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Sept. 8, 2022

Chuck Newhall (NEA) - How he founded one of the most successful venture capital firms in history

Chuck Newhall (NEA) - How he founded one of the most successful venture capital firms in history

  1. Our guest today is Chuck Newhall, who is one of the founders of New Enterprise Associates or also known as NEA. NEA is one the largest and most renowned venture capital firms in the world. The companies he financed have over $400 billion in revenues today. He’s also a Vietnam War veteran and earned many combat decorations including the purple heart and is an American hero. 
  2. Chuck released his latest book “Dare Disturb the Universe, a memoir on venture capital” which is an amazing story about the history of investing in innovation and that gets to the core about what it is and it’s role in the economy.

Some of the questions we discuss:

  1. 1. What is the purpose of venture capital and what are its origins?2. When does it make sense to bring in a seasoned CEO vs. a CEO entrepreneur?Recruiting Sidgemore forLoss money for a period of time3. What attracted you to venture capital?
  2. 4. Why did you want to be a financier rather than an entrepreneur?
  3. 5. What makes a great venture capitalist? What qualities do you need?
  4. 6. How did the partnership come together? How did NEA raise your first fund, what was the size of your first fund?
  5. 7. What are your rules of fundraising?
  6. 8. What is your approach to portfolio management?
  7. 9. You had the line that NEA and Kleiner Perkins could not be more different firms. What did you mean by that?10. How do you think about focus when you are multi-stage?
    1. What makes a great VC firm and what tends to be their downfall?
    2. How do you think about innovation vs. sustainability? Most of the tech companies for example that go public aren’t profitable. Uber and Lyft for example that have been
    3. How do you think about founder uniqueness?
    4. You mention in the book how venture capital is different to other forms of financing. What regulations or legal systems would you change?
    5. What has been the biggest changes / shifts in venture capital since you started?
Transcript
WEBVTT 1 00:00:02.399 --> 00:00:14.880 Oh, welcome to the consummer movie. See. I am your host, 2 00:00:15.199 --> 00:00:20.440 Mike Gelb, and on this podcast we talk about consumer innovation and venture capital. 3 00:00:20.800 --> 00:00:23.679 Our guest today is Chuck New Hall, who is one of the founders 4 00:00:23.719 --> 00:00:28.160 of new enterprise associates, so we're also known as NI A. Ni a 5 00:00:28.359 --> 00:00:32.159 is one of the largest and most renowned venture capital funds in the world. 6 00:00:32.399 --> 00:00:37.640 The companies his finance have over four hundred billion in revenues today. He's also 7 00:00:37.759 --> 00:00:42.000 being on war veteran and earned many combat operations, including a purple heart, 8 00:00:42.119 --> 00:00:45.920 and is an American hero. Chuck released his latest book, there to serve 9 00:00:46.000 --> 00:00:50.280 the universe, a memoir on venture capital, which is an amazing story about 10 00:00:50.280 --> 00:00:54.560 the history of investing in innovation and really gets to the core about what it 11 00:00:54.640 --> 00:00:58.640 is and its role in the economy. Without further ADO, here, Chuck, 12 00:01:06.840 --> 00:01:10.959 Chuck, thank you so much for joining me here today. How are 13 00:01:11.000 --> 00:01:15.560 you? A Great Mike. It's a Nice Hundred Degree Day in Baltimore and 14 00:01:15.680 --> 00:01:19.200 uh, you don't want to go outside, so I'm sitting in the air 15 00:01:19.280 --> 00:01:25.040 conditioning. That sounds exactly like Baltimore, or the East Coast more broadly speaking, 16 00:01:25.120 --> 00:01:26.280 in the summertime. As you know, I grew up in the DC 17 00:01:26.439 --> 00:01:30.480 area, so I know that region pretty well and that sounds status quo for 18 00:01:30.519 --> 00:01:34.280 the region. Obviously. Thank you. I know you've written also a lot 19 00:01:34.480 --> 00:01:37.159 on this too. Thank you so much for your service as well in Vietnam 20 00:01:37.519 --> 00:01:42.359 and also, I mean you've had this incredible career in venture capital and business 21 00:01:42.359 --> 00:01:44.879 that we're gonna be focusing on. Our conversation were on that part of your 22 00:01:44.920 --> 00:01:47.319 life. So I want to start out by saying, like, what do 23 00:01:47.480 --> 00:01:53.760 you think is the purpose of venture capital and what are its origins? Great 24 00:01:53.799 --> 00:01:59.040 companies from scratch that change the way the world is. Do you want an 25 00:01:59.120 --> 00:02:02.640 example? Yeah, I would love an example. Well, my partner worked 26 00:02:04.000 --> 00:02:10.520 for G Information Systems and this was a big computer service company which g provided 27 00:02:10.560 --> 00:02:16.840 to business and consumers service. The fellows at Axcel, which we were very 28 00:02:16.879 --> 00:02:22.919 close to, the firm that Jim Schwartz and Arthur Patterson founded, found a 29 00:02:22.960 --> 00:02:29.520 little company called unit Washington and they thought Peter's background was ideal, so they 30 00:02:29.560 --> 00:02:34.800 asked uh any a to join them in financing unit and Peter Really became the 31 00:02:34.919 --> 00:02:38.639 lead investor. And there was this guy by the name of Alan who was 32 00:02:38.680 --> 00:02:42.360 a techie who ran it. Good Guy, but he didn't know really about 33 00:02:42.439 --> 00:02:46.520 how to build a business. The business really only had about a million and 34 00:02:46.520 --> 00:02:51.240 a half of revenue. He started bootstrapped it and it was losing money hand 35 00:02:51.280 --> 00:02:55.840 over fist, and so peter brought in a management team he that he recruited 36 00:02:55.879 --> 00:03:01.319 out of g information systems, John said more and two other guys who were 37 00:03:01.439 --> 00:03:07.000 highly experienced, and they created a company called unit, which at one time 38 00:03:07.080 --> 00:03:14.000 had seventy of the traffic over the Internet. That company created the Internet, 39 00:03:14.120 --> 00:03:20.560 both business and consumer. So Peter, before recruiting Sidgemore, knew the strategy 40 00:03:20.639 --> 00:03:25.400 of g information systems and he basically said what they did on mainframes we can 41 00:03:25.439 --> 00:03:30.000 do over the cloud and over the Internet. And that's in fact what the 42 00:03:30.039 --> 00:03:35.639 company did. But instead of focusing on the UH consumer market like many did, 43 00:03:35.879 --> 00:03:39.599 he focused on the business market but also while serving the consumer market. 