WEBVTT - An Interview With Bill Janeway: Masters in Business (Audio) 0:00:03.240 --> 0:00:07.119 This is Masters in Business with Barry Ridholds on Bloomberg 0:00:07.240 --> 0:00:11.559 Radio Today. On the podcast, we have William H. Jane Way, 0:00:11.640 --> 0:00:14.440 better known as Bill Janeway. You'll hear his whole curriculum 0:00:14.480 --> 0:00:17.239 VITA in a minute, so I won't go into the 0:00:17.320 --> 0:00:21.160 details on that. Uh. For those of you who are 0:00:21.200 --> 0:00:28.000 interested in technology, venture capital, the history of financing, you 0:00:28.040 --> 0:00:33.760 are about to sit through a master class in angel investing, 0:00:33.880 --> 0:00:41.440 VC technology, how the world has developed to fund speculative innovation, 0:00:41.560 --> 0:00:46.440 the proper role of government, of the private sector, of 0:00:46.479 --> 0:00:51.400 the public markets. This is really a fascinating conversation, a 0:00:51.560 --> 0:00:54.960 tour to force. I'm not exaggerating when I said we 0:00:55.080 --> 0:00:58.240 have another eight pages of question. I could have kept 0:00:58.280 --> 0:01:01.040 going for another hour of half, but I promised to 0:01:01.080 --> 0:01:03.720 get him out of here fifteen minutes ago and we 0:01:03.840 --> 0:01:09.119 still ran late. Um. He is tremendously insightful, with an 0:01:09.360 --> 0:01:15.800 enormous breath of experience and thoughtfulness about what it means 0:01:15.840 --> 0:01:20.640 to be a successful early stage investor in technology and 0:01:20.760 --> 0:01:23.360 other fields. I think you're gonna find this to be 0:01:23.840 --> 0:01:29.800 an absolutely brilliant, insightful, delightful conversation. So, with no further ado, 0:01:30.280 --> 0:01:37.520 my conversation with Bill Janeway. This is Masters in Business 0:01:37.560 --> 0:01:42.360 with Barry Ridholds on Bloomberg Radio. My special guest today 0:01:42.400 --> 0:01:46.319 is William Janeway, better known as Bill. I think he 0:01:46.520 --> 0:01:50.640 is the most important person our listeners may never have 0:01:50.720 --> 0:01:53.880 heard of before. And that's only because some of the 0:01:53.920 --> 0:01:57.200 things we're gonna talk about are a little inside baseball. 0:01:57.240 --> 0:01:59.760 But let me give you a quick walk through of 0:01:59.840 --> 0:02:03.560 his curriculum vita. He is currently a managing director and 0:02:03.640 --> 0:02:07.440 senior advisor at Warburg Pincus, where he helped to develop 0:02:07.840 --> 0:02:12.840 their Technology Investment division. Princeton undergrad got his PhD in 0:02:12.880 --> 0:02:17.600 economics at Cambridge ultimately became the co founder of the 0:02:17.680 --> 0:02:21.760 Institute for New Economic Thinking that he co founded with 0:02:21.800 --> 0:02:25.240 George Soros. In two thousand and twelve, he published a 0:02:25.280 --> 0:02:30.040 fascinating book called Doing in a Capitalism in the Innovation Economy, 0:02:30.280 --> 0:02:32.440 and we're gonna talk a little more about that during 0:02:32.440 --> 0:02:35.959 our conversation. He also helped to fund and create b 0:02:36.080 --> 0:02:39.280 e A Systems. Is that an accurate way to describe that? 0:02:39.880 --> 0:02:42.960 And we'll spend some time explaining how he a cash 0:02:43.000 --> 0:02:46.240 investment of a little more than fifty million dollars became 0:02:46.680 --> 0:02:50.280 a six point five billion dollar payout a few years later. 0:02:50.639 --> 0:02:52.760 There's so much more stuff to go over. We'll we'll, 0:02:52.840 --> 0:02:55.919 we'll get into it as we go. William Janeway, Welcome 0:02:55.919 --> 0:02:59.560 to Bloomberg. Great to be here, Barry so I said 0:03:00.120 --> 0:03:04.120 as in the introduction that many of the lay people 0:03:04.440 --> 0:03:07.280 listeners may not know who you are. But let me 0:03:08.560 --> 0:03:12.040 give a quote from your book by Mark and Reason. 