WEBVTT - Second Avenue Nick Hanauer: Masters in Business (Audio) 0:00:03.240 --> 0:00:07.159 This is Master's in Business with Barry Ridholts on Bloomberg 0:00:07.280 --> 0:00:11.240 Radio this week. My guest to somebody you probably never 0:00:11.280 --> 0:00:14.360 heard of, but yet when you hear what he's accomplished 0:00:14.360 --> 0:00:18.120 and what he's done, he's he's been a fascinating uh character, 0:00:18.239 --> 0:00:21.920 a fascinating player behind the scenes. His name is Nick Hanauer. 0:00:22.600 --> 0:00:25.160 I don't want to spoil anything, but let me at 0:00:25.200 --> 0:00:28.640 least give you enough background about him so you'll you'll 0:00:28.680 --> 0:00:31.080 want to hear the whole thing. Uh. He was the 0:00:31.160 --> 0:00:36.760 first outside investor into Amazon outside of Jeff Bezos's immediate family, 0:00:36.840 --> 0:00:40.080 the first non family investor. Uh. That worked out pretty 0:00:40.080 --> 0:00:43.960 well for him. Became interested in the uh Internet in 0:00:44.000 --> 0:00:48.199 the early nine nineties and and was right there. Actually, 0:00:48.280 --> 0:00:52.680 he's the guy who convinced Bezos to open up Amazon 0:00:52.920 --> 0:00:56.760 in Seattle as opposed to New York or or elsewhere. Uh. 0:00:56.760 --> 0:00:59.720 He's done a number of other fascinating things. He's running 0:00:59.720 --> 0:01:03.840 family business that's the largest pillow and linen business in 0:01:03.960 --> 0:01:07.240 the United States. UM. He runs a venture capital shop. 0:01:07.560 --> 0:01:11.280 He also sold one of his companies, a quantive, to 0:01:11.400 --> 0:01:15.680 Microsoft for six point four billion dollars in cash. That 0:01:15.760 --> 0:01:20.080 was a pretty uh, pretty lucrative transaction. Really interesting guy, 0:01:20.200 --> 0:01:23.560 not the sort of stuff that that people um no 0:01:24.080 --> 0:01:27.080 uh know him by his name or know him by 0:01:27.120 --> 0:01:31.440 these accomplishments A little bit behind the scenes. However, a 0:01:31.480 --> 0:01:35.720 couple of years ago, he became interested in income inequality 0:01:36.360 --> 0:01:40.400 and he wrote an article for Politico that just went 0:01:40.480 --> 0:01:46.480 completely viral and it was called to my fellow fellows, zillionaires, 0:01:47.520 --> 0:01:51.160 Beware the pitchforks are coming for US plutocrats, and it 0:01:51.200 --> 0:01:54.160 went completely viral. He ended up doing a TED video 0:01:54.320 --> 0:01:57.560 on this, which was not broadcast and not created this 0:01:57.680 --> 0:02:00.960 giant backlash, and ultimately he did a second video for 0:02:01.080 --> 0:02:05.040 Ted that that was broadcast and that went viral. UM. 0:02:05.080 --> 0:02:07.560 I think you'll find Nick to be a really insightful, 0:02:07.680 --> 0:02:11.359 interesting guy who sees the world from a very specific, 0:02:12.120 --> 0:02:16.840 uh perspective, and it's really quite um, quite interesting, quite fascinating. 0:02:17.080 --> 0:02:20.440 I think you'll enjoy our conversation without any further ado, 0:02:20.840 --> 0:02:27.679 my conversation with Nick Hannaur. This is Masters in Business 0:02:27.760 --> 0:02:32.519 with Barry Ridholts on Bloomberg Radio. My special guest today 0:02:32.680 --> 0:02:37.120 is Nick Hannaur. Am I pronouncing that right? I was, yeah, perfect? 0:02:37.960 --> 0:02:41.359 And Nick is a very interesting guy. Let me give 0:02:41.400 --> 0:02:45.239 you the short version of his curriculum Vita University of 0:02:45.320 --> 0:02:49.919 Washington with the philosophy degree. Took over the family owned business, 0:02:49.960 --> 0:02:53.639 Pacific Coast Feather Company as chairman and CEO. This is 0:02:53.639 --> 0:02:56.959 a business that's been around for a hundred plus years, right, Well, 0:02:57.360 --> 0:03:00.600 my family has been in the business since four My 0:03:00.600 --> 0:03:05.040 my great my grandfather and my great uncle bought Pacific 0:03:05.080 --> 0:03:08.560 Coast out of bankruptcy in nineteen forty after moving from 0:03:08.960 --> 0:03:12.240 Germany to the United States. And and you're probably best 0:03:12.280 --> 0:03:14.960 known for a couple of things. You were the first 0:03:15.360 --> 0:03:20.120 non family investor in Amazon dot com. And you founded 0:03:20.160 --> 0:03:23.280 a company that was eventually called a Quantive that was 0:03:23.320 --> 0:03:27.640 eventually sold to Microsoft for six point four billion dollars. Correct. 