William Janeway on What's Needed for the Innovation Economy

the author of the Innovation Economy. He was an early guest where quite bluntly, I really didn't know what the hell I was doing, And I think this conversation is far more detailed than in depth if you are at all interested in venture capital, technology investing UH and the role of both the Defense and Intelligence agencies specifically and the federal government generally in impacting venture investing technology long form investing where there may not be an immediate payoff,

but ultimately you end up with a really significant set of payoffs. Whether we're talking about UH, the Interstate highway system, the cross continental railroads, the space um race for the Moon, all of these things had no immediate expected payoff, but long term they've delivered a tremendous amount of value. And the intersection between technology, venture capitalism, and economics UH is something that Professor Janeway specializes in. I think you'll find

this conversation absolutely fascinating. So, with no further ado my conversation with Bill Janeway, I'm Barry rit Halts. You're listening to Masters in Business on Bloomberg Radio. My special guest today is Bill Janeway. He has a storied background in both economics and venture capital. He helped to create b e A Systems, which connects software apps to database. Had you invested about fifty million dollars into b e A, UH when Bill started putting money into it, it would

have become over six billion dollars in six years. He is an affiliated lecturer of Economics at the University of Cambridge, where he teaches a class venture Capital in the Innovation Economy. He's a senior advisor at Warburg Pincus, where he helped build technology investing platform there for over thirty years. He's on the board of the US Social Science Research Council, the governing board for the Institute of New Economics, the

Field Institute for Research in Mathematical Sciences. UH. No less a character than Mark Andresen called him a key creator of the modern venture capital world. He is also the author of Doing Capitalism in the Innovation Economy, Markets, Speculation, and the State. Bill Janeway, Welcome back to Bloomberg. It is great to be back here, Barry, especially with you. That is quite the curriculum. Vita and I. We left a ton of it off. We'll talk a little bit

about B E A systems in a bit. I want to start with your academic background in economics, your val Victorian Princeton. You get your doctorate from Cambridge and economics. How do you go from that to venture capital? Well, actually it's a closer connection than I knew at the

time it would be. When I got to Cambridge, I was studying under the students, the top students who had been taught by John Maynard Kean's and I wrote my dissertation for Richard Khan, who invented the multiplier as a way of looking at the impact of government spending or

taxes on the macro economy. But all of the work that I did there, everything I learned there was about decision making under conditions of uncertainty, decision making by investors, workers, consumers, businessmen, politicians who cannot know what the full consequences of their actions are gonna be. Now, isn't that effectively every actor in the economy? You got it. But by the time I finished my doctorate and was thinking I would pursue

a course in economics and academic economics. It turned out that economics was converting itself for a long generation into a kind of mechanical process of cranking out the efficient outcome on the assumption that everybody knew everything that's The marketplace itself is already reflecting all the information that's available, and therefore, hey, nobody can really beat the market consistently over time, or or so Chicago, Pharma and French and

right across the whole economy. The rational expectations hypothesis said, government can't have any lasting impact on the economy because people in the economy will react an offset whatever it tries to do. In any case, I decided that at the ripe old age of seven, I could not take this stuff and spend my life pumping it into the

brains of innocent undergraduate. So I went on. I went on what I talk of as my my thirty five years sabbatical, where in the trenches of venture capital that I evolved in through joining an extraordinary firm whose core competence was understanding the science based industries, from chemicals to pharmaceuticals, to electronics to computing, I discovered that what I learned at Cambridge as an academic economist, was directly relevant to try and to frame the sword of decisions and the

sort of ways of protecting yourself, your investors, and the entrepreneurs you are backing from the necessary ignorance of operating at the frontier of technology. So that's pretty fascinating. I want to push back on the concept that, hey, this efficient market hypothesis really doesn't get it right. A perfect example I read over the weekend while I was doing

a little research for for our conversation. Some people have been wondering why the US tax cuts haven't had a larger impact on either employment or wages or R and D. And the most interesting explanation I came across was, well, everybody has already operated on the basis that they're tax havens, and this thirty corporate tax rate is no big deal anyway. We're all paying uh, eighteen percent or less. Therefore, a giant corporate tax cut has much less of an impact

than you would imagine, true or false? And what does that say about your belief that, hey, maybe the market is less efficient than we think. For first, I think that's correct. I don't think the average of about eight, not thirty, and of course, particularly the digital companies that can move their cash flows and their assets around by keys on a computer. They're not manufacturing steel and build locomotives,

it's just code. Very mobile, they're very mobile. Second, however, the tax cut has had a significant substantial impact unavailable accessible cash flow, not reported earnings. So that but what's happened to that cash flow? And this is something again about the nature of the stock market, That cash flow has overwhelmingly been devoted Apple being the most extreme example.

Stock buybacks and dividends, that not not raising wages for workers, not investing in the new stuff, but but putting more money in the in the pockets of stockholders, which you know is a rational response of management, particularly when their stockholders, who are increasingly index funds, are necessarily very short term oriented and the executives are also short term oriented. Hey, we we eliminated the agency problem by tying their compensation

to the stock price. So so you go on this thirty year walk about, and you spend some time in um Wearburg Pankis, you spent some time at Eberstaaten company. What prompted you to say, Hey, this venture capital thing, it's gonna be big one day I want to stay

involved in. You know, it's funny. It was actually a crossover from being an economist to being a venture capitalist in the In the mid late seventies, when I was a kid on Wall Street, I was really interested in the kind of longer term strategic issues around the economy.

There had been a big fiasco. One of the first attempts to use computers to model the economy, not just modeled the they modeled the world came out of M I T and was kind of a fiasco, was called the Limits of Growth Study for the Club of Rome, and this was referenced in your book. Absolutely absolutely. But the the the young guys at M I T who have been caught up in this, they learned a big lesson and they set out using computers to build very detailed,

very granular, local models of economic behavior. And I stumbled on these guys as I was trying to find out how to think about and how to handle the consequences of the first oil crisis, which blew up all the econometric models. They were useless because all the important variables of the economy, from interest rates to exchange rates to inflation rates had just been blown out. Of the historical database. I found these young guys and I got a message.

The message was, Hey, this is what computers are interesting about. It's not just being a flexible typewriter or or being a faster or more flexible adding machine. You can build simulations and explore the behavior of the world. That got me interested in computers. From there, the first wave of artificial intelligence, the first wave of the hypeer artificial intelligence that got me out to Xerox Park, the kind of the haven for the most creative people in the computing world.

Thanks to a friendship with John Ceelee Brown, who was on his way to becoming director of Xerox Park, I got immersed ahead of the game, a kind of kind of unfair advantage and seeing where computing was gonna go. I want to circle back to what you said about the Xerox Research Center. Um that gave us things like the graphical user interface, the mouse. Essentially that was Steve jobs is aha moment that led to the first Macintosh.

