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