Speaker 1: This is Masters in Business with Barry Ridholds on Bloomberg
Speaker 1: Radio Today. On the podcast, we have William H. Jane Way,
Speaker 1: better known as Bill Janeway. You'll hear his whole curriculum
Speaker 1: VITA in a minute, so I won't go into the
Speaker 1: details on that. Uh. For those of you who are
Speaker 1: interested in technology, venture capital, the history of financing, you
Speaker 1: are about to sit through a master class in angel investing,
Speaker 1: VC technology, how the world has developed to fund speculative innovation,
Speaker 1: the proper role of government, of the private sector, of
Speaker 1: the public markets. This is really a fascinating conversation, a
Speaker 1: tour to force. I'm not exaggerating when I said we
Speaker 1: have another eight pages of question. I could have kept
Speaker 1: going for another hour of half, but I promised to
Speaker 1: get him out of here fifteen minutes ago and we
Speaker 1: still ran late. Um. He is tremendously insightful, with an
Speaker 1: enormous breath of experience and thoughtfulness about what it means
Speaker 1: to be a successful early stage investor in technology and
Speaker 1: other fields. I think you're gonna find this to be
Speaker 1: an absolutely brilliant, insightful, delightful conversation. So, with no further ado,
Speaker 1: my conversation with Bill Janeway. This is Masters in Business
Speaker 1: with Barry Ridholds on Bloomberg Radio. My special guest today
Speaker 1: is William Janeway, better known as Bill. I think he
Speaker 1: is the most important person our listeners may never have
Speaker 1: heard of before. And that's only because some of the
Speaker 1: things we're gonna talk about are a little inside baseball.
Speaker 1: But let me give you a quick walk through of
Speaker 1: his curriculum vita. He is currently a managing director and
Speaker 1: senior advisor at Warburg Pincus, where he helped to develop
Speaker 1: their Technology Investment division. Princeton undergrad got his PhD in
Speaker 1: economics at Cambridge ultimately became the co founder of the
Speaker 1: Institute for New Economic Thinking that he co founded with
Speaker 1: George Soros. In two thousand and twelve, he published a
Speaker 1: fascinating book called Doing in a Capitalism in the Innovation Economy,
Speaker 1: and we're gonna talk a little more about that during
Speaker 1: our conversation. He also helped to fund and create b
Speaker 1: e A Systems. Is that an accurate way to describe that?
Speaker 1: And we'll spend some time explaining how he a cash
Speaker 1: investment of a little more than fifty million dollars became
Speaker 1: a six point five billion dollar payout a few years later.
Speaker 1: There's so much more stuff to go over. We'll we'll,
Speaker 1: we'll get into it as we go. William Janeway, Welcome
Speaker 1: to Bloomberg. Great to be here, Barry so I said
Speaker 1: as in the introduction that many of the lay people
Speaker 1: listeners may not know who you are. But let me
Speaker 1: give a quote from your book by Mark and Reason.
Speaker 1: UH currently a VC at Andreson Horowitz and essentially the
Speaker 1: person who invented UH Netscape and and really created the
Speaker 1: modern browser and the modern form of the internet. And
Speaker 1: Reason said Bill Janeway is a key creator of modern
Speaker 1: venture capital, and he tells an amazing story of the
Speaker 1: intersection of economics and innovation. This book is essential to
Speaker 1: anyone who wants to understand technology and how it's creation
Speaker 1: will be financed for decades to come. That's That's quite
Speaker 1: the endorsement, isn't it. It's a great endorsement. I have
Speaker 1: a great regard for Mark, and he is one of
Speaker 1: those rare people whose transition from building a business operationally,
Speaker 1: which of course he did at Netscape and then opswhere,
Speaker 1: to being a success will investor. It's a hard frontier
Speaker 1: to cross. So let me ask you a simple question,
Speaker 1: and I'm curious when people ask what do you do?
Speaker 1: How do you respond to that? Well, it depends on
Speaker 1: which morning I wake up. Some mornings I wake up
Speaker 1: and it's a hundred percent Warburg Pincus. It's working with
Speaker 1: my younger colleagues defining investment opportunity or thinking strategically about
Speaker 1: where there's a hole in the market for innovative technology.
Speaker 1: Sometimes I wake up and it's a Cambridge University day.
Speaker 1: I'm deeply embedded in the economics department at Cambridge, which
Speaker 1: is playing a key role in creatively responding to the
Speaker 1: global financial crisis of two thousand and eight, which woke
Speaker 1: up a lot of minds, a lot of economists who
Speaker 1: have been living in a kind of fantasy world of
Speaker 1: perfect expectations and efficient markets. So that's another part of
Speaker 1: my life, and that, of course, is where the Institute
Speaker 1: for New Economic Thinking comes in and and sometimes I'm
Speaker 1: very much involved with the Social Science Research Council, a
Speaker 1: not for profit based here in New York run by
Speaker 1: a great social scientists named Irak cats Nelson, and where
Speaker 1: we're creating an environment where economists can feel comfortable interacting
Speaker 1: with other social scientists rather than playing at being sort
Speaker 1: of physicists because they've got the math, and so these
Speaker 1: different lives intersect and they keep the neurons talking to
Speaker 1: each other NonStop. You know, I've long said that economists
Speaker 1: have suffered from physics envy. You know, physics and astrophysics.
Speaker 1: They can land a rover on a comet a billion
Speaker 1: miles away. Economists don't quite have that practical application of
Speaker 1: their models. Something you've been critical of and said economics
Speaker 1: needs to move from a theoretical practice to something more practical. Well, here,
Speaker 1: here's the problem. Economics is just so much harder than
Speaker 1: physics because look, the molecules. The molecules don't have consciousness,
Speaker 1: they're not aware of what they don't know. But every
Speaker 1: human being, except for maybe an extremist who might be
Speaker 1: running for president, wakes up in the morning knowing that
Speaker 1: not only does she not know what the consequences of
Speaker 1: her actions are going to be, but nobody else does either.
Speaker 1: And frankly, that is the lesson I deeply learned when
Speaker 1: I was a graduate student at Cambridge studying under the
Speaker 1: students of the great John Maynard Keynes. The central thesis
Speaker 1: of Cames's economics was making decisions that you have to
Speaker 1: make about committing money, whether it's to household goods or
Speaker 1: investment in new stuff, where you know that you can't
Speaker 1: know what the return is going to be, so people
Speaker 1: do the best they can, and all too often the
Speaker 1: result is a mess. That's why to us in an
Speaker 1: eight to me for economics and for everybody dependent on economists,
Speaker 1: two thousand and eight was the gift that keeps on
Speaker 1: giving a wake up call. To say the least, it
Speaker 1: taught us humility about what the great hyak cames as
Speaker 1: rival and friend called the pretense of knowledge we pretend
Speaker 1: we know in our models more than we can, and
Speaker 1: bringing back into the reality of decision making under uncertainty
Speaker 1: and how that scales up into failures of coordination. That's
Speaker 1: what new economics is about, and that's why I'm so
Speaker 1: thrilled forty years after I left Cambridge to be back
Speaker 1: involved in economics, having spent that time making decisions under
Speaker 1: uncertainty about information technology venture capital. You're listening to Masters
Speaker 1: in Business on Bloomberg Radio. My guest today is William Janeway.
Speaker 1: He is a venture capitalist and author of the book
Speaker 1: Doing Capitalism in the Innovation Economy. I want to pull
Speaker 1: a quote out of the book and discuss something you
Speaker 1: had written some time ago. The innovation economy emphasizes the
Speaker 1: strategic role played by the state and by financial speculators
Speaker 1: sources of investment unconcerned with economic value. Explain that a bit.
Speaker 1: So when you're operating at the frontier, you're making investments
Speaker 1: in new stuff. Maybe it's building railway networks, maybe it's
Speaker 1: putting fiber optic cable in the ground, or maybe it's
Speaker 1: trying to find out what this new stuff is good for.
Speaker 1: The one thing that you share with other investors at
Speaker 1: the frontier is you don't know what the return is
Speaker 1: gonna be. You can't. You can you can run a
Speaker 1: spread street. Anybody can run a spreadhet. Those are those
Speaker 1: are really assumed numbers, and you know, when you start
Speaker 1: out with that basis, who knows where it goes. So
Speaker 1: if investment that the frontier is limited only to where
Speaker 1: you have a really high degree of confidence that you're
Speaker 1: gonna make a profit, you're not gonna have very much investment.
Speaker 1: So there are two forces that historically, this is his
Speaker 1: this is history, this isn't theory. Historically two forces have collaborated,
Speaker 1: have intersected. One is governments driven by political missions, legitimate
Speaker 1: missions that transcend cost benefit analysis economic calculation. Manifest destiny
Speaker 1: is what we called it in the nineteenth century when
Speaker 1: we took nine percent of the land mass of the
Speaker 1: lower forty eight states and gave it to a bunch
Speaker 1: of railroad promoters who criss crossed the country with railroad
Speaker 1: lines on the basis of which came Railway Express and
Speaker 1: Sears Uh Sears, Roebuck and cantal Monk created the the
Speaker 1: the mail order retail economy, created a national market. The
Speaker 1: state moved the technology building that network out to the
Speaker 1: point where speculators could fund the exploration of what to
Speaker 1: do with that. They mobilized capital on a scale that
Speaker 1: those rational, careful green eye shade investors would never have done.
Speaker 1: We saw exactly the same thing in the ninety nineties
Speaker 1: when we built out the Internet and we had, you know,
Speaker 1: two hundred dot coms that went bust, but we were
Speaker 1: left with Amazon and Google and eBay. Amazon took two
Speaker 1: point two billion of cash investment to get to positive
Speaker 1: cash flow and transform the retail economy of the world.
Speaker 1: You could only do that with speculative money. That is
Speaker 1: investing to get out in time before the bubble bursts.
Speaker 1: We can talk about bubba. So let's talk about bubble
Speaker 1: right now. You mentioned railroads. They eventually be am a
Speaker 1: giant boom and then collapsed just a handful of survivors.
Speaker 1: In fact, every major technological innovation, it seems there's a
Speaker 1: huge boom, it reaches a point of speculaive excess, becomes
Speaker 1: a bubble, and then collapses. Whether it's cars that were
Speaker 1: a hundred card manufacturers at one point, what are there
Speaker 1: now three or four in the United States and a
Speaker 1: couple of dozen worldwide computers, radio and television, and of
Speaker 1: course the internet. Is this the nature of technology that
Speaker 1: boom bust cycle. Well, first, the first thing, the first
Speaker 1: law of bubbles is wherever you have markets in tradeable assets,
Speaker 1: from tulip bulbs to beach houses in the Nevada desert.