44 00:03:39.800 --> 00:03:44.599 And in the day the businesses would use it, in the night the consumers 45 00:03:44.599 --> 00:03:50.240 would have access to the pipes which also could give them instantaneous communication. But 46 00:03:50.360 --> 00:03:55.240 in any event unit grew. My partner Dick Kramlock, had started a communication 47 00:03:55.719 --> 00:04:02.400 box company and Um high speed data communications, and they became the most important 48 00:04:02.439 --> 00:04:10.159 customer of the unit and basically provided the proof of concept. So intern unit 49 00:04:10.280 --> 00:04:15.840 grew to about for three or four billion dollars in a period of four years. 50 00:04:15.319 --> 00:04:17.720 Uh, you know, lost money for a good bit of time. 51 00:04:17.759 --> 00:04:24.079 Like we were talking about, where you basically in a land grab to grab 52 00:04:25.000 --> 00:04:29.800 I S P S, and uh, they acquired a bunch of I S 53 00:04:29.839 --> 00:04:34.279 P S Internet service providers from college, from universities, but that market soon 54 00:04:34.360 --> 00:04:39.879 became overpriced. So they basically had to start in each region of the country. 55 00:04:39.920 --> 00:04:43.839 But then they get a dominant market share and that's how they became the 56 00:04:43.879 --> 00:04:48.680 industry leader. So Peter Basically helped the company formulated strategy, it recruited its 57 00:04:48.759 --> 00:04:57.879 management, he talked the CEO founder into becoming chairman and in wonderful partnership with 58 00:04:58.040 --> 00:05:03.000 John Sidgemore, who built the company, and Um provided. Basically you provide 59 00:05:03.000 --> 00:05:11.279 it. You end up providing marital advice to the CEOS and chief executives of 60 00:05:11.319 --> 00:05:15.680 the companies you find. Find you you enter. So you become sort of 61 00:05:15.319 --> 00:05:20.720 a father confessor or someone to bounce ideas off of, and you know you're 62 00:05:20.720 --> 00:05:25.439 not always right, but at least you give your opinion. I appreciate you 63 00:05:25.519 --> 00:05:30.279 sharing this story as an investor. When you're analyzing early companies, when does 64 00:05:30.319 --> 00:05:32.439 it make sense to how do you think about, you know, changing the 65 00:05:32.560 --> 00:05:36.480 leadership and this leadership in general for the company? Well, when we always 66 00:05:36.519 --> 00:05:41.720 started a company, I had a partner, vin pro throw, who died 67 00:05:41.759 --> 00:05:46.040 about when he was fifty years old, but he'd sti helped helped L J 68 00:05:46.240 --> 00:05:50.000 seven starred Moss Tech. He started at Dallas Semiconductor. He was a Texan 69 00:05:50.519 --> 00:05:56.199 and his family had money in oil and gas and real estate and he was 70 00:05:56.240 --> 00:05:59.800 a little guy, but he was like Lorne Green and bonanza, you know, 71 00:06:00.000 --> 00:06:04.480 are coming on. Pro Throw Country Behave and uh, quite a big 72 00:06:04.560 --> 00:06:11.120 presence. And he always said when he sat talked with an entrepreneur, and 73 00:06:11.240 --> 00:06:15.439 he was one himself, as I was. I helped to start any a 74 00:06:15.600 --> 00:06:20.199 as one of three people think about the management resignation box, and the management 75 00:06:20.319 --> 00:06:29.160 resignation box is what happens when you forecast increased revenues and a swing into profitability 76 00:06:29.279 --> 00:06:31.920 and you don't make it and you get a second try, maybe even a 77 00:06:32.040 --> 00:06:38.639 third try, but there comes a time when the CEO becomes a danger to 78 00:06:38.920 --> 00:06:43.920 the own the success and viability of his own company. And that's when the 79 00:06:43.959 --> 00:06:49.199 board of directors has to step in, hopefully well before that happens, and 80 00:06:49.240 --> 00:06:56.000 convince the CEO or, an unfortunate cases, forced the CEO to make the 81 00:06:56.079 --> 00:07:00.560 change and he leaves the company. By far the best that Suation is onelike 82 00:07:00.639 --> 00:07:05.279 one of my partners, David Mott, had with Meta bune and Dave Hackner, 83 00:07:05.600 --> 00:07:11.319 where they worked in tandem together to build Metam Mune into the billion billion 84 00:07:11.399 --> 00:07:16.639 dollar company. And that's the I call that venture capital Heaven. And Uh 85 00:07:17.000 --> 00:07:21.040 so, I've had to change out sixty C e o s during my career. 86 00:07:21.560 --> 00:07:29.279 My best recommendations came from CEOS that I had moved out of that top 87 00:07:29.360 --> 00:07:32.040 position. But other times, you know, you had to force the change 88 00:07:32.040 --> 00:07:39.040 and that was unpleasant because you develop close relationships with these people and it's sort 89 00:07:39.079 --> 00:07:44.560 of like having to shoot your friend, which is not happy for either you 90 00:07:44.800 --> 00:07:46.879 or the friend. No, for sure, I'd imagine that is a very 91 00:07:46.920 --> 00:07:53.560 tough scenario because, of course, as investors and shareholders, you're looking out 92 00:07:53.600 --> 00:07:57.600 for what the best interests are for the company to succeed. If the company 93 00:07:57.600 --> 00:08:01.480 maybe has has gotten to a place where it makes sense to maybe bring in 94 00:08:01.519 --> 00:08:05.160 someone that's more season CEO, I could understand how that could be a very, 95 00:08:05.199 --> 00:08:09.360 very tough scenario. Let me tell you one story that is sort of 96 00:08:09.439 --> 00:08:16.199 humorous. So we'd fact the company called the