Jerry Neumann - The Deployment Age, Power Laws, and Venture Capital - [Invest Like the Best, EP.45]

I know firsthand how complex the tech stack is for asset managers, and seemingly every new tool and data source makes the problem even worse, adding more complexity, more headcount, and more risk. Ridgeline offers a better way forward, one unified platform that automates away all that complexity across portfolio accounting, reconciliation, reporting, trading, compliance, and more, all at scale. Ridgeline is revolutionizing investment management, helping ambitious firms scale faster, operate smarter, and stay ahead of the curve. See what Ridgeline can unlock for your firm. Schedule a demo at ridgelineapps.com. This podcast is sponsored by CFA Institute, the global association of investment professionals whose mission is to lead the investment profession by promoting the highest standards of ethics, education and professional excellence for the ultimate benefit of society. CFA Institute serves a global community of investment professionals working to build an investment industry where investors' interests come first, financial markets function at their best and economies grow. The Chartered Financial Analyst Credential is the most respected and recognized investment management designation in the world. The views expressed in this podcast do not necessarily represent the views of CFA Institute. Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at InvestorFieldGuide.com. Before we begin, there is something else that I want to bring to your attention. I'm working on a new project, codenamed Frontier, and I'd like you to be involved. The honest truth is that I am not yet sure what Frontier will be, other than a means to connect what has become an insane network of smart, interested, and interesting people who can all stand to learn from one another. I aim to bring this universe of learning fiends together and to do so soon. To get involved, you can visit InvestorFieldGuide.com forward slash Frontier.

where you'll have the option to sign up for updates and early access, or even apply to be part of Building Frontier. Whatever this becomes, it's going to accelerate the rate at which we all discover and apply new ideas in investing and beyond. I can't wait to build it together. Now, on to the show. I am drawn to a group of investors that I call practitioner philosophers. These are people who have gotten their hands dirty in their respective fields, but despite being doers, they still often sit back and ponder the big questions. My guest this week is one such practitioner philosopher, New York City-based venture capitalist, Jerry Newman. I came across Jerry's essays a year ago, and he is on a very short list of writers whose work I read without fail and almost always more than once. You can think about this conversation on business, investing, and venture capital as a big funnel. We start very broad discussing where we might be in a large 70-year economic cycle. We then break down the so-called power law, which seems to govern venture capital returns and business outcomes. Then we get even more specific, discussing Jerry's process for evaluating early stage companies and the particulars of what might make a good venture capitalist. I say might because as Jerry explains often, nothing is certain and luck may always play a huge role. I just love this conversation. It is the type that without the podcast as an excuse would be a very odd and intense one if I were just meeting Jerry for the first time. You'll find no small talk or even medium talk here. This is a meaty discussion with one of the smartest and most straightforward people I've come across. Let's dive in. We have a lot to talk about today in the world of venture capital investing, and I thought we would start pretty broad, which is with an essay you wrote. talking about a theory of another person who I'll let you explain called the deployment age. And we'll use this as the jump off point because it's sort of like the big theory of where we are in a very big cycle in terms of financial capital and investing and the economy. So we'll start there. I'll just kind of open it up to you to explain this idea of the deployment age and kind of what it means for where we sit today looking forward as investors. All right. Thanks, Patrick. It's an honor to be here. I've listened to your podcast quite a bit.

I'm intimidated. I teach, and you find out when you start teaching that if you don't really understand something, you can't explain it to somebody else. So you read a book, you're like, okay, I get it. Yeah, it makes sense. And then you try to explain to somebody else, like, I don't really get this at all. So I went back and I started reading it, and I read it, and I was skeptical. of the theory. And the theory itself is pretty old. Well, it's based on pretty old research. It's based on the Kondratiev waves, the idea that the business cycle has this really long wave, that 60, 70 years. There are smaller waves inside of it, but there's this long wave. And people have seen evidence of that. Of course, you can find evidence of anything if you have enough data. So there's always been a bit of a back and forth on whether or not that's true or not. But Perez was, I think, one of the first people to come up with a convincing explanation for why this would be so. On the face of it, you say to yourself, well, there might be a 70-year wave, but why 70 years, right? Why not 50 years? Why not 200 years? The economy doesn't have some sort of ticking clock that says, oh, it's 70 years, time to change cycles. So there has to be some convincing explanation that would say, why does this happen? And she did come up with a convincing explanation. So what the theory says is it's not just capital-driven. It's driven by both capital and social cycles, the long wave. What happens is there comes a time where there's not a lot of good investment opportunities in the established markets. And financiers come around and say, where can I make more money? And they start finding these little innovations that seem pretty interesting. And at some point, they find that there is a constellation of innovations, a whole technological system, she calls it, innovations that are interlinked. And together, they can change the economy or that people believe they could change the economy. So if you think about, I like to use older examples rather than current examples just because there's more data about them. You think about the age of iron and steel. So let's talk about the age of railroads, steam engine railroads. So the first industrial, second industrial age, first one being the water-driven industrial age. Yeah, water-driven looms and whatnot. But so the steam engine, the railroad, the innovations that you had.

to have to create a railroad were not just a steam engine. You also needed innovation in metallurgy to create rails that were strong enough to hold these extremely heavy engines. You needed innovations in standardization machine parts. You needed innovation in corporate form. So you needed limited liability companies, joint stock companies. You needed a stock market. All of these things had to come together to build a railroad. So they were all there. They weren't all invented at the same time, but they were invented. Different times, but at some point they were all gelled together into this whole system that you could use to build a railroad, and people started building them. And the first railroad was really to bring coal from the mine to the ship. So you want to bring it just out of the mine to a ship, load it onto the ship. The ship will take it wherever it's going because ships were obviously much cheaper than railroads. But once they had them, people started using for other things. They started using them to transport mail from place to place. So this is the first half of the cycle. There's innovations. The financiers start pouring money into it. People are pretty excited because there's these obvious uses where you can make a lot of money. And at some point, all of that money pouring in becomes a bubble. And there was obviously the railroad bubble in the UK in, what year was it, 1830s, 1840s. And people were buying railroad stocks at far-inflated prices, and then there was a crash. And during the crash, there was a lot of readjustment. There was government regulation. After the crash, it became a much more sober market. market was driven instead of by these financial capitalists, by production capitalists, people inside the railroad companies saying, right, how do we invest to make money? We don't want to take a ton of risk. We're not doing anything crazy. We just want to invest in things where we can make money and grow our companies. And that became a much more predictable market. And that second half is called the deployment age. So this was her theory was you have this kind of S curve of at the beginning, the innovations are pretty slow. People are putting money into them. As they start to accelerate, people pour more and more money into them until it becomes a bubble.

And then when it becomes a bubble, eventually you have a crash. After the crash, things start to calm down. It's driven by production capital who doesn't like to take risks. And because they don't like to take huge risks, the innovation starts to slow down. It becomes more sustaining innovation, not radical innovation. And so the S-curve starts to flatten out again. And then once the S-curve gets flat enough, capital starts looking for somewhere else to put their money so that the next cycle starts. So this is her theory. It's interesting. The interesting thing about it is if you take the last five waves since the first Industrial Revolution, they all follow this pattern of technological system, technological revolution, this new constellation of innovations that can change the economy, and then money pouring into them, a bubble, a bust, and then production capital taking over and regulation coming in. Innovation is becoming more integrated into society. When you start looking at it that way, the similarities between each of these waves are kind of eerie, because I described that, and people would say, well, that sounds a lot like what just happened with the dot-com bubble and the dot-com bust, and yeah, it does, but it also is exactly what happened with the age of mass manufacturing in automobiles, and then the crash in 1929, and then the kind of much more stable era after World War II. what happened with the railroads, it's eerie. So in some sense, it seems explanatory. In another sense, obviously, you're backfitting. You could fit any theory to data you already have. Is it true? It might be true. It's a theory. I think really, if it's predictive, if what happens over the next 20 years is what she predicts, then you have to give it a lot more credence. There's tons of what I call big history books, books that try to explain cycles in history through some I'll use the word formula like this, that seem to repeat themselves. You've got like Oswald Spengler, other people that have done this. And it's always fascinating because often it is quite eerie. And what's amazing about this theory and these four and a half observations in the last 250 years is how much else has changed. during and in between these different cycles so but you know one has world war ii in it others are more relatively peaceful you know social norms life expect all these different variables have changed a lot but the cycle seems to look

very similar. So, so the next question is if it's true and we are, I can't remember what you call it. I think the ICT revolution is the one that we're in sort of information technology. If we are kind of in the second half of that, meaning we've had our constellation of innovations, we've had our major bubble and bust, and now we're in this deployment age. What does that mean? Like what's an analog for what that might look like relative to something? In history, people might understand how should it make us think about investing our own capital? Is there the chance that we could short circuit this kind of long cycle that seems to be inexorable? All of these are interesting questions. So maybe we'll start with what does this mean for where we are now? If this is right, if this is happening again, what does it mean the next 10, 20, 30 years are going to look like? So that was the question I asked myself. And what I did was I went back and I said, all right, well, if the last deployment age started after World War II, then what was it like after World War II in the innovation community? Because that's what I'm in. And that's what's interesting to me. So you read people like Kenneth Galbraith and about the organization man. You think about Madman, right? Madman and the man in the gray flannel suit. That kind of business is what the deployment age looks like. It's much more locked down, right? It's not the kind of wild embrace of or wild pursuit of. strange ideas that has really characterized most of our lives. So it is pretty different. I think, let's take an example. When Steve Jobs took Apple public, he had no idea what people would use the computer for. One of the first Apple TV ads was, I think the marketing people said, well, what are people going to use this personal computer for? Aside from games, which is what they really use it for. And they said, well, it's a home computer. What do people do in the home? Well, they cook. So they'll have it in the kitchen. They'll put their recipes on it. So this advertisement showed a woman, obviously, in the kitchen looking up a recipe on her Apple computer. Now, I don't think anybody ever did that until the Internet, where you could look up recipes you didn't type in yourself. But that was what they could think of. They had no idea what people were going to use it for. And until the spreadsheet came out, really nobody had any idea besides games what people were going to use their personal computer for. But a company still went public before that. People were willing to embrace these ideas that were kind of crazy because they had this belief that...