Speaker 1: Wherever you have market, you're gonna have hurting behavior. You're
Speaker 1: gonna momentum investing. You're gonna have people who, just like
Speaker 1: today with the unicorns, are motivated by fomo fear of
Speaker 1: missing out. And by the way, when you have professionals
Speaker 1: managing other people's money, if they don't follow the bubble,
Speaker 1: they get fired, the money gets taken away, so somebody
Speaker 1: else does. So bubbles are banal. There are indogenous, they
Speaker 1: are ubiquitous. Everywhere you look in the history of finance
Speaker 1: you find bubbles. But not all bubbles are the same.
Speaker 1: So before we go into how bubbles differ, I have
Speaker 1: to ask you a question. I'm going to assume that
Speaker 1: you believe Himan Minsky was correct. Well, you know, Himan
Speaker 1: Menski was a mentor of mine during the thirty five
Speaker 1: years when I was totally immersed in venture capital investing
Speaker 1: on the side, I kind of kept my mind open,
Speaker 1: listening and looking for people who for thinkers, who who
Speaker 1: who wrote and analyze the world I was actually living
Speaker 1: in and I met Hi Menski in about two We
Speaker 1: bonded he was out at Washington University. I read his books.
Speaker 1: I wrote some essays for him when he moved east
Speaker 1: and was at Bard College at the Levy Institute, I
Speaker 1: used Tom up for his conferences. He had a tremendous
Speaker 1: influence on me. And of course, in two thousand and
Speaker 1: eight the world rediscovered the most neglected economists of the
Speaker 1: second half of the twentieth century. I discovered him through
Speaker 1: Paul McCulley, who has been a guest on the show
Speaker 1: and I know for many years from his days of PIMCO,
Speaker 1: briefly explain Minsky's primary economic thesis about stability leading to instability.
Speaker 1: Minsky's thesis the the evolution of the UH, of the
Speaker 1: movement from the conservative, prudent UH system to one of crazy,
Speaker 1: wild speculation that self destruction goes like this, and and
Speaker 1: and let's remember Minsky was really applying this to the
Speaker 1: banking system, not to the stock market. But there's an analogy.
Speaker 1: So I lend you money, Barry. I lend you money,
Speaker 1: and you not only pay me back the interest on
Speaker 1: a timely fashion, but when you owe me back the loan,
Speaker 1: you pay me act the loan out of your own income,
Speaker 1: out of money you've earned. So guess what you want?
Speaker 1: Another loan? You got it. And this time you know,
Speaker 1: I don't really care. I trust you. You keep paying
Speaker 1: me that interest on a timely basis. And if at
Speaker 1: the end of the day we got to roll over
Speaker 1: the loan, we gotta refinance it. Well, we've just moved
Speaker 1: from what from what Minsky called the first the hedged environment,
Speaker 1: where you're paying the loan back out of cash flow,
Speaker 1: out of earnings, to the speculative environment, because there's a risk,
Speaker 1: there's a risk that the market may not be so
Speaker 1: acceptable when it's time. But it's still it's still pretty
Speaker 1: solid in its business as usual. But then, and this
Speaker 1: is what happened in two thousand and seven. Then people
Speaker 1: have been making so much money making these loans, they
Speaker 1: feel really comfortable lending you the third loan. And this time,
Speaker 1: you know, you wake up one morning and things are
Speaker 1: a little tight, and you call me up and say,
Speaker 1: you know, yeah, I know, I owe you this interest payment,
Speaker 1: but it would really help me if instead of paying
Speaker 1: you cash, I pay you in kind. I give you
Speaker 1: a little more of that debt. This is called pick loans.
Speaker 1: Payment in kind, another word to recapitalize the interest and
Speaker 1: the previous principle. And you're rolling the whole loan over again.
Speaker 1: And the signal that you're in a banking bubble which
Speaker 1: is going to blow is when the lenders start lending
Speaker 1: the borrowers the interest to pretend the loan is still good.
Speaker 1: That's exactly what happened in two thousand and seven. You're
Speaker 1: listening to Masters in Business on Bloomberg Radio, My guest
Speaker 1: today is William Janeway. He is a venture capitalist, author
Speaker 1: and managing director at Warburg Pinkis. And we are discussing
Speaker 1: how you helped to create b e A Systems, which
Speaker 1: is a technology company that really integrat rates databases with
Speaker 1: the Internet. Is that a gross over simplification. B e
Speaker 1: A was created in the mid nineties and became the
Speaker 1: company that delivered the platform for running important commercial applications,
Speaker 1: applications that involve people spending and collecting money across the
Speaker 1: Internet with millions of simultaneous users. Companies now owned by Oracle.
Speaker 1: It's the core of Oracles platform technology today, which is
Speaker 1: called Oracle Fusion. But b e A, beginning in the
Speaker 1: mid nineties through the mid audies, was a pioneer in
Speaker 1: transforming the world of transactional computing, of commercial computing from
Speaker 1: being dominated by IBM everything on an IBM mainframe to
Speaker 1: being distributed out across millions of separate machines interlinked by
Speaker 1: the Internet. So this this allowed the transition from mainframe
Speaker 1: to server. And and so that's such a weird name.
Speaker 1: B e A Systems would be a stand for well
Speaker 1: in at Warburg Pinkers, we we had created an investment
Speaker 1: thesis that it was time the technology had evolved to
Speaker 1: the point where IBMS dominant control of the marketplace where
Speaker 1: it could charge enormous premium prices, that that was was vulnerable,
Speaker 1: and that around the commercial world of enterprises you were
Speaker 1: seeing client servers Sun Systems running Oracle databases was opening up.
Speaker 1: So we began a program that that went on for
Speaker 1: a decade of investing in the way I like to
Speaker 1: put it in frankly, and kind of helping IBM become
Speaker 1: just another competitor. So in the middle of that process,
Speaker 1: um I was introduced to a felic called Bill Coleman.
Speaker 1: Bill had run UM the core software, it's Sun micro Systems.
Speaker 1: He had actually been working for Eric Schmidt and and right,
Speaker 1: and and Bill had a great idea sons sons mantra
Speaker 1: was the network is the computer, So Bill said, if
Speaker 1: if the networks the computer, the network needs an operating
Speaker 1: system like a computer does that that allocates and manages
Speaker 1: all the different resources. And he connected with a brilliant
Speaker 1: young engineer named Alfred Twang and a seasoned commercial sales
Speaker 1: and marketing guy named Ed Scott. So Bill and Ed
Speaker 1: and Alfred had this idea that that they could, with
Speaker 1: enough capital and enough time, build software that would effectively
Speaker 1: replace IBM's core transaction platform. So we began having conversations
Speaker 1: in the autumn of ninety four, and you know, I said,
Speaker 1: you know, guys, I I get it. I get the vision.
Speaker 1: We've been thinking about this ourselves for five years. You
Speaker 1: guys are incredibly landed. But before we set down to
Speaker 1: to build something's gonna take three or four years, gonna
Speaker 1: cost a ton of money. Why don't we see if
Speaker 1: we can cheat. Why don't we see whether there's stuff
Speaker 1: out there that could play this role but is owned
Speaker 1: by people who don't know what to do with it.
Speaker 1: So we actually launched the e A with Bill and
Speaker 1: Alfred with the working title it's like, you know, working
Speaker 1: title for a play bill Out and Alfred b e A.
Speaker 1: We did it as a research project, first to evaluate
Speaker 1: all the existing technologies that were available, and then to
Speaker 1: validate that there were real markets, real markets with real
Speaker 1: customers that could buy into alternatives to IBM. And we
Speaker 1: found this technology that had been developed in guests where
Speaker 1: Bell Labs A T and T and Bell Labs A
Speaker 1: T and T in those days when it was a
Speaker 1: dominant communications company basically had to give everything away that
Speaker 1: it wasn't using in communications because of the monopoly rules. Exactly. Well,
Speaker 1: that was that became loosened. But before then A T
Speaker 1: and T sold its Unix Systems Labs. This is where
Speaker 1: the Unix operating system was, and this is where this
Speaker 1: core technology called Tuxedo was. They sold it to a
Speaker 1: little company called Novel nowhere competing with Microsoft, run by
Speaker 1: a guy called Ray Norda who was dedicated to fighting
Speaker 1: Bill Gates to the death. So he bought this technology
Speaker 1: which was super complex, big heavy duty stuff. You needed
Speaker 1: engineers surrounding it into a company that that told everything
Speaker 1: in a red box at a computer land store. I
Speaker 1: used to say, you know, I'm not well unless they
Speaker 1: can microminiatureize three systems engineers and put it in every
Speaker 1: red box so that they can come out and dance
Speaker 1: and make it work. So in any case, Ed Scott
Speaker 1: had a long conversation with the new CEO, Bob Frankenberg.
Speaker 1: Bob Frankenberg had come from HP, he knew enterprise computing
Speaker 1: and he knew that Novel and Tuxedo didn't mix. So
Speaker 1: we put together a deal which launched the e A
Speaker 1: by acquiring the Tuxedo technology and having it in the
Speaker 1: hands of people Billonette and Alfred who knew what to
Speaker 1: do with it. So that was a fifty five million
Speaker 1: dollars was we we We had already bought a couple
Speaker 1: of consulting businesses by this time. We had we had
Speaker 1: committed because we knew we were gonna be buying stuff
Speaker 1: from scratch. This was the innovation. We created what we
Speaker 1: called the line of equity, not a line of credit,
Speaker 1: a line of equity. So we priced out fifty million
Speaker 1: dollars up front, and so when the guys went into
Speaker 1: Novelle needing to do a deal, they didn't have to say, hey, Bob,
Speaker 1: don't do a thing. We'll be back in six months
Speaker 1: when we raised another round of venture capital. We were
Speaker 1: there with them. We could do the deal in real time.
Speaker 1: That meant in a year BA was running at a
Speaker 1: hundred million dollar revenue base could go public just in
Speaker 1: seven as the Internet bubble started to take off. But
Speaker 1: Tuxedo wasn't designed for the Internet. And this was the
Speaker 1: genius of Bill and Nett and Alfred and Bill and Alfred,
Speaker 1: the technology guys really came together. They did a search
Speaker 1: for technology that was that was Internet native, and they
Speaker 1: found a little startup called web Logic. So web Logic
Speaker 1: was already a hot company even though it was just
Speaker 1: beginning to ship stuff, just beginning, and the valuation happened
Speaker 1: it before it will happen again. This is what a
Speaker 1: bubble starts to smell like. The valuation for the startups
Speaker 1: started rising and rising, but so did the stock of
Speaker 1: b e A because we've been able to go public.