You said it gave you an unfair advantage. Expand on that it gave me the unfair advantage of seeing that can puting computers were not which were dominated by the IBM main frames with a secondary center in the digital equipment mini computers and the competitors with digital equipment. These were very centralized systems. They had dumb terminals, green screens. You couldn't do any local work. Everything went back to the main frame or the mini computer to be processed.

It was a very rigid, inflexible and of course, because each of these systems were proprietary, if you were a digital equipment customer, let alone an IBM customer, you have to buy everything from them, and believe me, they made money on that. So it was a giant centralized system as opposed to the modern between phones and laptops and iPads, we have a completely decentralized system. Although theoretically, as we moved to the cloud, we're kind of moving back a

little interesting, but but in a very different way. But I'll come back. That's a good point. Let's hold that thought. What you could see at Deox Park were computers being networked together with special functions that they could be optimized for. While the machine in front of you was designed to be helpful, but you know, it was map to how people work, and it was much too expensive and Xerox

management back in on the East Coast. UH couldn't get their heads around the notion of making the kind of high risk, long term investments, So companies like Adobe in three comm were founded by people who left Xerox Park. That kind of raises the question, why did they even have a Xerox Park At least with a T and T and Bell Labs later loosened, they were using their own research to build out new products or were they

up to a point? There was a deal, a T and T in nineteen fifty six kind of deal with what was then an economically active government unlike where we are today, right back when it was a legitimate legal and the deal was it could keep its monopoly on long distance telephones if any technology developed at Bell Labs that was not directly used for communications would be licensed on a fair and non discriminatory basis to the world.

And that's where Unix came from. That's where a whole raft of innovative technologies that had general purpose use, not just for communications, were given to the world, given to academic researchers, given to companies that were learning how to what to do with this stuff, and laying the basis for the digital revolution. That began to emerge in the early so that that government deal with A T and T was very different than what xerox parks deal was.

They they just didn't know what to do with that. Well, two things one um neither today, T and T. They licensed it. They the big deal they cut with the government in where they gave up the long distance monopoly and they broke up the company in return for the opportunity to use the technology and go out and compete with IBM and Digital demonstrated that I, A, T and T had no ability to compete in commercial markets. Xerox

is a different story. Xerox Is monopoly was based on patents, patents for this phenomenal ability to make copies very low cost, and it generated an enormous amount of cash. It was a different kind of innovator's dilemma. However, the existing business was so good and so certain that when one of the young guys from the park would come east and say,

I got a great idea for a business plan. Just give me twenty million bucks and in five years I'm gonna have a three million dollar business and it will be profitable and it'll be worth you know, a billion dollars and they look at them and say, wait a second, that is so high risk. We could take that same twenty million bucks and we'll hire a bunch of additional engineers and salesmen. We know exactly what the return is going to be. Go back, go back to your cave.

And they had they finally worked out, but it took a long time. In the late eighties, they worked out that. You know, if they just did a deal with the young entrepreneurs and took twenty percent of the company in return for giving them the intellectual property, the patents, and then let him go out and find venture capital. Xerox wasn't trying to build the business. It was a beneficiary of the work that had been done on its nickel out at Yaks Park. That actually worked in a couple

of really valuable businesses. What came out of that documentum for example, Major Company, they missed a ton of stuff. They took all Adobe going down the lift. It was just the first two a's. What else came out of that Apple they never had a chance to invest in. That was That was Apple. That was Steve Jobs being the brilliant opportunist he was. And but it took him ten years. It took the corporate bureaucrats back in Stanford ten years to work out that would better to own

something versus of nothing. So let's let's talk about another institution that came up with a similar idea, and that is the n S, A, C, I, A, D O D. Going back to the age of DARPA and DARPA net. Why are our national security agencies so interested in startups and technology? How much of this stuff actually finds its way into real world spy versus by usage? Well, there's no question that from speech recognition to the geographical positioning

satellites and onto all of the machine learning technologies. Uh, the U S intelligence agencies have been major funders of upstream research. Um. That goes back a long way. Of course, the page rank algorithm. A couple of graduate students at Stanford got a grant from the NSF which was directly related to the n S as interest in being able to do efficient search of what people were doing and saying on the Internet. Um. So there's there's a history

there that goes back to the fifties. That's that's ironic given that Google just rejected I mean, essentially they own their own existence to the intelligence agencies? Is that is that? Am I overselling that a little bit? Well? I think that that kind There was a link certainly to the NSF. I mean the funding for the research work as graduate students that produced the page rank algorithm that was the

basis for Google came from the National Science Foundation. The complex history, however, of how from silicon to software and then onto the Internet, all of the fundamental building blocks of the digital revolution were initially the consequence of upstream research financed by the government, and the government as the first customer for this stuff when it was still immature, when it was too expensive and too unreliable for commercial use.

That changed. That changed, Big changes took place between nineteen eight three. On the one hand, in night the PC revolution began to take off, and the commercial markets began to be bigger, whether it was for whether it was for microsop microprocessors or for software, bigger than the government market. Second, a bill was passed through Congress which said that DARPA had to justify every dollar it invested in terms of its direct military significance. It hadn't been that way before,

but a much broader much. You know, there's a There's a great line from the from the play that became Hello Dolly, Dolly says, you know, money is like manure. For it to do any good, you've got to spread it around. And that's what DARPA did. DARPA was an extraordinary institution, particularly in the years from the from Sputnik, which was why it was found in nineteen fifties seven eight through the nineteen seventies. Seems kind of shortsighted to uh,

to cancel it. Let's let's talk about Warburg Pinkis because you've been affiliated with them for a long time. You're a senior adviser there. You helped to build their technology, research and investing platform. Uh, tell us what brought you to Warburg back in what I've known the firm for almost a decade. Warburg Pinkers was one of the original firms. It was the largest founding member of the National Venture

Capital Association. Was founded by two extraordinary men, Lionel Pinkis and John Vogelstein, who had an idea going back to the sixties that when when when the investment banking and brokerage firms in Wall Street, you know, they did deals and they do a movie deal and they do uh an oil deal and roll one off and everyone in a while they do us at a black box any gravity machine tech deal that was going to cure cancer,

but it was very amateurish. Lionel and John had very simple idea, if you actually focus your attention, all of your attention on those investments, understand the context, the business issues, the business model, the competitive situation, you would likely to do a little better than just throwing money against the wall. So the firm had been when I joined, the firm was already more than twenty years old. It had not

been an active investor in technology. It had followed the founding great firms like Kleiner Perkins, Asset Management, the Silicon Valley firms. But as they had raised the first billion dollar fund that anybody had raised, they decided that maybe they should try to invest in technology the way they invested everywhere else. As the lead strategic partner with management, I had spent the previous ten years building an investment

practice of raising money for private companies. Sounds a little bit like unicorns, but a big difference private companies from institutional investors. Based on our our firm, the Eberstat Firm deep work in understanding the science based industries. I had come to John Vogelstein at Warburg Pinks again and again with really interesting companies, but that required passive investment, no control,

no board seat. And John would again and again tell me, you know, this looks like a really interesting business, it's not an investment for Warburg Pinkers. In the mid eight we sold our firm to a British merchant bank as brokerage commissions, and our business model came under stress. And it became clear after a time that if I was going to do what I've been learning to do, I

had to go someplace else. So John and I had lunch, We talked through we we just finished each other's sentences, and I landed at Warburg pink Is in AD eight at a wonderful time. Sure you're you're looking at the late eighties in the early nineties. That is the golden era of go down the list, semiconductors, software, mobile, and that's still early days of biotech and judgments and things

like that, exactly right. And the technologies that I'd been exposed to a Xerox park and then I've done some investing in from Eberstat secondarily sort of supporting our institutional clients as they made the investments. Now, these were beginning to mature. So for ten years, from late eighties eighty nine right through into the heart of the Internet dot com bubble, we invested. We searched out as many ways as we could find from making a big strategic bet.