nutritional management it was a healthcare 97 00:08:16.319 --> 00:08:20.439 service company and it was based on the work that a doctor called Jack George 98 00:08:20.480 --> 00:08:28.639 Blackburn did it Harvard and the morbidly obeast people a count for a very significant 99 00:08:28.720 --> 00:08:35.480 part of healthcare cost because with those comes all the ancillary diseases which range from 100 00:08:35.559 --> 00:08:37.919 cancer to you know, you can, you name it. These are the 101 00:08:37.960 --> 00:08:43.080 people that are way, way overweight, and Blackburn had a way of getting 102 00:08:43.080 --> 00:08:50.480 people to do that and he did it by a very elaborate healthcare uh service 103 00:08:50.879 --> 00:08:56.080 where he'd provide psychological help, exercise, you name it. They go into 104 00:08:56.120 --> 00:08:58.919 a sort of a total life management program and it worked well. We brought 105 00:09:00.039 --> 00:09:05.759 and an experienced team, so we thought, including a guy named Pete Phildeus 106 00:09:05.799 --> 00:09:09.320 who was in the candidate to run to Baxter labs and had left Baxter to 107 00:09:09.639 --> 00:09:13.879 form a blood bag company that has been very successful. So we thought we 108 00:09:13.919 --> 00:09:18.799 had a proven CEO. But what he did is um he never was able 109 00:09:18.879 --> 00:09:26.480 to prove the model and so he expladed it to four facilities to sixty eight 110 00:09:26.600 --> 00:09:31.960 facilities to sixteen facilities and he was just losing money hand over fist. And 111 00:09:33.080 --> 00:09:35.720 we said, you know, you can't keep it expanding it and you just 112 00:09:35.840 --> 00:09:41.120 have to focus on making your facilities you have profitable and get the company to 113 00:09:41.200 --> 00:09:46.039 cash flow before you start blowing out, blowing it out across the nation. 114 00:09:46.320 --> 00:09:50.759 And he flipped me the keys and said, okay, you think you're so 115 00:09:50.840 --> 00:09:54.960 hot, run it now. Unfortunately, uh, I'm not a I know 116 00:09:56.080 --> 00:10:01.200 one thing. I'm not a CEO and I had brought in someone who was 117 00:10:01.440 --> 00:10:05.679 to help me, but basically the model was not duplicable. We never could 118 00:10:05.759 --> 00:10:13.279 duplicate the results that George Blackburn had with a morbidly abased across a number of 119 00:10:13.320 --> 00:10:18.879 facilities. So eventually we had to shut the company down very sad you mentioned 120 00:10:18.879 --> 00:10:20.559 that. You know, the one thing that you're not is a CEO, 121 00:10:20.960 --> 00:10:26.519 and I'm kind of curious you you had been around venture capital from such a 122 00:10:26.559 --> 00:10:30.519 young age. Your father was a venture capitalist worked in aerospace innovation. You 123 00:10:30.639 --> 00:10:33.440 obviously remember in the book you mentioning that he had a very, you know, 124 00:10:33.519 --> 00:10:39.159 close friendship with Lawrence Rockefeller, who was also a venture capitalist as well. 125 00:10:39.519 --> 00:10:45.159 Put it this way. Lawrence Rockefeller started polaroid, Eastern Airlines, McDonald 126 00:10:45.200 --> 00:10:52.039 Douglas, I tech, thermo electron before Apple and Intel. So Lawrence had 127 00:10:52.080 --> 00:10:56.720 an immense impact on the venture capital business. No, for sure. For 128 00:10:56.799 --> 00:11:00.559 sure. I'm curious, since you were around this from such a young age 129 00:11:00.919 --> 00:11:05.519 and clearly you were attracted to innovation, right, it seems. But why 130 00:11:05.559 --> 00:11:09.360 did you want to go in the finance here out become a venture capitalist rather 131 00:11:09.440 --> 00:11:16.039 than become an entrepreneur? Well, that's a story that will is again is 132 00:11:16.080 --> 00:11:20.799 sort of funny. So I grew up around venture capital, all right. 133 00:11:20.120 --> 00:11:26.159 My father, one of his companies, uh, became thiah hall, which 134 00:11:26.240 --> 00:11:31.759 basically sent the man to the moon and built the first rocket engine. So 135 00:11:31.840 --> 00:11:37.080 we had people like Chuck Yeager and Edward Teller to be a dinner, and 136 00:11:37.159 --> 00:11:43.519 I grew up around entrepreneurs and my study at College, University of Pennsylvania, 137 00:11:43.879 --> 00:11:48.600 if you can believe it, was the romantic hero in eighteenth and nineteenth century, 138 00:11:50.080 --> 00:11:54.360 late eighteenth and early nineteenth century American and British literature, and I felt 139 00:11:54.799 --> 00:12:01.200 very seriously and fascinated with people who wanted to change the way the world is, 140 00:12:01.279 --> 00:12:05.720 who had this. You know, vision that they put above everything else 141 00:12:05.759 --> 00:12:09.960 in their life and fought for it. And I guess I am an entrepreneur 142 00:12:11.159 --> 00:12:16.960 and I certainly have h helped to be run any A, but I wouldn't 143 00:12:16.960 --> 00:12:22.399 call myself a CEO. So I had decided I wanted to be a writer 144 00:12:22.879 --> 00:12:26.200 and a warrior, because I was more a uniform from the age of Eight 145 00:12:26.320 --> 00:12:31.080 until twenty three and was with a hundred and first hair airborne in the special 146 00:12:31.080 --> 00:12:37.320 forces, and I very much considered becoming a special lost person. Those were 147 00:12:37.320 --> 00:12:41.399 the days when you couldn't get above colonel because everybody thought the next war would 148 00:12:41.440 --> 00:12:43.320 be with tanks. In Europe. There were a bunch of fools, but 149 00:12:43.559 --> 00:12:48.279 um anyway. So I decided not to make the U A warrior a career 150 00:12:48.519 --> 00:12:54.600 and I became somewhat disillusioned with writing because you had to be a college professor 151 00:12:54.639 --> 00:12:58.919 to support yourself, and all I saw with college professors was they argued about 152 00:13:00.240 --> 00:13:03.320 how many angels could stand in the head of a pin and get into big 153 00:13:03.360 --> 00:13:07.840 fights over what chaucer was talking about. So I was sort of disillusioned with 154 00:13:07.919 --> 00:13:13.720 that and