Speaker 1: Well you did it Beego public? And what sort of
Speaker 1: value sen to go public at? Well, initially it was
Speaker 1: at about a two dollar valuation and that's so that's
Speaker 1: a pretty good return on fifty five million and we
Speaker 1: didn't even have all the million in yet, But by
Speaker 1: that valuation was up to a billion, which was a
Speaker 1: very good thing because the Bye web Logic it took
Speaker 1: a hundred and fifty million of shares of stock and
Speaker 1: if we hadn't had the public market valuation, couldn't have
Speaker 1: done it. So how long after that did it take
Speaker 1: to get to six and a half billion, Well, first
Speaker 1: it took it took about a year after that to
Speaker 1: get to a billion dollars in revenues, a billion revenue.
Speaker 1: That's a real company, that's a real company, very profitable,
Speaker 1: becoming the standard. And with the bubble, with the bubble
Speaker 1: and the stock market valuation went to twenty five billion.
Speaker 1: So who ends up taking b e A out when
Speaker 1: everything is well? First of all, the public speculative stock market,
Speaker 1: war Paying Kiss owned after the I p O. Warburg
Speaker 1: pink Is still owned more than fifty percent of the company.
Speaker 1: And when we were the Soul funders, Soul funders through
Speaker 1: this line of equity. So we began distributing our shares
Speaker 1: to our limited partners. The shares were fully tradeable, completely liquid,
Speaker 1: and the stock kept rising as we were distributing the shares.
Speaker 1: And so that's where that's six and a half billion
Speaker 1: of realized value came from distributing shares into a rising market.
Speaker 1: And you know, we talked about high mensky. I My
Speaker 1: my senior partner, John Vogelstein, who was the chief investment
Speaker 1: officer at Warburg Pinkers, was a great student of markets.
Speaker 1: And I bat Way back at Cambridge, had written my
Speaker 1: PhD thesis on nineteen nine to nineteen thirty one in Britain.
Speaker 1: So I'd seen, if you like, I'd seen the movie before.
Speaker 1: I've seen the stock market bubble of nineteen twenty nine.
Speaker 1: When our c A. She took the stock price chart
Speaker 1: of our CIA from twenty six to nine. It looked
Speaker 1: like b E A from nine six to and that's
Speaker 1: all you needed to see. We knew it was a bubble.
Speaker 1: We knew it wasn't gonna last. We knew we'd built
Speaker 1: a real company, but it was time to realize the
Speaker 1: value that we've created. You're listening to Masters in Business
Speaker 1: on Bloomberg Radio. My guest today is Bill Janeway. He
Speaker 1: is a managing director at Warburg Pinkus, an author of
Speaker 1: the book Doing Capitalism in the Innovation Economy, as well
Speaker 1: as a venture capital investor. Let's let's dive right into
Speaker 1: the VC process. We were speaking earlier about B e
Speaker 1: A systems. What's the decision process like when you're doing
Speaker 1: more traditional sort of venture investing where someone brings you
Speaker 1: a company and you're interested in it. There may be
Speaker 1: other investors, other vcs or angels participating. What's that process like? Well,
Speaker 1: I think we want to frame this in thinking about
Speaker 1: venture capital as an industry. So to begin with, this
Speaker 1: is not a very old industry. It's about nine eighty
Speaker 1: when it went from being a craft practice by people.
Speaker 1: We could get them all in this room, I promise you,
Speaker 1: the founding and entrepreneurs, but American research and Development, Graylock,
Speaker 1: ven Rock, J. H. Whitney, um Warby Pinkins was a
Speaker 1: founder of the National Venture Capital Association. That were barely
Speaker 1: twenty five firms in the country that were founders of
Speaker 1: the NVCA, But one of the venture capital has been
Speaker 1: studied intensely through empirical analysis, and there are a few
Speaker 1: stylized facts that emerge over these thirty five years since
Speaker 1: nineteen eighty. The first is there is tremendous kew in
Speaker 1: the returns of venture capitalists, meaning a small number of
Speaker 1: venture capital funds have fantastic performance, a large number have
Speaker 1: very mediocre performance. We see something very similar amongst hedge funds,
Speaker 1: and not quite as skewed, but still there is a
Speaker 1: a shifted distribution most private equity as well. Now. Second,
Speaker 1: and this has been confirmed right through two thousand and ten.
Speaker 1: Unlike most public market investors, there is persistence in the return.
Speaker 1: So it's not just a few funds, it's a few firms.
Speaker 1: So performance of firm one helps predict performance of firm
Speaker 1: of fund to fund three and that's why you have
Speaker 1: these iconic names and well, uh, Benchmark and Sequoia, these
Speaker 1: firms have been successful over decades um So. Third, however,
Speaker 1: for the industry as a whole, for the me infirm,
Speaker 1: the returns are very closely correlated with the public market
Speaker 1: because there and that's that's where we're going to come
Speaker 1: to a very interesting change in the last fifteen years.
Speaker 1: It used to be that we could take in the
Speaker 1: eighties and nineties, we kind of take access to the
Speaker 1: I p O market for granted each year. And this
Speaker 1: is frankly, this is my own research when I went
Speaker 1: back to Cambridge and became a financial economist again after
Speaker 1: thirty five years as a venture capitalist. The correlation is
Speaker 1: really tight with the state of the I p O market.
Speaker 1: In a hot I p O market, venture capitalists look
Speaker 1: like geniuses. When the market cools down and the exit
Speaker 1: opportunities shrink, then the returns And since two thousand, venture
Speaker 1: capital returns have been just for the for the average,
Speaker 1: have been just about what you get from investing in
Speaker 1: the nest AT index, where you also have complete liquidity.
Speaker 1: So this is a stress, This is a strain and
Speaker 1: a lot of people are concerned about this. Do we
Speaker 1: have do we have too many vcs? Is there too
Speaker 1: much money slashing around? Well, there certainly is a lot
Speaker 1: of money slashing around, but you don't have to think
Speaker 1: about the technology the environment for innovation, and that's changed too.
Speaker 1: So back in the eighties and nineties, if you wanted
Speaker 1: to build a new I T company, talk about biotechnology separately.
Speaker 1: If you want to talk about a new I T company,
Speaker 1: to get to the first dollar of revenue, you have
Speaker 1: to be thinking ten to twenty million dollars of complete
Speaker 1: risk capital. You had to you had to build a
Speaker 1: company from scratch. You had to have your own hardware,
Speaker 1: your own software, develop your own servers today, and your
Speaker 1: own by licenses today. You could pretty much do that
Speaker 1: with off the shelf stuff. Well, it's open source with
Speaker 1: free stuff and renting by the or what. I was
Speaker 1: talking to an old friend of mine, an old timer
Speaker 1: who goes back then and is doing a new startup,
Speaker 1: and he's building some software for investment banks how to
Speaker 1: pull together all the data they need for spreadsheets. And
Speaker 1: I said, so, Chris, when you get this to where
Speaker 1: you can actually start chipping it to a customer how
Speaker 1: much it will it have cost you? He thought for
Speaker 1: a moment, he said, you know, sixtys it would have
Speaker 1: been ten to fifteen millions years ago, when lots of startups.
Speaker 1: When I was about to say, when people are a
Speaker 1: little negative on the future of the country, the future
Speaker 1: of the economy, when I go to certain conferences and
Speaker 1: and I go to this thing on the West coast
Speaker 1: in San Diego, of all places that are these young
Speaker 1: entrepreneurs right out of college, my mind is blown at
Speaker 1: how innovative and forward looking a lot of these new
Speaker 1: technologies are. What we're playing off is the maturation of
Speaker 1: the digital internet infrastructure, spilling over into the open source software,
Speaker 1: the cloud computer. It is a golden age for innovating
Speaker 1: and developing new digital services. Obviously we all talk about
Speaker 1: Uber and Airbnb, but there are twenty more a week now.
Speaker 1: Let me let me interrupt you there. If you have
Speaker 1: a longer perspective, if if for the people who are
Speaker 1: waiting for the US economy to collapse, isn't this the
Speaker 1: antidote to that? Aren't we going to see a boom
Speaker 1: in new services, new technology, new apps. Hasn't the whole
Speaker 1: app economy just completely changed the game. Based on what
Speaker 1: you're talking about, it's ten or twenty thousand dollars or
Speaker 1: free to to change the world. Well, and it has
Speaker 1: all sorts of impact. You know, it changes what kinds
Speaker 1: of jobs are available, it changes what time, the terms
Speaker 1: of employment. A lot of people think that in this
Speaker 1: world you can't rely on your employer for healthcare. We
Speaker 1: really need to expend even more the social safety net
Speaker 1: so people can afford to play in the gig economy,
Speaker 1: whether it's a uber driver, or whether making deliveries, or
Speaker 1: whether writing software for a startup, writing code for open source.
Speaker 1: So it has a lot of social impact. But you're
Speaker 1: absolutely right, You're dead right. Innovation isn't over. It's on
Speaker 1: a roll, and it's really just ramping up your building
Speaker 1: on decades of innovation that have made so much things,
Speaker 1: so much stuff cheaper and more available. And in fact,
Speaker 1: again taking a long historical look back, it took you know,
Speaker 1: fifty years from the invention of the microprocessor to get
Speaker 1: where we are today. Well, going back to that railroad age,
Speaker 1: it took fifty years from the Baltimore and Ohio Railroad
Speaker 1: to get to Sears Roebuck. Going back to the age
Speaker 1: of electricity. It took fifty years from Edison turning on
Speaker 1: the Pearl River, the Pearl Street Power Plan in New York,
Speaker 1: the first generating station to where you could have a
Speaker 1: a mix master and a refrigerator in every middle class
Speaker 1: home in America. And oh, by the way, you could
Speaker 1: have manufacturing factories where you could just move the machines
Speaker 1: around and reconfigure the process and create tremendous increase in productivity.
Speaker 1: What what's the significance of that fifty year? It takes
Speaker 1: a long time to first make the new stuff reliable
Speaker 1: and ubiquitous. How much of that is it takes a
Speaker 1: generation to grow up just assuming Hey, electricity, Yeah, I
Speaker 1: could do stuff with that. There's a lot to There's
Speaker 1: a lot to that, Barry, there's a lot to that. Um.