And the bet was IBM dominance of commercial computing was vulnerable, exposed, and we can help them lose their monopoly control. And so we invested at the level of the the underlying the infrastructure software that's b e A, in Veritas Enterprise Applications, three or four companies, and we I think got a major shift in the most important industry that now exists. We got it right at the right time. So did I get the numbers about b e A correct, because

they're just astonishing. Fifty four million dollars invested into b A six years later become six point five billion. Is that about right? Well, it is right, But there's a there's a PostScript. Because John Voglostein was a great student of markets, and he studied He knew bubbles come, bubbles go when's when it's too good to be true, it's too good to be true. I had actually written my doctoral dissertation on nine to thirty one, so in a sense,

i'd seen the movie before two. So beginning in about we had this portfolio that represented something like two million invested, and we just started liquidating everything we could into the bubble. We owned so much of b A that we only got five percent out all right before the bubble ended. But there was still another five six million that came out later, so it actually with more than seven billion on the on the five but a little longer time.

That's just astonishing. My guest today is Bill Janeway. He is the author of The Innovation Economy, which there is a new edition of and and let's talk about the differences between the original edition, which came out five six

years ago exactly right, and the new edition. Given what's been going on in the modern world of social networks Facebook, Twitter, LinkedIn, go down the whole list, how has the universe of digital companies changed versus what you were looking at back in the nineties or the well, the first edition of the book was, frankly a kind of celebration of this extraordinarily constructive partnership between the public sector and particularly the Defense Department and with DARPA as this point of the

spear and the private sector including the entrepreneurs and venture capitalists like me. But looking looking back from the last six to twelve months, something really fundamental has changed. The digital revolution, which began to reach maturity thanks to the extraordinary speculative funding of the late nineties the end of the twentieth century. By the way, Dan Gross has an amusing book called pop White, bubbles are eventually good for

the economy. That's exactly what you're referring to. Is if you're laying fiber optic at some ungodly amount per mile and then that company goes bust, well, at least we still have the cable laid and somebody buys a cheap out of bankruptcy. Just like the railroads a hundred years before, or computers or televisions or automobiles, every new industry seems to go through that boom and bus phase. A lot, you know, a lot of bubbles leave you with nothing

but ranch houses in the in the Nevada Desert. Financial bubbles don't leave you with the same, not quite the same as technology. When the banking system, the credit system, when they when they pop. The consequences are horrible. When it's just in the public market, in the stock market and it pops, there's no leverage, so so the But in any case, in any case, what's happened. What's clear over the last five years, the digital revolution has taken

on a momentum of its own. It's running out of control, no longer needs support and subsidy from the public sector. On the contrary, it's attacking the authority of the state at every level from the most Is it the companies and the platforms themselves or is it the end users who have found ways to manipulate these platforms, perhaps for the occasional nefarious uh objective, As Johnny Cash famously said, why do I have to choose? Of course, it's both.

It's both the disruption of micro markets like the New York market for transportation or accommodation. But on the other hand, it was this i T revolution, this digital revolution, that enabled the second Great globalization, the integration of financial markets, critical to the financial crisis of two thousand and eight, just by the way as the telegraph and the steamship produced the first Great globalization at the end of the nineteenth century, But this is happening at a very special time.

It's happening when the hard work over a long generation of some very smart, committed people who knew they were doing the right thing by their light to render the government illegitimate as an economic agent. But has in that so, let me push back on you at least a little bit, hasn't There always been a group of people who and and perhaps we know them more intimately these days, because

nothing is a secret. But there were always survivalists, and there were always radical anarchists, and there were always people, you know, I grew up with the moon landing when I was in grammar school, and it seemed almost like immediately it was, oh, that wasn't real. That was fake. There's always been, but they've been disparate and not organized that in nineteen Another thing that happened in nineteen two, Ronald Reagan said, government isn't the solution. Government is the problem.

That view sat down with the entrepreneurs of Silicon Valley. Intel wouldn't have existed without the government. Was the solution to how do you do a startup into a capital intensive, massively strategic industry that nonetheless needs time and support from a collaborative customer as well as the benefit of the upstream research funding and silicon processing and all that stuff.

The flip side we had, you know, in two thousand and eight, when the world came to an end, for about three months, the government was there around the world, from from London to Beijing to New York to Wall Street. If you if you remember in October o eight when the TARP was first proposed on a Monday in Congress and some of the Libertarians shot it down. Markets collapse, and by that Friday it's scared Senators, fed chiefs, congressmen

enough that by Friday that said, all right, dollars. But as soon as there was a floor under the financial crisis and its economic collapse, then we were back to the world in which the govern meant exists only to screw up markets that otherwise give you the efficient outcome. And that misses the point, the whole point of the economics of innovation. The whole point is that you need sources of funding that are not focused on immediate economic value,

that have a long term strategic purpose. And what we've lost now it's two things from the rendering the government and legitimate one very limited if any ability to respond to the forces of globalization in a way that which is damaging the constituents. Many of them don't know that there's no other source of support. That's looking backwards, but it's also there's a problem looking forward if we're going to organize globally any kind of coherent response to climate change,

which may I stipulate is real. It's not a Chinese hoax. I saw a tweet that said, it's just a Chinese house. If we're gonna for we need exactly the same kind of upstream funding, upstream commitment to research, to technology development, to support of the deployment that we got with the digital revolution. We're not doing it. We've we've abdicated. The

Chinese are doing it. And that's why the biggest message from where my book stands today is that we may, looking forward over the next generation, have the opportunity to see only the second, only the second passage of leadership of the innovation economy from the incumbent dominant nation now the United States a hundred years ago, hundred and twenty years ago Britain, to a new leader. So let's talk. Let's delve into that, because there you raised two really

interesting issues about China, climate change and technology. I would be remiss if I did not address the first is you talk about having a government entity that can think long term and make these long investments. That is not the description of the United States. That is the description of China. Whether it's their science funding, whether it's their

infrastructure there, high speed rail, go down the list. It looks like China has said, hey, I'll be happy to jump into the void that the United States is leaving leaving, whether it's technology, politics, you name it. They're stepping up. And this is not something they've done previously other than that little genghis content. But short of that, China has been very happy to be isolationist. These roles seem to be reversing. Is that Is that a fair assess? I

think it is. I I see it in the work that is being done to understand the strategic investments China's making. And not just in China. They're bringing yeah, exactly in Africa, in in Southern Europe, they're making major investments in transforming the energy infrastructure of those parts of the world. Um, the you do get some people saying, you know, the Chinese are almost embarrassed because they thought it was going to take another twenty or thirty years before they could

challenge us. Who knew we were gonna just see that leadership mantlet. The second issue I have to bring up is, so let's stipulate climate change is real. It mankind causes it. You look at the history of the industrial evolution forward, we're spewing out all this carbon. And yet when we look at technology, the ability to move to wind, solar, geothermal, title, they're just the sources of energy seemed to be um the cost differential versus cheap carbon based is going from.