0:03:27.760 --> 0:03:30.120 We'll speak about both of those as well as being 0:03:30.760 --> 0:03:34.600 um a venture capitalist in Seattle at Second Avenue Partners. Correct. 0:03:34.920 --> 0:03:38.720 So let's talk a little bit about that diverse background. 0:03:38.760 --> 0:03:42.160 So when people ask you, uh, hey, Nick, what do 0:03:42.160 --> 0:03:44.760 you do for a living, how do you answer that? Well, 0:03:44.800 --> 0:03:49.200 I mean, you know, today I devote myself to uh, 0:03:49.520 --> 0:03:51.280 you know, a lot of my time is devoted to 0:03:51.800 --> 0:03:55.400 civic issues, policy, politics, philanthropy and so on and so forth. 0:03:55.440 --> 0:03:58.720 But in my work life. I'm a serial entrepreneur and 0:03:58.800 --> 0:04:02.120 venture capitalist. And you know, it was fortunate enough to 0:04:02.240 --> 0:04:06.400 grow up in a family business, the family pillow business 0:04:06.480 --> 0:04:09.760 Pacific Coast, and my uh my dad was a great mentor, 0:04:09.880 --> 0:04:13.080 and my dad hired another guy to run the company, 0:04:13.120 --> 0:04:16.640 frankly named Roy Clothier, who was was an incredible mentor 0:04:16.680 --> 0:04:19.479 to me and my brother, and so I had that 0:04:19.600 --> 0:04:22.600 great experience. But but you know, my folks were very supportive, 0:04:22.600 --> 0:04:26.560 and so I started starting other companies in my early twenties, 0:04:27.279 --> 0:04:31.440 um both outside the business and and also within the business. 0:04:31.480 --> 0:04:34.080 We started diversifying and I helped to run a retail 0:04:34.080 --> 0:04:35.839 business that we ended up buying, and a bunch of 0:04:35.839 --> 0:04:38.479 other things, and so you know, at a very you know, 0:04:38.480 --> 0:04:40.760 I started working for this family business when I was 0:04:40.839 --> 0:04:45.040 seven years old. I ran every machine and the factory. 0:04:45.200 --> 0:04:47.720 I worked all through junior high school, high school, college, 0:04:47.720 --> 0:04:50.200 and so I just had this foundation that was very, 0:04:50.279 --> 0:04:53.400 very broad. So you became CEO of the family business 0:04:53.400 --> 0:04:56.320 in the early two thousands. Yeah, I was never CEO 0:04:56.480 --> 0:04:59.680 of the family business. I became co chairman, co chairman 0:05:00.320 --> 0:05:05.320 with uh my brother who sadly passed away in a 0:05:05.360 --> 0:05:08.960 car wrect a long time ago, and um, and I 0:05:09.040 --> 0:05:13.000 transitioned out of the business when the Internet stuff came around. 0:05:13.040 --> 0:05:16.400 I'm co chairman of the board today. So let's let's 0:05:16.440 --> 0:05:19.520 talk about how the business led you to sort of 0:05:19.600 --> 0:05:23.560 discover the Internet. Yeah, so that's a that's actually a 0:05:23.640 --> 0:05:29.560 great question. So, um, so you wouldn't think that running 0:05:29.560 --> 0:05:33.080 sales and marketing for pillow company would lead you to 0:05:33.120 --> 0:05:36.920 the Internet, but in a very strange way, it did, because, Uh, 0:05:37.720 --> 0:05:41.720 when I led sales and marketing for the for the company, 0:05:41.760 --> 0:05:45.440 what I did is I broke our customers up into 0:05:45.520 --> 0:05:51.880 into groups, into groups of companies that had the same strategy, uh, 0:05:51.960 --> 0:05:57.080 and so such as Hoste Yeah, exactly precisely. So we 0:05:57.160 --> 0:06:01.800 sold the wholesale club's, mass merchandiser's depart in stores, uh, 0:06:01.800 --> 0:06:05.839 specialty stores, mail order catalogs, so on and so forth. 