0:03:12.600 --> 0:03:16.680 UH currently a VC at Andreson Horowitz and essentially the 0:03:16.680 --> 0:03:21.359 person who invented UH Netscape and and really created the 0:03:21.440 --> 0:03:25.400 modern browser and the modern form of the internet. And 0:03:25.600 --> 0:03:29.280 Reason said Bill Janeway is a key creator of modern 0:03:29.400 --> 0:03:32.520 venture capital, and he tells an amazing story of the 0:03:32.639 --> 0:03:38.040 intersection of economics and innovation. This book is essential to 0:03:38.080 --> 0:03:42.320 anyone who wants to understand technology and how it's creation 0:03:42.800 --> 0:03:46.160 will be financed for decades to come. That's That's quite 0:03:46.240 --> 0:03:48.640 the endorsement, isn't it. It's a great endorsement. I have 0:03:48.680 --> 0:03:51.040 a great regard for Mark, and he is one of 0:03:51.040 --> 0:03:56.080 those rare people whose transition from building a business operationally, 0:03:56.280 --> 0:03:58.440 which of course he did at Netscape and then opswhere, 0:03:58.760 --> 0:04:02.080 to being a success will investor. It's a hard frontier 0:04:02.160 --> 0:04:05.440 to cross. So let me ask you a simple question, 0:04:06.000 --> 0:04:09.200 and I'm curious when people ask what do you do? 0:04:09.440 --> 0:04:11.520 How do you respond to that? Well, it depends on 0:04:11.560 --> 0:04:14.560 which morning I wake up. Some mornings I wake up 0:04:14.560 --> 0:04:17.839 and it's a hundred percent Warburg Pincus. It's working with 0:04:17.920 --> 0:04:23.479 my younger colleagues defining investment opportunity or thinking strategically about 0:04:23.480 --> 0:04:27.680 where there's a hole in the market for innovative technology. 0:04:27.800 --> 0:04:30.800 Sometimes I wake up and it's a Cambridge University day. 0:04:30.839 --> 0:04:34.520 I'm deeply embedded in the economics department at Cambridge, which 0:04:34.600 --> 0:04:39.120 is playing a key role in creatively responding to the 0:04:39.200 --> 0:04:42.640 global financial crisis of two thousand and eight, which woke 0:04:42.720 --> 0:04:45.640 up a lot of minds, a lot of economists who 0:04:45.640 --> 0:04:48.200 have been living in a kind of fantasy world of 0:04:48.600 --> 0:04:52.800 perfect expectations and efficient markets. So that's another part of 0:04:52.839 --> 0:04:55.480 my life, and that, of course, is where the Institute 0:04:55.520 --> 0:05:00.919 for New Economic Thinking comes in and and sometimes I'm 0:05:01.040 --> 0:05:04.920 very much involved with the Social Science Research Council, a 0:05:05.320 --> 0:05:09.160 not for profit based here in New York run by 0:05:09.160 --> 0:05:11.960 a great social scientists named Irak cats Nelson, and where 0:05:11.960 --> 0:05:17.919 we're creating an environment where economists can feel comfortable interacting 0:05:17.960 --> 0:05:22.280 with other social scientists rather than playing at being sort 0:05:22.320 --> 0:05:26.360 of physicists because they've got the math, and so these 0:05:26.400 --> 0:05:29.800 different lives intersect and they keep the neurons talking to 0:05:29.880 --> 0:05:34.480 each other NonStop. You know, I've long said that economists 0:05:34.480 --> 0:05:38.720 have suffered from physics envy. You know, physics and astrophysics. 0:05:38.800 --> 0:05:43.120 They can land a rover on a comet a billion 0:05:43.120 --> 0:05:48.680 miles away. Economists don't quite have that practical application of 0:05:48.720 --> 0:05:53.360 their models. Something you've been critical of and said economics 0:05:53.440 --> 0:05:59.080 needs to move from a theoretical practice to something more practical. Well, here, 0:05:59.160 --> 0:06:02.080 here's the problem. Economics is just so much harder than 0:06:02.080 --> 0:06:08.160 physics because look, the molecules. The molecules don't have consciousness, 0:06:08.760 --> 0:06:11.840 they're not aware of what they don't know. But every 0:06:11.880 --> 0:06:15.760 human being, except for maybe an extremist who might be 0:06:15.839 --> 0:06:19.520 running for president, wakes up in the morning knowing that 0:06:19.560 --> 0:06:23.440 not only does she not know what the consequences of 0:06:23.480 --> 0:06:25.719 her actions are going to be, but nobody else does either. 