It used to be hugely expensive and only a handful of of zealots did it. Then it became a little more competitive, and now why would you use coal when alternatives are just are cheaper and cleaner. But we still need we need some really innovative new technology, particularly energy storage for sources of energy that are intermittent. Did you did you read recently about the UM I think it was the professor at M I T who came up with a methodology of pulling carbon out of the atmosphere.

And actually it's more of a chemical than a technology. Now if that proves, But let's let's let's roll things back to Okay, the transistor has been invented the night. The notion that you can use solid devices with particular properties, not vacuum tubes, to douce to switch signals, is that our idea is out there. Nobody knows how to actually turn that into working machines that can function at scale. IBM makes a bet. BET's on a material called germanium.

Physicists will tell you germanium from a purely theoretical perspective's right, because the electrons moved through it better than silicon exactly. But absolute bear to produce at scale, and silicon is easy to and and and the guys in Washington put out a whole bunch of experiments. And it turns out that this little, this little oil field instrument company in Houston, Texas Instruments, works out how to process silicon. It's not

quite as good theoretically, but practically it's much better. Scales up tremendously, and it scales up in response to government orders when the government doesn't care that it's really expensive because it's putting, you know, it's building the memory systems for the guidance systems for the Minuteman missile. But then they do something else they actually broke or a deal between IBM and t I. The technology gets transferred to IBM and return for IBM, giving t I a big order.

It's the kind of active intervention based on intelligent experimentation we should be doing. R p E, which has got barely two hundred and fIF the million dollars of funding Darpen today still has over three billions. If we were doing this seriously, and we had somebody at the Department of Energy with a mission not to protect the coal industry with all of its fifty employees, UM, we would be doing the same kind of experimentation every imaginable form

of battery technology, the science of energy chemical conversion. We need a new Manhattan project for this sort of thing. We have been speaking with Bill Janeway. He is the author of Doing Venture Capital in the Innovation Economy. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. Be sure and check out my daily column on Bloomberg dot com. You can follow me on Twitter at rit Holts. I'm Barry

rit Holts. You're listening to Master's in Business on Bloomberg Radio. Welcome to the podcast. Bill, Thank you so much for doing this, UM I have I'm so glad the run of questions I had you and I didn't get to any of them, which is always a good sign of a good conversation because you say something and it sends me off in a different direction. So I I appreciate your ability to UM to help guide where where this conversation UH is going. And you certainly have a illustrious

enough career. There's not a lot of stuff that you haven't seen. I know you're not big into biotech, but pretty much anything involving software, electronics, semiconductors. You were right there in the middle of that throughout the whole UH, the whole run, well it was. It was a great time to get engaged in the as as. Wait a second, I have to stop you. What is that watch? Oh?

That is a yellow time X. I think it costs eleven dollars by When I first saw it on your wrist, I assumed, oh, that's an Apple watch, and then you flipped it over and I'm like, wait a second, an Apple watch forty one years ago. Yeah, I traded an addiction to nicotine for an obsessive compulsion for running. Okay, and so my default is a running watch, and I have a good watch. I have a couple of decent watches. But this is sort of what I put on in the morning and take off if I'm going to a

fancy dinner party in the evening. And you know what if I if I drop it off the side of a rowboat, can you still replace it? Are they still making Yeah? They still. You go into any running store and you'll find something like this. Just go for the bottom end. I don't have the bus. Yeah. If I want to know how my heart's doing, you know, I just take my pulse. I don't need a two hundred and fifty dollars five hundred dollar, thousand dollar. Let's see what my pulse is. So my pulse, I'm all excited.

My pulse is eighty three centing. He are talking. It's been an exciting conversation. If I concentrate, I could get it down to the low sixties. But I really have to bore the audience and just ll out. But here, let's see what what that just got it down to? Um? No, still there you go. So you take your pulse. You literally just count Yeah, all right, but analog, you know, analog.

Sometimes it's adequate, but truly analog. That's the first digital watch that's truly analysts holding your fingers on your on your wrist, that's an analog readout. So so you you started really full born too. The VC side in the late eighties, was it in my imagination. It's hard today and it was easy then throw a dart. You're gonna find a company that's gonna make money. You know. I'll tell you what's really interesting, because this is now I'm

gonna put on my academic hat. There there's been a lot of academic research on venture capital, and I'm a student of it, and I've contributed to it and i teach it. So I'm really I really know this data and I know the analysis of the data. There are two overwhelming what they call statistical stylized facts about the history of venture capital. It's about since nineteen eighty that's

when we can start to have real data. The first is there's incredible skew in the returns, meaning that it's a fat head and a long tail, a handful of giant winners. Now are you talking about the companies You're talking about the venture funds. First, I'm talking about the venture funds. If you take all the venture funds that have ever been raised and invested since nineteen eighty, a ridiculously small number of those funds have delivered all of

the excess return versus the Natstack index. But here's the second fact, and this is distinctive, if not unique, to venture capital. There is what they call the academics called persistence in the returns. In other words, firm X raises for fund one, and the performance of fund one predicts the performance of fund too. And let me flesh that out a little bit. So fun one does well, so

a institutions throw money at them. They're not wasting a lot of time, energy resources trying to raise money because people want part of that. But more importantly, the deal flow that they get to look at it. They get first choice everywhere exactly. So that's Kleiner Perkins. Let's go down the list. Well, it evolves over time. It evolves over time, andres and Horowitz was not on that list, didn't um and and firms go through changes. I will

give uh. You know in the in the nineties, Benchmark was founded and they've generated the twenty year record now pretty good, really consistent partners. One well, Sequoia goes way back. They've now expanded there were you know, they've really increased the scale of the firm and the fund, and they're investing globally, so we'll have to seek and they maintain with a somewhat different profile the kind of outstanding results

they've had for a generation. Firms also go through generational shifts and leadership, but by and large, the point about this is if you're if you're if you're trustee of a pension fund, and the and the consultants come and tell you, you know, you've got to play venture capital. Over time, you're gonna add incremental return to the portfolio.