0:06:05.920 --> 0:06:08.839 And what I did is I reasoned that every single 0:06:08.920 --> 0:06:14.040 one of those companies basically deployed a different kind of 0:06:14.040 --> 0:06:18.000 strategy to connect themselves profitably with customers. And if I 0:06:18.040 --> 0:06:22.480 customized our approach by channel, we could deliver more profit 0:06:22.839 --> 0:06:26.240 for those companies than our competitors could. And so we 0:06:26.279 --> 0:06:29.760 stopped really selling pillows and started selling profit. And what 0:06:30.000 --> 0:06:33.640 that process did is it taught me more about the 0:06:33.720 --> 0:06:37.360 dynamics of retail than you could ever believe. And the 0:06:37.400 --> 0:06:40.919 beautiful thing about pillows is that they're little white squares. 0:06:41.480 --> 0:06:44.960 So what's happening in the retail channel really really matters. 0:06:45.320 --> 0:06:47.799 So there was a point at which I probably knew 0:06:47.839 --> 0:06:53.000 more about the competitive dynamics of retail by channel than 0:06:53.080 --> 0:06:56.320 virtually anyone in the country. I knew how many dollars 0:06:56.360 --> 0:07:00.120 per square foot every one of those channels generated, and 0:07:00.120 --> 0:07:02.920 and and every every detail of how it worked. And 0:07:03.000 --> 0:07:06.400 so when the Internet came along in the very early nineties, 0:07:07.000 --> 0:07:10.000 I could do strategic arithmetic that almost nobody else could do, 0:07:10.320 --> 0:07:13.440 because I could compare what the Internet would become to 0:07:13.600 --> 0:07:18.520 what department stores and mass merchandisers and wholesale clubs we're doing. 0:07:18.920 --> 0:07:23.000 And it was unbelievably obvious that the Internet was going 0:07:23.040 --> 0:07:26.680 to be an enormously powerful channel of distribution for goods 0:07:26.680 --> 0:07:30.360 and services and and you know, and so I started 0:07:30.400 --> 0:07:33.680 looking around for a way to exploit that, you know, 0:07:33.760 --> 0:07:36.800 that that awareness, and as luck would have it, uh, 0:07:36.840 --> 0:07:38.840 a friend of mine had the same insight, and his 0:07:38.920 --> 0:07:41.560 name was Jeff Bezos. Tell me a little bit about 0:07:41.560 --> 0:07:44.760 Second Avenue Partners. What do you do with that entity? Yeah, 0:07:44.800 --> 0:07:47.840 so Second Avenue Partners is an early stage. You know, 0:07:47.880 --> 0:07:51.120 we're a venture capital business. Although although it's a slightly 0:07:51.120 --> 0:07:54.520 different from the conventional model because my partners Pete Higgins 0:07:54.520 --> 0:07:56.720 and Mike Slaide and I only invest our own money. 0:07:56.760 --> 0:08:01.120 We didn't raise a fund limited partners investor. Know, that 0:08:01.160 --> 0:08:04.080 gives you an ability to really think very long term, right, 0:08:04.200 --> 0:08:06.280 and to do whatever we want. And what we didn't 0:08:06.320 --> 0:08:07.680 want to do is go to work for the man, 0:08:08.960 --> 0:08:12.720 which is where exactly we didn't want to go to 0:08:12.720 --> 0:08:14.400 work for the man, which is what you're doing if 0:08:14.400 --> 0:08:17.960 you're raising a pot of money from insurance companies and UH, 0:08:18.000 --> 0:08:22.320 pension funds and stuff like that. Uh. And by by 0:08:22.440 --> 0:08:25.440 only deploying our own capital, gives us the freedom to 0:08:25.520 --> 0:08:29.360 be frankly more experimental, so longer term horizon. So how 0:08:29.360 --> 0:08:31.640 does that manifest itself with your investments? What sort of 0:08:31.640 --> 0:08:33.040 things do you in the last minute we have in 0:08:33.080 --> 0:08:35.280 the segment, what sort of things are you putting your 0:08:35.280 --> 0:08:38.640 money into? You know, a broad variety of things and 0:08:38.640 --> 0:08:40.880 and and you know, the beauty of the model is 0:08:40.920 --> 0:08:43.120 that we don't have to be we We didn't we 0:08:43.120 --> 0:08:45.400 didn't have to persuade somebody that we were experts in 0:08:45.480 --> 0:08:48.559 something and focus our attention on that. What we can 0:08:48.559 --> 0:08:51.559 do is simply look for really, really interesting opportunities. So 0:08:51.679 --> 0:08:55.640 we've we've made investments in in U a V technology, 0:08:55.679 --> 0:09:00.560 unmanned aerial vehicles very successfully, and internet software and medical 0:09:00.600 --> 0:09:03.360 services and and you know, and all of it somehow 0:09:03.480 --> 0:09:06.920 magically works. I'm Barry Ridhults. You're listening to Masters in 0:09:06.920 --> 0:09:10.360 Business on Bloomberg Radio. My special guest today is Nick Hanauer. 