, and that 0:16:15.400 --> 0:16:18.160 is the n S, A, C, I, A, D O D. 0:16:19.240 --> 0:16:23.120 Going back to the age of DARPA and DARPA net. 0:16:23.680 --> 0:16:30.680 Why are our national security agencies so interested in startups 0:16:30.680 --> 0:16:33.840 and technology? How much of this stuff actually finds its 0:16:33.880 --> 0:16:39.120 way into real world spy versus by usage? Well, there's 0:16:39.120 --> 0:16:43.440 no question that from speech recognition to the geographical positioning 0:16:43.480 --> 0:16:48.680 satellites and onto all of the machine learning technologies. Uh, 0:16:48.800 --> 0:16:52.080 the U S intelligence agencies have been major funders of 0:16:52.160 --> 0:16:56.840 upstream research. Um. That goes back a long way. Of course, 0:16:56.920 --> 0:16:59.960 the page rank algorithm. A couple of graduate students at 0:17:00.040 --> 0:17:03.440 Stanford got a grant from the NSF which was directly 0:17:03.480 --> 0:17:06.160 related to the n S as interest in being able 0:17:06.200 --> 0:17:08.800 to do efficient search of what people were doing and 0:17:08.840 --> 0:17:12.000 saying on the Internet. Um. So there's there's a history 0:17:12.000 --> 0:17:14.680 there that goes back to the fifties. That's that's ironic 0:17:14.760 --> 0:17:18.800 given that Google just rejected I mean, essentially they own 0:17:18.880 --> 0:17:22.320 their own existence to the intelligence agencies? Is that is that? 0:17:22.720 --> 0:17:24.840 Am I overselling that a little bit? Well? I think 0:17:25.000 --> 0:17:30.080 that that kind There was a link certainly to the NSF. 0:17:30.200 --> 0:17:33.960 I mean the funding for the research work as graduate 0:17:34.000 --> 0:17:36.320 students that produced the page rank algorithm that was the 0:17:36.359 --> 0:17:39.720 basis for Google came from the National Science Foundation. The 0:17:41.119 --> 0:17:46.240 complex history, however, of how from silicon to software and 0:17:46.280 --> 0:17:50.360 then onto the Internet, all of the fundamental building blocks 0:17:50.359 --> 0:17:55.760 of the digital revolution were initially the consequence of upstream 0:17:55.840 --> 0:17:59.439 research financed by the government, and the government as the 0:17:59.520 --> 0:18:03.080 first customer for this stuff when it was still immature, 0:18:03.119 --> 0:18:06.960 when it was too expensive and too unreliable for commercial use. 0:18:07.359 --> 0:18:11.359 That changed. That changed, Big changes took place between nineteen 0:18:11.400 --> 0:18:16.760 eight three. On the one hand, in night the PC 0:18:16.840 --> 0:18:20.200 revolution began to take off, and the commercial markets began 0:18:20.240 --> 0:18:22.280 to be bigger, whether it was for whether it was 0:18:22.320 --> 0:18:28.640 for microsop microprocessors or for software, bigger than the government market. Second, 0:18:29.080 --> 0:18:32.360 a bill was passed through Congress which said that DARPA 0:18:32.560 --> 0:18:36.600 had to justify every dollar it invested in terms of 0:18:36.640 --> 0:18:40.240 its direct military significance. It hadn't been that way before, 0:18:40.400 --> 0:18:43.760 but a much broader much. You know, there's a There's 0:18:43.800 --> 0:18:46.280 a great line from the from the play that became 0:18:46.359 --> 0:18:50.720 Hello Dolly, Dolly says, you know, money is like manure. 0:18:51.280 --> 0:18:54.080 For it to do any good, you've got to spread 0:18:54.119 --> 0:18:56.800 it around. And that's what DARPA did. DARPA was an 0:18:56.840 --> 0:19:02.040 extraordinary institution, particularly in the years from the from Sputnik, 0:19:02.119 --> 0:19:04.400 which was why it was found in nineteen fifties seven 0:19:04.440 --> 0:19:08.640 eight through the nineteen seventies. Seems kind of shortsighted to uh, 0:19:08.760 --> 0:19:12.920 to cancel it. Let's let's talk about Warburg Pinkis because 0:19:12.960 --> 0:19:15.600 you've been affiliated with them for a long time. You're 0:19:15.640 --> 0:19:18.920 a senior adviser there. You helped to build their technology, 0:19:19.720 --> 0:19:24.560 research and investing platform. Uh, tell us what brought you 0:19:24.600 --> 0:19:29.119 to Warburg back in what I've known the firm for 0:19:29.400 --> 0:19:32.720 almost a decade. Warburg Pinkers was one of the original firms. 