I was sitting in a Hamburger Hill, which I did the reconnaissance 155 00:13:13.840 --> 00:13:20.320 for and about uh six of my men had been killed or wounded and we 156 00:13:20.320 --> 00:13:24.960 were withdrawing from the hill and it came upon me because the equipment that was 157 00:13:26.080 --> 00:13:31.679 being used to provide us with fire support, the in flight refueling system that 158 00:13:31.879 --> 00:13:39.399 enabled the Navy jet fighters to support land ground troops, whose accompany my father 159 00:13:39.519 --> 00:13:43.159 had started, which really changed the way the world was in terms of fighting 160 00:13:43.200 --> 00:13:48.879 wars, because now you could get close in air support anywhere you win. 161 00:13:48.159 --> 00:13:52.440 And I said, you know, I'd like to be around those people I 162 00:13:52.480 --> 00:13:58.399 was reading about at the University of Pennsylvania. I call them the romantic heroes 163 00:13:58.879 --> 00:14:03.480 slash entrepreneurs, and I'd like to change the way the world is. And 164 00:14:03.559 --> 00:14:07.159 that was my vision. That became my purpose in life, where I was 165 00:14:07.200 --> 00:14:15.080 willing to sacrifice anything in pursuit of creating those companies. That's really powerful that 166 00:14:15.279 --> 00:14:20.799 it was in Vietnam that actually inspired you, because you saw all the technological 167 00:14:20.840 --> 00:14:26.799 advance in the military inspired you to release think about innovation in that way. 168 00:14:26.919 --> 00:14:31.320 If you can believe it, I was shooting with my two hands and thinking 169 00:14:31.360 --> 00:14:35.480 about that at the same time. It's unbelievable. It really is unbelievable. 170 00:14:35.679 --> 00:14:41.399 So why did you decide to eventually start your own partnership? And this is 171 00:14:41.399 --> 00:14:45.720 a few years um later, but why did you eventually decided about your own 172 00:14:45.720 --> 00:14:50.399 partnership and how did any a raise your first fund and how did the partnership 173 00:14:50.480 --> 00:14:56.320 come together? Well, that's an interesting story too. So I was in 174 00:14:56.399 --> 00:15:01.440 love by with venture your capital, and I was interviewing at Harvard Business School 175 00:15:01.759 --> 00:15:05.039 and I got turned down by gray lock. My father was a good friend 176 00:15:05.039 --> 00:15:09.679 of George Dorio, who the Great Venture Capital Guy who started American research and 177 00:15:09.720 --> 00:15:15.200 development. I was turned down there. Uh Dorio said, you know, 178 00:15:15.399 --> 00:15:20.159 English Major's relation shouldn't be venture capitalist. You should have an engineering degree, 179 00:15:20.320 --> 00:15:24.080 that n't be a three star general like me. And I loved George Dorio 180 00:15:24.279 --> 00:15:28.360 and he was a role model, but I didn't necessarily follow his advice. 181 00:15:28.679 --> 00:15:33.120 So I went to an investment management firm called T ro price, and T 182 00:15:33.360 --> 00:15:37.960 ro price was a leader in gross stock investing. In other words, they 183 00:15:39.039 --> 00:15:43.039 wanted to invest in the company that the entrepreneur had built and was in the 184 00:15:43.080 --> 00:15:46.840 process of making into IBM, buy and hold for the long term, and 185 00:15:46.879 --> 00:15:50.039 they said, I think it's a good thing for us to get into the 186 00:15:50.120 --> 00:15:56.000 venture business. So why don't you put together a plan to do so? 187 00:15:56.000 --> 00:16:00.600 So I did that while working for the New Horizons Fund and investing in venture 188 00:16:00.639 --> 00:16:06.120 back companies when the world fall apart in the oil crisis. So I had 189 00:16:06.159 --> 00:16:11.879 about a fifty eight percent compound annual return on my investments and UH T ro 190 00:16:11.120 --> 00:16:15.279 price at the end decided. Well, we're having the you know, the 191 00:16:15.360 --> 00:16:21.679 market's gone to blazes because the oil crisis occurred. The growth stocks are down, 192 00:16:22.000 --> 00:16:29.279 we have to use our money for retiring our senior employees and besides that, 193 00:16:29.720 --> 00:16:33.639 we don't want to give a profits interest, a carried interest, to 194 00:16:33.759 --> 00:16:37.279 someone who's managing a division, because of all the guys that manage the Growth 195 00:16:37.279 --> 00:16:42.039 Stock Fund, the New Horizons Fund and everything else will be wanting a profits 196 00:16:42.080 --> 00:16:47.399 interest, and that's the way the venture business is. But really we think 197 00:16:47.480 --> 00:16:52.399 it would upset our whole company. So basically Tom Berry and Cub Harvey, 198 00:16:52.679 --> 00:16:56.320 who? Cub Harvey was CEO of the firm and Tom Berry was running the 199 00:16:56.320 --> 00:17:00.840 New Horizons Fund, a great guy went on to run the Rockefeller Office, 200 00:17:00.879 --> 00:17:04.680 if you can believe it. The whole Shebag said you ought to start your 201 00:17:04.720 --> 00:17:10.200 own venture firm, but you you know you're a young analyst, thirty two 202 00:17:10.319 --> 00:17:12.920 years old, wet behind the years, and I think you ought to go 203 00:17:12.960 --> 00:17:18.640 out and get some partners. So I went out and talked my wife's first 204 00:17:18.720 --> 00:17:25.200 cousin, Frank Bonsall, who really created the investment banking business and venture back 205 00:17:25.279 --> 00:17:29.279 companies for Alex Brown and they were one of the four horsemen and he knew 206 00:17:29.319 --> 00:17:33.519 everyone in the venture business. Had done a lot of venture investing while in 207 00:17:33.599 --> 00:17:37.480 an investment bank. And we went out and said Cubb said, well, 208 00:17:37.519 --> 00:17:41.519 you've got to get someone who really knows what he's doing. So we went 209 00:17:41.599 --> 00:17:47.319 to Uh a, R and D and UH talked to Jim Morgan, who 210 00:17:47.400 --> 00:17:52.200 was one of George Dorio's right hand men at a R and D. Jim 211 00:17:52.240 --> 00:17:56.359 Decides to join us. Now you have to understand, I've now spent every 212 00:17:56.400 --> 00:18:02.480 