0:09:10.840 --> 0:09:14.440 He is a venture capitalist and one of the earliest 0:09:14.480 --> 0:09:17.760 investors in Amazon dot Com. Let's let's talk just for 0:09:17.800 --> 0:09:21.040 a moment about Second Avenue Partners. So you own such 0:09:21.040 --> 0:09:25.200 an strange and different mix of companies, some of which 0:09:25.240 --> 0:09:30.880 I assumed through Second Avenue Partners, others directly Seattle Bank, Marshacks, 0:09:31.040 --> 0:09:36.080 news Vine, q Alliance. It seems like these are wholly unrelated. Yeah, 0:09:36.120 --> 0:09:39.440 they are unrelated. And uh, you know, I can't prove 0:09:39.520 --> 0:09:42.040 beyond a shadow of a doubt that it is wise 0:09:42.520 --> 0:09:46.880 to invest in a broad array of uh companies and industries. 0:09:46.920 --> 0:09:50.920 It certainly seems interesting, it's super interesting to do um 0:09:51.000 --> 0:09:56.120 and you know, My thinking about investing UH is fairly simple, 0:09:56.120 --> 0:09:57.880 and what I try to follow is what I call 0:09:58.000 --> 0:10:01.400 Nick's rule of transformational value, and that is that you know, 0:10:01.440 --> 0:10:05.720 my view is that all transactions, all consumers seek to 0:10:05.960 --> 0:10:09.560 maximize the value of the products that they buy, and 0:10:09.679 --> 0:10:12.760 value really is best understood as a ratio of the 0:10:12.760 --> 0:10:16.559 benefits the product delivers, divided by the cost, and things 0:10:16.640 --> 0:10:21.200 that have high value have a high ratio of benefits 0:10:21.520 --> 0:10:26.319 to cost versus the alternatives. And it's been my experience 0:10:26.679 --> 0:10:30.040 that in every case where you find a breakout investment, 0:10:30.080 --> 0:10:34.720 a company that really builds an extraordinary franchise, they start 0:10:34.800 --> 0:10:38.480 with what I call transformational value, which is the ratio 0:10:38.679 --> 0:10:42.440 of the benefits they deliver the consumer to the cost 0:10:42.840 --> 0:10:46.719 is someplace between ten and a hundred times higher than 0:10:46.760 --> 0:10:50.839 the alternative, and one to two orders of magnitude higher. 0:10:50.920 --> 0:10:53.200 So let me give you an example, So Amazon dot com. 0:10:53.240 --> 0:10:56.760 So when Amazon dot Com came along, the best way 0:10:56.800 --> 0:10:58.640 to buy a book in the world was to go 0:10:58.679 --> 0:11:00.959 to a superstore where perhaps us there were fifty or 0:11:01.000 --> 0:11:03.240 seventy five or a hundred thousand titles, and you would 0:11:03.240 --> 0:11:05.000 have to get in your car, you have to drive 0:11:05.040 --> 0:11:08.280 to that store you have to paw through that, you know, 0:11:08.520 --> 0:11:14.000 find the right book. And so Amazon dot Amazon dot 0:11:14.040 --> 0:11:16.720 com comes along and the day we open, we we 0:11:16.800 --> 0:11:19.240 offered I'm going to get this slightly wrong, but over 0:11:19.280 --> 0:11:23.000 a million titles, so ten times the selection that you 0:11:23.000 --> 0:11:26.160 could find at the biggest superstore if you lived in 0:11:26.200 --> 0:11:31.479 a big city. We sold them for I think less 0:11:31.520 --> 0:11:35.599 than the suggested price, so almost half of what you 0:11:35.640 --> 0:11:38.880 would have to pay at a normal retail store. And 0:11:39.320 --> 0:11:41.400 you don't have to drive there, you don't have to 0:11:41.800 --> 0:11:44.840 you don't have to use your time, take your car 0:11:44.880 --> 0:11:47.720 park and go do it. And so it was very 0:11:47.760 --> 0:11:50.120 clear that we were offering consumers who were looking for 0:11:50.160 --> 0:11:53.959 books and you know, an immense amount more value than 0:11:54.000 --> 0:11:58.960 they could get using the usual channels. And as a consequence, 0:11:59.400 --> 0:12:05.240 from the first day onward, sales exceeded our wildest expectations. 