0:06:26.440 --> 0:06:30.760 And frankly, that is the lesson I deeply learned when 0:06:30.760 --> 0:06:33.839 I was a graduate student at Cambridge studying under the 0:06:33.920 --> 0:06:38.080 students of the great John Maynard Keynes. The central thesis 0:06:38.200 --> 0:06:43.839 of Cames's economics was making decisions that you have to 0:06:43.920 --> 0:06:47.120 make about committing money, whether it's to household goods or 0:06:47.200 --> 0:06:51.960 investment in new stuff, where you know that you can't 0:06:52.000 --> 0:06:54.080 know what the return is going to be, so people 0:06:54.120 --> 0:06:57.240 do the best they can, and all too often the 0:06:57.279 --> 0:07:00.400 result is a mess. That's why to us in an 0:07:00.440 --> 0:07:05.400 eight to me for economics and for everybody dependent on economists, 0:07:06.080 --> 0:07:08.760 two thousand and eight was the gift that keeps on 0:07:08.960 --> 0:07:11.120 giving a wake up call. To say the least, it 0:07:11.160 --> 0:07:15.560 taught us humility about what the great hyak cames as 0:07:15.680 --> 0:07:20.480 rival and friend called the pretense of knowledge we pretend 0:07:20.600 --> 0:07:24.680 we know in our models more than we can, and 0:07:25.160 --> 0:07:31.920 bringing back into the reality of decision making under uncertainty 0:07:32.040 --> 0:07:36.800 and how that scales up into failures of coordination. That's 0:07:36.840 --> 0:07:39.320 what new economics is about, and that's why I'm so 0:07:39.440 --> 0:07:43.400 thrilled forty years after I left Cambridge to be back 0:07:43.440 --> 0:07:47.880 involved in economics, having spent that time making decisions under 0:07:47.920 --> 0:07:52.800 uncertainty about information technology venture capital. You're listening to Masters 0:07:52.840 --> 0:07:56.800 in Business on Bloomberg Radio. My guest today is William Janeway. 0:07:57.000 --> 0:07:59.679 He is a venture capitalist and author of the book 0:08:00.160 --> 0:08:03.960 Doing Capitalism in the Innovation Economy. I want to pull 0:08:04.000 --> 0:08:07.320 a quote out of the book and discuss something you 0:08:07.440 --> 0:08:12.280 had written some time ago. The innovation economy emphasizes the 0:08:12.400 --> 0:08:18.160 strategic role played by the state and by financial speculators 0:08:18.760 --> 0:08:24.320 sources of investment unconcerned with economic value. Explain that a bit. 0:08:24.720 --> 0:08:29.000 So when you're operating at the frontier, you're making investments 0:08:29.000 --> 0:08:34.800 in new stuff. Maybe it's building railway networks, maybe it's 0:08:35.280 --> 0:08:38.080 putting fiber optic cable in the ground, or maybe it's 0:08:38.440 --> 0:08:40.880 trying to find out what this new stuff is good for. 0:08:41.640 --> 0:08:45.200 The one thing that you share with other investors at 0:08:45.200 --> 0:08:47.599 the frontier is you don't know what the return is 0:08:47.600 --> 0:08:50.000 gonna be. You can't. You can you can run a 0:08:50.040 --> 0:08:52.280 spread street. Anybody can run a spreadhet. Those are those 0:08:52.280 --> 0:08:55.120 are really assumed numbers, and you know, when you start 0:08:55.120 --> 0:08:57.920 out with that basis, who knows where it goes. So 0:08:58.160 --> 0:09:04.000 if investment that the frontier is limited only to where 0:09:04.280 --> 0:09:07.319 you have a really high degree of confidence that you're 0:09:07.320 --> 0:09:10.040 gonna make a profit, you're not gonna have very much investment. 0:09:10.280 --> 0:09:14.040 So there are two forces that historically, this is his 0:09:14.200 --> 0:09:19.640 this is history, this isn't theory. Historically two forces have collaborated, 0:09:19.800 --> 0:09:27.400 have intersected. One is governments driven by political missions, legitimate 0:09:27.440 --> 0:09:35.200 missions that transcend cost benefit analysis economic calculation. Manifest destiny 0:09:35.280 --> 0:09:37.559 is what we called it in the nineteenth century when 0:09:37.559 --> 0:09:41.280 we took nine percent of the land mass of the 0:09:41.320 --> 0:09:44.160 lower forty eight states and gave it to a bunch 0:09:44.200 --> 0:09:49.040 of railroad promoters who criss crossed the country with railroad 0:09:49.080 --> 0:09:52.640 lines on the basis of which came Railway Express and 0:09:52.720 --> 0:09:57.920 Sears Uh Sears, Roebuck and cantal Monk created the the 0:09:57.920 --> 0:10:02.720 the mail order retail economy, created a national market. The 0:10:02.800 --> 0:10:07.280 state moved the technology building