The answer is, if you can get into the venture funds that don't need your money, do it the best funds, but don't just have a you know, three percent allocation for a twenty billion dollar fund that has to be invested in venture capital because there's a you know, there's some really good stuff. In economics, there's a concept called adverse selection sure which means if they need your money, you don't want to give it to them. You don't want to be a member of any club that will

have you. So by the way that data set, both the persistency side and the fat headlong tail side is true for the hedge fund world, it's true for the private equity world, and arguably it's true for the world of public companies if you're not indexing but buying individual stocks of We used to think a disproportionate amount of

returns came from a small number of companies. The most recent data, and I wrote about this some time ago based on somebody else's study, it's even narrower than we thought. It's a tiny percentage of companies delivering more than half of the returns. It's it's amazing. Well go that goes with this, this institutional change in the market, the rise of people managing other people's money, right where if don't do at least as well as the index guess what

their clients their investors take their money away. And then, of course, when more and more of that institutional money is passive index funds, you're, by charter, by contract, you can't be a contrarian. So what it means is, you know, cumulatively, you get more momentum investing, more hurting behavior. At the same time, we've had this extraordinary phenomenon since two thousand, the number of public companies in the United States, as you know, it's half of what it was thousand is about,

which is that's kind of kind of hilarious. There was a wonderful book in the mid nineties by a I want to say, Cornell professor Robert Frank. I'm sure I can find it if I just if I just clicked. But it was called The Winner Take All Society, and it looks at things like UM athletes and movies and just how you end up with this just unbelievable concentration UM yep, Johnson School of Management at Cordell Robert H. Frank. Now, remember the columnist Robert Frank is a different, different person.

But we see that across Overville, these alternative investment platforms. If you're not in the top let's call a ten, you're you're you're more or less spending a lot of money for a very low probability of retire. But now that feeds into one of the phenomena that actually got me back into looking at this whole process, that intersection of government and the stock market and the market economy, which what I call the three player game and in

my in my books and my lectures. It got me going back into it was this amazing phenomenon, the unicorns, the unicorn bubble, the Airbnb, the Ubers, the parin nos, go down the list, the the well what to those? Just are Uber? We know is private? Airbnb they haven't their private, They're still private. Who else is on that list? There? Actually? If you, if you, if you actually were to go to Google, huh and type in unicorns tech unicorns just unicorns just just straight up well Airbnb, you know they

in the in the data. Airbnb is usually counted in accommodation and not as a tech company. But it's something like two hundred and fifty globally. So the first first one that comes up is unicorn, Wikipedia about the um the mythological unicorn. With the second one is Fortune list of uh unicorns and it's Uber, Ziomi, Airbnb, Palantier, Well, Snapchat is no longer private, China, Internet plus SpaceX Pinterest. Let's see the full list. This is already a little dated.

I've seen one that we were i I. It's something over two hundred globally private companies valued at more than a billion dollars. There the tons so that raises a really interesting question, Um, and it goes back to you mentioned the DARPA VC funds is barely three billion dollars. It's not a VC funds, but it's a research fund that that sort of looks and it's now much more heavily towards military technology, not the general purpose investing that used to be. Exactly, But what do you make of

the funds? Like soft bank has a hundred billion dollar funds, that seems like a lot of capital. There are two things. What one is they used a substantial hunk of that money to help buy ARM not exactly a venture investment, a huge ARM holding as a semiconductor it's really it's it's an intellectual property company that licenses architectures for the devices that dominate the mobile phone business, along with qualcom Um.

But they also they put five hundred million dollars into a no revenue start up that is a game proposals to deliver a platform for computer games called Remarkably enough, the company is called Improbable. I didn't make it up. Five hundred million dollars half a billion dollars. Do you have any idea what you can do the kind of

party you can have with half a billion dollars. Well, if you're doing ten million dollar deals, where you're taking depending whether you're early stage or late stage, whether you're taking ten percent or you could. You know, I would rather roll the dice with fifty companies than one. Exactly, that's the point given given the again that fat headlong tail. To get one of the winners, you have to, you know, you have to. There's a pony in here somewhere, right,

but you gotta. That's why they call it spray and pray to A Couple of different things have gone have gone on pray and prey. So one is the cost of launching a startup has dropped like a stone. Two guys, a laptop and an internet connection is for someone else. Destroy software, open source software, rent your computer cycles and your storage from Amazon. You only pay as you use it. So getting something out and onto the net cost nothing.

So that the old days of ten or twenty million dollars just to set up a firm, that's right gone. So lots and lots of startups. But the cost of building a business, the cost of getting to scale, and the way these companies are doing it by not by generating cash, by selling services and products to customers, but by issuing securities to investors while they give away free in order to get users. So that's Spotify, and that's

exactly right. You know, it's Airbnb had a business model pretty much from the beginning, and Uber lost a billion dollars last quarter in cash now, but they're making it up in volume, so it all wokes out. When I was growing up in the business, my mentor was a guy called Fred Adler. Nobody remembers Fred anymore. He was first generation investment venture capitalist, a lawyer who knew how to turn around companies, and he had a He had

a motto. It was corporate happiness is positive cash flow. Right. What it means is if if, if, if, what you're getting paid by your customers generates more cash than the cost to deliver the goods or service. Two things happen. One you have a validation that what you're doing is economically worthwhile, and two you're liberated from dependence on the capital markets, which are there when they're there, and when

they're not there you start. Now, what's weird about this unicorn bubble is that it's institutional investors who are used to buying liquidity in the market, who are on the one hand, prepared to accept so much more risk to get a return in the zero real risk free rate environment would you've had for almost ten years, and on the other hand, are paying premium values relative to the existing public companies, you know, the Googles and the facebooks to get access for What they say is you know,

fomo fear of missing out because as you this goes all the way back to saying that the returns are so concentrated. But instead of saying, well, I'm gonna put you know, a million bucks into fifty startups and hope that two or three or four of them blow out, and I write a million, but the five million gets me big, big returns. They're writing checks that are fifty five million to play that game and and and a

rich valuations. Not they're not early stage in that tree ridge, and so they're exposed to I mean, the the unicorn bubble, like all bubbles, will end. That's the law of bubbles. Bubbles end um. And you can see two different ways

it can end. One is that the FED indeed normalizes rates, which they seem to be in the process of credit spreads open up and it becomes possible to get, you know, a real return of five, six seven percent as an institution investing in you know, TRIPLEB bonds um which will take a lot of money shift money within the financial system. The other is that you have you know, a fraud like thearas. You have the genius, the incredible genius and

energy of Elon Musk. Now, let's say, subject to some closer scrutiny, SpaceX, Boring Company or Tesla or whatever he's cranking them out. And if there's a cumulative drumbeat a companies that promised unbelievable transformational technology to the world failing to meet those expectations, that changes you know how you know better than I how market psychology, how investors shift the frame and the lens through which they're looking at investments.