0:12:05.280 --> 0:12:07.880 That people really really appreciated the value we delivered to 0:12:07.920 --> 0:12:09.520 them and they preferred to buy books in that way, 0:12:09.520 --> 0:12:12.520 and the rest is history. So you had mentioned earlier 0:12:12.559 --> 0:12:15.679 that when you were involved with the family business, it 0:12:15.840 --> 0:12:19.280 led you to a start exploring what was available in 0:12:19.400 --> 0:12:22.360 terms of the Internet and early nineties. You tell a 0:12:22.400 --> 0:12:26.280 story about the two jeffs and how ultimately you found 0:12:27.080 --> 0:12:29.240 Amazon dot Com. What what is the story of this? 0:12:29.480 --> 0:12:32.439 So so I talk a lot about how I became 0:12:32.480 --> 0:12:35.280 successful and stuff like that, and you know, I feel 0:12:35.400 --> 0:12:40.160 very strongly that the most you know, it's been my experience, 0:12:40.200 --> 0:12:42.480 certainly my case and in the case of almost everyone 0:12:42.480 --> 0:12:47.160 I've ever met, that the extraordinary success is usually a 0:12:47.200 --> 0:12:51.840 confluence of extraordinary skill and extraordinary luck. It's both, it's both, 0:12:51.960 --> 0:12:55.400 And there are no extraordinarily rich people who weren't also 0:12:55.520 --> 0:13:00.000 extraordinarily lucky. For every extraordinarily rich, talented person, there's another 0:13:00.120 --> 0:13:02.720 equally talented person that just didn't have the brakes. And 0:13:02.840 --> 0:13:06.800 my favorite story to prove that point about myself is 0:13:06.880 --> 0:13:09.439 that I had this very early interest in the Internet, 0:13:09.480 --> 0:13:14.160 and I had two incredibly talented friends who simultaneously started 0:13:14.240 --> 0:13:19.000 internet retail businesses. One was Jeff Bezos, who started Amazon 0:13:19.080 --> 0:13:22.440 dot Com focused on books, and another was an equally 0:13:22.480 --> 0:13:25.319 talented guy named Jeff Tobber, who was a divisional merchandise 0:13:25.360 --> 0:13:27.560 manager at Bloomingdale's, which at that time was the number 0:13:27.559 --> 0:13:31.600 one retailer in the country, who started in online um 0:13:31.920 --> 0:13:34.920 uh superstore. Yeah, it was. It was an online department 0:13:34.960 --> 0:13:39.080 store and to make a very long story, short books 0:13:39.120 --> 0:13:42.719 are a pure commodity, and you know, a copy of 0:13:42.920 --> 0:13:45.559 Warren Pieces, a copy of Warren Peace, you know exactly 0:13:45.559 --> 0:13:47.760 what you're gonna get. And in the early days of 0:13:47.800 --> 0:13:51.600 the internet, Uh, people didn't trust what they'd get. So 0:13:51.679 --> 0:13:54.760 it was much easier to get people to purchase books 0:13:54.880 --> 0:13:57.120 than it was a suit or a pair of shoes 0:13:57.200 --> 0:13:59.920 or something like that. Is that the genius of Bezos 0:14:00.080 --> 0:14:03.480 is that he came across something that everybody knew, everybody 0:14:03.559 --> 0:14:08.040 was familiar, and but there was a long tail effect 0:14:08.040 --> 0:14:10.199 that hey, we could offer you two million of these, 0:14:10.559 --> 0:14:13.080 the local stores got twenty thousand. Come shop at us. 0:14:13.120 --> 0:14:15.800 Selection mattered, but it was a pure commodity. It's a 0:14:15.920 --> 0:14:21.000 very unusual, very unusual combination. I don't think people really 0:14:21.080 --> 0:14:25.120 perceived Amazon that way in the early days, because I 0:14:25.200 --> 0:14:29.840 remember was either my college roommate, I'm already out of 0:14:29.880 --> 0:14:33.760 school for fifteen years. My college roommate for my birthday 0:14:33.800 --> 0:14:36.880 gave me an Amazon gift certificate. And so you start 0:14:36.920 --> 0:14:39.760 playing around on the site and there are views not 0:14:39.840 --> 0:14:43.400 only from professionals but from other readers, and there's a 0:14:43.520 --> 0:14:47.320 huge juge tale of product. Plus it was music and 0:14:47.440 --> 0:14:49.720 video and other stuff. And but we did that quite 0:14:49.760 --> 0:14:52.880 quickly afterwards, very justly. I'll never forget. We had this, 0:14:53.280 --> 0:14:55.840 remember a conversation in Jeff's office and way back up 0:14:55.880 --> 0:14:57.720 a sex. So