Speaker 1: There's another aspect of it too, however, and that is
Speaker 1: that it takes time to explore wastefully what this stuff
Speaker 1: is good for. You. Remember we started out talking about
Speaker 1: decisions under uncertainty. Why we need a mission driven government
Speaker 1: to to to subsidize the railroads and initially create the Internet,
Speaker 1: and why we need speculators. It's because we don't know
Speaker 1: what's gonna work and what isn't we gotta try and try.
Speaker 1: I like to say the innovation economy proceeds by trial
Speaker 1: and error and error and error and error. It's learning
Speaker 1: by doing. There's no roadmap that is given from on
Speaker 1: high that tells us how to get there at the frontier.
Speaker 1: It's a lot easier for somebody who's playing catch up.
Speaker 1: But why not playing catch up? My friend Dan Gross
Speaker 1: wrote a book called pop Why Bubbles are Good for
Speaker 1: the Economy Ill and his thesis is railroads, radio, television, computers, fiber.
Speaker 1: He said, if it wasn't for global crossing and Metromedia
Speaker 1: fiber that laid thousands and thousands of miles at hundreds
Speaker 1: of dollars per mile and then ultimately it's pennies per
Speaker 1: mile out of bankruptcy, you don't end up with YouTube
Speaker 1: and Google and Facebook and all these other things. That
Speaker 1: exactly right. So so in the last minute we have
Speaker 1: you you mentioned, and we'll we'll get a little more
Speaker 1: into this in the next segment. In the last minute,
Speaker 1: we have what is the proper role of government in
Speaker 1: fostering this sort of speculative innovation. Well, government isn't good
Speaker 1: at picking winners, but it's good at enabling competitive entrepreneurs
Speaker 1: to become winners funding science and also, and this WEE
Speaker 1: can come back to, it's not just providing research funding,
Speaker 1: it's being a customer and early supportive customer for stuff
Speaker 1: that is not yet ready for commercial prime time. If
Speaker 1: people want to find information about your writings or or
Speaker 1: what you're doing doing, capitalism in the innovation economy is
Speaker 1: available at bookstores and at Amazon. Where else can they
Speaker 1: find your writing? And Amazon outlet near you, and they
Speaker 1: can also find me. I've written for Forbes, i write
Speaker 1: UH for Projects Syndicate, and I'm pretty visible on the
Speaker 1: on Google. And thanks good part to Bloomberg Television, Tom
Speaker 1: Keane and Surveillance and UH and now with Barry ridhlt UH.
Speaker 1: If you enjoy this conversation, be sure and hang around
Speaker 1: for our podcast extras where we keep the tape rolling
Speaker 1: and continue chatting. Be sure and check out my daily
Speaker 1: column on Bloomberg View dot com. You can follow me
Speaker 1: on Twitter at Rid Halts. I'm Barry Ridhults. You've been
Speaker 1: listening to Masters in Business on Bloomberg Radio. Welcome to
Speaker 1: the podcast extras. We've been speaking with Bill Janeway and
Speaker 1: in case I forget to say this later. Thank you
Speaker 1: so much for doing this. This is fascinating stuff. I
Speaker 1: am just holy entranced by the intersection of technology, finance,
Speaker 1: and economics. And that's a space you know, really really well.
Speaker 1: There's so many questions I did not get to. But
Speaker 1: before I even get to my favorite questions, let me
Speaker 1: let me go back through a few things that I
Speaker 1: blew through and might have missed. By the way, be
Speaker 1: e a sist is that I get the numbers right.
Speaker 1: The initial investment from Warburg was fifty four million dollars,
Speaker 1: and then the distribution two limited partners was six point
Speaker 1: five billion in less than a decade, about six years later.
Speaker 1: Is that right? That's right, Barry, that's an astonishing number.
Speaker 1: I hope you were one of those limited cards, right.
Speaker 1: I assume that's a fair statement that. Uh do you
Speaker 1: ever look back and say, if only I put another
Speaker 1: hundred grand into that, it would have been worth bajillions.
Speaker 1: One of the things I've learned over time is good
Speaker 1: enough is good enough? There you go, that's the right,
Speaker 1: that's the right attitude. You know, the would have could
Speaker 1: have shoot a philosophy will just eat away. I know
Speaker 1: people who constantly kick themselves my my, my, my wife.
Speaker 1: We met as partners in the firm where we both
Speaker 1: worked before I joined Warburg Pink. She was an investment
Speaker 1: professional and her boss had a great saying because somebody
Speaker 1: would come to him and say, you know, you know,
Speaker 1: I knew we should have we should have recommended that stock.
Speaker 1: I knew we should have, and he said, you know what,
Speaker 1: put it in the retrospect fund. That's the one where
Speaker 1: nobody ever loses any money. That's right, and everything they pay.
Speaker 1: You know, I'm I remember writing getting my hands on
Speaker 1: the first iPod, literally one of the first iPod and
Speaker 1: writing it up. And at the time, many many splits ago,
Speaker 1: Apple was fifteen with thirteen cash. You're risking two dollars
Speaker 1: and the guys I knew board of fifteen and they
Speaker 1: sold it at twenty and they were thrilled to death.
Speaker 1: And I can't tell you how often you see a
Speaker 1: stock like that. But the reality is, no one's going
Speaker 1: to hold it for a thirty seven thousand percent run.
Speaker 1: Think about how many drawdowns Apple has had over that period.
Speaker 1: Most people have no choice but to get but to
Speaker 1: panic out. There's no other way. Well, this is what
Speaker 1: we were talking about. We were talking about bubbles. We
Speaker 1: talked about Minsky in the banking system bubbles, the stock
Speaker 1: market bubbles, and and and this is something that I
Speaker 1: think is is really important. Bubbles are you, big buddess?
Speaker 1: Bubbles happened everywhere, and you can think about them in
Speaker 1: two dimensions. One is, where is it taking places that
Speaker 1: the banking system highly leveraged when it blows up, it
Speaker 1: blows up the economy, or the stock market very little
Speaker 1: leverage when it blows up, the world doesn't come to
Speaker 1: an end difference between two thousand and two thousand and
Speaker 1: eight bingo. But the second dimension is what's the object
Speaker 1: of speculation? Is a toolip bulbs? Is it those beach
Speaker 1: houses of the Nevada desert, Or is it some kind
Speaker 1: of technology that if it's deployed at scale and if
Speaker 1: enough exploration, enough trial and error takes place, it really
Speaker 1: can change the world. It can create a new economy.
Speaker 1: So that's why the lecture I give today mostly is
Speaker 1: called productive bubbles, separating out that small number of this
Speaker 1: phenomenon of this crazy irrational speculation, which again and again
Speaker 1: for the last two hundred years has been responsible for
Speaker 1: moving us from the Malthusian economy of misery through the
Speaker 1: railroad age, the electricity age, the automobile age, and now
Speaker 1: the Internet age. That you would think the Malthusians would
Speaker 1: give up the ghosts, but they seem to be perennially
Speaker 1: forecasting doom and gloom even though the genius of human
Speaker 1: intellectual capital is this never ending parade of even though
Speaker 1: it began his wartime technology. You look at at innovations,
Speaker 1: it all goes back to how can we become a
Speaker 1: better finding machine a thousand years ago? It's now trans
Speaker 1: transposed itself and become something entirely different, which leads me
Speaker 1: to a really fundamental question I have to ask you.
Speaker 1: So you get your PhD at Cambridge in economics, how
Speaker 1: did that turn into a career in venture capitalism? That's
Speaker 1: not the typical route. Well, I'll tell you what happened.
Speaker 1: I studied, as I mentioned briefly, I studied on Derrick
Speaker 1: Kanes's directs students. I'm what they call, you know. They
Speaker 1: have post Kinzians and Neo Kaanesians and new Canesian's. I'm
Speaker 1: a Paleo Kanesian. I'm an old Kynesian. I took to
Speaker 1: heart the core message of Canes in the general theory
Speaker 1: and the other writings, which was, first of all, decision
Speaker 1: making under uncertainty. Nobody knows the future, and everybody knows
Speaker 1: that nobody knows the future. I would challenge a lot
Speaker 1: of you on that, because I think a lot of
Speaker 1: people believe either they know the future or experts, economists,
Speaker 1: analysts have a good sense of the future. But you're
Speaker 1: singing my song. I believe no one has a clue
Speaker 1: what's going to happen, and they spend most of their
Speaker 1: day lining to themselves that they do, and then they
Speaker 1: wake up one morning and it's two thousand and eight
Speaker 1: or it's nine. That's when the uncertainty meme raises its head,
Speaker 1: when people start saying, well, things are very uncertain. No, no,
Speaker 1: we you just realized temporarily that you don't understand what's
Speaker 1: what's going to happen. But then take that one step further,
Speaker 1: take that one step further. So I'm worried about the future.
Speaker 1: So I want to save more money. Okay, I want
Speaker 1: to save more money. And by the way, you're worried
Speaker 1: about the future too, and you save more money, and
Speaker 1: all of a sudden, everybody saving more money. Paradox of
Speaker 1: thrift coordination failure. Each person individually does what's rational, and
Speaker 1: the result is a systematic mess, which which makes perfect
Speaker 1: sense and also raises the role of government. Two, During
Speaker 1: periods of a collapse in private sector business household demands,
Speaker 1: the government should temporarily step in and and fulfill that,
Speaker 1: which is eventually what the United States has done most crises,
Speaker 1: but didn't really do it this last crisis. At least
Speaker 1: it did some. It did more than Congress wanted to do.
Speaker 1: It could have done more, as the president's advisors begged
Speaker 1: him to. But in any case, but where we get there,
Speaker 1: Before we get to the policy message that there's another aspect.
Speaker 1: There's another aspect of this. Why I left academic economics
Speaker 1: because the third piece is economics by nineteen seventy had
Speaker 1: fundamentally come to be about how do we allocate resources efficiently?
Speaker 1: How do we eliminate waste in the system. Now you
Speaker 1: need two assumptions for that to be the case. First,
Speaker 1: all resources have to be already fully employed, so you're
Speaker 1: just it's a question of moving to the most productive
Speaker 1: application of labor capital natural resources. And second, coming back
Speaker 1: to where we began this whole discussion, you have to
Speaker 1: know what the return on that next investment is going
Speaker 1: to be in advance? Can you really do that? Well,
Speaker 1: I in nineteen seventy nine seventy there were jobs available
Speaker 1: at the best economics departments everywhere because frankly because of
Speaker 1: the federal government, because of the response to Sputnik, the
Speaker 1: federal investment in higher education, huge increase in graduate schools.