So so let's let's explore that a little bit because my pet thesis is there's just so much damn money slashing around that it's always looking for a home. And when you say to somebody, hey, tenure, I could get you, you know, two point two percent or wherever it will be by the time this broadcast. I don't want two percent. I'm looking for a six, seven, ten whatever. So first is all this capital the reason a fraud like Tharakhous could get was it nine million dollars in funding? I'm

doing that off the top. I think it was a bit like it was still huge and you know whatever, it was reality distortion fee old. It certainly is the fact that there is a huge amount of money around now. The two things to say about that. One is the thing about liquidity is the more you needed, the less there is liquidity comes there. Remember with the liquidity in the buyout market in two thousand and six, Remember that buy out of the Texas Utility Company Electric Utility Company?

But was it forty billion dollars? Some ungodly number? And in September two thousand and eight you couldn't scrape two nickels together. So the perception of it is this sort of self validating process. There's so much money around today that we can exsume it will always be around until

guess what it's not. That's where I think the real challenge for the entrepreneurs and the core investors in these unicorns, because the process of learning how to generate to pay your bills because your customers are giving you more money than you're paying out to serve them. That is a

really hard discipline to learn. And if you're being able to raise one billion, two billion, three billion a year, giving up almost no control, giving up minimal amounts of ownership, minimal dilution, boy, that's that's that's the best heroin you could ever have. So when you look at let's hold thereinos aside, because clearly it was a fraud, right, I mean, I don't believe it started as a fraud. And if you haven't read the book Bad Blood, it was delfe

I read the newspaper columns in real time. Um, but the book reveals stuff about it that the columns did not like. The board of directors was a did you know they had no voting shares that she had, Elizabeth, and that you know there were no people from a medical device biotech healthcare background on the board, at least

at first. With all respect to too great public service Henry Kissinger and George Sultz, if you're ever given an investment opportunity, we have two members of the board who are former secretaries of State in their nineties, politely say thank you and pass on by. There were people have accused me of um having hindsight bias in this, but there were some fairly obvious red flags, that being one of them. Nobody, every single VC that specialized in medtech, healthcare,

biosciences took a hard pass. That's a screaming red flag. Talk to any humatologists in the world and they will tell you. And I'm not a humatologist, and I don't play one on television, but I do know some very good academic ones. You cannot run the full panel of bloods that they do when they put that needle in your take it a full vial of that blood. You can't get that out of a drop of capillary blood

from your face. The process of ricking your finger um introduces interstitial tissue and liquids and contaminants, So even if you had enough blood, it's contaminated blood. But let's the what I'm more interested in, and what I think is much more significant, is that these digital platforms and marketplaces, they are disruptive. They are creating opportunities for commerce on

a radically different basis. So we're talking about Airbnb and Uber and lift and anything that is using the digital, especially mobile interface that's a giant computer in your pocket to turn things into a different um economic value proposition. That's a fascinating an It also brings up, however, another aspect of where the digital revolution is. I said it was attacking the authority of the statement. Of course, a

lot of that's happening at the local level. It's not and I'm not now talking about grand strategy and or or the you know, the future of the planet and climate change and all that. The problem here, and this is a problem for investors, is that too many of the genius entrepreneurs who know that they are creating a new world have zero interest in understanding how we got

to this world that they're disrupting. And what that means is that again and again and again they pay no attention or they dismiss the existing ecosystem, which includes regulatory but not just political and state regulations, practices, culture. A black cab driver in London is not the same thing as a cab driver in San Francisco operating a totally different environment, meaning that that's highly regulated. They have to

pass the tests to be a cab driver. They're incredibly knowledgeable, and they have a standing in the culture that's just different in kind. So what happens when these disruptive which which are much more efficient economically, no question about that, and much more efficient technologically, but they run into these frictions,

these political and regulatory frictions. It slows things down. Now, if you're promising to change the world and you have investors investing in you in pursuit of that rate of return that comes from a successful revolution, and you get delayed by a year or two year, but that it just kills the present value of that hope for home run future. So it feeds back into the investment proposition that you're looking at today and you're trying to value today. So let me let me get more specific, because I

want to make sure I understand that. So you have a set of a regulatory environment and a set of cultural background in a place like London, and that doesn't necessarily make it all that vulnerable to an outfit like Uber, because their cab drivers are valued members of society who contribute more than mere transportation. There an active part of

the history and the lore of London. Compare and contrast with New York City, where I've made the case and I don't think it's a stretch that you had a artificially created monopoly, the number of medallions kept low, the serve quality service terrible. Good luck funding cab in the rain at rush hour. The first moment anything happens, there

are no cabs. I I kind of have gotten the sense that the New York City Council and the medallion owners conspired to create to artificially constrained market forces, and as soon as Uber came along, it exploded because at a certain point the market will not be denied. Exactly right, Barry,

I think you're absolutely right. But the point is exactly that you need and it took Uber has an Airbnb has been doing a better job of understanding that these each local market that they go into has to be evaluated its own terms, with its own history, and adapt there too. And not all the regulations A lot of them are, but not all the regulations are monopolists. Rents seeking.

You know, there's a reason why if you're having people stay in your apartment, you want to have a fire extinguisher and something like if your neighbors are living there, they board an apartment, they weren't buying into a hotel. That's a completely legiti exactly right. So my my point here is only that, in addition to all the stem discipline science, technology, engineering, mathematics that we all focus on,

is the secret for the future. A little more teaching in history, a little more even reading relevant historical novels, a little learning about the political the evolution of regulations in particular domains, particular regimes. It could be very helpful for the entrepreneur, or at least their financial investor, who's trying to give them a strategic sense of where to bob and where do weave and how to maximize the likelihood that their transformational technology will convert into long term

economic value. So when when you're looking at a possible investment in a startup and you're looking at the entrepreneurs, do you find that a lot of these folks are one dimensional. They have their tech skills, they've come up with something that seems interesting, but they're lacking a broader world view. Well, you know, I'm I'm I'm at more than one remove away from this. I'm not running the portfolio and I have it for years, um, but I

do stay tuned in. In particular, you mentioned in introducing me, Uh, you know, I'm Tim o'ry. He's outside director at O'Reilly media, Tim is just which is you Oley Media has and certainly the throw weight in terms of insight foresight that Tim has demonstrated over a long generation. And by the way, let me just fleck his book with the amusing title

w t F What's the Future? Uh? Is a great guide to reading the digital revolution as it has unwound, as it has evolved over the last couple of years, last twenty years, um, Tim, Tim has the exactly what I'm talking about, a deep interest in the history and not just the technical history, but the cultural and political history of that we are transforming. UH. And you know, this is not the first time that there's been a political backlash from new technology. William Jennings Bryan, the populist

movement at the end of the nineteenth century. Was there sponsor the railroads? How about the Mathusians. Isn't that a giant rush back against you know, we'll never be able to feed ourselves, so the there is now a giant political pushback. You know, big tech is a target. UH. Some of it has been invited by a kind of arrogance that goes with it. I say, it goes with the territory of being the source, the leader, the manager,

the driver of transformational technology into the economy. But it will be best for everyone if there's a more deeper understanding of the world that is being disrupted, not just

understanding of the forces of disruption. And you know, frankly, let me let me chew that over a sec Better to have a more complete understanding of the world being disrupted than just the disruptive forces themselves, right, exactly right, that's and that's what this new edition of my book is really trying to deliver, and to deliver to audiences

that include those disruptors. It will be better for our whole system and will certainly be better for us to have a you know, a better chance of responding to the Chinese challenge, which ain't going away. Um, of course this comes at a peculiar moment in American history and