you were on the board though, weren't 0:14:57.720 --> 0:14:59.760 you on the board of advisors? Yeah? So I was 0:14:59.800 --> 0:15:02.000 his first investor, you know, I mean, you know, when 0:15:02.040 --> 0:15:04.920 Jeff decided to start Amazon, he you know, as luck 0:15:04.960 --> 0:15:06.760 would have he was living in New York City and 0:15:06.800 --> 0:15:11.240 he were work working at d Shaw. And I know 0:15:11.360 --> 0:15:13.200 Jeff because he was dating a very very close friend 0:15:13.240 --> 0:15:15.640 of mine named and Dinning, who was another vice president 0:15:15.680 --> 0:15:20.120 at d Shaw. And you know, he, you know, among 0:15:20.160 --> 0:15:22.680 other reasons, I suppose because I begged him to ended 0:15:22.760 --> 0:15:24.720 up starting Amazon in Seattle, and there was some very 0:15:24.720 --> 0:15:26.640 good reasons to do it, because it was close to 0:15:26.880 --> 0:15:29.280 Microsoft where there were lots of developer talent, and it 0:15:29.360 --> 0:15:33.360 was close to a large book distribution center which was 0:15:33.400 --> 0:15:36.280 in Rosberg, Oregon at the time. And you know, so 0:15:36.320 --> 0:15:37.960 he ended up sending his stuff from New York to 0:15:38.000 --> 0:15:39.920 my house and off we went. And so I was 0:15:40.000 --> 0:15:41.840 not actually formally on the board. I was a board 0:15:41.840 --> 0:15:44.440 advisor for the first six or seven years of the 0:15:44.520 --> 0:15:47.080 of the company's exists until two thousand or something like that. 0:15:47.280 --> 0:15:49.680 So so yeah, we you know, in the early days, 0:15:50.360 --> 0:15:52.360 you know, as my friend Eric Dillon said, we Jeff 0:15:52.400 --> 0:15:54.400 would call us to decide what kind of pop to 0:15:54.400 --> 0:15:58.080 put in the the pop machine. But you know, after 0:15:58.280 --> 0:16:01.240 after a while, Jeff is a brilliant guy, got his 0:16:01.640 --> 0:16:03.800 management legs under him, and he doesn't need a lot 0:16:03.800 --> 0:16:07.800 of help today. But but I want to emphasize something 0:16:07.800 --> 0:16:12.600 about Amazon dot com, the Amazon dot COM's success that 0:16:12.840 --> 0:16:17.520 almost nobody understands. That that that that that contributed more 0:16:17.560 --> 0:16:20.280 than anything to it, and it is something called the 0:16:20.320 --> 0:16:23.640 negative cash conversion cycle. And what that means is that 0:16:23.800 --> 0:16:30.280 because our terms with our with our suppliers the book, 0:16:30.400 --> 0:16:34.720 the book resellers was sixty to ninety days, and because 0:16:34.720 --> 0:16:37.840 they could ship to us within a day, we could 0:16:37.880 --> 0:16:43.520 collect cash from our customers sixty to ninety days before 0:16:43.680 --> 0:16:46.400 we had to pay our suppliers. And what that means 0:16:46.520 --> 0:16:49.000 is the bigger you get, the more cash flow you have. 0:16:49.160 --> 0:16:51.720 I'm Barry Retults. You're listening to Masters in Business on 0:16:51.760 --> 0:16:55.440 Bloomberg Radio. My special guest today is Nick Hanauer, a 0:16:55.560 --> 0:16:59.720 venture capitalist, early investor in Amazon and let's talk about 0:17:00.000 --> 0:17:03.600 one of your big successes, the company you had founded 0:17:03.680 --> 0:17:06.560 called Avenue A Media. Where did the idea for that 0:17:06.600 --> 0:17:09.040 come from? Yeah, so Avenue a Media morphed into this 0:17:09.080 --> 0:17:12.720 company a quantive uh and uh, you know we had 0:17:12.760 --> 0:17:15.119 this again. This goes back to the very early days 0:17:15.119 --> 0:17:19.679 of the Internet. We had at the Pillow Company, Pacific Coast. 0:17:19.720 --> 0:17:22.560 We had this idea that we would have a website, 0:17:23.160 --> 0:17:27.440 and um, we had the idea that we would build 0:17:27.560 --> 0:17:30.800 essentially what what we now know as a click network 0:17:30.840 --> 0:17:34.399 to drive traffic to the website. Define define click network. 