that network out to the 0:10:07.360 --> 0:10:12.600 point where speculators could fund the exploration of what to 0:10:12.640 --> 0:10:16.280 do with that. They mobilized capital on a scale that 0:10:16.400 --> 0:10:23.240 those rational, careful green eye shade investors would never have done. 0:10:23.480 --> 0:10:26.079 We saw exactly the same thing in the ninety nineties 0:10:26.360 --> 0:10:29.679 when we built out the Internet and we had, you know, 0:10:29.800 --> 0:10:33.240 two hundred dot coms that went bust, but we were 0:10:33.280 --> 0:10:37.480 left with Amazon and Google and eBay. Amazon took two 0:10:37.520 --> 0:10:41.880 point two billion of cash investment to get to positive 0:10:41.880 --> 0:10:45.120 cash flow and transform the retail economy of the world. 0:10:45.600 --> 0:10:50.240 You could only do that with speculative money. That is 0:10:50.440 --> 0:10:55.000 investing to get out in time before the bubble bursts. 0:10:55.160 --> 0:10:57.240 We can talk about bubba. So let's talk about bubble 0:10:57.320 --> 0:11:00.240 right now. You mentioned railroads. They eventually be am a 0:11:00.280 --> 0:11:03.960 giant boom and then collapsed just a handful of survivors. 0:11:04.280 --> 0:11:08.800 In fact, every major technological innovation, it seems there's a 0:11:08.920 --> 0:11:12.959 huge boom, it reaches a point of speculaive excess, becomes 0:11:12.960 --> 0:11:16.080 a bubble, and then collapses. Whether it's cars that were 0:11:16.080 --> 0:11:19.160 a hundred card manufacturers at one point, what are there 0:11:19.160 --> 0:11:21.520 now three or four in the United States and a 0:11:21.559 --> 0:11:25.679 couple of dozen worldwide computers, radio and television, and of 0:11:25.720 --> 0:11:29.080 course the internet. Is this the nature of technology that 0:11:29.200 --> 0:11:32.120 boom bust cycle. Well, first, the first thing, the first 0:11:32.160 --> 0:11:35.920 law of bubbles is wherever you have markets in tradeable assets, 0:11:36.320 --> 0:11:40.640 from tulip bulbs to beach houses in the Nevada desert. 0:11:41.520 --> 0:11:45.280 Wherever you have market, you're gonna have hurting behavior. You're 0:11:45.280 --> 0:11:48.800 gonna momentum investing. You're gonna have people who, just like 0:11:48.880 --> 0:11:52.760 today with the unicorns, are motivated by fomo fear of 0:11:52.840 --> 0:11:57.120 missing out. And by the way, when you have professionals 0:11:57.160 --> 0:12:02.160 managing other people's money, if they don't follow the bubble, 0:12:02.679 --> 0:12:05.520 they get fired, the money gets taken away, so somebody 0:12:05.520 --> 0:12:10.559 else does. So bubbles are banal. There are indogenous, they 0:12:10.559 --> 0:12:14.079 are ubiquitous. Everywhere you look in the history of finance 0:12:14.280 --> 0:12:18.080 you find bubbles. But not all bubbles are the same. 0:12:18.280 --> 0:12:20.680 So before we go into how bubbles differ, I have 0:12:20.800 --> 0:12:24.160 to ask you a question. I'm going to assume that 0:12:24.200 --> 0:12:28.480 you believe Himan Minsky was correct. Well, you know, Himan 0:12:28.520 --> 0:12:32.200 Menski was a mentor of mine during the thirty five 0:12:32.320 --> 0:12:35.960 years when I was totally immersed in venture capital investing 0:12:36.600 --> 0:12:39.440 on the side, I kind of kept my mind open, 0:12:39.960 --> 0:12:44.160 listening and looking for people who for thinkers, who who 0:12:44.240 --> 0:12:47.120 who wrote and analyze the world I was actually living 0:12:47.160 --> 0:12:50.560 in and I met Hi Menski in about two We 0:12:50.720 --> 0:12:54.280 bonded he was out at Washington University. I read his books. 0:12:54.320 --> 0:12:57.160 I wrote some essays for him when he moved east 0:12:57.200 --> 0:12:59.560 and was at Bard College at the Levy Institute, I 0:12:59.640 --> 0:13:02.480 used Tom up for his conferences. He had a tremendous 0:13:02.520 --> 0:13:06.920 influence on me. And of course, in two thousand and 0:13:06.960 --> 0:13:10.920 eight the world rediscovered the most neglected economists of the 0:13:10.920 --> 0:13:13.679 second half of the twentieth century. I discovered him through 0:13:13.720 --> 0:13:15.560 Paul McCulley, who has been a guest on the show 0:13:15.600 --> 0:13:18.600 and I know for many years from his days of PIMCO, 0:13:19.280 --> 0:13:25.360 briefly explain Minsky's primary economic thesis about stability leading to instability. 