American politics, and peculiar to say the least. I mean, that's and and you know how long this persists, how long we have I've got to I got to share with you because I know you know how to read the net one of the more maybe most frustrating things you can do. Right now, Let's go to Google type in the letters o s t P that stands for Office of Science and Technology Policy, and you'll see white House dot OSTP dot gov. Right, if you bring that up, well, I'll ask you to just let it sit there on

the Google screen. White white House dot gov is the first thing that comes up. Right. Now, look down the list and you'll find something that says OSTP dot Obama archive. That's the third thing. So the second thing is Wikipedia. Okay, Now go and click on the OSTP dot Obama archive, right, John Holden, Director, and you'll see that that's how it what it looked like on January telling me this has not been updated. No, I'm telling you that this is frozen because that's the way it was and that's why

it's in the Obama archive. But if you go through it, you'll see that there's program after program, people and initiatives and conferences and all that. Now, after looking at that, now go and look at here's a November one article Donald Trumps Science Office is a ghost town. So go and look at OSTP dout gub white House dot OSTP dot gov. Al Right, just click the original. Just click the original, uh engagement at it's a one pager. That's that's it, there's no there's no there's no links. There

are no links. That's all there is. That's it. So another word science and technology not not exciting to this group, doesn't exist. You know, if you look at the list of unfilled positions. And I'm not sure if if my original viewpoint on this is correct. I used to think he was running just for a branding exercise. He made most of his money, read him Um O'Brien's book, Trump Nation. Most of his wealth came from the t and forward election where there was a ton of branding opportunities. What

have you. I suspected that he was an interest in winning, that this was just a great gift from the media and pub listening machine. And because most people run have their list of here's everyone we're gonna put in. The fact it's a year later and they still have all these unfilled roles kind of makes me think that he wasn't expecting to win. That said, now that you're there,

perhaps you may want to fill some of these slots. Well, you know what's going on at the E p A. And by the way, we're recording this in between the weekend of the G seven events and the right before the summit with North Korea. So if there has subsequently been a nuclear war, that by the time this broadcast, neither of us anticipated that correct or or or the other thing, a complete nu de nuclearization. I don't think either of us are expected that. I'll tell you I'm

I'm I'm not. I'm not born to be. I go practice as a political prognosticator. You read all about that in so many different places. I have those I respect, those I don't respect, But I will this and this.

I think I have some expertise. And if you're going to maintain if a nation is going to maintain leadership in taking science, deriving from it working technology, and converting that technology into job creating, profit generating real business, then one player in that game has to be a legitimate, honest, functioning government. Without there you go, you know, but that some people legitimately that's the idiotic pushback, I know, And that's why going back into that using winners and losers.

But you know, that's what going back into that history of the Defense Department in DARPA and silicon and software and microprocessors and the Internet. That's why it's so important going back to the history of how we tied the nation together with Transcontinental Railroads by taking nine of the land area of the lower forty eight states and giving it as a gift to subsidize the building of the Transcontinental Railroads. We built the interstate highway system. We built

it under a Republican president. By the way, the legislation was called the National Defense Transportation Act. It was legitimate because they designed it so that every bridge was high enough that a transporter carrying an Atlas first generation intercontinental ballistic missile could be driven along the interstate. And that made the investment in the public transportation network for the country, made it politically legitimate. And am I misremembering this or

is this just the myth? Every fifth mile of the interstate highway system how to be a straight mile that could double as a runway in an emergency. You know, I don't know that. As a fact. I liked the concept. It certainly was. There was a sense there that public investment for the public good was legitimate, appropriate and what do you call it? You didn't have to call it socialism, was just it was for the public good. The multiplier effect of the interstate highway system is still being effected.

This felt to this day. All right, so I only have you for a finite amount of time. Let me jump to some of my favorite questions that we ask all our guests. Tell us the most important thing we don't know about you. Well, let's see, I guess the most important thing that you probably don't know is that when I was forty five, I ran a one nineteen half marathon in the fifty nine minute ten miler. And then that was the summer fifty in a ten mile.

That's pretty good. That's under six minutes. Not bad for at five year old. Oh that's damn good. And ex smoker. And and then I made this fundamental decision because on the one hand, I was joining Warburg pain Kiss after I've been serving out my contract after we sold the Upper stat firm, and I knew that was gonna be

a full time job. And on the other hand, my wife was running a consulting business, and I had worked out that if we really wanted to have a kid, staying in the same city as her her doctor suggested was probably a useful enabling friend. And so we were gonna have a kid. And I decided that you could have a full time job, you could try to be a decent parent, and you could run competitively at the club level of New York two out of three. That at the end of the matter, that's very funny. You

mentioned one of your mentors earlier. Tell us repeat their name, and what other folks influence your perspective? Critical influence on my perspective, as I say, was Fred Adler. Uh. Fred Fred came from backstreets of Brooklyn, got went went from Brooklyn College to Harvard Law School, joined actually one of the leading Catholic law firms in New York, and discovered he was a terrific turnaround artist and put together the financing for the second successful mini computer company, Data General,

back you know now forty five years ago. He and I connected. We collaborated effectively a lot about that in my book. Uh. He was a tough guy, and uh, I used to He used to tell me that I was really good at admitting my mistakes. And I used to tell him that the only compliment he ever gave me was he never offered me a job. But then then in the mid eighties, when I was really engaged in this new swinging world of information technology through through my my cousin who was out in St. Louis. He'd

been at Monsanto. I met one of the most remarkable figures in the second half of the twentieth century, Himan Minsky. Oh, of course, Hi Menski was a Maverick renegade. He'd gotten his his doctorated at Harvard under the great Joseph Shampeter. But he he didn't follow. He refused to follow the new line of efficient markets and stability right, and he never put it into math, which made it hard for

him to be expected accepted. But in all of us by the mainstream economists, who all suffer from a horrible sense of physics penis envy, it's it's that I think they've over mathsized economics. But I got to know, I got to know and right right. And he came east. He wound up at Leon Levy's Institute at Bard College, and I used to go there in the late eighties

and sort of play hookey from venture capital. But it made me, gave me the chance to think and to interact with somebody who was deeply engaged in understanding the dynamics of the financial system. And as you say, how stability breeds instability, how confidence becomes overconfidence becomes overlending and leads to a crisis, and that that is going to have an impact on the real economy. It's not just

happening off there on the markets. And that was a huge, huge benefit of course, going into the world of the last fifteen years. It's unfortunate he didn't live long enough to see his his research and his writings all come true. Just just amazing. UM. Any venture capitalists influenced the way you look at the world of VC investing, I meaning

back in the day when oh yeah, sure. In addition to fred Um, one of the most phenomenally successful venture capitalists ever was Arthur Rock, who was the early investor into Intel, if I'm remembering correctly. Intel, he put the financing together originally for fair Child Semikin, which was the predecessor,

Which was the predecessor. He was investor in Scientific Data Systems, which was another one of the the first generation many computer companies, was brought by Xerox, the first It was the first billion dollar exit in the history of the venture capital industry. UM and of course he was along with the venture arm of the Rockefeller family, he was the original investors in Apple. UM. So I hope you still invested. Um that that that's a that's a fascinating run.