Speaker 1: And I had a real heart to heart talk with myself,
Speaker 1: having been immersed in kains and uncertainty and ignorance and
Speaker 1: coordination failure, was I really going to be capable of
Speaker 1: teaching these naive and innocent young minds that we all
Speaker 1: know how to allocate resources efficiently, that the problem of
Speaker 1: economics is just about efficient allocation, that we can assume
Speaker 1: that all resources will always be fully employed. And I said,
Speaker 1: I can't do that. I said to myself, I can't
Speaker 1: do that. So how did you How did you morph
Speaker 1: from an academic economist too a pragmatic investor in technology.
Speaker 1: Well it happened by way of a very unusual firm. Now,
Speaker 1: this is back in the old days of Wall Street,
Speaker 1: when there were hundreds of private investment partnerships in Wall Street.
Speaker 1: They were all subsidized by being members of the New
Speaker 1: York Stock Exchange. Back then, brokerage commissions were fixed. Monopoly
Speaker 1: profits were available, so you couldn't compete on price, but
Speaker 1: you competed for business. There were usually three ways to compete.
Speaker 1: First of all, we all went to school together. We
Speaker 1: all went to St. Grattle, Sex together. Second, the three Bees,
Speaker 1: Booze babes and baseball tickets. That was literally how you
Speaker 1: would you would attract four brains. Donaldson, Lufkin and Jenrette
Speaker 1: the LJ had created the idea of the research based
Speaker 1: brokerage firm doing fundamental research. That that was a new
Speaker 1: innovation that hasn't always existed, did not always exist, and
Speaker 1: it was it was It grew up with the rise
Speaker 1: of institute sational investors who would pay for research by
Speaker 1: directing brokerage commissions to the firms that provided smart guidance.
Speaker 1: So the firm I joined was one of those research
Speaker 1: firms which had a very distinctive style. It focused only
Speaker 1: on the science based industries chemistry, chemicals, pharmaceuticals, electronics, and
Speaker 1: this new stuff called computing. But you come with a
Speaker 1: economics background, you don't have a science or undergraduate what
Speaker 1: was your background? I did I did not have a
Speaker 1: technical background, but pretty good reader, and I learned, actually
Speaker 1: as an economist, about this new computing stuff. In V
Speaker 1: three we had the first oil crisis. The economy went
Speaker 1: into freeze free fall. Simultaneously, inflation went up, unemployment went up.
Speaker 1: That wasn't supposed to happen. The models, the first econometric models,
Speaker 1: all broke down, and I went in search for people
Speaker 1: who are trying to make sense of this. I found
Speaker 1: some guys at M I T who were building simulation
Speaker 1: models of the economy, not purely statistical models, but what
Speaker 1: are now called agent based models, where you could watch
Speaker 1: an artificial economy evolved. And I got it. It just
Speaker 1: hit me like a ton of bricks that computers were
Speaker 1: not just flexible typewriters or quick adding machines, that they
Speaker 1: were engines for exploring systems that were too complicated to
Speaker 1: model in simple mathematics, and I fell in love with computing.
Speaker 1: I then discovered by way of the getting involved and
Speaker 1: understanding the first wave of artificial intelligence. I found my
Speaker 1: way out to Xerox Park in uh Palo Alto, California.
Speaker 1: This is in the seventies nine. I spent as many
Speaker 1: nights after dinner, hanging out there watching the future unfold,
Speaker 1: seeing things lie um mice for controlling a computer. Steve
Speaker 1: Jobs got the tour of Xerox Center two years before
Speaker 1: he was So why didn't you start Apple? The graphical
Speaker 1: user interface, the mouse, there's a the network, the dot
Speaker 1: matrix and uh ink jet printer. There's a run of
Speaker 1: things that that is just an astounding like a T
Speaker 1: and T labs. But that but that was how. That
Speaker 1: was how I made the transition and and became immersed
Speaker 1: in learning the technologies, learning enough about the technologies to
Speaker 1: be able to talk to entrepreneurs in their own language,
Speaker 1: and to see the world in the course of the
Speaker 1: eighties to see these these these highly special technical styles
Speaker 1: of computing that we're used by engineers and by academics
Speaker 1: begin to grow in scale and reliability. And that led
Speaker 1: to this sense by none ten nine that these technologies
Speaker 1: could spill out of the laboratory and come into the
Speaker 1: big markets for commercial computing. That's how we got to
Speaker 1: be e A. How did you How long did you
Speaker 1: spend on the West Coast? How long were you out
Speaker 1: there for? Well? I I spent probably a week to
Speaker 1: ten days a month for thirty five years. I had
Speaker 1: three million miles on American by about and uh we
Speaker 1: we we um when I I should first say that
Speaker 1: the world of Wall Street was changing through all this
Speaker 1: pict brokerage commissions go away, commissions start to decline fundamental
Speaker 1: research by the mid nineteen eighties. You can see two
Speaker 1: paths forward. One, it becomes a commodity because you can't
Speaker 1: afford to pay the smart guys, they're going to the
Speaker 1: buy side. There are people like Ben Rosen, who was
Speaker 1: a great computer analyst at Morgan Stanley creates seven rows
Speaker 1: in the your capital firm. So there was a migration
Speaker 1: of the real talent. Uh So, either it becomes a
Speaker 1: commodity or you need another subsidy. If the subsidies investment banking,
Speaker 1: it's not a commodity, it's prostitution. So we sold the
Speaker 1: firm in night five to a great British investment management
Speaker 1: firm called Robert Fleming. Our firm was called f Ebberstat
Speaker 1: sold it to Robert Fleming in eight five. I served
Speaker 1: out my contract as part of the deal, and the
Speaker 1: I had the great opportunity to join Warburg Pincers and
Speaker 1: to help build this technology investing at Warburg pink You
Speaker 1: really created that. At Warburg they didn't have much of
Speaker 1: a technology footprints or am I overstating that, well they
Speaker 1: we we No, that's not quite fair because, for example,
Speaker 1: Warburg Pinkers was one of the founding investors in Gartner
Speaker 1: Group back Gideon Gartner, another one of those great sell
Speaker 1: side investment research analysts who got the message and created
Speaker 1: one of the great advisory firms. I was gonna say,
Speaker 1: that's not a technology innovation, that's really a alright, someone's
Speaker 1: leaving to do a research independent company play. But it
Speaker 1: gave you. It gave you a view of what was
Speaker 1: going on in technology, and there were some really smart people.
Speaker 1: But the center of gravity of the firm was was
Speaker 1: not doing these relatively earlier stage, risky technology investments. So
Speaker 1: you moved them down downstream to a much or upstream
Speaker 1: to a much earlier stage. The Lionel Pinkus and John
Speaker 1: Boglestein were great entrepreneurs. They were pioneers of private equity
Speaker 1: broadly defined from venture capital through growth equity investing. In
Speaker 1: nineteen eighty six they had raised the first billion dollar
Speaker 1: fund that anybody had ever raised. WARBURI Pinkas was always
Speaker 1: large relative to the industry. And given that they decided
Speaker 1: that we ought to explore investing in technology as Warburg
Speaker 1: Pinker as a lead strategic investor, rather than following other people.
Speaker 1: What was the billion dollar fund they had raised initially?
Speaker 1: What was that for? Was that was for the same
Speaker 1: breadth of investing, investing in emerging growth companies, investing in turnarounds,
Speaker 1: investing very occasionally in buyouts, but very broad. Warburt Pink
Speaker 1: has always had a very broad expanse investing contrarian to
Speaker 1: what the stock market thinks is the great thing to do.
Speaker 1: So when did the first pure technology early early stage
Speaker 1: funds come out of Warburg Pinker. Well, we always invest
Speaker 1: out of one fund. It's one fund, we invest across it.
Speaker 1: And that means that when markets changed as they did
Speaker 1: in we could be realizing the investments in technology while
Speaker 1: putting new money into energy at twelve dollars a barrel,
Speaker 1: so we could move against markets within un fund. We've
Speaker 1: we've always invested from one big fund. The actually the first,
Speaker 1: the first real technology investment that we lad. There were
Speaker 1: there were several, the first really early stage it's a
Speaker 1: company called Level one. Remember Level one, I'm thinking that
Speaker 1: Level one. Level one was not unrelated with silicon optimized
Speaker 1: for communications and particularly for digital communications for d s L.
Speaker 1: Warburge was a big broadband in between what we have
Speaker 1: today and and the twisted copper playing a whole telephone.
Speaker 1: When I got to warburg Pin because we made a
Speaker 1: small investment with some other investors um and the first
Speaker 1: go round, the first customer had been acquired by IBM
Speaker 1: and basically closed down. So we had a choice. We
Speaker 1: could either restart but if, or just give up. But
Speaker 1: if we and and and the leadership of the company
Speaker 1: with an outstanding scientist named Bob Pepper who would work
Speaker 1: very closely at r c A. Starnoff Labs, with my
Speaker 1: new partner, Henry Crissell, who was himself a great applied
Speaker 1: physicist and also a great investor. So we took a
Speaker 1: deep breath and we said we're gonna restart Level one
Speaker 1: behind Bob Pepper, make a second effort and focus on
Speaker 1: making it possible for the plain old fashioned copper wires
Speaker 1: to carry data at a high enough rate so that
Speaker 1: you can actually interact with a computer, not just you know,
Speaker 1: push a button and have a cigarette wait to see
Speaker 1: what happens. And so this is still pretty early stage stuff.
Speaker 1: This is not this was this was a restart of
Speaker 1: a startup. So it really was a startup UM, but
Speaker 1: we had tremendous confidence in Bob Pepper. We helped bring
Speaker 1: up a board of really strong people. UM. Some years
Speaker 1: later into wound up acquiring the company for more than
Speaker 1: a billion dollars. Really, let's talk a little bit about Intel,
Speaker 1: because you mentioned that vcs really blossomed in nine eighties.
Speaker 1: But my recollection of National Semiconductor and then Intel and
Speaker 1: that whole line of companies that starts in the like
Speaker 1: early nineteen sixties, well, Butt Nick and all that is
Speaker 1: where Kleiner, Perkins and some of the other big vcs
Speaker 1: traced back to. Well, getting the timing, there's it's it's
Speaker 1: an interesting history. So American Research and Development a R
Speaker 1: and D. The great General George Dorio starts a R
Speaker 1: and D in the late nineteen forties, takes them about
Speaker 1: five years to scrap together a few million dollars out
Speaker 1: of the Boston Trust industry and makes a bunch of investments,
Speaker 1: none of which really worked very well, but put seventy
Speaker 1: thousand bucks behind an engineer named uh Ken. Oh my God,
Speaker 1: I'm blanking. No, No, that's Bob Neiss's Intel. No Digital
Speaker 1: Equipment Corporation, Ken Ken Ashman, No, We're gonna look it up.