0:13:25.520 --> 0:13:30.719 Minsky's thesis the the evolution of the UH, of the 0:13:30.800 --> 0:13:39.120 movement from the conservative, prudent UH system to one of crazy, 0:13:39.120 --> 0:13:42.600 wild speculation that self destruction goes like this, and and 0:13:42.600 --> 0:13:45.679 and let's remember Minsky was really applying this to the 0:13:45.760 --> 0:13:49.800 banking system, not to the stock market. But there's an analogy. 0:13:49.840 --> 0:13:52.920 So I lend you money, Barry. I lend you money, 0:13:53.000 --> 0:13:55.960 and you not only pay me back the interest on 0:13:56.000 --> 0:13:59.160 a timely fashion, but when you owe me back the loan, 0:13:59.400 --> 0:14:02.320 you pay me act the loan out of your own income, 0:14:02.559 --> 0:14:05.880 out of money you've earned. So guess what you want? 0:14:05.880 --> 0:14:09.720 Another loan? You got it. And this time you know, 0:14:10.400 --> 0:14:13.199 I don't really care. I trust you. You keep paying 0:14:13.200 --> 0:14:16.880 me that interest on a timely basis. And if at 0:14:16.880 --> 0:14:18.680 the end of the day we got to roll over 0:14:18.679 --> 0:14:21.840 the loan, we gotta refinance it. Well, we've just moved 0:14:21.880 --> 0:14:26.960 from what from what Minsky called the first the hedged environment, 0:14:27.280 --> 0:14:29.480 where you're paying the loan back out of cash flow, 0:14:29.480 --> 0:14:33.240 out of earnings, to the speculative environment, because there's a risk, 0:14:33.480 --> 0:14:35.720 there's a risk that the market may not be so 0:14:35.840 --> 0:14:39.200 acceptable when it's time. But it's still it's still pretty 0:14:39.200 --> 0:14:42.800 solid in its business as usual. But then, and this 0:14:42.880 --> 0:14:46.640 is what happened in two thousand and seven. Then people 0:14:46.680 --> 0:14:49.400 have been making so much money making these loans, they 0:14:49.440 --> 0:14:54.480 feel really comfortable lending you the third loan. And this time, 0:14:54.560 --> 0:14:57.320 you know, you wake up one morning and things are 0:14:57.320 --> 0:14:59.520 a little tight, and you call me up and say, 0:14:59.560 --> 0:15:02.760 you know, yeah, I know, I owe you this interest payment, 0:15:03.240 --> 0:15:07.040 but it would really help me if instead of paying 0:15:07.080 --> 0:15:11.480 you cash, I pay you in kind. I give you 0:15:11.520 --> 0:15:14.960 a little more of that debt. This is called pick loans. 0:15:15.120 --> 0:15:18.960 Payment in kind, another word to recapitalize the interest and 0:15:19.040 --> 0:15:23.160 the previous principle. And you're rolling the whole loan over again. 0:15:23.280 --> 0:15:27.440 And the signal that you're in a banking bubble which 0:15:27.560 --> 0:15:31.920 is going to blow is when the lenders start lending 0:15:32.040 --> 0:15:35.840 the borrowers the interest to pretend the loan is still good. 0:15:36.480 --> 0:15:39.360 That's exactly what happened in two thousand and seven. You're 0:15:39.400 --> 0:15:42.800 listening to Masters in Business on Bloomberg Radio, My guest 0:15:42.840 --> 0:15:47.080 today is William Janeway. He is a venture capitalist, author 0:15:47.480 --> 0:15:51.960 and managing director at Warburg Pinkis. And we are discussing 0:15:52.040 --> 0:15:56.760 how you helped to create b e A Systems, which 0:15:56.840 --> 0:16:01.960 is a technology company that really integrat rates databases with 0:16:02.080 --> 0:16:05.560 the Internet. Is that a gross over simplification. B e 0:16:05.640 --> 0:16:08.480 A was created in the mid nineties and became the 0:16:08.520 --> 0:16:14.840 company that delivered the platform for running important commercial applications, 0:16:14.880 --> 0:16:19.440 applications that involve people spending and collecting money across the 0:16:19.480 --> 0:16:23.640 Internet with millions of simultaneous users. Companies now owned by Oracle. 