Let's talk about books, because you mentioned a few. Um, this is everybody's favorite question. Tell us your favorite books VC, economics, fiction, nonfiction. I don't care. What do you read and what do you think other people should read? Well, I I mentioned Tim O'Reilly's WTF, WTF what's the future there? They know? I've been. I read a lot of history. I read

a lot of history. I've been just stumbled on an extraordinary book that I should have and existed, and I wish I had because I sure would have used it in my book and I will be using it in my economics course at Cambridge. It's called Funding a Revolution. It was published in at the peak of the Internet bubble by the National Academies of Sciences. It's a detailed, granular report on each program through which the United States government created the digital revolution. It's you know, it's not

for everybody. Perhaps I found it riveting because you had the people, the names, the programs, where they came from, where they went. Um. But then on the other hand, UM, I read the Harvard historian then Beckert wrote a book on the cotton industry that the cotton textile industry, which

came out about five years ago or so. It is an amazing examination of the first global industry, again, an industry which critically depended on the power of states two create the sources, the the the raw cotton coming in, and the dynamism of entrepreneurs and speculative capital. Let me ask you about a couple of books, because you you made me think about a few. Not Andy Groves, only the paranoids survived, But there was a book on the history of Intel along with Rock and Fairchild Semi is

it inside Intel? Could have been. I think that's the book that really tracks the history. I thought that was fascinating. I don't know if you you read that. I don't know that one. I do know the you know, the Fumbling the Future at Xerox, which tells the story. It's pretty um, it's pretty tough. And then what about have you read Scott Galloway's The Four Google, Apple, Facebook, and Amazon? You know? I read. I read a lot of academic papers and I and that's one of the reasons I

uh teach the course in a way. It forces me to stay up with the literature. And you know something we haven't talked about, but this is a message I wanted to deliver. UM two thousand and eight was a crisis. It was shocking, and it almost brought the world economy down. But for economics as a discipline, for finance as a discipline,

it was the gift that keeps on giving. It has shocked those disciplines out of a kind of complacent assumption that the market will always deliver the right answer, reliably and with resilience, and it is generated a body of growing body, a much more realistic and relevant academic work based on a shift of focus from pure theory towards impure goal analysis. Economics gets its own Minsky moment. Yeah,

that's exactly right, quite quite fascinating. Tell us about a time you failed and what you learned from these ah, more than one learning by failing? Um, Well, i'll tell you the stories in the book. UM. When we were working how to win, one of the passages towards investing and helping IBM ceased to be a monopoly came through

a company that we started. Right around this was when the European Community, the Single Market was created, and we we we hooked up with a couple of American entrepreneurs who knew the European computer commercial computing industry really well, and they have perceived it was a kind of a

hole in the market. In the US, you had a host of new companies, software companies that were delivering tools for making it easier and more efficient and more productive to use a big IBM machine, and that their technology, their products didn't get to Europe because they were too small to build a European channel. So the idea was

we would get together. We would buy a set of service companies that provided people to the IBM data centers and spread across all of industrial Europe, just the way it was in the US, and then we would bring into them products that we licensed from those American companies, and that way we would build a pen European business. It was called easy soft Um. There were three entirely separate,

independent reasons why this was a really bad idea. The first was between doing a project as a service company and walking away and selling a product that you are responsible for and you have to support is talk and cheese and very different, totally different. Second, those companies in the US, there were three things that could happen to them. The people we were licensing product from one. They could grow up and succeed and get big and want to

take their products back too. They could fail completely and we were well and but we were stuck supporting the product without the tech the techies who had built it, or three halfway in between. They could be bought by Computer Associates, a really big, ugly company at that time, and that was the worst of all. And one of each, at least one of each happened. And then the final reason was it turned out that the IBM data center was no longer a rich, vibrant, growing market. It was stagnating,

it was declining. That lesson was worth all the money we wrote off in easy Soft because it said, now's the time, Now we can go at IBM. What sort of advice would you give to a millennial or someone just beginning their career who is thinking about technology, venture capital, etcetera. Well, you know, in a way I've already given it. Um. You know, half of all the male undergraduates at Stanford are taking computer science, I think more than that of the m I t. You don't have to tell him

to take computer science. What I would say is, along with your computer science, along with your double a read history, read the history of economics, but also politics, broadened their outlook for in your outlook and look for you know,

the great novels. I'll tell you if more people had read Trollops the Way we Live now, which is about a fraud ster operating in the context of technology financial speculation about technology a hundred and fifty years ago, you know, we might not have had Fewer people would have followed Bernie made off right right, And and our final question, what do you know about the world's of venture investing today that you wish you knew thirty or forty years

ago when you first started exploring this space? Well, I guess when I first started, I didn't perhaps have enough appreciation that the terms of the relationship with the entrepreneur matters so so much. And one of the things I worry about now. You know, you can see that there's been this sort of shift in the terms of trade. They used to say the golden rule is he who has the gold rules makes the rule. Right, Yeah, but that's not the case when you're talking about the founders.

You know, whether it's Elizabeth Holmes, the voting share, there's some there can be you know, you can see that a Google and a Facebook with all that's going on in Facebook, because they're exempt from real governance by stockholders because of the ownership stake of the controlling stock by Facebook or with Page and Bryan at Google, right they can they can't afford to make upstream investments in science

that other companies are not able to. They're supposed to take their cash, any extra cash they have, and use it to buy backstock. So I think that there's a challenge here because by and large, I actually do think that Serge Brand and Larry Page have done a pretty damn good job, certainly of building a great company and of exploring where they can invest this cash flow for

the future. They've been brilliant acquirers of relevant technology. Look at YouTube Spectacular or or for that matter, all of the all of the mobile technology Android another home run Maps was brought unbelievable. The person behind Google Maps actually just has a book coming out, Yeah, Never Lost Again or something along those Just Win. So, you know, but I think that that is something I had to learn by doing learn the hard way in the job. We

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