Speaker 1: But filling in um that becomes seventy dollars becomes hundreds
Speaker 1: of millions of dollars. Digital Equipment is the in a way,
Speaker 1: the first truly great technology investment out of a R
Speaker 1: and d uh. Some of the youngsters got some backing
Speaker 1: from the Watson family created Graylock Ventures. This is still
Speaker 1: in the sixties. And then on the other hand, an
Speaker 1: extraordinary entrepreneurial stockbroker named Arthur Rock follows the New York
Speaker 1: Giants to San Francisco in the baseball giants in the
Speaker 1: end of the fifties, and he puts together the financing
Speaker 1: for Fairchild Semiconductor with Sherman Fairchild, the industrialist. That's why
Speaker 1: it was called that those were the geniuses, the treasonous six.
Speaker 1: I guess seven who left Shockley. That was Bob Nois
Speaker 1: and Gordon Moore and by the way, you go fajen uh.
Speaker 1: And they started what from Fairchild, which then begat Intel,
Speaker 1: And that's when Silicon Valley begins to be Silicon Valley.
Speaker 1: And by the way the book. I don't remember the
Speaker 1: Intel book. I don't remember if it was Um, I'm
Speaker 1: trying to remember who wrote it, or it's not the
Speaker 1: CEO of Intel, but it was someone who was Andy Grove.
Speaker 1: It wasn't Andy Grove, only the Paranoid survivor. But it's
Speaker 1: the history of Intel, which is really a discussion of
Speaker 1: the early history of venture investing. I remember that was
Speaker 1: a fascinating read, but it was It's important to remember
Speaker 1: this was a craft. These were a tiny number of firms,
Speaker 1: half a dozen, tiny number of individuals. There were a
Speaker 1: bunch on the East coast. East Coast tended to be
Speaker 1: family offices like ven Rock, the Rockefeller family, J. H. Whitney,
Speaker 1: the Whitney family UM and the West coast tended to
Speaker 1: be these new partnerships. But even as late as nineteen seventy,
Speaker 1: the model, the business model hadn't been established. So there
Speaker 1: was a guy called ned Heiser in Chicago. He started
Speaker 1: the front. It was a corporation and had some preferred stock,
Speaker 1: which was what was owned by the limited partners and
Speaker 1: had the preferred return, and the common stock, which was
Speaker 1: in effect that carried interest, was owned by the general partners.
Speaker 1: When Warburg Pincus was went from putting deals together on
Speaker 1: a case by case basis, you know, was some entrepreneurs
Speaker 1: in one room and some rich family representatives and another
Speaker 1: and created its first fund in nineteen seventy one. Uh
Speaker 1: wear EM E MW Ventures was forty forty one million dollars.
Speaker 1: Lionel used to say, it was all the money in
Speaker 1: the world, and it was set up as a corporation
Speaker 1: and they took all the money down on day one.
Speaker 1: Despite that, it generated net to the investors through the
Speaker 1: nineteen seventies when the stock market was a disaster. If
Speaker 1: they'd taken the money down step by step the way
Speaker 1: we all do today, it would have been so there
Speaker 1: was an experimentation, trial and error going on about financial innovation.
Speaker 1: Venture capital was an institutional innovation which by nine eighty
Speaker 1: began to reach scale because of a regulatory change. What
Speaker 1: was that? What was that change? It was under the
Speaker 1: law that governed pension funds, the Ariskle Law, the Employment
Speaker 1: Retirement Investment. Well, originally when it was first established, there
Speaker 1: were very tight rules about what pension fund trustees could
Speaker 1: do with the money that they were responsible for. They
Speaker 1: had to be very conservative. The amendments to the regulations
Speaker 1: in seventy nine created a kind of safe harbor. You
Speaker 1: can take a portion of the pension fund and a
Speaker 1: little more risk seeking, and that enabled pension funds to
Speaker 1: start investing in venture capital. Before that, it had been
Speaker 1: wealthy families, and it had been a few university endowments,
Speaker 1: but it was very limited capital. After night, the capital
Speaker 1: began to open up, and then in eighty three the
Speaker 1: I p O market opened up. Between seventy three and
Speaker 1: eighty three, there were just a couple of windows. One window.
Speaker 1: December nineteen eighty Apple goes public, jan Entech goes public.
Speaker 1: Then the Great Federal Reserve Chairman Paul Boker sends rates
Speaker 1: to I p O stop It reopened in eighty three.
Speaker 1: We thought, hey, we thought it was a bubble. What
Speaker 1: did we know? But from seven it must have felt
Speaker 1: like it. After fifteen years in the desert, a little
Speaker 1: bit of water, it looks like actually very well put
Speaker 1: barry so. But but there were real returns and a
Speaker 1: whole wave of new companies that began to go public,
Speaker 1: and the validated the venture capital model, particularly around it
Speaker 1: also around biotech. Now biotech biotech shares with I T
Speaker 1: the same dependence on long term government investment in research.
Speaker 1: You can't you can't just do this bootstrap it. You
Speaker 1: can't just pull a bunch of things off the shelf.
Speaker 1: This is really complex, sophisticated, expensive research to create a company,
Speaker 1: well to create the science on which you company can
Speaker 1: exploit for a particular application. But there's one big difference,
Speaker 1: fundamental difference between biotech and information technology. In biotech, when
Speaker 1: you sit down and say we're gonna try to apply
Speaker 1: this molecule to cure that disease. If it works, if
Speaker 1: you get through the f d A, you know what
Speaker 1: the market is. You know it's big. And one way
Speaker 1: to think about this for investors, early stage investors is,
Speaker 1: you know there are two states of the world. We
Speaker 1: get to the FDA, we make a gazillion dollars, we fail,
Speaker 1: we lose everything. Half a gazillion sounds pretty good, right,
Speaker 1: half a gazillion, of course, But the fact that the
Speaker 1: market risk is low, even though the technology risk is huge,
Speaker 1: is what distinguishes biotech from infotech and information technology. The
Speaker 1: market risk is at least as big as the technology risk,
Speaker 1: whether you're building the infrastructure or whether you're exploiting it.
Speaker 1: With these new applications and solutions. How many dot com
Speaker 1: babies went bust? How many of the unicorns today are
Speaker 1: going to wind up lying down and falling over after
Speaker 1: their mark to reality. Let's talk about the unicorns, and
Speaker 1: we mentioned how much money is out there slashing a round.
Speaker 1: Do we have a technology bubble? We have a unicorn bubble.
Speaker 1: We have a unicorn bubble, meaning the most desirable companies
Speaker 1: everybody wants to get. Here's what's really weird. This has
Speaker 1: not happened before. This is unique. Here you have major
Speaker 1: investment firms, you know, Fidelity, t Row, who are paying
Speaker 1: public companies that normally own publicly traded equities, and they
Speaker 1: have been paying valuations that are higher than the comparable
Speaker 1: valuations of already public web services companies. They're paying premium.
Speaker 1: They're paying a premium. Now. In the old days, back
Speaker 1: back when there was no I P. O market in
Speaker 1: my prior life, we raise capital my old firm at
Speaker 1: Eberstat back in the late seventies for emerging growth companies
Speaker 1: that were already profitable that we're growing and we and
Speaker 1: we valued them at below the public companies because there
Speaker 1: was no liquidity. Because my my question is why I
Speaker 1: was about to say, why it's strictly driven by the
Speaker 1: liquidity factor. Well, the premium paying premium for illiquidity is
Speaker 1: the one thing you know is it won't last. It
Speaker 1: won't last. You can every bubble, and the Unicorn bubble
Speaker 1: is is a bubble. Every bubble has a plausible story
Speaker 1: somewhere under the hood, right, Well, the narrative always gets
Speaker 1: you to suspend your irrational self because the narrative is
Speaker 1: so compelling. Even the south Sea Bubble, the south Sea
Speaker 1: Company was going to take over all the trade to
Speaker 1: South America as the Spanish Empire collapsed. But this time
Speaker 1: the story is very plausible because with the Internet matured
Speaker 1: as a medium for distributing and consuming services with zero
Speaker 1: cost and and just incremental renting the cost of run
Speaker 1: in it, the reach the potential scale of these new
Speaker 1: companies appears to be limitless. So you have the appears
Speaker 1: to be limitless, but we know nothing real well, but
Speaker 1: so you have these examples, you have these proof points.
Speaker 1: One of the jokes, one of the lines people use
Speaker 1: is um it's motivated. The Unicorn bubble is motivated motivated
Speaker 1: by fomo fear of missing out in pursuing the next FAGA, Facebook, Apple, Google, Amazon.
Speaker 1: So the for the time being, as long as these
Speaker 1: companies have access to what appears to be limitless capital,
Speaker 1: so they they're avoiding too marks to reality. There are
Speaker 1: two ways these these valuations will get marked to reality.
Speaker 1: One is they do an I p O. You know,
Speaker 1: you get a price every day, and you know, the
Speaker 1: joke is the I p O is the new down round.
Speaker 1: You know, look at school. I do not know that,
Speaker 1: but that's very funny. And and the other is sooner
Speaker 1: or later, positive cash flow is corporate happiness. Sooner or later.
Speaker 1: If you have a sustainable business, you're gonna be paying
Speaker 1: your bills based on what your customers give you, not
Speaker 1: what your investors give you. And therefore you have an
Speaker 1: objective way to mark the valuation relative to earnings. And
Speaker 1: we're gonna see which of these companies are able to
Speaker 1: monetize the usage that they're generating in order to generate
Speaker 1: positive cash flow. Doesn't have to be a lot. Amazon
Speaker 1: doesn't generate a lot of positive cash flow. But you
Speaker 1: and I know that Jeff Bezos has about fifty three
Speaker 1: different levers he wants to generate cash. He just tweaked,
Speaker 1: you know, tweaks uh free shipping another buck on Amazon Prime.
Speaker 1: He's got an infinite number of ways because he's got
Speaker 1: a real sustainable business. Amazingly, his investors have allowed him
Speaker 1: to take twenty years to be profit free while building
Speaker 1: out what is now one of the most valuable, disruptive
Speaker 1: businesses in the world. And he has been He's been
Speaker 1: a genius at exploiting the opportunity to maximize growth subject
Speaker 1: to minimum positive cash flow. And I think it is
Speaker 1: because people appreciate that he can generate more cash flow.
Speaker 1: He can trade growth for cash flow any day he
Speaker 1: wants through a dozen different levers. So you you mentioned Amazon.