bit of money I've made. I've made about three or four hundred thousand dollars 213 00:18:02.519 --> 00:18:06.920 and I'd put it all into starting the N A A and Jim Morgan decides 214 00:18:07.000 --> 00:18:11.480 to quit the day that we were mailing the prospectives. So we go out 215 00:18:11.599 --> 00:18:15.799 and we're beating indoors. And the way you get to get people to invest 216 00:18:17.359 --> 00:18:22.440 is you get people who know you. Unfortunately, I had been backing a 217 00:18:22.440 --> 00:18:26.720 bunch of successful entrepreneurs. T ro price put in one million dollars, which 218 00:18:26.759 --> 00:18:33.240 wouldn't retiring all their UH employees. Was sevent of the net worth of the 219 00:18:33.319 --> 00:18:38.799 firm landmark, another friend I knew how a wolf who ran the deer family 220 00:18:40.039 --> 00:18:44.759 money, put in four and a half and then we got entrepreneurs like Bob 221 00:18:44.839 --> 00:18:49.160 Creeble of lock tight. I knew the people at three m very well and 222 00:18:49.200 --> 00:18:53.839 that we're a t ro price client, and Um and then Dick and frank 223 00:18:53.960 --> 00:18:59.920 each new people and somehow we talked people into giving US sixteen and a half 224 00:19:00.079 --> 00:19:03.680 million dollars, which was our first fund, and that's how we started, 225 00:19:04.039 --> 00:19:10.720 and then we just went out and started making investments and building companies and the 226 00:19:10.759 --> 00:19:15.279 rest is history. You had this line the book that any a and Kleiner 227 00:19:15.319 --> 00:19:18.480 Perkins could not be more different firms. What did you mean by that? 228 00:19:19.240 --> 00:19:25.400 H Well, there was a story about JP Morgan, the great JP Morgan, 229 00:19:25.480 --> 00:19:30.680 who created the Investment Bank and the Morgan Bank and all these other things, 230 00:19:30.799 --> 00:19:33.599 who created all the railroad and he was with a young partner and he 231 00:19:33.720 --> 00:19:37.759 was going through the New York Yacht Club and the young uh, he would 232 00:19:38.079 --> 00:19:42.000 morgan goes and this is my partners so and so Yat, and this is 233 00:19:42.039 --> 00:19:47.240 my partner so and so. Yet this and my partner so and so Yat. 234 00:19:47.720 --> 00:19:52.240 The young guy said, well, where are the customers? SHACHTS for 235 00:19:52.359 --> 00:19:57.000 any a? Uh, we had. The most important people were our entrepreneurs 236 00:19:57.000 --> 00:20:03.200 and our limited partners, and they came first. And the whole firm was 237 00:20:03.400 --> 00:20:08.480 designed around being entrepreneur friendly and giving the best limited partners the best deal in 238 00:20:08.960 --> 00:20:14.839 the industry. So our fees were about a third of what the rest of 239 00:20:14.839 --> 00:20:18.720 the industries were, but we had a higher carried interest. Well, carried 240 00:20:18.799 --> 00:20:26.279 interest is not what deteriorates limited partner rate of returns. That is se determined 241 00:20:26.279 --> 00:20:30.599 by the fees. I don't want to go into the math and that it's 242 00:20:30.640 --> 00:20:34.400 really very simple. And then but whether you return capital before you pay it 243 00:20:34.440 --> 00:20:41.480 all back. And so any a basically build a business that would have entrepreneurs 244 00:20:41.599 --> 00:20:45.559 come back three and four times to start companies. And the partners of limited 245 00:20:45.960 --> 00:20:52.240 if any a one, I think uh contributed about a billion and a half 246 00:20:52.319 --> 00:20:57.119 dollars. Uh An e a ten, which was a two billion dollar fund. 247 00:20:57.519 --> 00:21:02.160 They just stayed with us. We were fortunate enough to get some of 248 00:21:02.200 --> 00:21:07.319 the guys who pioneered the fund of Funds Business and as they grew, we 249 00:21:07.400 --> 00:21:15.160 grew like bond French of Adam Street and ray held of Abbot capital, uh, 250 00:21:15.200 --> 00:21:18.880 and a whole group of that, the Hancock people, and we were 251 00:21:19.119 --> 00:21:26.720 uh, we we developed an extremely loyal limited partner group, an extremely loyal 252 00:21:26.960 --> 00:21:32.759 group of entrepreneurs. Now, Kleiner Perkins had a loyal group of entrepreneurs. 253 00:21:32.799 --> 00:21:37.880 I wouldn't say as loyal as ours, but they basically charged high carried interest 254 00:21:37.960 --> 00:21:41.839 and high fees. I don't think, well, I'm not gonna say it, 255 00:21:41.880 --> 00:21:45.960 but I leave it to your imagination. I don't think they treated their 256 00:21:45.000 --> 00:21:48.559 limited partners as well as we did in the end. I think we treated 257 00:21:48.559 --> 00:21:53.960 our entrepreneurs better. So I would call them more like, uh, high 258 00:21:55.119 --> 00:22:02.160 characterized Kleiner Perkins in the days as pirates of the Caribbean. I really appreciate 259 00:22:02.200 --> 00:22:06.039 you sharing this. So it seems like for any a, you know, 260 00:22:06.279 --> 00:22:11.240 since you had a greater priority when it came to the actual carried interests me, 261 00:22:11.480 --> 00:22:14.920 you actually you needed to generate a return order to make money. As 262 00:22:15.000 --> 00:22:18.960 GPS right. Oh Yeah, they you have to understand. Adventure capitalists aren't 263 00:22:18.960 --> 00:22:25.160 paid a salary. Now we get a salary that's called alone and we got 264 00:22:25.160 --> 00:22:27.519 to pay that back with interest. So at the end of the day, 265 00:22:27.839 --> 00:22:32.880 if our investors don't make money, we don't make money. A matter of 266 00:22:32.920 --> 00:22:37.000 fact, we could lose money. It took any a partner about ten years. 