0:16:23.720 --> 0:16:27.440 It's the core of Oracles platform technology today, which is 0:16:27.440 --> 0:16:30.840 called Oracle Fusion. But b e A, beginning in the 0:16:30.880 --> 0:16:34.960 mid nineties through the mid audies, was a pioneer in 0:16:35.120 --> 0:16:41.600 transforming the world of transactional computing, of commercial computing from 0:16:41.640 --> 0:16:45.320 being dominated by IBM everything on an IBM mainframe to 0:16:45.440 --> 0:16:51.520 being distributed out across millions of separate machines interlinked by 0:16:51.760 --> 0:16:54.760 the Internet. So this this allowed the transition from mainframe 0:16:54.840 --> 0:16:58.880 to server. And and so that's such a weird name. 0:16:58.960 --> 0:17:01.240 B e A Systems would be a stand for well 0:17:01.280 --> 0:17:06.119 in at Warburg Pinkers, we we had created an investment 0:17:06.160 --> 0:17:10.240 thesis that it was time the technology had evolved to 0:17:10.280 --> 0:17:15.280 the point where IBMS dominant control of the marketplace where 0:17:15.280 --> 0:17:20.480 it could charge enormous premium prices, that that was was vulnerable, 0:17:21.040 --> 0:17:26.000 and that around the commercial world of enterprises you were 0:17:26.080 --> 0:17:31.960 seeing client servers Sun Systems running Oracle databases was opening up. 0:17:32.200 --> 0:17:35.240 So we began a program that that went on for 0:17:35.280 --> 0:17:38.359 a decade of investing in the way I like to 0:17:38.400 --> 0:17:41.440 put it in frankly, and kind of helping IBM become 0:17:41.520 --> 0:17:45.960 just another competitor. So in the middle of that process, 0:17:46.520 --> 0:17:49.919 um I was introduced to a felic called Bill Coleman. 0:17:50.640 --> 0:17:55.520 Bill had run UM the core software, it's Sun micro Systems. 0:17:55.560 --> 0:18:00.680 He had actually been working for Eric Schmidt and and right, 0:18:01.200 --> 0:18:05.720 and and Bill had a great idea sons sons mantra 0:18:06.080 --> 0:18:10.439 was the network is the computer, So Bill said, if 0:18:10.600 --> 0:18:13.760 if the networks the computer, the network needs an operating 0:18:13.800 --> 0:18:17.679 system like a computer does that that allocates and manages 0:18:17.800 --> 0:18:21.640 all the different resources. And he connected with a brilliant 0:18:21.720 --> 0:18:28.240 young engineer named Alfred Twang and a seasoned commercial sales 0:18:28.280 --> 0:18:32.000 and marketing guy named Ed Scott. So Bill and Ed 0:18:32.080 --> 0:18:36.119 and Alfred had this idea that that they could, with 0:18:36.359 --> 0:18:42.760 enough capital and enough time, build software that would effectively 0:18:42.960 --> 0:18:49.359 replace IBM's core transaction platform. So we began having conversations 0:18:49.359 --> 0:18:53.040 in the autumn of ninety four, and you know, I said, 0:18:53.560 --> 0:18:55.840 you know, guys, I I get it. I get the vision. 0:18:55.880 --> 0:18:58.840 We've been thinking about this ourselves for five years. You 0:18:58.880 --> 0:19:02.560 guys are incredibly landed. But before we set down to 0:19:02.560 --> 0:19:04.760 to build something's gonna take three or four years, gonna 0:19:04.800 --> 0:19:06.760 cost a ton of money. Why don't we see if 0:19:06.760 --> 0:19:10.959 we can cheat. Why don't we see whether there's stuff 0:19:11.040 --> 0:19:15.720 out there that could play this role but is owned 0:19:15.720 --> 0:19:17.119 by people who don't know what to do with it. 0:19:17.600 --> 0:19:22.280 So we actually launched the e A with Bill and 0:19:22.359 --> 0:19:24.840 Alfred with the working title it's like, you know, working 0:19:24.880 --> 0:19:27.639 title for a play bill Out and Alfred b e A. 0:19:28.200 --> 0:19:31.679 We did it as a research project, first to evaluate 0:19:31.720 --> 0:19:35.240 all the existing technologies that were available, and then to 0:19:35.400 --> 0:19:38.960 validate that there were real markets, real markets with real 0:19:39.040 --> 0:19:43.119 customers that could buy into alternatives to IBM. And we 0:19:43.240 --> 0:19:46.639 found this technology that had been developed in guests where 0:19:46.880 --> 0:19:50.920 Bell Labs A T and T and Bell Labs A 0:19:51.040 --> 0:19:52.960 T and T in those days when it was a 0:19:53.040 --> 0:19:56.639 dominant communications company basically had to give everything away that 0:19:56.720 --> 0:20:03.240 it wasn't