The future was going to be some amazing thing that you just can't predict. And they contrast that with during the previous wave. So in 1949 or so, the Eckerd Malkley Computer Company was started. And this was Eckerd Malkley. We're from University of Pennsylvania, I believe. They started marketing the first commercial computer, the ENIAC. So they started in, I think, 1949 or so, maybe 1947. They had done their work during World War II. And they were going to commercialize it. So they started this company. They went out in the market. They tried to raise money. They could not raise money. They just couldn't raise money. And they ended up having to sell the company in 1950 for next to nothing because they couldn't raise money from anybody. Nobody's willing to put money into this risky idea. And when you think about it, that computer, the ENIAC, was far less risky than the Apple. The government was buying them, right? They were using them for real problems. They knew what they would use them for, but they still couldn't raise money. And then in the 1950s, when Kenneth Olson started a digital equipment corporation, he raised money from one of the first venture capital firms, ARD. He sold 70% of his company for $70,000. He basically gave, this is the best offer he could get. He had a $30,000 loan as well. Sorry, I think it was a $100,000 loan as well, which is probably considered equity, right? When ARD liquidated their stake, it was worth some $400 million. So Ken Olson ended up, who knows how much money he made, but it wasn't that much. I mean, it was maybe $25, $30 million. It's hard to know exactly, but it certainly, he wasn't Sergey Brin, right? But that's what he could get in the 1950s because nobody else was willing to put any sort of risk money into this crazy idea, which wasn't that crazy. He was competing with IBM, which was an established company. So during the deployment age, people back away from risk. Financial capital, the people who are willing to take, I think Perez calls it at one point, casino capitalism, people who are willing to say, I'm going to make 10 bets. Nine of them are going to fail, but the 10th one is going to give me 12x. That's a good bet. You take that edge every day. But people aren't willing to do that. They go towards.

I don't want to ever lose money. I'm going to have a plan. It's going to be a 10-year plan, a 20-year plan, and it's going to be very low risk. It's going to be hedged. I'm not going to lose money because if you're a production capital, if you're an executive inside a big corporation and you start this new project and you invest some of the company's money and the project fails, you get fired. So there's no incentive for you to do that. And that's, I think, what the deployment edge looks like. People aren't willing to take those risks of failing. And that's obviously worrying. I mean, not that the 1950s were a bad time in this country. Socially, they were a little strange from our point of view. But economically, they were a time of actually sort of a leveling. There was a much larger middle class. There was a lot less inequality. So people weren't complaining about the lack of innovation so much, not until the late 60s. But it wasn't a bad time. You know, I think from the point of view of... larger markets. I read somewhere that the 50 biggest stocks going into the 1950s were pretty much the exact same biggest 50 stocks coming out of the 1950s. And that's, I think, probably another feature of people not taking big risks, not doing this kind of disruptive stuff. So I think if you think about that, how that affects us today, you'd look at Amazon or Alphabet or Facebook and say, all right, these are probably going to be the biggest companies 10 years from now. They're not going to get knocked out of the box by some upstart. There's a component of all this, which I found interesting in the deployment age, which is sort of the world catching up with the technology systems and then becoming, it's almost also a period of integration where there's like a diffusion of this technology. And you wrote somewhere that said, it's not that basically every company is going to need to be a tech company, right? The deployment of these various technologies is going to be a requirement in any business, not just the Microsofts and the Amazons and the Apples of the world. So that's an interesting angle. too. I wonder how much pushback you got when kind of exploring this idea in public, because it seems to run so contrary to the ethos of Silicon Valley, even of kind of venture here in New York, which is kind of a burgeoning, interesting scene now with a lot of excitement and even some new technologies. We were talking about, you know, cryptocurrencies before we started taping. So what's the pushback been like and how have since you first started exploring the idea?

How have your views evolved, if any, and how do you square kind of the idea or the characteristics of a deployment age like the 1950s, which with what still seems like a fairly frothy, like exciting, optimistic time for venture investing? Well, I think like most venture capitalists, I really hope that Perez is wrong because I was really in pretty happy ignorance, making my investments, trying to invest in things that are going to make the world better. And then I read the book, and I'm like, wow, what she says is that the time for financial capitalism has passed, and production capital is going to take the helm. I think she said that literally. I think that's a quote. And I'm financial capital. That's what I do. And the people who read my blog are primarily financial capital, and that's what they do. And I did get pushback. I think the biggest pushback I got, which was interesting, was, well, if this wave is over, if the ICT revolution has started to be controlled by production capital, which is somewhat inarguable, actually, then we'll just go on to the next one. We'll go on to the next big technological revolution and fund that. But Perez says that that's not what happens. If that was what happened, then that would have happened. People would do that already. Financial capitalists in the past have not done that. So the speculators of the 1920s didn't go into the 1950s and say, hey, let's start speculating again. That didn't happen. And the reason it didn't happen is because if you have a technological revolution where you have a bunch of technologies in this constellation, Making that move forward, making it progress, is actually really difficult. You need a lot of weight behind it to push it forward. So there's this idea from Thomas Hughes, the academic. He wrote this book called Systems of Power. It was about electrification in the United States. And what he said was you have this whole constellation of technologies. They're linked together in a system, which means that no one technology can move too far ahead of the rest. And if one technology is lagging, it holds all the rest back because they are linked together in the system. He called this one lagging this reverse salient, which was probably something that people related to more at the time. But you need to push the whole system forward. And to do that, you need a lot of money. It's just expensive. When you think about how much it costs to build the Internet, say.

I mean, it seems like from our point of view, like as just users of the internet, it was pretty cheap. But when you think about all of the fiber optic lines across the entire country, around the entire world, every single router, every, you know, all of this equipment everywhere, all the research that went into making this work, all of the different software, the browsers, everything, right? It's a lot of money. I mean, it was a huge amount of money. I mean, think about, I mean, you know, L3 back in the 90s, right? How much money did they spend on putting fiber optic lines in? And to do that, you really... need to have sort of a societal alignment behind pushing this one set of technologies forward, which means that other technologies don't get pushed forward. So when venture capitalists say, oh, well, we'll just invest in some other technological revolution, it's kind of funny. I mean, venture capital is a really small sector. You know, when you think about how much money there is in venture capital compared to any other money management sector, it's minuscule. They're not moving society in a different direction. They don't have that kind of leverage. They have the leverage to introduce really cool new ideas, which might inspire others. When the web browser was introduced, it inspired people like L3 to put a lot of fiber optic cables in the ground because they said, well, people are going to use this. They're going to need fiber optic cables. We're providing the shovels, whatever the analogy is there. And we can just make money doing it, which I don't think they did. I feel like they lost a lot of money, actually, which is actually also part of Perez's theory. So that's the thing, right? So when Henry Ford started producing the automobile in mass quantities, people would drive along these dirt roads or really bad roads, gravel roads. And until the U.S. government came in and said, hey, we're going to invest a ton of money in building this interstate highway system, you didn't have the society-changing aspects of the automobile. And the government stepped in there and funded that. But until they did, you didn't have motels and diners and all of the other things that came along with changing the society to revolve around the automobile. So you need to have a lot more weight than just what venture capitalists can bring. You can't just come along and say, great, now we're doing X. Now we're doing cryptocurrency, and that's going to be the next technological evolution. You can't do it by yourself. You need to get society behind you. What does this mean, do you think, for one of the troubling things about these big cycle theories that last 70 years is that pretty much...

Most people only live within one of them. So they view kind of, let's say, the history of venture capital back to, how do you pronounce his name, George D'Odoro or something like that? Dorio, yeah. Dorio, yeah. So you go back to the entire history of venture capitalism, and that's all kind of within this one cycle. So we look to history often to inform us about where we should put our money or where things are going. But most of the relevant history here might just be within the one cycle and therefore... be misleading. So many people, especially the leading venture firms have generated exceptional returns. And there is a spirit still, I see it in New York all the time of entrepreneurialism, and people want to be founders and start businesses. And it's great, right? I love that spirit. But I wonder if all of this means that people should, if you think it means people should temper their expectations, or change their strategies for their invested capital entirely. So what do you think? Do you think that LPs out there should kind of heed this as a as a warning and become more focused on, you know, investing in big public markets where there's the production capital is going to kind of earn the returns the next couple of decades. I think, no, I don't think that people should back away from venture capital. There was venture capital before Dorio and before, I mean, Dorio was sort of an outlier back then, but Pan Am was funded by venture capital. Henry Ford was funded by venture capital in a sense. He was funded by people with money. Westinghouse was funded by a bunch of Pittsburgh angel investors. Thomas Edison was funded by J.P. Morgan, right? I mean, people have always put money into promising ventures and made money doing so. So that's, I think, will continue. I think the easy money is gone, which is, I mean, take it how you want. But I think I started venture investing in the 90s. So I started in 1997 venture investing. And I made a ton of money between 97 and 2001, even though I had absolutely no idea what I was doing. I don't know. I had like 45% IRR for that fund. And that actually wasn't even top quintile. And I was lucky. But it also was just an easier time to make money. I mean, anybody could make money. So I think that's not true anymore. It's not true that anybody can make money. I think you actually have to know what you're doing. If you know what you're doing, then you can make money like anything else. I think it has become more of a normal investing.