267 00:22:37.599 --> 00:22:41.920 With me it took like twelve years before I started taking money out of 268 00:22:41.920 --> 00:22:45.759 the business as opposed to putting the money in. Now I because you have 269 00:22:45.839 --> 00:22:52.039 to put up one percent of the capital for each partnership you start and since 270 00:22:52.160 --> 00:22:56.000 you're doing early stage investing, it can take eight to ten years to achieve 271 00:22:56.079 --> 00:23:00.839 liquidity. So you just do the math on that. And you know that 272 00:23:00.960 --> 00:23:06.960 it became a good thing in recruiting because the people we who wanted to make 273 00:23:07.000 --> 00:23:10.640 a fast buck didn't want to come with any a. You had to have 274 00:23:10.759 --> 00:23:14.559 people who, uh, let me read you a quote from Jim Schwartz, 275 00:23:14.599 --> 00:23:18.880 who I admire, and a quote from Dick Kramlick, which captured to me 276 00:23:18.000 --> 00:23:22.440 the essence of the venture capital business. This is Jim Schwartz, who started 277 00:23:22.480 --> 00:23:27.559 axl who wrote the introduction to my book. You know, it's interesting to 278 00:23:27.599 --> 00:23:33.039 have a quote, competitor. We didn't consider other venture capitalist competitors because they 279 00:23:33.039 --> 00:23:38.039 were our brothers in arms when we went on boards together. Venture capital has 280 00:23:38.079 --> 00:23:44.880 always been about helping a person or a project succeed. It is about adding 281 00:23:44.960 --> 00:23:49.799 judgment, perspective and selfless desire to see a company succeed. Venture capital, 282 00:23:49.799 --> 00:23:55.240 as best practice, is a calling, not as a job. It was 283 00:23:55.319 --> 00:24:02.640 never about maximizing wealth. Venture capital must be practiced with absolute integrity and ethics. 284 00:24:03.079 --> 00:24:07.279 That's Jim Schwartz, my partner, Dick Kramlich, said. Venture capitalism 285 00:24:07.480 --> 00:24:11.960 is about having the courage to put your trust in others and the conviction to 286 00:24:12.039 --> 00:24:18.519 do the right thing even when it's hard. I really, really appreciate that 287 00:24:18.599 --> 00:24:21.200 and also, I mean those are two, you know, incredible quotes and 288 00:24:21.240 --> 00:24:22.880 I think it also underlines as well, because, you know, one of 289 00:24:22.920 --> 00:24:26.640 the reasons why you wrote dare to serve the universe, your your latest book, 290 00:24:26.920 --> 00:24:33.640 is because you wanted to distinguish how venture capital was different to private equity 291 00:24:33.880 --> 00:24:40.319 and also hedge funds. Right, absolutely, you know, hedge funds started 292 00:24:40.319 --> 00:24:45.759 in the forties and fifties and much as the Charlie Darson started to leverage my 293 00:24:45.960 --> 00:24:51.359 out business, venture capital has been around for a long, long time. 294 00:24:51.799 --> 00:24:56.920 I mean the Phoenicians. When they sent out voyages, an investor syndicate would 295 00:24:56.960 --> 00:25:00.880 put up eighty all the capital and take twenty eight of the profits. The 296 00:25:00.920 --> 00:25:07.119 people who ran the ship, who went to England uh took of the profits, 297 00:25:07.119 --> 00:25:11.799 which is the same structure the venture business uses today, and the investor 298 00:25:11.880 --> 00:25:15.680 syndicate would always send along someone with the crew to keep an eye on them, 299 00:25:15.720 --> 00:25:19.440 like a board of director remember to make sure they were doing the right 300 00:25:19.519 --> 00:25:25.519 things on the long voyages. So you can go back to Marco Polo and 301 00:25:26.240 --> 00:25:32.640 Christopher Columbus, and those were venture capital deals. The whalers worked on an 302 00:25:32.680 --> 00:25:37.960 eight basis with uh and the English merchant banks did it when they started railroads. 303 00:25:38.519 --> 00:25:45.880 Andrew Mellon in eighteen eighty at the melon bank gave two hundred thousand dollars 304 00:25:45.920 --> 00:25:51.720 to still Gulf oil carbor on the general reinsurance in Al Co aluminum. No 305 00:25:51.799 --> 00:25:57.759 one has ever tracked Lucius Ordway in nineteen O two was an angel, which 306 00:25:57.839 --> 00:26:03.960 is just a success Phil Entrepreneur who is a venture capitalist. He's helped start 307 00:26:03.079 --> 00:26:11.119 three M Sherman Fairchild and other angels started IBM Group of Rochester Angels Back George 308 00:26:11.160 --> 00:26:18.039 Eastman to create the photography business in Eastman Kodak goes all through the early nineteen 309 00:26:18.119 --> 00:26:23.119 hundreds. Lawrence Rockefeller started in thirty eight Warburg Pinkas and JH Whitney nineteen thirty 310 00:26:23.119 --> 00:26:27.720 eight and nineteen forty six. So the adventure business has been around for a 311 00:26:27.759 --> 00:26:33.079 long time now. EGOTISTS like Arthur Rock, who is one of the greatest 312 00:26:33.160 --> 00:26:38.680 venture capitalists, and my partners, Dick's former partner, thought venture capital began 313 00:26:38.759 --> 00:26:44.960 in California in nineteen seventy, but that's because California has never read history about 314 00:26:45.000 --> 00:26:51.039 anything except California. I really appreciate you. You're telling us a story about 315 00:26:51.200 --> 00:26:53.279 ventor capital. I loved as well how you outlined it in your book. 316 00:26:53.559 --> 00:26:56.480 So I mean, with this being said, that how venture capital is different 317 00:26:56.480 --> 00:27:00.279 and a lot older industry than you know other parts of finance, whether it's 318 00:27:00.279 --> 00:27:06.559 habit equity, lb Os Um, you know hedge funds. How should venture 319 00:27:06.640 --> 00:27:11.240 capital like thinking about from the government's perspective? How should it be regulated, 320 00:27:11.480 --> 00:27:15.920 versus how other forms of finance are regulated? Well, first thing is if 321 00:27:15.960 --> 00:27:22.519 you treat capital gains as ordinary income, that destroys the whole economic premise of 322 00:27:22.559 --> 00:27:27.160 the venture capital business. Now, hedge funds, the average holding period is 323 00:27:27.640 --> 00:27:34.519 for a program trade or sixteen seconds. The average holding period for a Lbo 324 00:27:34.720 --> 00:27:40.039 Fund is probably three years, of the long holding being three years. Any 325 00:27:40.119 --> 00:27:45.000 a we'd often hold things ten years before we achieve liquidity. Now we could 326 00:27:45.000 --> 00:27:52.039 achieve liquidity right fast or much faster during the bubble. But uh, our 327 