using in communications because of the monopoly rules. Exactly. Well, 0:20:03.280 --> 0:20:07.119 that was that became loosened. But before then A T 0:20:07.280 --> 0:20:10.280 and T sold its Unix Systems Labs. This is where 0:20:10.280 --> 0:20:13.040 the Unix operating system was, and this is where this 0:20:13.200 --> 0:20:16.800 core technology called Tuxedo was. They sold it to a 0:20:16.800 --> 0:20:24.040 little company called Novel nowhere competing with Microsoft, run by 0:20:24.040 --> 0:20:27.959 a guy called Ray Norda who was dedicated to fighting 0:20:27.960 --> 0:20:31.360 Bill Gates to the death. So he bought this technology 0:20:31.440 --> 0:20:36.560 which was super complex, big heavy duty stuff. You needed 0:20:36.640 --> 0:20:40.959 engineers surrounding it into a company that that told everything 0:20:41.000 --> 0:20:43.520 in a red box at a computer land store. I 0:20:43.600 --> 0:20:46.600 used to say, you know, I'm not well unless they 0:20:46.600 --> 0:20:49.720 can microminiatureize three systems engineers and put it in every 0:20:49.720 --> 0:20:51.960 red box so that they can come out and dance 0:20:52.000 --> 0:20:54.920 and make it work. So in any case, Ed Scott 0:20:55.200 --> 0:20:59.800 had a long conversation with the new CEO, Bob Frankenberg. 0:21:00.040 --> 0:21:05.560 Bob Frankenberg had come from HP, he knew enterprise computing 0:21:05.840 --> 0:21:10.040 and he knew that Novel and Tuxedo didn't mix. So 0:21:10.080 --> 0:21:13.280 we put together a deal which launched the e A 0:21:14.040 --> 0:21:18.159 by acquiring the Tuxedo technology and having it in the 0:21:18.240 --> 0:21:20.960 hands of people Billonette and Alfred who knew what to 0:21:21.000 --> 0:21:23.639 do with it. So that was a fifty five million 0:21:23.680 --> 0:21:26.960 dollars was we we We had already bought a couple 0:21:27.040 --> 0:21:30.600 of consulting businesses by this time. We had we had 0:21:30.680 --> 0:21:33.040 committed because we knew we were gonna be buying stuff 0:21:33.080 --> 0:21:36.280 from scratch. This was the innovation. We created what we 0:21:36.320 --> 0:21:38.480 called the line of equity, not a line of credit, 0:21:38.720 --> 0:21:41.800 a line of equity. So we priced out fifty million 0:21:41.840 --> 0:21:45.399 dollars up front, and so when the guys went into 0:21:45.440 --> 0:21:50.199 Novelle needing to do a deal, they didn't have to say, hey, Bob, 0:21:50.600 --> 0:21:52.600 don't do a thing. We'll be back in six months 0:21:52.640 --> 0:21:55.560 when we raised another round of venture capital. We were 0:21:55.560 --> 0:21:58.439 there with them. We could do the deal in real time. 0:21:59.119 --> 0:22:02.200 That meant in a year BA was running at a 0:22:02.359 --> 0:22:07.600 hundred million dollar revenue base could go public just in 0:22:08.760 --> 0:22:13.240 seven as the Internet bubble started to take off. But 0:22:13.840 --> 0:22:16.840 Tuxedo wasn't designed for the Internet. And this was the 0:22:16.960 --> 0:22:19.880 genius of Bill and Nett and Alfred and Bill and Alfred, 0:22:19.960 --> 0:22:23.480 the technology guys really came together. They did a search 0:22:23.560 --> 0:22:28.040 for technology that was that was Internet native, and they 0:22:28.119 --> 0:22:33.160 found a little startup called web Logic. So web Logic 0:22:33.320 --> 0:22:36.679 was already a hot company even though it was just 0:22:36.840 --> 0:22:44.919 beginning to ship stuff, just beginning, and the valuation happened 0:22:44.960 --> 0:22:46.720 it before it will happen again. This is what a 0:22:46.720 --> 0:22:50.200 bubble starts to smell like. The valuation for the startups 0:22:50.200 --> 0:22:52.840 started rising and rising, but so did the stock of 0:22:52.920 --> 0:22:56.000 b e A because we've been able to go public. 