Not normal in the sense that it's similar in process to other types of investing. Every type of investing is a different process. But normal in the sense that you can't expect outsized returns without actually knowing what you're doing. So if I was an LP, you want to find people who know what they're doing, not put money with people who are... Just smart. In my framework, it would be more alpha, less beta. So if you were the late 90s venture capitalist, the beta in that world was just enormous returns. And the top quintile was probably 60% IRRs or whatever the case may be. And it's interesting that in this era when... beta has become so cheap in the public sense that alpha arguably is more and more dear, just harder and harder to find. So that's another interesting dynamic is, okay, so you want to find good people, but will they even take your money? The top venture firms are oversubscribed. A person listening to this, myself, that want money with Benchmark or want money with Sequoia or Greylock or something, I can't get my money in there. So it's a really interesting problem for LPs. It's also, I think, The interesting thing that's sort of behind that problem itself is that when you look at the really successful venture funds, the Union Square Ventures, the Foundry Groups, the Sequoias, people don't replicate their strategies. They think they're replicating their strategies, but people look at this adventure capital generally as being something that's about picking. Like, I'm going to find a good company that's definitely going to make money and put money into it, as if they're investing in a stock, something much more predictable. Well, not that stocks are predictable, but they're more predictable. And nobody goes behind and says, wait. Why do those venture firms make so much more money than the regular average venture firm? What can I do to be more like that? Because the strategy that they're employing is terrifying to most people. They're investing in things where there's uncertainty. There's nightie and uncertainty. It's not risk at all. I love to look at Foundry Group's portfolio. So I go online and I'll look at their portfolio page and I'll look at the companies and you just laugh. You're like, what are they doing? Like, why are they investing in these companies? This is crazy. None of these don't make any sense. And then they come up with, you know, I don't know what their IR is now, but I think the last published number was like 65% per annum for the last fund. I mean, it's incredible returns. So there's this disconnect between, like, these are not the companies I would pick, and they're doing astoundingly well. And I think it's that disconnect itself that is their strategy, in a sense. I mean, I know that sounds odd.

When you think about, like, oh, so Frank Knight, you know, people always talk about uncertainty in Frank Knight, his 1921 book. They say, oh, there's a difference between uncertainty and risk. Risk is predictable. It's insurable. Uncertainty you can't insure because you actually don't know the probability distribution looks like. And what Knight said, which I think people overlook, is that he said this is at the core of entrepreneurs making money. They're going after uncertain prospects because if they weren't uncertain, then some incumbent would, he didn't say incumbent, but whatever the word he used was, some larger company would have come in and snapped it up. And this, I think, is true. Apple can compete with any startup if it wants to, but most big companies choose not to go after uncertain opportunities. They really would prefer this five-year plan. It's production capital. But there are always these uncertain opportunities and things where you can't know what's going to happen that big companies just won't go for. You can't walk into your boss's office at a big company and he says, well, what's the expected value here? And you say, I don't know. How big is the market going to be? Well, I don't know. You just can't do that, right? in their right mind would do that. I have friends who are executives at big companies, and you suggest, well, you should go in and tell them that they should invest in blockchain. They're like, I can't do that. Like, what kind of case can I make for that? You can't, right? I mean, you don't know what's going to happen. So I think these uncertain prospects are where the alpha is. And if you embrace uncertainty, then you can get alpha. But it's a scary thing, right? People hate uncertainty, right? There's the Ellsworth paradox. People really shy away from uncertainty. The guest I had on literally today as we're recording is Andy Ratcliffe from Benchmark. And we talked a lot about the Howard Marks 2x2 matrix of the only way to make money is to be right and non-consensus, which is kind of another way of saying uncertain. And that is a perfect bridge into the second topic, which is this idea of power laws explaining the distribution of outcomes in, I guess, in businesses, but in venture capital returns as well. There's a lot of nuance here, but I think it's such an interesting and important thing to understand because we just...

don't intuit power laws. We intuit normal distributions because it governs most of our world. You know, how tall are people, whatever the case may be, tend to follow a very normal bell curve, normal distribution. Whereas the outcomes to venture capital investors tend to follow this power law distribution. So I'll let you start by just explaining what that even means. And then we'll get into some of the particulars about, as you put it, how VCs can almost choose the alpha in their power law. And we'll get into some of the details, but let's start big. picture what does that even mean that power laws govern return outcomes for venture capital yeah so nine years ago when i started angel investing i said all right i'm gonna i'm gonna put my money into i'm gonna believe in myself and invest my own money in this but i'm going to do it as if i was a professional so i decided to make a plan, right? How much money am I going to put out per year? What's my strategy? And I also try to do the thing that, when I go onto my portfolio online, they have this little graph of like how your portfolio is going to grow with these error bars, you know, like somewhere between here and here based on how much risk you're taking. I'm like, actually, I need to do that, right? I need to know like how much money I'm going to get back because it's my money and I'm recycling it, right? And I, at the end of my 10-year period in which I can invest the money I have, I need to have more money to invest. Otherwise, I have to get a job, so. So I tried to do that. I'm like, all right, so how do I predict how much money I'm going to make? And I realized that I just couldn't. I mean, I couldn't. I had no way of it. I'm like, well, it's a power law. People say it's a power law. So I just put a power law in there. And I just couldn't operationalize that. So years later, I'm still thinking about this. Like, how do I operationalize this? And finally, I said, all right, I'm going to actually read about power laws, right? So I'm going to go read some of the literature. Because everybody says it's a power law, it's a power law, it's always a power law. And all they really mean by that is there are a few really large outcomes, and most of them aren't.

which is not an especially useful explanation of anything. It's just sort of a throwaway line to explain. It's basically to people who say, why is venture capital like this? Oh, it's a power law. Go away. So I'm going to look at a power law. So I started looking into power laws, learning the math. One of the things I discovered, which was interesting, was that most venture funds have a power law with an alpha of pretty close to two. So a power law is really determined by a single constant. It's the alpha, which is the shape of the curve. The other interesting thing I noticed, which was maybe a coincidence, is that when you take the mean of a power law distribution, so the mean of a normal distribution is the peak of the bell shape, right? The very top there. That's the mean. When you take the mean of a power law distribution, the formula for it, when alpha goes below 2, it goes to infinity. So the mean of a power law distribution with an alpha below 2 is infinite, whatever that means. all these venture firms were just below two. Their alphas were just below two as far as I could determine. I mean, this was both from my own calculations of various venture returns as well as academic literature that has studied this. Is it a coincidence or is it something that's actually going on on purpose? I don't want to be like metaphysical about it. Please do. Well, you know, the argument that I make in the post is it can't be a coincidence, right? It's too regular across time that the alphas are just below two. Is it that most normal people, people who are actually managing money for a living, who need to have some sort of predictability, won't go there because it's sort of a chaotic border? Below that, when the average goes to infinity, it has to do with something with not being able to predict what's going to happen. There has to be some connection there, although that's the metaphysical part. I don't know what that connection is. If that's so, then venture firms are going to the place where they're not competing with private equity firms, say. They're saying, all right, private equity firms are doing this. We have to go. downstream to where the companies are less predictable. And we don't want to go too far downstream because they become less and less predictable, but we're going to go just past the boundary where the private equity firms won't go. And that's where we're going to stick because you have venture firms where the alpha is like 1.98. It's like right there. And so if that's true, it's an interesting implication, right? So what that would say is...

I think when I first looked at this, I said, well, that would mean that every once in a while, extremely rarely, you would have some outcome that was just ridiculous, ridiculously large. And then I think like six months later, WhatsApp got bought for $18 billion, and it was like 10 people, right? And I'm like, okay, all right. That's pretty ridiculous. That's more evidence. I believe it a little bit more now. But that's what it says, right, is that there are going to be these outcomes which are really world-changing, extremely rarely, which is an interesting thing. I mean, hard to know if it's true or not. earthquakes follow a power law. But obviously you can't have an infinitely powerful earthquake because there's only so much energy in the earth itself, in the deformational energy in the crust or whatever they said. So they have this kind of tail off at the end of the power law to say, well, that's it. You get that far and no further. Is that true in venture capital as well? Could be. I suppose there is in some sense a finite amount of value that could be created. Or maybe there isn't. I don't know. I mean, if you invent free energy, is that a finite amount of value or an infinite amount of value? I want to put some examples in here that will serve as points of reference for people trying to understand this. I went and read your post like six times. So I actually had tens of thousands of people read that post, which was kind of odd because they always say for every equation you add, you have your readership. So I think my initial readership must have been in the trillions. That's a lot of equations. So this concept of an alpha and what that number means, the lower the the alpha gets, just forget what the alpha really means. It's just something that scales. It's how long the tail is. Yeah, it's how long or fat the tail is, right? So a fatter tail, people that have read Nassim Taleb or someone like that, Black Swan, will be familiar with this idea that fatter tails, which is what we actually observe in a lot of financial and business outcomes versus what you would expect, which is like a normal distribution, just mean that there are, a lower alpha means more like crazy outlier. results. And I think your point, and I want to get into the implications for venture funds, is that if you're a super low alpha, you probably can't raise money from LPs consistently because you might have one fund that is 1,000x or something, and the next one doesn't hit one of those long tail. And it also might take too long. So talk about that. So talk about if venture firms are sort of optimizing for