Speaker 1: Not too long ago, Tim Cook was on sixty Minutes
Speaker 1: and he mentioned, they're not that far away from the
Speaker 1: billion iPhones sold. Stop and think about a billion of
Speaker 1: these at five hundred bucks apiece. No wonder that the
Speaker 1: biggest and wealthiest company. We could talk about Facebook, we
Speaker 1: could talk about Google, but I know I don't have
Speaker 1: you all day, So I want to get to some
Speaker 1: of my favorite questions that I asked, and and we
Speaker 1: we skipped enough questions that we could do another hour.
Speaker 1: But let me let me work through some of these,
Speaker 1: because um, these are what really hangs some meat on
Speaker 1: the bones. So you mentioned going to M. I. T.
Speaker 1: And seeing what they were doing with economic modeling, and
Speaker 1: you've mentioned another number of people have been influential. But
Speaker 1: I have to specifically ask who were your mentors? Who
Speaker 1: are the people who really shaped your intellectual philosophy. I'd
Speaker 1: say there were three. First of all, there was the
Speaker 1: founder of the firm I joined soon after he died.
Speaker 1: His name was Ferdinand Everstadt. He was probably the greatest
Speaker 1: unknown American of the middle of the twentieth century. Really
Speaker 1: in nineteen twenty nine he wrote nineteen He wrote the
Speaker 1: the Young Plan that was going to save the world
Speaker 1: from reparations and war debts blown up by the depression,
Speaker 1: by by the crash of twenty nine and the depression.
Speaker 1: But during the war he ran industrial mobilization for World
Speaker 1: War Two on a dollar a year. In between, he
Speaker 1: started his own firm and created the first mutual fund
Speaker 1: after nineteen nine, the first fund investing only in the
Speaker 1: science based industry. That's why it was called Chemical Fund.
Speaker 1: After the war, he wrote the National Security Actor nineteen
Speaker 1: forty seven, which created the Defense Department. He was a
Speaker 1: public private financier, public servant. I knew him from when
Speaker 1: I was a boy. He was a great Princeton alumnus.
Speaker 1: He was one of the funders of the original Woodrow
Speaker 1: Wilson School. He taught me about this intersection between Wall
Speaker 1: Street and Washington, this dynamic play between private and public
Speaker 1: sector in a positive way. Lawrence lobbying votes factly, how
Speaker 1: the collaboration between the two could create a great country.
Speaker 1: Second mentor was Ed Giles. Ed Giles gave me my
Speaker 1: shot at every stat He was one of the greatest
Speaker 1: investment analysts in history. He had three business cards, Chemical Analysts,
Speaker 1: director of Research, and President. He only used the chemical
Speaker 1: analyst card. He taught me about going deep, really understanding
Speaker 1: the dynamics of the industry, whether it's chemicals or computing,
Speaker 1: in which you want to play a role in in
Speaker 1: finding investments, in defining investment opportunities. And then the third.
Speaker 1: The third was an extraordinary man named Fred Adler. Fred
Speaker 1: Adler in the nineteen eighties, nineteen seventies and eighties was
Speaker 1: an iconic venture capitalist. He was a lawyer, he was
Speaker 1: a turnaround artist, a crisis manager, and he was a
Speaker 1: venture capitalist. And Fred Fred had an unusual personality. Um
Speaker 1: he Uh. He was very tough, very tough with people
Speaker 1: who worked for him. Uh. He had funded one of
Speaker 1: the second of the great mini computer companies, Data General.
Speaker 1: He built a firm, He built a firm Uncle. Data
Speaker 1: General became a huge company absolutely, and Fred put the
Speaker 1: money together financing together for that ten years later, fifteen
Speaker 1: years as after Arthur Rocket put the money together for
Speaker 1: fair Child, semi same kind of way. Um. Fred taught
Speaker 1: me about how to understand the internal dynamics of a
Speaker 1: business followed the cash Fred, you had these had these
Speaker 1: pillows made up that said corporate happiness is positive cash
Speaker 1: flow and used to throw them at his entrepreneurs. In
Speaker 1: between yelling and screaming at him. I used to tell
Speaker 1: him that the only compliment he ever gave me was
Speaker 1: that he never offered me a job because he but
Speaker 1: but the guys who found an Axcel one of the
Speaker 1: great firms in the world, they were they worked for
Speaker 1: Fred back in the in the early nineteen eighties. So
Speaker 1: Fred and I collaborated. We created a number of companies together.
Speaker 1: One of them was emerged as Life Technologies, the the
Speaker 1: company that provided the tools for all the people doing biotechnology.
Speaker 1: So that was my third mentor before I joined before
Speaker 1: I joined Warburg Pinkas. So so these are mentors. What
Speaker 1: about investors who influenced your approach to investing? You mentioned
Speaker 1: Keynes as obviously a key influencer. I think a lot
Speaker 1: of people don't realize what a great investor he was.
Speaker 1: Kaine's John Maynard Keynes was was a great investor. Um,
Speaker 1: I didn't know him personally. He died when I was
Speaker 1: three years So I was gonna say what other investors, well,
Speaker 1: Vogustin John Boglestein was the founding chief investment officer and
Speaker 1: president of Warburg Pinkas. John was a great investor. He
Speaker 1: hired me, he gave me my shot at Warburg Pinkas,
Speaker 1: and he had, as I say, in extraordinary knows from
Speaker 1: markets and he was he was one of the fundamental contrarians.
Speaker 1: And so he helped me understand that, you know, being
Speaker 1: patient looking for where the world isn't looking building new
Speaker 1: businesses or there's a It actually ties very closely to Kines.
Speaker 1: There's a wonderful passage in Kiness general theory where he
Speaker 1: talks about how the value the price of shares in
Speaker 1: the market has an inevitable impact on investment activity in
Speaker 1: the real economy. He says, it makes it makes no
Speaker 1: sense to start a new business if you can buy
Speaker 1: one on the stock exchange more cheaply than it would
Speaker 1: cost to start it. Kane's this is the ninety six
Speaker 1: He saw the LBO business in advance, and then on
Speaker 1: the other hand, he said, it could it could be
Speaker 1: worthwhile to take an extravagant amount of money to invest
Speaker 1: in a startup like b e A if you can
Speaker 1: float it on the stock exchange for a profit. So
Speaker 1: this dynamic feedback between what's happening in the stock market
Speaker 1: and what's happening with real investment from John Maynard Kin's
Speaker 1: to John Vogelstein and my experience is a seamless web.
Speaker 1: Those were my mentors. How about books aside from your
Speaker 1: own book, and I could tell by your writing that
Speaker 1: you've read quite widely. What what are some of your
Speaker 1: favorite books, whether they're about investing and venture capital or
Speaker 1: anything else. Well, of course, the general theory changed my life.
Speaker 1: It's why I went to Cambridge. It remains an enormous
Speaker 1: UH reservoir of insight and understanding about people making economic
Speaker 1: and financial decisions. Hi Minsky's book UH it's got a
Speaker 1: terrible title, Stabilizing an Unstable Economy, But boy, if if
Speaker 1: you if you'd read it before two thousand and eight.
Speaker 1: And by the way, and Tim Geitner's memoir, my partner,
Speaker 1: Tim Geitner, who's president at Warburg broncas now he talks
Speaker 1: about how, having been immersed in the in the Asian
Speaker 1: financial crisis of the late nineties, he read Minsky. So
Speaker 1: he was prepared intellectually for two thousand and eight in
Speaker 1: a way that most policymakers were not. Uh. So Minsky's
Speaker 1: work tremendously important. The There are two books that I've
Speaker 1: read recently that I would recommend to everyone. UH. They're
Speaker 1: not they're not directly economics books. One is UH. It's
Speaker 1: a book by a young historian called Jonathan Levy. It's
Speaker 1: called Freaks of Fortune. Freaks of Fortune. It came out
Speaker 1: last year, and it's about how during the nineteenth century
Speaker 1: in the United States we involved evolved a whole array
Speaker 1: of new institutions for dealing with the risks and uncertainties
Speaker 1: of an industrializing economy, adopting British patterns of maritime insurance
Speaker 1: to insurance of UH for railroads UH and right through
Speaker 1: the creation of credit unions sharing financial risk. It's a
Speaker 1: tremendous book I really recommended very strongly. And the second one,
Speaker 1: the second the second is a book that I literally
Speaker 1: just finished reading yesterday. It's called Liberty and Coercion. Liberty
Speaker 1: and Coercion. It's written by a historian named Gary Gerstel
Speaker 1: g E. R. S. T. L E. He just moved
Speaker 1: from the United States to Cambridge, England as the Paul
Speaker 1: Mellon Professor of American History. It's an extraordinary exploration of
Speaker 1: the dynamic, contradictory intersection between the federal government, whose powers
Speaker 1: were enumerated listed in the Constitution, and the state governments,
Speaker 1: which inherited the more or less unlimited power of the
Speaker 1: British police power the British state. So that even while
Speaker 1: the federal government is limited by the by the Um
Speaker 1: and the Constitution and the Bill of Rights, the states
Speaker 1: could tell you whether you can own another human being,
Speaker 1: who you were allowed to marry, whether you could own
Speaker 1: a home. The power of the state was effectively limitless.
Speaker 1: And this conflict that of course exploded in the Civil War.