00:27:52.119 --> 00:27:56.319 whole business, since you're not paid salaries, depends on the long term capital 328 00:27:56.359 --> 00:28:02.720 gains, and in that were a lot with our two principal partners, the 329 00:28:02.920 --> 00:28:07.440 entrepreneurs and the limited partners, both of which have a sole focus of creating 330 00:28:07.480 --> 00:28:12.480 great companies that create capital gains. If you put the incentive to take the 331 00:28:12.559 --> 00:28:18.440 largest fee you can out of the pool of capital, you totally change the 332 00:28:18.440 --> 00:28:22.319 way the venture business works. So I hope some fool politician, and I 333 00:28:22.400 --> 00:28:26.480 won't comment about who I think are fools, because I think most of them 334 00:28:26.519 --> 00:28:32.359 are, but particularly the guy who's running the show right now, want to 335 00:28:32.559 --> 00:28:37.519 tax carried interest as ordinary income. But they don't realize what that would do 336 00:28:37.640 --> 00:28:41.759 to the engine what they call the American economy, which, when I forget 337 00:28:41.799 --> 00:28:48.319 which communist Chinese premier came over to the United States and said that. You 338 00:28:48.359 --> 00:28:53.119 know, over the counter exchange and venture capital is America's secret weapon and its 339 00:28:53.160 --> 00:28:59.000 greatest strength. Don't mess with what works well. I really appreciate your thoughts 340 00:28:59.000 --> 00:29:02.440 on this. I really do, especially how what a VIC's role is to 341 00:29:02.799 --> 00:29:06.279 in that you're actually, you know, with the company for a long time. 342 00:29:06.359 --> 00:29:10.000 You're part of the building part, obviously not the CEO, but you're 343 00:29:10.039 --> 00:29:12.480 you're very much involved in the company, unlike, you know, a hedge 344 00:29:12.480 --> 00:29:15.400 fund per se, which, as you say, like it's really trading, 345 00:29:15.480 --> 00:29:21.359 not investing, in some ways right. I went to talk with one of 346 00:29:21.359 --> 00:29:26.720 the most successful hedge funds and basically they were a group of statisticians out of 347 00:29:26.920 --> 00:29:33.200 M I t who developed models for how to go short and long companies based 348 00:29:33.240 --> 00:29:37.880 on mathematical formulas and trade them. That isn't what venture capital is about, 349 00:29:38.839 --> 00:29:41.160 no, for sure. Speaking of all this, I mean, how do 350 00:29:41.359 --> 00:29:45.680 you think when you meet with the young company and you get involved with the 351 00:29:45.680 --> 00:29:49.640 young company and maybe it's the first time? CEO, what piece of advice 352 00:29:49.720 --> 00:29:55.599 do you have for the CEO when it comes to board construction? My first 353 00:29:55.680 --> 00:30:03.440 and foremost advice to a entrepreneur and someone getting married is the most important thing 354 00:30:03.519 --> 00:30:07.559 you pick in life, or the partners which you choose, either your wife 355 00:30:07.960 --> 00:30:12.960 or the people you choose to do your business with, including the venture capitalists. 356 00:30:14.000 --> 00:30:17.960 And, by the way, I've seen venture capitalists mess more companies up 357 00:30:17.960 --> 00:30:22.519 than CEO s because they get into agreed war when a company goes through a 358 00:30:22.599 --> 00:30:26.880 multiple round of financings and end up doing crazy things. So I I had 359 00:30:26.920 --> 00:30:32.000 a rule that I'd only deal with people that I knew and had worked with 360 00:30:32.240 --> 00:30:36.680 for a long, long time. So I had about five or six partners 361 00:30:36.680 --> 00:30:40.559 of choice and if I didn't get one of those partners to go along with 362 00:30:40.599 --> 00:30:42.920 me, it would be unlikely that I had fund a company. That makes 363 00:30:42.960 --> 00:30:47.599 not of sense. I can imagine that, given at least. I mean 364 00:30:47.920 --> 00:30:49.279 this year is a bit different, but in the last, you know, 365 00:30:49.400 --> 00:30:53.960 few years where deals are happening so fast right that it can be hard to 366 00:30:55.359 --> 00:30:59.000 build that trust with an investor or or with the pounder to truly know if 367 00:30:59.000 --> 00:31:03.119 they are are a great partner, just because some of these deals and some 368 00:31:03.160 --> 00:31:04.799 people are able to fundraise you know quite quickly. That is a great point. 369 00:31:06.200 --> 00:31:11.359 Well, let me make a comment on that um which is venture capital 370 00:31:11.480 --> 00:31:17.160 is like war. It's the closest thing to combat that exists in the business 371 00:31:17.160 --> 00:31:22.039 world. And I tell you, in war and venture capital you build partnerships 372 00:31:22.079 --> 00:31:26.599 and confidence each other quickly when the shooting starts. That makes a lot of 373 00:31:26.599 --> 00:31:30.279 sense. Building Trust very, very quickly. That you have to do, 374 00:31:30.400 --> 00:31:33.880 just like you do, yeah, when you're fighting for survival. Exactly. 375 00:31:34.119 --> 00:31:40.079 What do you think are some of the biggest changes and shifts with venture capital 376 00:31:40.160 --> 00:31:44.559 since you got started? Well, of course, venture capital business G ro 377 00:31:44.720 --> 00:31:49.720 price, juice to say the investors only in certainty. Certainty is change. 378 00:31:51.079 --> 00:31:56.880 The venture capital business changes every day with the technologies, with the type of 379 00:31:56.079 --> 00:32:02.079 people that are being financed, because you know, Amazon was started by a 380 00:32:02.119 --> 00:32:09.359 group of young guys, and Google and twitter. Ibm Uh Sherman Fairchild recruited 381 00:32:09.400 --> 00:32:15.599 Tom Watson to build that company and Tom Watson came from national cash register. 