high returns, but also like some degree of predictability so that they can actually raise money with some regularity because these firms want to continue to exist. What is the time component? How does that feature into all this? Yeah, so two things. First, I think, so the other interesting thing about power laws is if the alpha is between two and three, you have infinite standard deviation. And if it goes below two, you also have an infinite mean. I think a lot of what Taleb talks about is the between two and three where you have this, where the standard deviation becomes extremely large and you start having these events that you think should be rare that just end up not being as rare as you think they should be. And then you go down one step further, you go down into venture capital where you have both that and the infinite mean. I felt that I had to propose some explanation of why this happens. You write these posts, and you always hope that somebody's smarter than you will read them, and they'll be like, okay, I can take this and actually do something real with it, as opposed to me just writing stuff. Unfortunately, nobody has, as far as I know. But the mechanism I proposed was the simplest possible mechanism, which really said, if you have, one of the ways you can generate a power law is through two exponential distributions interacting. So I said, well, what if you had an exponential distribution of time to exit and an exponential growth of value? over that time. And if you combine those two things, you come up with a very simple power law that says that the alpha is a function of both the growth you expect, the growth rate, and time. Which is, okay. Interestingly, when you plug in sort of the venture capital rules of thumb, you end up with alphas that are very close to what the alphas actually are. So the model is not completely crazy. It's obviously oversimplistic. It doesn't account for nearly all of the strange things that go on in the venture capital world. So it can't be the right model. Sometimes really simple models work, right? They work better than really complicated models. They account for 90% of the behavior that a much more realistic model might account for. So this is too simple. It's not the right model, but it seems to work. But one of the things it says is when you look at, say, like a portfolio of patents, the alpha on a portfolio of patents is more like 1.68. It's much lower than most venture capital funds.

And I think what that is saying is that they can grow very rapidly, but it takes a really long time to get from the patent to actual some sort of exit on the patent. So you're selling that patent or turning that patent into a commercial product that creates money, right? So if you want to go lower on the alpha, you have to have a much longer time frame. And venture capitalists have talked about that. Venture capitalists have talked about having... A 20-year fund or something, yeah. Right? Like how much could they do if they had a 20-year fund? I think that's hard to manage. It's hard to manage the uncertainty for that long. I think it's hard to get people to invest in that sort of thing. It's hard enough already to tell if a venture capitalist is any good. You invest for five years, you have two really successful outcomes. Like, are you good or are you lucky, right? How can you tell? How can you distinguish between a good venture capitalist and a lucky venture capitalist? This would just compound the problem, right? I mean, more than compound it. So I don't know if people would go for that. You know, Fred Wilson used to talk about raising a longer term fund. And if anybody on Earth could raise a longer term fund, at least on the East Coast, it would be Fred Wilson. But he didn't do it. So... Is it because he couldn't or because who wants to invest for 20 years? I don't know. Kind of like your limits on earthquakes. Like there are just limits and things, right? And human patience, right? Like it's longer than 20 years. You're talking about a big chunk of a career or you'd have to have someone raise that when they're really young to be really invested in the outcomes for the whole period. And there's probably just some upper bound on how long term we actually can think and the kind of unpredictability that we're willing to take on as an investor. Well, or you have to have an institution. that wants to be around longer than any of its individuals. Right. So most venture firms... But there are still people making decisions within those institutions. I mean, venture capitals are kind of weird, right? Because you always have the same person who they eat what they kill, right? So they find the deal, they do the deal, they manage the deal, they exit the deal. It's always one person, right?

usually one person. Everything has to happen inside one brain. And that's efficient in some way because it's easier not to have to move the information from one brain to another. But it does limit what you can do. And I think there's certainly a possibility that somebody could build a firm that doesn't do it that way. Venture capital is still, in some sense, really a cottage industry of five guys hanging out together because they like each other. It's an old boys club. And they do deals and they make money. Is there a better way to manage the venture capital firm so you can have longer-term funds and make longer-term investments? Or not. I teach at Columbia. One of my students had this idea last year for bringing water back from the asteroid belt to fuel rockets. Staple of science fiction. But it's actually feasible. It's feasible, right? And he did the math. He said, well, if you can bring your payloads to low-Earth orbit instead of high-Earth orbit, and then bring the fuel to bring it from low-Earth orbit to high-Earth orbit from the asteroid belt, it's more efficient than bringing all that fuel from Earth. You showed me the math. I'm like, yeah, all right. That actually makes sense, right? It's actually like a viable company. It's going to take you 50 years to build this company. It just is, right? So he's like, well, do you think somebody would fund me? No. No, I don't. I mean, I don't think nobody, there's nobody except governments and potentially really large companies who would fund you for a 50-year outcome because there's so much unpredictability in between, even though that company might be. incredibly valuable, right? It might be a positive expected value investment or a positive net present value of that investment, but they still won't do it. So he ended up, I introduced him to a bunch of people he got a ton of job offers from because he was so forward thinking and he's now working on the idea for, I think, one of the space agencies. who's willing just to fund it just because they think it's a neat idea, right? Perfect story. So to bring this into more tangible terms, let's talk about portfolio concentration as it pertains to this idea of power laws. So if you buy that, a lot of the return or most or all of the return is going to be generated by some of these fat tail outcomes in any given venture fund.

and you've got $100 million to invest, how many bets should you make? And I've seen, say, Peter Thiel, for example, who says that you should have a very concentrated portfolio. But maybe there's an argument on the other side. So what does it mean from your perspective? If we have these kind of power laws with an alpha of two and this embracing of uncertainty, like you mentioned, a lot of the best venture firms, that's what drives their returns. What does that mean kind of optimally for portfolio concentration? Yeah, so I've instigated that argument online a few times. The opposite end of that spectrum is Dave McClure, 500 Startups, who invests in hundreds of startups. What the Power Law Post said and what the math says is if the mean is actually infinite of the distribution, then the more picks you make from that distribution, the higher your maximum return is going to be. the highest returning multiple from that distribution. And there's a formula for that. So the more picks you make, the higher your maximum return is going to be. So you should make more picks, right? I mean, the more picks you make, the better. And that's, I think, what McClure says is the more picks I make, I have this chance of having some huge outcome, right? Or WhatsApp, right? Where you have essentially 1,000x. But if I don't make enough picks, then I may not be in that one. And that one will make up for all the picks that I make that didn't do that. because it's a power law. What Thiel says, so I think that's true with the one caveat. So what Thiel says is you can't pick that many companies and retain quality. So if you were in some unconscious sense picking companies that fit this alpha of 1.95, say, so you're saying I'm going to have an alpha of 1.95 and companies that have this alpha or have come out of this distribution have this certain look about them. And I don't think any venture capitalist is actually somehow. calculating the alpha of their investments. They're intuiting it or something. Yeah, I think they know what it looks like from experience. It's really just tacit knowledge. This is what a company that has that sort of alpha looks like. So I'm going to invest in companies that look like that. So Teal is saying there aren't enough companies that look like that to make that many investments. You should only invest in companies that fit into this low alpha distribution, and there aren't that many of them. And McClure is saying, I think there are a lot of them, and I'm investing only in those.

So the question is, can you maintain a low alpha? Or if you make 500 picks, do you end up having an alpha of 2.5? Dilute. Yeah. You sort of work your way out of where you want to be because there aren't enough companies. And I do think that I've known investors who invest in, put small amounts of money in a lot of companies. Some of the companies you look at and say, there's no way this company can be big. It's just, it can't. I mean, it's just impossible for a services company. I mean, things where there's no scaling factor. I mean, professional services companies. So I think they are moving themselves out of that alpha distribution. It doesn't mean they're bad investments. It just means that the same math doesn't apply. So on the one hand, your portfolio should be as big as you can get it without pushing yourself out of the venture capital realm. On the other hand, so I wrote this post yesterday on the Kelly Criterion. Actually, after listening to your podcast and hearing people talk about the Kelly Criterion, I'm like, oh, that's a good idea. How does that apply in venture? And I was talking more about taking your pro rata allocation for future rounds. And I've always, I've had this argument with a lot of venture capitalists. Should you follow on after the seed or not? Some people believe you shouldn't. I think you should. The reasons I think you should have nothing to do with Kelly Criterion or they haven't. They've been more along the lines of the informational advantage. I understand what this company is worth better than the person who's coming in after me because I've been involved for the past year and a half, working next to the founder, trying to figure out what's going on here. They usually come in with a price that's lower than what I think it should be. They're coming from the outside. They have less information, so they're priced below where I think it should be. So, all right, it's a bargain, right? I'm getting this price that's lower than what the real price should be. So I've almost always taken my follow-ons. Other people say, well, if you take your follow-on, then you're diluting your multiple, right? If your first bet is going to be 100x, then your second bet, if the price is...

twice as high is only going to be 50x, because whatever the eventual exit is, it's the same exit price for both rounds. So now you have... It's like a vanity metric. Well, yes. It is for me, right? Because, I mean, if I can get 3x every year or whatever, I mean, that's, yeah, of course I would do that 2x. You know, I mean, like, it's my money, right? I want my money to increase. I'm taking positive expectation bets, limited by how much money I actually have to invest. But if you're a venture capitalist and you're raising money from LPs... LPs want to invest in top quintile. And if you walk into an LP and say, I've got a 100x multiple, wow, that's great. If you walk in and you say, I've got a 50x multiple, well, that's less great. It's still pretty good. You're still pretty good, right? But it's less great. And that's not on every company. Obviously, that's on your best performing company. But I think it's a lot less good. It's a lot harder to sell yourself to LPs. And especially if you're on your first or second fund and you don't have any real outcomes yet, you only have these sort of markups. How do you convince somebody to give you more money? They need to do that. So maybe it makes sense for them. I don't know. I'm not them. We've talked a lot about some big theories, big ideas around cycles and distribution of returns and things like that. Let's turn now to... how you've actually done this. So, so, you know, you are a venture investor for better or worse. And I think we'll continue to be as far as I know. So what does your process look like? How kind of what has been your history? How concentrated are you? Are there places that you focus? And then I want to get into a really neat framework that you put out there for kind of who profits from innovation and using that as a kind of lens through which to view a potential. investment of seed investment or an early stage investment. So what does your portfolio look like? What has been kind of the distribution of outcomes in your own experience? Let's dive into some of the tangibles. Okay. I've been in venture investing for 20 years. Well, I started venture investing 20 years ago. My first seven years or so were for a corporate venture capital fund here in New York. I came in, I had no idea what I was doing. They had no idea what they were doing. We all learned together. We made money. It was the 90s. So that was good.