0:19:32.720 --> 0:19:35.439 It was the largest founding member of the National Venture 0:19:35.440 --> 0:19:40.440 Capital Association. Was founded by two extraordinary men, Lionel Pinkis 0:19:40.440 --> 0:19:44.399 and John Vogelstein, who had an idea going back to 0:19:44.440 --> 0:19:49.040 the sixties that when when when the investment banking and 0:19:49.040 --> 0:19:51.720 brokerage firms in Wall Street, you know, they did deals 0:19:51.800 --> 0:19:56.000 and they do a movie deal and they do uh 0:19:56.040 --> 0:19:59.159 an oil deal and roll one off and everyone in 0:19:59.200 --> 0:20:01.080 a while they do us at a black box any 0:20:01.119 --> 0:20:03.879 gravity machine tech deal that was going to cure cancer, 0:20:04.200 --> 0:20:07.160 but it was very amateurish. Lionel and John had very 0:20:07.160 --> 0:20:11.719 simple idea, if you actually focus your attention, all of 0:20:11.720 --> 0:20:16.600 your attention on those investments, understand the context, the business issues, 0:20:16.680 --> 0:20:19.760 the business model, the competitive situation, you would likely to 0:20:19.800 --> 0:20:22.040 do a little better than just throwing money against the wall. 0:20:22.760 --> 0:20:25.160 So the firm had been when I joined, the firm 0:20:25.240 --> 0:20:28.520 was already more than twenty years old. It had not 0:20:28.640 --> 0:20:33.440 been an active investor in technology. It had followed the 0:20:33.520 --> 0:20:38.000 founding great firms like Kleiner Perkins, Asset Management, the Silicon 0:20:38.080 --> 0:20:41.600 Valley firms. But as they had raised the first billion 0:20:41.640 --> 0:20:46.080 dollar fund that anybody had raised, they decided that maybe 0:20:46.119 --> 0:20:49.560 they should try to invest in technology the way they 0:20:49.600 --> 0:20:54.280 invested everywhere else. As the lead strategic partner with management, 0:20:54.920 --> 0:20:58.119 I had spent the previous ten years building an investment 0:20:58.480 --> 0:21:03.320 practice of raising money for private companies. Sounds a little 0:21:03.320 --> 0:21:07.160 bit like unicorns, but a big difference private companies from 0:21:07.280 --> 0:21:12.560 institutional investors. Based on our our firm, the Eberstat Firm 0:21:12.800 --> 0:21:16.680 deep work in understanding the science based industries. I had 0:21:16.680 --> 0:21:20.119 come to John Vogelstein at Warburg Pinks again and again 0:21:20.800 --> 0:21:27.760 with really interesting companies, but that required passive investment, no control, 0:21:27.880 --> 0:21:30.399 no board seat. And John would again and again tell me, 0:21:30.440 --> 0:21:33.520 you know, this looks like a really interesting business, it's 0:21:33.520 --> 0:21:36.080 not an investment for Warburg Pinkers. In the mid eight 0:21:36.080 --> 0:21:38.840 we sold our firm to a British merchant bank as 0:21:38.920 --> 0:21:43.240 brokerage commissions, and our business model came under stress. And 0:21:43.600 --> 0:21:46.359 it became clear after a time that if I was 0:21:46.400 --> 0:21:48.960 going to do what I've been learning to do, I 0:21:49.000 --> 0:21:52.399 had to go someplace else. So John and I had lunch, 0:21:52.480 --> 0:21:55.640 We talked through we we just finished each other's sentences, 0:21:55.680 --> 0:21:58.000 and I landed at Warburg pink Is in AD eight 0:21:58.160 --> 0:22:02.200 at a wonderful time. Sure you're you're looking at the 0:22:02.280 --> 0:22:05.760 late eighties in the early nineties. That is the golden 0:22:05.960 --> 0:22:11.520 era of go down the list, semiconductors, software, mobile, and 0:22:12.000 --> 0:22:15.600 that's still early days of biotech and judgments and things 0:22:15.640 --> 0:22:19.080 like that, exactly right. And the technologies that I'd been 0:22:19.200 --> 0:22:21.720 exposed to a Xerox park and then I've done some 0:22:21.880 --> 0:22:27.640 investing in from Eberstat secondarily sort of supporting our institutional 0:22:27.800 --> 0:22:31.080 clients as they made the investments. Now, these were beginning 0:22:31.080 --> 0:22:36.000 to mature. So for ten years, from late eighties eighty 0:22:36.080 --> 0:22:40.639 nine right through into the heart of the Internet dot 0:22:40.640 --> 0:22:45.119 com bubble, we invested. We searched out as many ways 0:22:45.119 --> 0:22:48.280 as we could find from making a big strategic bet. 0:22:48.440 --> 0:22:55.080 And the bet was IBM dominance of commercial computing was vulnerable, exposed, 0:22:55.400 --> 0:22:59.000 and we can help them lose their monopoly control. And 0:22:59.040 --> 0:23:02.240 so we invested at the level of the the underlying 0:23:02.280 --> 0:23:07.560 the infrastructure software that's b e A, in Veritas Enterprise Applications, 0:23:07.560 --> 0:23:12.480 three or four companies, and we I think got a 0:23:12.600 --> 0:23:17.359 major shift in the most important industry that now exists. 