382 00:32:15.920 --> 00:32:20.960 So you know, you went from at least in the technology space, particularly 383 00:32:21.000 --> 00:32:27.720 the consumer technologies, spaced from proving, from backing proven business people to financing 384 00:32:27.759 --> 00:32:31.519 a lot of visionary pioneers. The type of businesses changed. You know, 385 00:32:31.799 --> 00:32:37.200 when my father started in the business, you financed aerospace companies. Then, 386 00:32:37.240 --> 00:32:43.759 of course, she started computer companies and that was unheard of because when I 387 00:32:43.799 --> 00:32:47.960 was in the sixties and seventies, big blue was God and no one could 388 00:32:49.000 --> 00:32:52.799 compete with big blue, which was IBM. But then you had a little 389 00:32:52.799 --> 00:32:57.920 company called Digital Equipment Corps and UH, another one out on the West Coast 390 00:32:58.279 --> 00:33:04.079 had started the mini computer business. Arthur financed that West Coast Company, Arthur 391 00:33:04.160 --> 00:33:07.759 Rock. And then you had apple come along. And who would have thought? 392 00:33:07.960 --> 00:33:12.480 You know, first of all, most conservative businessmen would have scratched their 393 00:33:12.480 --> 00:33:15.599 said head and said, why would you ever name a company after a fruit, 394 00:33:15.799 --> 00:33:21.000 an apple of all things? I happen to live off apples because I 395 00:33:21.039 --> 00:33:23.559 have to have an apple every day. So let me tell you a little 396 00:33:23.599 --> 00:33:29.839 story about Apple. So we were getting started and Um there was this English 397 00:33:29.920 --> 00:33:34.440 guy, Anthony Montague, and he was the second son of Lord Montague, 398 00:33:34.839 --> 00:33:38.839 very fancy, proper Englishman, except as the second son you got a pair 399 00:33:38.839 --> 00:33:44.680 of shotguns and your brother, the first oldest son, gets everything, every 400 00:33:44.960 --> 00:33:50.000 single thing. Just a pair of shotguns. Now they're knife shotguns. But 401 00:33:50.440 --> 00:33:54.839 so antony had to make money. Ran His a merchant bank and then sold 402 00:33:54.920 --> 00:34:00.960 at this family's ferm and then he started to venture capital for and we were 403 00:34:00.079 --> 00:34:06.440 fortunate enough that we got to know Anthony and he became a close friend of 404 00:34:06.480 --> 00:34:10.920 any a, along with his partners, and Dick introduced him years ago before 405 00:34:10.960 --> 00:34:16.360 anyway was formed to this little company out in a Silicon Valley. So Antony 406 00:34:16.480 --> 00:34:21.320 goes out there and you imagine this guy. He would dress in a wool 407 00:34:21.440 --> 00:34:25.400 suit in the summer and he always had a coat and tied English accent very 408 00:34:25.480 --> 00:34:30.719 proper, but he was a wild hare because he'd like to drive a Cadillac 409 00:34:30.800 --> 00:34:36.000 in London streets and he loved electric carving knives. He was really a character. 410 00:34:36.320 --> 00:34:39.880 He also, uh it was the first guy to back Andrew Lloyd Webber, 411 00:34:40.039 --> 00:34:44.280 so he had a lot of interest as well as being a major art 412 00:34:44.360 --> 00:34:50.599 collector of Art Lucien freyd anyway, so Antony goes into this company, sits 413 00:34:50.639 --> 00:34:54.400 down and and he made his mind up quickly. About Twenty minutes into the 414 00:34:54.440 --> 00:34:59.800 meeting he said I will not leave this company and he pounds the table very 415 00:35:00.000 --> 00:35:06.000 hard, scares these two little techno freaks across the table from him and says 416 00:35:06.119 --> 00:35:09.719 I will not leave this company until you let me invest. So they got 417 00:35:09.760 --> 00:35:14.960 him a Ruben Sandwich for dinner that night and I don't know what they got 418 00:35:15.039 --> 00:35:17.400 him the next night. Maybe a tuna fish sandwich. They tried to give 419 00:35:17.480 --> 00:35:22.360 him the worst food to drive him away they could. But when he when 420 00:35:22.400 --> 00:35:25.679 they arrived in the morning, which was around six am, there was any 421 00:35:25.920 --> 00:35:30.559 opening up the door to let him in and when they left at night he'd 422 00:35:30.639 --> 00:35:34.800 locked the door behind him. So uh, at last. Uh. On 423 00:35:34.840 --> 00:35:38.159 the fourth day one of the CO founder of the company said, okay, 424 00:35:38.159 --> 00:35:42.719 Anthony, I've never had a house in my life and he bought at four 425 00:35:42.800 --> 00:35:47.440 percent of apple for four hundred thousand dollars. Oh my gosh, that's unbelievable. 426 00:35:47.800 --> 00:35:52.159 That is unbelievable. He proved to Mommy and daddy that he had more 427 00:35:52.199 --> 00:35:58.360 than a pair of shotguns. Yeah, he definitely, he definitely, definitely 428 00:35:58.400 --> 00:36:01.400 did. By the way, when my son started his business, he did 429 00:36:01.440 --> 00:36:07.880 it with Antony Montague. Son Ashton started his own venture business. So you 430 00:36:07.880 --> 00:36:14.280 can say my family got into business in ninet and we're still going strong today. 431 00:36:14.559 --> 00:36:16.400 That's amazing. That's amazing. Well, Chuck, I mean thank you 432 00:36:16.440 --> 00:36:21.320 so much for coming on the PODCAST. This has been so terrific chatting with 433 00:36:21.360 --> 00:36:23.480 you. Um, if you haven't picked it up. Listeners, I highly 434 00:36:23.519 --> 00:36:28.719 recommend you. Do Dare disturb the universe. It's a fantastic read, not 435 00:36:28.840 --> 00:36:31.559 just because I'm with you. I really did enjoy reading it, and Chuck, 436 00:36:31.599 --> 00:36:35.159 thanks again so much for your time. Well, it's an honor to 437 00:36:35.199 --> 00:36:38.599 be in the program and get a chance to tell people about venture capital. 438 00:36:38.920 --> 00:36:42.440 And there you have it. It was such a pleasure chatting with Chuck New 439 00:36:42.440 --> 00:36:45.639 Hall. I hope you all enjoyed that one. If you enjoyed this episode, 440 00:36:45.760 --> 00:36:47.360 I love it if you'd write a review on the apple podcast. You're 441 00:36:47.400 --> 00:36:51.960 also welcome to follow me your host, Mike, on twitter at Mike Gelb, 442 00:36:52.000 --> 00:36:55.079 and also follow for episode announcements at Consumer VC. Thanks for listening. 443 00:36:55.119 --> 00:37:13.000 Everyone, do it. I want the good thing. I want to do 444 00:37:12.159 --> 00:37:15.480 it. I want you do