educated myself on their dime. And then I left and decided to go back into the operating world and started my own company and did that for about four or five years, depending on when you consider the beginning to be. When I left that company, I kind of kicked around and said, I'm going to start another company because I'm an engineer by training. I like building things. I'm going to build another company. I'm going to do something real. After I left the company, a bunch of our early employees also left. They didn't like the new management and they started their own companies. And one of them said to me, he said, you know, I was watching you and Seth, my co-founder, do this. I said, geez, if they can do it, I can do it, right? Which I'm pretty sure isn't a compliment. I took it as a compliment, but I think a lot of people do this, right? They see a company being built and they realize it's not nearly as mysterious as it seems like from the outside. So a bunch of the people, I think I've backed seven people from that. my company at this point. And our first two employees both started companies. One of them came in and said, hey, I've got this great idea. Apple is releasing an SDK for their iPhone where outside developers can build apps. People are going to need analytics in their apps. I built this analytics framework that they can embed in their apps so they can see how people are using them, what they're using them, when they're using them, so they can improve their product. So yeah, that's a great idea. I'll put some money into your company, just a little bit of money. And it's great. And what else? where else can I raise money? I said, well, I'll introduce you to the people who invested in our company. And this was in 2008. So nobody was, like all the venture investors were sitting on their hands, kind of waiting to see what was going to happen. So I brought him around to a bunch of the people who invested in my company. And in the end, Union Square Ventures and First Round Capital invested, which was all-star roster. And he was kind enough to put out a press release saying, we raised money from Union Square Ventures, First Round Capital, and Jerry Newman.

And all of a sudden, I started seeing a lot of deals, I think mainly because people said, there's nobody investing except for this guy, right? He's the only one writing early stage checks. Union Square, first round, and Jerry Newman are writing checks, and that's it in the United States. That's not entirely true, but it was a much thinner market then, right? So I started seeing a lot of other companies, some really interesting stuff, some stuff that pertained to the company that I had started, so I knew the market. What was the company that you had started? The company I started was... This is an idea that everybody loves this idea. It's a really stupid idea, though, although I didn't realize that until afterwards. We were providing a way for people to monetize their own data. So there's all this data about you being collected online by third parties and then being sold to target advertising, to target... offers online all this stuff right so we said well why wouldn't you keep your own data in this lockbox and release it to people when you want with your permission and get you would get paid for it they would have to pay you for your data that sound great it does sound great right i and people come to me with this idea like at least every three months i see this idea and it's actually an awful idea um and i wrote a blog post about why it's just there's just not enough money this well there's not enough money in your data, right? It's maybe like $7 a year that you could actually garner from that, which isn't enough to motivate anybody. And also people seem to think, you know, there's this asymmetrical way that people look at it where they say, well, how much will you pay for people to not collect your data? Like, well, obviously nothing. That's why they allow it to happen and they watch ads instead so they can get media for free instead of paying for media. On the other hand, how much will you charge if you do sell your data? And they're like, well, I need like $100 a year. It's like, well, okay, so you won't pay $100 a year to not have your data collected. But if it is collected, you want to get paid $100 a year. It doesn't make any sense, right? It's irrational, but people think that way. So there's these two problems. And it just started out well. It was going all right. We ended up moving more into the advertising sector and being one of the early programmatic companies. So there's this whole programmatic advertising move where people have moved from when you buy advertising media, you used to pick up the phone and you'd call Yahoo or...

CNN online and say, hey, we want to buy $2 million of ads on your front page over the next six months. And CNN would say, great, send us a purchase order. We'll figure out, send us the creative, and we'll get it all online. That's how it used to be done and still is done in some places. And people came along and said, well, gosh, why don't we just do this all by computer? Why wouldn't you just bid on it in real time? We'll have this phrase at the time, which we were bringing Madison Avenue and Wall Street together. We're going to create a market for advertising. So we were one of the first companies in that market. We were way too early. But I met a ton of people who were doing that. That has now become, I think it's probably the dominant way of buying advertising online is through these marketplaces or through this kind of bidding for ads in real time. And people bid for ads, single ads. It used to be you'd buy $2 million worth of ads. And at a $2 cost per thousand, that means that's like a billion impressions, a billion ads. Now people will buy single ads. They'll buy a single impression to put in front of this. soccer mom in Iowa. And it's interesting because it's more targeted, so it's more interesting for the advertiser. The publisher should, in theory, make more money, although that's just now starting to happen. But it's a huge problem because if you're buying, instead of putting in one order for a billion ads, you're buying a billion ads one by one. So you actually have more trading in some of these exchanges than you have on the New York Stock Exchange. The volume of orders per day is higher. The computational problem was pretty intense, especially for the startups that came into it. So I started investing in these companies. And I had theories about where the world was going to go. And this tends to be my strategy. I said, all right, here is an opportunity, right? A new technology has come around that has provided a solution to this problem that exists. How could this turn out? What are the possible scenarios? So I do a lot of scenario planning. And in this case, there are seven scenarios that I think are... possible. So I invested in seven companies, one for each of these scenarios. So I don't know if that really makes sense or not, but it turns out that one of them has hit it big. They went public last year, the trade desk. And that's my 100x in my portfolio. But that was my first sector. And it was mainly because I had the network there. So at one point, I think I saw probably every programmatic advertising startup in the country.

Everybody would email me because they knew that I invest in that sector. So when you see all this stuff, you have a ton of information. You can see what everybody's doing. You can see what prices people are paying. Somebody will come in and say, like, we have nobody else is doing this. We have no competition. Nobody else is even close. And you can say to yourself, well, I've seen five of those in the past month. You can use this information to actually make better decisions. And then from there, I was pretty involved with these companies early on the first couple of years, sitting on boards, talking to the founders every week. And you start to learn about the technologies they're using. So they were using a lot of big data technologies. They had to. There was so much data. So I started investing in big data. I started investing in machine learning. I've now progressed. I've done some deep learning stuff, what people are calling AI. So I tend to be somewhat opportunistic. I try really hard not to pretend that I know what's going to happen, which is really hard, actually. People tend to have an idea about what the future is going to look like. They'll hear a pitch, and a lot of these founders are great at pitching, right? They will convince you of what they are selling, that this is going to be the future. And maybe that's, I mean, I have that kind of personality, right? I'm an optimist. So somebody comes in and pitches me. I'm like, well, this is a freaking amazing idea, right? I love this idea. This is awesome. So I have this rule where I never make a decision on the spot. I always have to sleep on it. Because the next day, you've calmed down and you're like, well, it's not that great an idea. Or I still love this idea. And if you still love the idea, then it's worth pursuing. So I tend to be opportunistic. People come to me, right? I don't try to predict the future. If I had some great idea about what company should be built, I would go build it. You make a lot more money building companies and investing companies. I mean, you look at the Forbes 400, there's a lot of entrepreneurs, there's not a lot of venture capitalists. So I don't build companies. People come to me with great ideas. If they're great ideas, I give them money to help them start. I do invest really early. I try to be the first money in. I'm investing my own money, so I can't compete with NEA's $3.3 billion fund. I need to be the first institutional money in to get the kind of price that I need. And then I try to be very involved for...

Certainly the first year, probably the first couple of years, one of the places I can really add value is helping people raise their next round of capital. So I've been doing this a long time. I know a lot of people. I can introduce you to venture capitalists. And I think venture capitalists will take my intros because I'm not an idiot. So I'm not introducing them to companies that just suck. The companies I introduce them to, they usually don't invest because they usually don't invest in anything. But they're interested. They're intrigued, at least. So at least I'm. Maybe I'm just entertaining to them. I don't know. So there's this progression from the proverbial like friends and family round, the angel round, maybe the seed round and then on up. So I'm curious about each of these, but we'll start with friends and family. Are there any circumstances under which? it is wise or would you recommend that individuals, sort of those friends and family make venture investments? So that happens a lot, right? I've participated in those sorts of things. I think a lot of people in our world have done something like that. Usually it's a friend or it's a good enough idea or whatever the case may be. But if you were just giving kind of cold, hard, Spock-like advice to people out there, what would be the minimum conditions for doing something like that? Is it a set of connections like what got you into the business and program? ads? Is it a certain number that you have to make so you have at least some diversification? What are the circumstances that people should consider doing that kind of friends and family type investments? Never. It's funny. My parents come from a different era and they always ask me, Hey, do you think we should invest in Apple? And I say, no, I think you should invest in index funds, right? Like, what do you know about Apple? They're like, well, we really like their new products. Like, great. Who are you buying the stock from? You're buying the stock from somebody who's living this day in, day out. They know what it's worth and they're selling it. Why are you buying it? You can't do the work to figure out what that's worth. You shouldn't. So you should be a passive investor. But they come from an era where active investing is a thing. You pick stocks. I think people look at venture capital and they want to pick stocks. They say, hey, I looked at this idea. I think it's a really good idea. I would definitely be a customer here.