0:17:34.440 --> 0:17:38.040 But basically, we we gave people an incentive to send 0:17:38.160 --> 0:17:42.040 traffic to us from their website by giving them a 0:17:42.080 --> 0:17:46.760 commission or an affiliate affiliate network. Basically, and sort of 0:17:46.800 --> 0:17:50.240 by accident, we built an affiliate network which at one 0:17:50.440 --> 0:17:54.639 point made my company's stupid website one of the highest 0:17:54.680 --> 0:17:58.760 trafficked sites on the Internet, the pillow the Pillow Company 0:17:58.800 --> 0:18:02.199 website is in the early days, we realized that we 0:18:02.240 --> 0:18:04.200 either had to shut this thing down or go turn 0:18:04.280 --> 0:18:06.280 it into a business, and we decided to turn it 0:18:06.280 --> 0:18:08.560 into a business, and so we spun it out of 0:18:08.560 --> 0:18:12.000 the Pillow Company. Basically, the early idea was to expand 0:18:12.080 --> 0:18:14.719 this into a into a a click network, and that 0:18:14.880 --> 0:18:18.080 didn't really work. And again, to make an incredibly long 0:18:18.119 --> 0:18:23.840 story short, we ended up being essentially an internet advertising agency. 0:18:23.880 --> 0:18:25.680 What we did is we built one of the early 0:18:25.720 --> 0:18:29.240 web servers, and what we enabled our customers to do 0:18:29.960 --> 0:18:33.239 was to place as with a variety of publishers and 0:18:33.280 --> 0:18:36.280 then measure the relative effectiveness of those averages of that 0:18:36.320 --> 0:18:41.520 advertising quatives exactly, and and and and drive better results 0:18:41.560 --> 0:18:45.159 as a consequence. And that and that company became, you know, 0:18:45.520 --> 0:18:47.760 very successful. It was a big company when we finally 0:18:47.760 --> 0:18:50.919 sold it, generating a huge amount of cash flow. And 0:18:51.000 --> 0:18:54.119 what sort of revenues was doing. I think it was 0:18:54.240 --> 0:18:56.640 approaching I mean, we're growing it like fifty percent a year, 0:18:56.680 --> 0:18:58.560 but I think it was approaching three quarters of a 0:18:58.560 --> 0:19:01.639 billion dollars in the real revenue and a hundred and 0:19:01.680 --> 0:19:05.040 fifty million in cash flow. Yeah. So Microsoft comes along 0:19:05.400 --> 0:19:09.160 and said, here's six point four billion in cash What 0:19:09.200 --> 0:19:12.239 was that negotiation? Like? That was a crazy negotiation. So 0:19:12.280 --> 0:19:15.320 what happened was that Google bought double Click. That was 0:19:15.359 --> 0:19:19.040 a huge, huge acquisition. So Google bought double Click for 0:19:19.160 --> 0:19:21.720 three billion dollars and we were twice as big as 0:19:21.920 --> 0:19:25.200 as as terms of a double click. Yeah, in terms 0:19:25.200 --> 0:19:28.240 of revenues, yea A Quanti was doing double the revenue 0:19:28.440 --> 0:19:32.280 and volume. We felt double click was much better known 0:19:32.320 --> 0:19:36.439 if it was they started before us, UM. But we 0:19:36.520 --> 0:19:38.520 had an agency business and we had a bunch of 0:19:38.520 --> 0:19:40.720 other businesses going and we were, you know, we felt 0:19:40.720 --> 0:19:43.639 like we were worth about twice as much UM but 0:19:43.760 --> 0:19:45.679 we and we had been doing a lot of strategic 0:19:45.720 --> 0:19:47.960 work with Microsoft in their in their in their ad 0:19:47.960 --> 0:19:52.800 business all along. But and when Google bought double Click, 0:19:52.960 --> 0:19:55.880 that started to make it made it made Microsoft nervous, 0:19:55.880 --> 0:19:58.480 It made Yahoo nervous, and it made a bunch of 0:19:58.480 --> 0:20:02.720 the big agency holding company nervous. And within weeks we 0:20:02.720 --> 0:20:06.679 were in a process. Uh. And and did it come 0:20:06.720 --> 0:20:12.240 about from Microsoft directly or did you approach them? I 0:20:12.560 --> 0:20:15.560 you know, you know, did your wife ask you out 0:20:15.600 --> 0:20:21.919 the first time or did you ask her? Well? I 0:20:21.920 --> 0:20:24.240 think it was slightly more nuanced and complicated in the 0:20:24.280 --> 0:20:27.080 case of a quantum in Microsoft. I can't remember exactly 0:20:27.119 --> 0:20:29.560 who did what first, but I think somebody asked a 0:20:29.640 --> 0:20:32.240 leading question and somebody else followed up with a leading answer, 0:20:32.240 --> 0:20:33.800 and