Speaker 1: Then after the Civil Rights amendments, the States struck back
Speaker 1: and segregation was entirely a function of state law. Then
Speaker 1: with the Great with the New Deal and the Great Society,
Speaker 1: the thirty years of the exertion of federal authority over
Speaker 1: the states, and then now the counter thrust against it
Speaker 1: under the Robert's Court. So this is an extraordinary Very
Speaker 1: little attention has been paid to what goes on at
Speaker 1: state level in the US, but for citizens and non
Speaker 1: citizens in America is what happens at the state level
Speaker 1: is at least as important at the federal It's a
Speaker 1: great book. It's amazing when you step back and look
Speaker 1: at things through a longer timeframe, how these phases and
Speaker 1: faints and counterfeits become so obvious that you don't see
Speaker 1: in the day to day operation. It's true for markets,
Speaker 1: it's true for history. If there's one thing that I
Speaker 1: feel that I've had an unfair advantage of because of
Speaker 1: the education I had, it's being able to bring to
Speaker 1: the immediate situation, whether it's a dot com bubble in
Speaker 1: two thousand and eight, or whether it's the global financial
Speaker 1: crisis two thousands, of the global financial crisis in two
Speaker 1: thousand and eight, it's a longer term historical perspective that
Speaker 1: crosses over from economics to politics and backing. So so
Speaker 1: let me digress from my questions and ask something I
Speaker 1: did not want to skip. So, Cambridge a couple of
Speaker 1: years ago just celebrated its eight hundred year I think
Speaker 1: it was twelve or six and twelve o nine. Um,
Speaker 1: so it's been around a couple of years. You're not
Speaker 1: only a member of the uh CO, chair of the
Speaker 1: eight hundred campaign for the University of Cambridge, but you
Speaker 1: funded an endowment for research in finance at Cambridge as
Speaker 1: well as creating a um U k US connection for
Speaker 1: for research on both sides of the Atlantic. Tell us
Speaker 1: what you want to accomplish with that that endowment and
Speaker 1: and what the impact of that has been. Well, when
Speaker 1: I went to Cambridge on a Marshall scholarship in nineteen
Speaker 1: sixty five, just exactly fifty years ago, the four years
Speaker 1: I was there just changed my life um and and
Speaker 1: and getting reconnected with Cambridge as I did UH in
Speaker 1: the in the nineties, in particular at a time when
Speaker 1: and a major change was going on in Britain and
Speaker 1: had already been going on in the US from the
Speaker 1: end of World War Two through the nineteen eighties into
Speaker 1: the nineteen nineties, Cambridge and the other great British universities Oxford.
Speaker 1: Of course we're essentially funded by the government. They were
Speaker 1: essentially national institutions. But just as the state universities in
Speaker 1: America in effect over the course of fifty years, have
Speaker 1: been privatized, so that state legislatures are responsible for less
Speaker 1: than ten percent and declining, and probably most of that
Speaker 1: goes for the football coaches salary, most of that for
Speaker 1: the worst, say the least. Um. So this idea of
Speaker 1: the of the university, of a national or a state
Speaker 1: university is a public good was being dismantled. Cambridge, with
Speaker 1: this incredible history, you know, from Newton to Darwin to
Speaker 1: Krick and Watson to Keynes, the the you know, probably
Speaker 1: the source of more original thinking that changed the world
Speaker 1: over the last five years. UM, Cambridge was discovering that it, too,
Speaker 1: like the American universities, was going to have to depend
Speaker 1: on private philanthropy to supplement, if not replace, the money
Speaker 1: that had been coming from the government. So I got
Speaker 1: involved as as an American and knew something about philanthropy.
Speaker 1: After all of your principal alumnus you know about fundraising,
Speaker 1: UM and and and at the same time, internally, Cambridge
Speaker 1: was going through some internal reforms towards a greater degree
Speaker 1: of professionalism in the leadership, the academic leadership, and the
Speaker 1: governance of the university. So on the one hand, given
Speaker 1: this deep history of Canes and and my perception somewhat
Speaker 1: ahead of the time, I have to confess that finance
Speaker 1: and economics are one discipline in that they what goes
Speaker 1: on in the stock market, goes on in the real economy,
Speaker 1: goes on the banking system. All of that needs to
Speaker 1: be brought together. That's why my wife and I initially
Speaker 1: funded the Cambridge Endowment for Research in Finance. But it
Speaker 1: was really joining forces with an extraordinary woman, Alison Richard,
Speaker 1: had been Provost of Yale. She became Vice Chancellor of
Speaker 1: Cambridge at the start of the new millennium and we launched.
Speaker 1: What I said to Alison, we should present this as
Speaker 1: this is the first fundraising campaign for Cambridge since Henry
Speaker 1: the eighth knocked off the monasteries. It will not be
Speaker 1: the last, and it isn't. We completed that campaign. We
Speaker 1: raised more than a billion pounds. Nobody had done that
Speaker 1: in Britain ever before. We didn't only raise money we
Speaker 1: raised consciousness. We raised consciousness among alumni, among leaders of
Speaker 1: other universities. It has to be some alumni association. You
Speaker 1: think about all the people have come out of Cambridge,
Speaker 1: that's that's quite an illustrious list. But they spent two
Speaker 1: three generations where if you ask somebody about giving some
Speaker 1: money to Cambridge, the answer would be, hey, I pay
Speaker 1: my taxes. So building a culture of philanthropy is a
Speaker 1: generation's long process. That's amazing. Now Cambridge has launched its
Speaker 1: second campaign two billion pounds double or nothing. They got
Speaker 1: thirty billion pounds to catch up to Harvard and Yaleen's
Speaker 1: they do they do that? You would think they had
Speaker 1: an eight hundred year or year head start. Well, some
Speaker 1: of the endowments to college endowments go way way back,
Speaker 1: did didn't Cain's actually manage some of the Caine manage
Speaker 1: the money of King's College, that's right, his college and
Speaker 1: uh and and by the way, Cambridge now has a
Speaker 1: very well managed professional endowment fund, which I'm pleased to
Speaker 1: say over the last year two has done at least
Speaker 1: as well as Harvard and Yale at Princeton Um. So
Speaker 1: the money that's given to Cambridge is very well taken
Speaker 1: can care of. And the breadth of the um donations
Speaker 1: and the breadth of the professionalism of fundraising at Cambridge
Speaker 1: in the last fifteen years has been tremendous. It is,
Speaker 1: it really is a great achievement. Celebrating the emergence of
Speaker 1: Cambridge's own revival of post two thousand and eight economics,
Speaker 1: My wife and I just made another major contribution million
Speaker 1: dollars for a professorship in financial economics and a fund
Speaker 1: for economics which will guarantee that the pore research funding
Speaker 1: is perpetuated. It's an endowment, not spend down money. And
Speaker 1: that's and that's at Cambridge. That's at Cambridge. So what
Speaker 1: do you say to Princeton when they come knock. I've
Speaker 1: I've also First of all, of course, Princeton is the
Speaker 1: richest university in the world per capita. Is that true? Yes,
Speaker 1: I had no idea. And second, we also, celebrating my
Speaker 1: fifty three union at Princeton, have funded a pro am
Speaker 1: in financial economics at Princeton, which I'm delighted to say
Speaker 1: has has taken root. So given all this education, let's
Speaker 1: let's talk about the students who are just graduating. The millennials,
Speaker 1: and soon there's going to be in another generation behind them.
Speaker 1: What advice would you give to someone coming out of
Speaker 1: school today who's interested in economics and venture capital and finance. What,
Speaker 1: Because it's a different world today than when I started,
Speaker 1: and certainly that from when you started. What sort of
Speaker 1: advice would you give someone who wants to go into
Speaker 1: your field. Well, first of all, the world is very,
Speaker 1: very competitive. It's more more competitive than it was. It's
Speaker 1: more open, there's more access, and that's that's unquestionably a
Speaker 1: good thing. Um. I I speak a bit as a father,
Speaker 1: a very proud father of my twenty six year old
Speaker 1: son who went to Oxford as it happened, the great university,
Speaker 1: shame to the family. On the contrary, and an Oxford
Speaker 1: has a wonder full program of philosophy, politics and economics
Speaker 1: PPE and our son was Sperversity of Pennsylvania. It's so
Speaker 1: funny you mentioned that that that's its own specific thing.
Speaker 1: But but that advice would you give him? And what
Speaker 1: advice would you give other recent graduates? I'd say one
Speaker 1: one bit of advice is um combining a really open mind,
Speaker 1: really reading and reading broadly, with a willingness to get
Speaker 1: down to work. I mean one of the one of
Speaker 1: the things that just has thrilled my wife and me
Speaker 1: about our son is that he just loves to get
Speaker 1: dug into doing real work. Academics, yes, but actually real
Speaker 1: work out there, um, doing his apprenticeship. Um, So looking
Speaker 1: for opportunities two whatever the job may be, but learning
Speaker 1: how too. As Woody Allen said, showing up is half
Speaker 1: the battle. Showing up on time, doing the job you're
Speaker 1: asked to do, and then looking for what more there
Speaker 1: is to be done. That somebody is absolutely but also
Speaker 1: as I say, reading and thinking about the context in
Speaker 1: which you're working, not just going down the line. Because
Speaker 1: the way things have opened up so much, there's so
Speaker 1: many diverse possible opportunities. UM. But I do respect, I
Speaker 1: do recognize that it is it is so competitive today
Speaker 1: that um, there's no there's no guaranteed road. Um. You know,
Speaker 1: Thomas Edison said, perspiration ten percent inspiration. The perspiration really matters.
Speaker 1: But but but the informed mind can can confind opportunities
Speaker 1: for the inspiration too. And and then my final question,
Speaker 1: and I'm going to change the date on this, what
Speaker 1: is it that you know about investing today that you
Speaker 1: wish you knew fifty years or so ago when you
Speaker 1: left school. That's a very very good question. Um, I
Speaker 1: think I learned, Um, I think I learned how important? Well,
Speaker 1: this is something I learned from my mentor at Giles.
Speaker 1: I used to say, a winner is somebody who knows
Speaker 1: what to do when he's a loser. What's the backup plan?
Speaker 1: What's the hedge? What's the cash in the bank that
Speaker 1: you the the extra resource that you have that lets
Speaker 1: you survive when the world goes against you. There's a
Speaker 1: quote that's attributed to Cains. Nobody can ever find in
Speaker 1: any of his writings that the market can remain wrong
Speaker 1: longer than you can remain solvent. Um, So I can
Speaker 1: remain in irrational far longer than the average investor can
Speaker 1: remain solvent. That's right. And so I would say that
Speaker 1: it's the it's it's it's thinking in advance about what
Speaker 1: you're gonna do. What's plan B, what's plans to see?
Speaker 1: What are you gonna do when the world goes against you?
Speaker 1: When you plug it in, it doesn't light up? Um,
Speaker 1: how you going to ride out the heart? Touch? Right?
Speaker 1: That's right, Bill, Bill, This has been absolutely fascinating. I know,
Speaker 1: I promised i'd get you out of here fifteen minutes ago,
Speaker 1: but I just couldn't stop. We've been speaking with Bill Janeway.
Speaker 1: He is the author of Doing Capitalism in the Innovation Economy,
Speaker 1: as well as the managing partner at Warburg Pincus and
Speaker 1: a co founder of the Institute for New Economic Thinking.
Speaker 1: If you enjoy this conversation, be sure to look up
Speaker 1: an inch or down an inch on all of our
Speaker 1: previous on Apple iTunes so you can see all of
Speaker 1: our previous conversations. I would be remiss if I did
Speaker 1: not thank my recording engineer Reggie, my producer Charlie Volmer,
Speaker 1: and my head of research, Michael Batnick. You've been listening
Speaker 1: to Masters in Business on Bloomberg Radio.