And that's like sort of the kiss of death. Like I'm going to be the customer. Well, okay, you and who else? You are not a market, right? You need to have tens of thousands of people be the market. And I think people have really bad instincts. So I remember, this is probably like six years ago, somebody came up to me at some function and was like, oh yeah, oh, so you invest in startups. I think Facebook is a total, like it's totally like not going to work. Like Facebook, nobody's going to use it. It's going to be awful. It's like, well, how long have you been saying this? Because millions of people are using it. There's this reality and people just, they have really bad instincts about what other people are going to use or what things are going to actually work. And I think that's fine. I mean, nobody has good instincts about things that you can't predict. I think that you have to have the discipline to be able to invest in things that you can't predict to say, I don't know what's going to happen here. I said this, I think, in one of those posts that you can divide startup pitches into two categories. There's the bad ideas and then there's the ideas which you just don't know if they're good or bad. And if you can actually make a decent distinction and sort out the ideas which are clearly bad, the perpetual motion machines and whatnot, and say, all right, these ones might work. I don't know, but they might work. Then you're doing a good job. If you can actually embrace the fact that you don't know, then you're doing a great job. The people who really think that they know, the people who are investing in ICOs, because they're absolutely certain that cryptocurrency is going to be the hugest thing ever, who simply won't brook any doubt whatsoever. those are the people who are losing all their money. Not because cryptocurrencies are a bad idea, but because they have this irrational belief in their own ability to predict the future. Nobody predicts the future, especially not when you're going into these markets. So should you go into a friends and family round? I have done friends and family rounds in things which are not tech, things that I don't understand, and I've lost money on them. But the point was I was supporting a friend. It was a friend of mine starting a business.

more money than she does, I'm helping her start the business. That's what friends do. I didn't do it because I was going to make some amazing return. So yeah, it's fine. And I think a lot of people also, I have friends in the hedge fund world who invest in venture capital because their day jobs are really boring at this point, right? They're like, yeah, buying distressed debt, which I know how to do. And I've been doing it for 30 years. I could use a little excitement in my life, right? So I'm going to invest some money in this thing. I see this so often. That's why I'm laughing. Yeah, but you know, which is fine, right? It's a hobby. Like, I mean, it's probably on average cheaper than skiing. I don't know. So, sorry, I've got five kids. Skiing gets expensive. It's, you know, and there's nothing wrong with that. But if you're really doing it to maximize your return, like this is how I pay my rent, right? I need to maximize my return. If you're doing that, there's a different process. And I think that's not something that you're going to simply intuit or just come by because you're just... tend to be smart in some other topic. There's the idea or framework that you put together, which I can't stop thinking about because I just think it's such a neat way of thinking about both investment opportunities, but also anyone's own business, even if you're part of a large corporation, like the segment you're responsible for or work within, which is this idea or the question of who profits from innovation. And there's this sort of two-part framework where you talk about complementary assets. and how easy it is to replicate something as sort of creating a matrix for different types of companies. So I'd love if you could flesh that out, maybe with some big company examples, so that people can really get their arms around this idea. Because I think it's such an interesting and powerful one. So what is this idea of kind of who profits from innovations? Yeah, so first, this is not my idea. This was from a paper by a guy named Ties, DJ Ties, called Who Profits From Innovation. So it was a complete ripoff of his idea.

So if you want to actually get a great explanation, you should go back and read his paper. What I did was I adapted it to my world. So the paper was written, I want to say, 30, 40 years ago. So it was a different era. But I was looking and I said, you know, this is true. People throughout my career in technology have been saying, well, how are you going to compete with, first, Microsoft? And I'm sure before that they were saying IBM. How are you going to compete with Google? Now it's how are you going to compete with Amazon or how are you going to compete with Facebook? How can you compete with these large organizations? I think about this a lot. So at the moment, I'm on the whole 90 and uncertainty kick. That's how you compete with them. But there are other ways to compete, right? How do you build moats, that kind of thing? What kind of moats can you have? And the idea that if you're a startup, you're going to need complementary assets, meaning you have to rely on other parts of the technological system to make your innovation functional. And your innovation is either easy or hard to replicate. Tease basically said, well, you can use those two things to say, all right. Who's going to actually make the money? And it's a bit of the sort of port of five forces framework. Who has the power in this relationship to extract the most profit from the value chain? So it's interesting. I think people start companies where some venture capitalists say, well, how are you going to compete with Amazon? Or how are you going to compete with Google on that? And that was my company was people said, how are you going to compete with Google? And I said, well, we are in a place where they don't want to be. Partly it was this market's too small at the moment for them to look at, and we're hoping it'll grow rapidly and we'll have an advantage. But in the end, it was all right, who do we need to partner with to do this? We need to partner with people they don't want to partner with. How easy is it to replicate? Well, depending on what you're building, it could be hard to replicate because you're building this whole network of various participants, a marketplace. And then you have other companies where they build things which pretty clearly, if they're successful, somebody is simply going to copy.

So I think about Pebble, the smartwatch company, right? They did the Kickstarter. They raised a bunch of money. They built a smartwatch. Great innovation. And then Apple said, yeah, that's pretty cool. We'll do that. Right? I mean, I don't know if Apple actually just copied them, but it's certainly not unheard of for people. There's a great quote I found in the Harvard Business Review from one of the former CEOs of Pepsi. And the article he wrote was something like, how to innovate in large companies. And what he said was, what you do is you find people who've done really cool things, and you just totally rip them off and do that. I'm like, all right, let's. I don't get through that innovation, but, you know. It's honest, anyway. It's honest, right? And that was, like, the funniest thing about it was he actually, like, you know they do that. But he just came out and said it. And people, you know, in the startup world always complain, like, they just copied me. Like, how do they sleep at night? They just copied my idea. I think they sleep fine. I mean, you know, that doesn't worry them. So how do you do something where they're not going to copy you? And either it's you have these complementary assets where you have some sort of control over how that process works, or you're something that's really hard to replicate. And that's, you know, in this case with Pebble, like, they didn't have either of those things, right? Apple had the complementary assets, and they could replicate the innovation quite easily because that's... what they do, right? They're a hardware company. So I think it's an interesting framework. It's an interesting exercise to go through. I don't think that's the only way to do it. I do think this uncertainty at this point is maybe a bigger aspect as we come into a place where innovations aren't that hard to replicate. You look at someone like Blue Apron. Blue Apron is going public today, $3 billion. You say, well, why didn't Amazon do that, right? It's not that hard to replicate. And it's a good question. I mean, that's the question. I don't have the answer to that question, actually. But I often wonder that. Why? What is it about Blue Apron that allows them to be a standalone company that has $800 million in revenue that somebody else just doesn't come in and say, we have a better distribution network. We can do this at lower cost than you can. We're just going to compete with you. Like, what is it? I don't know the answer. Can you explain whether or not something is easy to replicate is, I think, fairly straightforward. Maybe not straightforward in terms of implementation, but conceptually.

Can you explain the complementary assets piece? So you define it as either generic or non-generic. And I think... The distinction is if it's generic, kind of anyone can access it without having to ask permission, so to speak, like, you know, the internet or something like that. The internet is a complimentary asset, meaning lots of businesses rely on the internet to do their own business, even though they're not controlling the internet. So it's some kind of separate asset. And then a non-generic one would be something like apartments for Airbnb. Is that kind of a clean distinction between those two things? Yeah. Well, yeah. Our apartment's non-generic. I guess they're non-generic. Yeah. I think the internet's obviously generic. and use it. Everybody has equal access, at least they do at the moment. We'll see what happens with net neutrality. And I think that's why net neutrality is such a big deal among startup people is because if you get rid of net neutrality, it may be a non-generic asset where the supplier of that asset can extract more rent. But yeah, so the non-generic assets are... One of the examples I use, which I think is a good example, is Twitter, when they used to have third-party Twitter clients, right? So there were these third-party Twitter clients, which were better than Twitter's Twitter client, which is a pretty low bar. And they would sit on Twitter, and they would pull all your tweets off. They would allow you to tweet into it, allow you to do lots of different things. And they were becoming a pretty big business. And this guy I know was actually starting to buy up all of them so that he could create his own network. And Twitter said, no, that's it. We don't want those anymore at all. We're just getting rid of them. We're going to create our own Twitter client, and everybody's going to use it. So this was an example of who profits? Well, clearly the incumbent profit there, right? The person who owned the complementary assets because the innovation was not hard to replicate. So they needed the complementary asset. It was a very strong, non-generic complementary asset in Twitter itself that was necessary. The people who had the third-party clients couldn't switch. But it wasn't hard to replicate. So Twitter said, we have the more important piece of this relationship. We should be making most of the money.