0:23:17.640 --> 0:23:19.840 We got it right at the right time. So did 0:23:19.840 --> 0:23:22.639 I get the numbers about b e A correct, because 0:23:22.640 --> 0:23:26.879 they're just astonishing. Fifty four million dollars invested into b 0:23:27.200 --> 0:23:31.000 A six years later become six point five billion. Is 0:23:31.040 --> 0:23:34.600 that about right? Well, it is right, But there's a 0:23:34.680 --> 0:23:39.000 there's a PostScript. Because John Voglostein was a great student 0:23:39.040 --> 0:23:43.200 of markets, and he studied He knew bubbles come, bubbles 0:23:43.240 --> 0:23:45.960 go when's when it's too good to be true, it's 0:23:46.000 --> 0:23:48.480 too good to be true. I had actually written my 0:23:48.560 --> 0:23:54.600 doctoral dissertation on nine to thirty one, so in a sense, 0:23:54.680 --> 0:23:58.639 i'd seen the movie before two. So beginning in about 0:23:59.480 --> 0:24:04.440 we had this portfolio that represented something like two million invested, 0:24:04.880 --> 0:24:08.719 and we just started liquidating everything we could into the bubble. 0:24:08.920 --> 0:24:12.040 We owned so much of b A that we only 0:24:12.040 --> 0:24:15.480 got five percent out all right before the bubble ended. 0:24:15.600 --> 0:24:18.240 But there was still another five six million that came 0:24:18.240 --> 0:24:20.439 out later, so it actually with more than seven billion 0:24:20.800 --> 0:24:23.040 on the on the five but a little longer time. 0:24:23.400 --> 0:24:27.560 That's just astonishing. My guest today is Bill Janeway. He 0:24:27.760 --> 0:24:32.000 is the author of The Innovation Economy, which there is 0:24:32.040 --> 0:24:35.480 a new edition of and and let's talk about the 0:24:35.560 --> 0:24:39.520 differences between the original edition, which came out five six 0:24:39.640 --> 0:24:43.680 years ago exactly right, and the new edition. Given what's 0:24:43.720 --> 0:24:49.560 been going on in the modern world of social networks Facebook, Twitter, LinkedIn, 0:24:49.680 --> 0:24:53.199 go down the whole list, how has the universe of 0:24:53.400 --> 0:24:58.680 digital companies changed versus what you were looking at back 0:24:58.720 --> 0:25:02.080 in the nineties or the well, the first edition of 0:25:02.080 --> 0:25:05.439 the book was, frankly a kind of celebration of this 0:25:05.640 --> 0:25:10.680 extraordinarily constructive partnership between the public sector and particularly the 0:25:10.680 --> 0:25:14.240 Defense Department and with DARPA as this point of the 0:25:14.280 --> 0:25:18.320 spear and the private sector including the entrepreneurs and venture 0:25:18.359 --> 0:25:25.719 capitalists like me. But looking looking back from the last 0:25:26.240 --> 0:25:31.760 six to twelve months, something really fundamental has changed. The 0:25:31.800 --> 0:25:35.439 digital revolution, which began to reach maturity thanks to the 0:25:35.480 --> 0:25:40.240 extraordinary speculative funding of the late nineties the end of 0:25:40.240 --> 0:25:43.120 the twentieth century. By the way, Dan Gross has an 0:25:43.200 --> 0:25:46.679 amusing book called pop White, bubbles are eventually good for 0:25:46.720 --> 0:25:50.720 the economy. That's exactly what you're referring to. Is if 0:25:50.720 --> 0:25:54.840 you're laying fiber optic at some ungodly amount per mile 0:25:55.440 --> 0:25:58.000 and then that company goes bust, well, at least we 0:25:58.040 --> 0:26:00.240 still have the cable laid and somebody buys a cheap 0:26:00.280 --> 0:26:03.680 out of bankruptcy. Just like the railroads a hundred years before, 0:26:04.000 --> 0:26:08.200 or computers or televisions or automobiles, every new industry seems 0:26:08.240 --> 0:26:09.960 to go through that boom and bus phase. A lot, 0:26:10.119 --> 0:26:12.160 you know, a lot of bubbles leave you with nothing 0:26:12.200 --> 0:26:17.000 but ranch houses in the in the Nevada Desert. Financial 0:26:17.040 --> 0:26:20.720 bubbles don't leave you with the same, not quite the 0:26:20.800 --> 0:26:25.200