before you knew it, we're in a process so 0:20:33.840 --> 0:20:37.439 this was pretty quick. This was well, I mean, you know, 0:20:37.480 --> 0:20:40.679 I think within sixty or ninety days or I can't remember, 0:20:40.720 --> 0:20:43.680 bere I should remember. But not that long after Double 0:20:43.720 --> 0:20:46.560 Click was purchased. We were in a process and before 0:20:46.600 --> 0:20:50.160 you knew it, there were a lot of suitors because yeah, yeah, yeah, yeah, 0:20:50.160 --> 0:20:51.920 a lot of people were very very interested, which is 0:20:52.040 --> 0:20:54.480 anyone who had a network, anyone who had an interaction 0:20:54.520 --> 0:20:57.800 with a lot of advertisers. She sat in between everybody 0:20:57.800 --> 0:21:00.000 and the advertisers, right, So it was a very stratetigue 0:21:00.320 --> 0:21:03.000 position to be in. And uh, and the company was 0:21:03.320 --> 0:21:06.000 generating a huge amount of cash and growing like a weed, 0:21:06.040 --> 0:21:09.000 and so it was very attractive business and a very 0:21:09.000 --> 0:21:13.920 attractive strategic acquisition and uh there you know, and uh, 0:21:13.960 --> 0:21:15.600 you know it ended up as a you know, a 0:21:15.640 --> 0:21:22.919 pretty crazy bidding more uh and yeah exactly, And you know, 0:21:23.000 --> 0:21:25.760 to be honest, a lot of the Microsoft people are 0:21:25.760 --> 0:21:28.119 our friends, right, you know, I just felt like a 0:21:28.160 --> 0:21:33.199 good thing. Yeah, we we had. It was six point exactly. No, no, no, no, 0:21:33.280 --> 0:21:35.520 it was good. Yeah, it was good. Yeah. Yeah. So 0:21:35.560 --> 0:21:38.160 how did how did that? What was that transaction? Like? 0:21:38.240 --> 0:21:41.080 When the papers are signed, where do you go for 0:21:41.119 --> 0:21:44.280 dinner that night. What the heck is that? Like? That 0:21:44.320 --> 0:21:47.120 has to be a crazy you just sold you did 0:21:47.160 --> 0:21:50.359 you say I'm going to Disneyland? How does you you 0:21:50.440 --> 0:21:54.320 respond to a six billion dollar sale for what essentially 0:21:54.800 --> 0:21:57.560 was a spin out of a click network from a 0:21:57.600 --> 0:22:00.440 pillow company. Yeah, you know, it was a great moment. 0:22:00.520 --> 0:22:05.120 I won't lie u uh. And you know, the thing 0:22:05.160 --> 0:22:08.480 about that company was that we built, you know, it 0:22:08.520 --> 0:22:11.879 was it was really the highlight of my business career, 0:22:11.920 --> 0:22:15.520 mostly because the team that we built. Uh, it was 0:22:15.600 --> 0:22:17.800 such a great team and people liked each other and 0:22:17.840 --> 0:22:21.359 worked so well together. So just a super fun, super 0:22:21.359 --> 0:22:23.480 fun thing. I don't I can't even remember. I mean, 0:22:24.040 --> 0:22:25.840 my wife and I think had dinner with another couple 0:22:25.880 --> 0:22:27.840 who owned a little bit of the stock and they 0:22:27.840 --> 0:22:29.439 made a whole bunch of money too, And it was, 0:22:29.720 --> 0:22:31.680 you know, it's very next thing. I'm Barry Ridhalt. You're 0:22:31.680 --> 0:22:34.720 listening to Masters in Business on Bloomberg Radio. My special 0:22:34.760 --> 0:22:38.560 guest today is Nick Hanauer. He is a venture capitalist 0:22:38.720 --> 0:22:43.520 and UH investor, UH and business person and also an author. 0:22:44.119 --> 0:22:48.960 So let's spend the segment talking about a very famous 0:22:49.160 --> 0:22:53.760 article you had written for Politico called a memo to 0:22:53.880 --> 0:22:59.199 my fellow fellow zillionaires, the pitchforks are coming for us plutocrats. 0:22:59.240 --> 0:23:02.880 How did that come up out? Well, you know, Verry, 0:23:02.920 --> 0:23:07.080 I write a lot, I write a lot. Uh and uh. 0:23:07.119 --> 0:23:10.000 You know, my main area of interest is political economy 0:23:10.359 --> 0:23:15.520 and economic inequality and the connection between growing inequality and 0:23:16.080 --> 0:23:19.400 a variety of problems, including a crappy business environment. And 0:23:19.480 --> 0:23:23.320 you know, my very strong feeling is that concentrating all 0:23:23.359 --> 0:23:25.440