So we can just get rid of you. And I think that's, you know, if you're relying on some non-generic complementary acid, then this is the same thing that Porter says, like, you know, the five forces, the supplier power, right? If your supplier has more power than you, this is a problem, right? They can extract more of the value from the value chain than you can. They can basically say, oh, looks like you're making money. That's ours. And this is what happens in the tech world as well. And I think it's something you should probably think about in some sense, either through five forces or through this, you know, TIS framework to say, if we start this company, Can we make money? Or is somebody that we're relying on going to take that money? This is in programmatic advertising. The question was always, companies would go public. The advertising agencies who were buying the advertising for the clients would say, oh, look at all that money you're making. Maybe you should be charging us less. And programmatic companies would say, well, no. And the agencies would say, well, there's other people we can go to. We'll go somewhere else because you're making this 50% margin. We think you're making. less. In fact, we don't think you should make any money, right? So who has the bargaining power? And that's when they built those companies, people didn't think about that, right? And people tend to not think about the end game here. Most startups don't have some sort of long-term strategy. They're really more of a bundle of tactics. But the long-term strategy is important in figuring out whether or not you can eventually extract value from this company. as an investor, you should focus on the one corner of that kind of four-part framework where it's hard to replicate and only relies on sort of generic third-party assets. Is that the sweet spot for finding or building or starting a great company? I mean, obviously there's exceptions to everything, right? But if you're trying to apply this framework to an investing strategy or a business strategy, is that the corner that people should focus on or am I thinking about that wrong? So there's a difference between being an investor and being a founder. Founders are in their companies for the long term. They want to build viable, long-term, sustainable, high-growth businesses. Investors need businesses that they can exit. So this is maybe a cynical take on it, but the truth is when you look at Apple Computer, they did not have an innovation that was hard to replicate in the end. Anybody could take the Apple Computer apart and see how it was built. Anybody could disassemble the software and see how it worked. The Apple was a phenomenal...

technological achievement. Steve Wozniak was an amazing engineer. He did a lot with a little, but pretty much immediately they had several large competitors and they were not, I don't think they were ever the largest company. I think Tandy Radio Shack with the TRS-80 was bigger than they were at the beginning. Not long afterwards, IBM got into the market, so they did not have an innovation that was hard to replicate. There were no non-generic complementary assets at the time. There was software, and a lot of the software was produced by Apple itself, and then there was software produced by other people, but it hadn't gotten to the point where there was a non-generic complementary asset, like when IBM and its PC came up against Microsoft, which they probably should have anticipated that. by allowing Microsoft to provide the operating system, this non-generic complementary asset, that Microsoft would end up taking most of the value in that value chain. They didn't, which is kind of an odd failure of strategic thinking at a company that was known for strategic thinking at the time. But investors still made a ton of money in Apple in that brief period between when they started and when they went public. So as an investor... I personally like to invest in companies which I think can be long-term value creators. But I think that's a really conservative strategy. And I do it because I think it's just right. And also because it is a conservative strategy. No matter what happens with the exit market, this business is going to be worth something. And I think over the last nine years, it's been a good strategy because there's been no IPO market for the most part. If there's an IPO market, it looks like the IPO market may be opening up again. Shorter-term strategies might make sense. Venture capitalists, if they'd made more money in companies which went bust two years after they went public or were acquired than they've made in companies that were long-term. No, I'm sorry. That's an exaggeration. But there's been a ton of companies. Tumblr. Unisquared Ventures made a ton of money on Tumblr, got bought by Yahoo for a billion dollars. Was it a good acquisition for Yahoo? I don't know. I don't work for Yahoo. Maybe it was. But it's hard to see how long-term that company would have turned a profit. But it was still a great investment. That's the kind of investment that it's hard to make that kind of investment where you don't know where the revenue is coming from. And, you know, they were willing to take that risk. So, and they made a lot of money doing it, but it is not symmetrical between it. It's not investors and founders don't face the same problem. Founders have to think longer term.

investors have to think about how they exit. The value chain idea makes me think about your expertise in media and you thinking about virtual reality and augmented reality as two avenues for venture capital that are sexy and interesting for people to think about. So could you use kind of this framework that we just talked about, who captures the value, media, kind of all these topics we've been exploring, to describe whether or not you think one or both of those are interesting areas for venture investing and why? A good friend who's a venture capitalist who loves virtual reality. He's really focused on it. He thinks it's the next big media. Venture capitalists are always looking for the next platform because you can build a lot of value on a platform and the ancillary companies around a platform you can build a lot of value in as well. The internet is one of the ultimate platforms. People made a ton of money in the internet itself, right? Cisco. And then they made a ton of money on companies which used the internet to... create their own businesses. So not just, you know, Netscape at the time, but Amazon and Google. So venture capitalists are always looking for the next platform. And there's no obvious one out there. You know, since smartphones, people have been sort of looking around saying, all right, what's next? And nothing's really popped up to really, nothing's popped up in the way that you can say that's definitely going to happen the way smartphones did. So people look at virtual reality and say, all right, maybe virtual reality is the next platform. Virtual reality is really cool. People love it. All right, fair enough. Maybe, maybe not. I'm sure that my 14-year-old son will love to play Call of Duty and virtual reality, but are there larger applications? Are there applications in the rest of the world? I don't know. The question becomes then, even if that's true, even if there is a market for virtual reality, who's going to make the money? And if you look back at the history of media, so look at radio. The innovation here was the radio itself. You had this way of transmitting voice magically through the air. The people who made the money were not the people who made radios. In fact, because they had this platform, which had to be a standard platform, a commodity platform that everybody had, right? Every radio had to be pretty much the same if you were going to have a mass audience. Then they wanted to sell these radios at the cheapest possible cost so that everybody would buy them. And this was true of TVs as well. You needed to have a TV in every home if you wanted to have a viable commercial industry. And those TVs all had to be the same. So you couldn't have like...

20 different radios that all operated on 20 different frequencies, they all had to operate in the same band of frequencies, or there wouldn't be a viable industry. So they made those really cheap, and the value was created inside the content industry. So the radio stations that people created content for the radio were the ones who made the money. So this is complementary assets, the radio itself and the content-creating companies. But the radio companies, the RCAs of the world, didn't make that much money. And they didn't try to make that much money, but they did own, RCA owned a bunch of the radio stations. So this was their strategy. Now, I think virtual reality is somewhat similar in that virtual reality is going to have some standard for virtual reality content. The virtual reality content is in some sort of standard format that can be displayed across virtual reality devices. To do that, you probably need to get those virtual reality devices into as many hands as possible. which means you're going to have to price them fairly cheaply and only have one standard set, which means virtual reality devices themselves will be cheap and standard. Nobody's going to make a ton of money in that business. And the money will be made in the virtual reality content. The problem is I think the virtual reality content will be made by incumbents because that in itself is not that innovative. Creative, there's always a lot of sustaining type innovation there, but it's not the sort of radical innovation, the uncertainty that would allow an opening for startups. I mean, if you're Disney and there are 100 million virtual reality goggles that people are using, are you going to say to yourself, that's too risky for me to go out and make content for virtual reality goggles? I mean, of course you're going to make the content, right? And then as a startup, how do you compete with Disney? So I don't see a lot of opportunity there for startups. I think augmented reality is different. In augmented reality, where you're not actually being entertained, you're overlaying something over the world. And people always think of Pokemon Go as being this augmented reality app. And all right, fine. It was a game. It was entertaining. But I think the real uses for augmented reality are much more ad hoc. So you're a machinist working on something on the factory floor, and you have your augmented reality glasses on. It says, turn this bolt.

Right. The bulb flashes. Right. With this wrench and the wrench flashes. I mean, like instead of having some kind of huge manual to tell you how to fix things, your augmented reality glasses are telling you, like, do this, do that. It makes you much more efficient. I don't know if you've ever worked on any. I have a motorcycle. I like to take it apart and put it back together. I have this 10 year old manual that tells you exactly how to take it apart and put it back together. Right. And without the manual, I would be a little lost at certain times. So you're flipping through the manuals all covered with grease and you're like, OK. You can find the right tool. If you had the augmented reality glasses, that manual would be in the software. And it would just say, okay, you're taking the top off the cylinder. Here's what you do. And the idea is that that is much more niche. So the development of the AR glasses for fixing some class of machinery is going to be very different than the tech for gardening or something like that. So you can profit. in the hardware portion of it or in the software portion of it versus content. Right. So you could have a company which is specializing in taking all those manuals. They're all made by one company, Chilton's, I think. I don't even know if this is an industry anymore, but I don't know. And nobody fixes their car, their own car anymore, do they? There's one big like solid state block. But you take all those manuals and you put them into a piece of software and you sell that software. Okay. That's, that's one niche, right? Yep. You have another niche that is. something else that uses augmented reality, you have a whole bunch of niches and each one is ad hoc. There's still potential for big companies like the company that translates whatever content that is into what the augmented reality glasses do. But you don't have to have the same format for each thing because the person who's buying augmented reality glasses to fix cars is not the same person who's buying them to look at data on a trading floor. They can be completely different glasses. They don't have to be standardized. You're not looking for...

volume in any of these niches. Each niche is more high value. Yeah, it's a fascinating way of thinking about the value chain. Last couple of questions, one of which is this idea of puzzle solving and kind of what makes a successful investor or venture capitalist. Every asset manager of any stripes gets the same question, which is like, what makes you special? What's your edge? Why might it last? And your answer was so honest and refreshing. So I guess I'll just ask you that question. What is it that makes you or anyone else special in this space? post was about saying how i'm not so now you're asking me again how i am um i had to frame it somehow i think so the puzzle solving came from kuhn right so thomas kuhn talked about how scientists solve puzzles and he said you have this puzzle like why is this why is there this anomaly that doesn't go away it's a puzzle you have to solve and it kind of goes back to popper would call them problems kuhn said they're puzzles which is a diminutive of problems But then FireAbon came along and said, hey, there is no process by which people solve these problems. They do whatever they do. Puzzle solving is not a recipe. There's no recipe for solving problems like this. You just solve them. You have to figure out, you have to use your brains and come up with a creative way of finding a solution. And that's clearly true. If there was a recipe for building successful billion-dollar companies, as some of the startup gurus now purport to have found, then you'd have just factories churning out billion-dollar companies, right? And this is clearly an impossibility. There can't be a recipe, right? It's logically impossible for there to be a deterministic way to build a big company. So if anybody says, here's my framework, here's my thesis, these are going to be the billion-dollar companies. They look like this. They act like this. Here's how I find them. They're selling you something, right? Every money manager is selling their LP as something. You have to. As I said in the post, when I've said this to LPs, they have been nonplussed at best. Maybe this is why I'm still an angel investor and not running my own VC fund, but I don't believe in thesis. I don't believe in recipes. I don't believe that there is an archetype for founders or an archetype for companies. I think that opportunities are ad hoc. Somebody comes to you and says, I'm building this company.