0:22:56.160 --> 0:22:59.600 Well you did it Beego public? And what sort of 0:22:59.640 --> 0:23:03.280 value sen to go public at? Well, initially it was 0:23:03.320 --> 0:23:06.080 at about a two dollar valuation and that's so that's 0:23:06.080 --> 0:23:08.600 a pretty good return on fifty five million and we 0:23:08.640 --> 0:23:14.160 didn't even have all the million in yet, But by 0:23:14.240 --> 0:23:16.359 that valuation was up to a billion, which was a 0:23:16.480 --> 0:23:19.400 very good thing because the Bye web Logic it took 0:23:19.400 --> 0:23:23.399 a hundred and fifty million of shares of stock and 0:23:23.440 --> 0:23:26.439 if we hadn't had the public market valuation, couldn't have 0:23:26.480 --> 0:23:28.480 done it. So how long after that did it take 0:23:28.520 --> 0:23:30.879 to get to six and a half billion, Well, first 0:23:30.920 --> 0:23:34.040 it took it took about a year after that to 0:23:34.080 --> 0:23:37.159 get to a billion dollars in revenues, a billion revenue. 0:23:37.280 --> 0:23:40.520 That's a real company, that's a real company, very profitable, 0:23:41.080 --> 0:23:45.439 becoming the standard. And with the bubble, with the bubble 0:23:45.480 --> 0:23:50.359 and the stock market valuation went to twenty five billion. 0:23:50.600 --> 0:23:53.199 So who ends up taking b e A out when 0:23:53.240 --> 0:23:58.600 everything is well? First of all, the public speculative stock market, 0:23:58.119 --> 0:24:02.719 war Paying Kiss owned after the I p O. Warburg 0:24:02.760 --> 0:24:05.360 pink Is still owned more than fifty percent of the company. 0:24:05.560 --> 0:24:08.440 And when we were the Soul funders, Soul funders through 0:24:08.480 --> 0:24:11.600 this line of equity. So we began distributing our shares 0:24:11.960 --> 0:24:16.240 to our limited partners. The shares were fully tradeable, completely liquid, 0:24:16.920 --> 0:24:20.359 and the stock kept rising as we were distributing the shares. 0:24:20.640 --> 0:24:23.000 And so that's where that's six and a half billion 0:24:23.440 --> 0:24:28.479 of realized value came from distributing shares into a rising market. 0:24:28.560 --> 0:24:32.399 And you know, we talked about high mensky. I My 0:24:32.400 --> 0:24:36.080 my senior partner, John Vogelstein, who was the chief investment 0:24:36.119 --> 0:24:39.440 officer at Warburg Pinkers, was a great student of markets. 0:24:40.119 --> 0:24:43.399 And I bat Way back at Cambridge, had written my 0:24:43.440 --> 0:24:48.760 PhD thesis on nineteen nine to nineteen thirty one in Britain. 0:24:49.000 --> 0:24:51.959 So I'd seen, if you like, I'd seen the movie before. 0:24:52.520 --> 0:24:55.240 I've seen the stock market bubble of nineteen twenty nine. 0:24:55.600 --> 0:24:58.480 When our c A. She took the stock price chart 0:24:58.560 --> 0:25:02.200 of our CIA from twenty six to nine. It looked 0:25:02.200 --> 0:25:06.280 like b E A from nine six to and that's 0:25:06.320 --> 0:25:08.560 all you needed to see. We knew it was a bubble. 0:25:08.640 --> 0:25:10.960 We knew it wasn't gonna last. We knew we'd built 0:25:11.000 --> 0:25:14.359 a real company, but it was time to realize the 0:25:14.480 --> 0:25:17.959 value that we've created. You're listening to Masters in Business 0:25:17.960 --> 0:25:21.440 on Bloomberg Radio. My guest today is Bill Janeway. He 0:25:21.600 --> 0:25:25.560 is a managing director at Warburg Pinkus, an author of 0:25:25.600 --> 0:25:29.640 the book Doing Capitalism in the Innovation Economy, as well 0:25:29.680 --> 0:25:34.760 as a venture capital investor. Let's let's dive right into 0:25:34.840 --> 0:25:38.840 the VC process. We were speaking earlier about B e 0:25:38.920 --> 0:25:44.600 A systems. What's the decision process like when you're doing 0:25:44.680 --> 0:25:48.159 more traditional sort of venture investing where someone brings you 0:25:48.240 --> 0:25:50.560 a company and you're interested in it. There may be 0:25:50.680 --> 0:25:56.439 other investors, other vcs or angels participating. What's that process like? Well, 0:25:57.400 --> 0:26:01.080 I think we want to frame this in thinking about 0:26:01.680 --> 0:26:06.520 venture capital as an industry. So to begin with, this 0:26:06.600 --> 0:26:10.560 is not a very old industry. It's about nine eighty 0:26:11.000 --> 0:26:14.040 when it went from being a craft practice by people. 0:26:14.320 --> 0:26:16.359 We could get them all in this room, I promise you, 0:26:16.480 --> 0:26:23.240 the founding and entrepreneurs, but American research and Development, Graylock, 0:26:23.400 --> 0:26:26.760 ven Rock, J. H. Whitney, um Warby Pinkins was a 0:26:26.800 --> 0:26:29.800