It's going to do this. Here's how the world's going to look 10 years from now and how we're going to fit into it. And here's where the value is. And you can look at that and say, is this true? Which you really can't know. But you can say, is this possible? Is this a possible state of the world in the future? And to figure out if that is a possible state of the world in the future. You have to go through this process of saying, well, if this happens, then how does the world bite back, right? How does everybody else in society respond? How do other companies respond? How does the government respond? What are all the systems obstacles to this actually happening? And can this company wend its way through these obstacles to get to this goal? And the answer is never yes. The answer is maybe, right? Maybe. But the answer is not no. So we talked a little bit about Bitcoin before we started. And to me, when you do that analysis, the answer is no. The society will not allow Bitcoin to be the default store of value or currency. I think that's... just true. Now, I could be wrong. I've been wrong before, about two-thirds of the time. But I think that the answer is no. And that's just a systems analysis, right? In other cases, you say, so when the guys who started Bank Simple came to me and said, we're going to build this bank which is actually customer-centric, not asset-centric, right? So we're actually going to flip the relationship from the customers of the bank. being the people who borrow money, to the customers of the bank really being the people who deposit money, which, you know, when you think about it, you know, your bank right now, their customers, you're not the customer, right? Right. That's, you're just the supplier of money, right? So they treat you like Walmart treats their suppliers. That's why banks treat you so badly. So they say, we're going to flip that. We're going to make the customer being the people who deposit the money. Okay. Is this possible? Is there a possible scenario in the future where this is actually a very large company? And the answer to me was unlikely, but it's possible. So there's a 1% chance of this being 1,000x. It's still a positive expectation bet, right? And obviously those numbers aren't precise in any sense, but that was my thinking. And so I invested, and that company actually did pretty well. It didn't become one of the largest banks in America, but the investment was a good investment. So this is how I think about things.

And I've totally forgotten what the original question was. We're talking about puzzles and how the answer to the question is basically the only way to get good at solving puzzles is just to solve a lot of them. There's not one, everyone's going to be different. There's not one way of doing it. And so... kind of the answer as to what makes you special isn't some, you know, holy grail formula that you apply and no one else knows about. It's just that you do the job. You just kind of keep doing it and learn from experience and kind of apply probably subconscious heuristics to, you know, we talked earlier about like Teal recognizing like the companies that have this in them just look a certain way. And I can't tell you the. 10 checklist items that maybe I can tell you two, but there are 10 and I don't know what the other eight are. And maybe I just intuit those from experience having solved a lot of puzzles. For me, it was, so after my first go at venture capital where we made a lot of money, but it was at a time where it wasn't that hard to make money. And I would talk to people and I think I might've actually even been trying to get a job in a venture capital firm. And they would say things like, well, anybody could make money then. And this kind of put a little chip on my shoulder. I said, all right, yeah, you know what? I can make money. And I'm going to show you how I can make money. And I've been very... I've been trying to bring the sort of unconscious things to consciousness. So a lot of my writing is this. I have these questions about what I've been successful doing. Why am I successful? What am I doing? What is it that you do? So I have a lot of the unconscious heuristics I've tried to make conscious. The things like uncertainty where I'm trying to find uncertainty. Everybody's trying to find uncertainty. But I'm actually going to consciously look for markets that don't yet exist. Because there's that uncertainty. And then there's other types of uncertainty, like technological uncertainty, that I won't take. So I've tried to think these things through to make it conscious. I've also tried really hard to be rational. So I think most people don't. I mean, most of us satisfy us. And I say, all right, I'm going to try to be—I'm an engineer. I'm going to try to be rational. And when I can't be rational because there's not enough data to be rational, I'm going to admit to myself that there's not enough data to be rational. So I'll look at a company. I'll make a checklist of, like, here are the risks.

Which of these risks can I mitigate through due diligence? Which of them can't I mitigate ever? Because they're just this really deep-seated uncertainty. Is the market going to be this big or that big? Is there going to be a market at all? And which of these uncertainties can I mitigate over time as we learn? So you can make this list and start checking things off. And if I mitigate these three uncertainties, then I can get the next round done. So the next year is going to be spent experimenting, exploring, trying to figure out if these things are... these hypotheses they made are true or not. And then once we've gotten those checked off, we'll still have some uncertainties, but we can go to the next round and say, look, this company is a great company, you should invest. And I've tried to do that consciously, not by applying sort of unconscious archetypes. And I think if there's anything special about me, it's the fact is that, that I'm trying to be conscious about what I'm doing and not just, there's a venture capitalist on the West Coast who raised a... pretty decent sized fund recently. And I asked one of their LPs, I said, I don't get it. Like this person's had one success. Their entire thesis is based on the fact that that company was successful and they're going to do more like that. Even though that one success seems to be a bit of luck, right place, right time, maybe not replicable. Why are LPs giving that person money? Like, why has he been able to raise this fund? And the answer was interesting. The LP said, you know, they like his swagger. And I don't think of myself as a person having a lot of swagger. I'm pretty earnest. I'm an engineer. I may be incredibly analytical and opportunistic. And that's what I do, right? I mean, I look for opportunities. I analyze them. I decide whether they make me nervous enough that they could be a good bet. And then I make the investment. And then one of my partners lying there in bed next to me says, why did you invest in that company? And I say something like, I don't know. I try to maintain my manly pride in that I know what I'm doing. And I think I do know what I'm doing. I think that's what you have to do. So I actually think that what makes me special is that I have a certain humility in how I do it. What is the most memorable individual day of your career in venture? If you had to pinpoint one day and what happened that day? Well, it would have to be the day the stock market crashed in 2000. I realized that my portfolio, which previously had been worth more than a billion dollars, was now worth maybe a couple hundred million dollars.

But I don't want to talk about that. How about the most memorable good day? You know, the most memorable, this company, Bank Simple, the second employee at my startup started this company. And I'd known him forever, smart as hell, great guy. I knew that he had a problem that he was not going to let go. So he was going to be able to stick with it through the hard times, which they're definitely going to be with that company. But I remember one day, probably, so I invested in December. And then in March, He came to me and said, look, you're the only person who's invested, which I never do. I always syndicate because I don't have enough money to back a company for a year. I just can't do it. He said, you're the only person who's invested. We can't raise more money. I don't know what we're going to do. I said, look, you're making good progress. I will put more money in. He said, I can't ask you to do that. He said, I don't know if we'll ever be able to raise more money, if anybody else will ever believe it. I said, you know, let's just keep going and see what happens. A couple weeks later, Alex Payne, who was like the third engineer at Twitter, cold called him and said, hey, I love what you're doing. I want to come work there. Okay? And I think it was because they're really trying to change something that was really broken. And Alex was like, this means something. I want to do this. So he came. And then two weeks later, I got a call from the CEO, Josh. He says, hey, I just got an email from Ron Conway. Ron Conway is this legendary angel investor on the West Coast, invested in Google. And I said, what did it say? It said, where do I send the check? I was like, wow, that's amazing. So what did you say? He's like, I don't know what to say. What should I tell him? I said, I think you should tell him your address. Just tell him where to send the check. Jesus. And Ron Conway invested. And then after Ron Conway invested, we had a bunch of venture firms who were suddenly like, wait a minute. This is actually pretty interesting. I've raised some money from some great venture capitalists. IA Ventures here in New York and First Run Capital. And the company went on to be a successful investment for all of us. So I think that was probably.

my most memorable was him, you know, calling me and saying, I got this email from Ron Conway. Okay. That's great. My closing question for everyone is to ask what the kindest thing that anyone's ever done for you is. How can anybody not say like, you know, something about their parents, right? But here's the kindest thing anybody's ever done for me in reality. This is maybe a, I should probably say something more interesting, but when I was a kid, my parents thought I was bored and I was bored. I get bored easily. And they said, I must've been 13. Like, you know what? We're going to buy him a computer. And they bought me a Terrace 80, which at the time was incredibly expensive. It was $800 in that day's money, which is probably several thousand dollars now. Nobody had computers. So them saying, like, you know, we're actually going to, we don't know much about computers. He seems to think they're interesting. He's bored. He seems smart. Let's buy him something that'll keep him occupied. They bought me a computer. And two years later, I was programming professionally. You know, I went to college to learn how to build computers. I built a... Smaller computer, not a full-fledged TRS-80, but I built my own computer when I was 16. I mean, it really, that was the beginning of this career that has made me successful. And I think it's one of those things where he's like, you know, like one of my kids walked up to me and said, hey, I need a $5,000 thing that seems kind of cool. Can you do that? I mean, you know, I think, you know, my parents made a bet on me. That's a, it was a good bet, but there's no way to know that at the time. That's got to be probably the, I don't know if kind is the right word, but certainly most impactful. Yeah, that's great. Great place to close. This has been a blast full of conceptual, interesting frameworks, ways of thinking about companies and investing and kind of where we sit in a big cycle. So thank you for all the time. Can we talk more? Thank you. I appreciate you having me on. Hey everyone, Patrick here again. To find more episodes of Invest Like the Best, go to InvestorFieldGuide.com forward slash podcast. If you're a book lover, you can also sign up for my book club at InvestorFieldGuide.com forward slash book club. After you sign up, you'll receive a full investor curriculum right away and then three to four suggestions of new books every month. You can also follow me on Twitter at Patrick underscore Oshag, O-S-H-A-G.

If you enjoy the show, please leave a quick review for us on iTunes, which will help more people discover Invest Like the Best. Thanks so much for listening.