ritholtz

Barry Ritholtz, a Bloomberg Opinion columnist, talks Bitcoin and Banks with Bloomberg’s Tom Keene and Lisa Abramowicz on “Bloomberg Surveillance.” Ritholtz’s opinions are his own.

 

Ritholtz Says to Think of Bitcoin as a Specific Company

Source: Bloomberg

 

The post Think of Bitcoin Like a Company appeared first on The Big Picture.

My morning train WFH reads:

• The thorny truth about socially responsible investing Think you’re investing ethically? You might be surprised. It’s good that  investors are trying to pay attention to where money flows. What isn’t so good: Plenty of people think they’re investing in ways that match their values when in reality, they aren’t. It’s really easy to slap the ESG label onto an investment product, likely increase fees on it a little bit, and call it a day. (Vox)

• Jane Fraser Has a Plan to Remake Citigroup While Tormenting Rivals The first woman to lead a top U.S. bank is betting on the wealth business, cutting back global branches, and going slow on the return to offices. (Businessweek)

• What’s wrong with America’s consumer-price index? Experts underestimated inflation last year. Now they seem to be overstating it (Economist)

• This Is What It Sounds Like…When Funds Die The fund landscape would be even more humongous were it not for one key factor: the hundreds of funds that die every single year. (Bps and Pieces)

• Beyond Evergrande, China’s Property Market Faces a $5 Trillion Reckoning Developers have run up huge debts. Now home sales are down, Beijing is imposing borrowing curbs and buyers are balking at high prices. (Wall Street Journal)

• S&P 500: Pay to Play? A new working paper attempts to figure out why some companies make it into the blue-chip stock market index. (Financial Times)

• You’ve decided to quit Facebook. Here’s how to migrate your online life elsewhere. Saying you’re ready to quit is easy. Finding out where to go next is the hard part. (Washington Post)

• Religious Exemptions for Vaccine Mandates Shouldn’t Exist Freedom of religion was never meant to excuse people from obligations that apply to everyone. (Wired)

• A Brief Introduction to Philosophy (Through a Certain Sex Act) For the comedian Jacqueline Novak, the embarrassing and uncomfortable are a gateway to the profound. (New York Times)

• How a team of musicologists and computer scientists completed Beethoven’s unfinished 10th Symphony When Ludwig van Beethoven died in 1827, he had started work on his 10th Symphony but, due to deteriorating health, wasn’t able to make much headway: All he left behind were some musical sketches. His notes teased at some magnificent reward. Now, thanks to the work of a team of music historians, musicologists, composers and computer scientists, Beethoven’s vision will come to life. (The Conversation)

Be sure to check out our Masters in Business interview this weekend with Soraya Darabi, co-founder and general partner of TMV. The firm has funded a broad cross-section of startups, 65% of which are led by women or people of color. Less than 5 years old, TMV has already had 10 exits.

How Evergrande Grew and Grew, Despite Years of Red Flags

Source: Wall Street Journal

 

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Over the years, I have discussed why I publish about investing and related topics (See this, this, this, or this). Quite a few of us have been doing this before “monetizing content” was a thing.

Spend time reading any of the RWM Mafia and a pattern as to why we put words to page begins to emerge. We write to:

Figure out what we think
Explore a topic or idea
Memorialize an investment position (or potential trade)
Share expertise
Educate readers
Publicize a concept
Express outrage
Signal interest in a topic
Influence decision-makers
Debate / argue around an issue
Defend an idea or position
Educate ourselves about a thing
Resolve a noisy internal dialogue

I am going to share a few examples, and if you look for a consistent thread through all of them, you should find that: Each adds value, searches for truth, expounds on deeply held beliefs, are sincere, and reflect curiosity about the world. If only everything I read had those 5 attributes.

Michael Batnick is Head of Research at RWM, a founding principal, and a crucial component of our investment committee (he does the heavy-lifting, I get all of the credit). This post is a perfect example of teaching readers even as he admits what he doesn’t understand:

I Don’t F*ckn Get It

All of this stuff is incredibly confounding. On the one hand, you have normal people speculating on Doge, which is cute and mostly harmless. I mean, it says right there on the website that “Dogecoin is an open-source peer-to-peer digital currency, favored by Shiba Inus worldwide” Silly, sure, but hard to get too worked up over this. And then on the other side are wealthy people who buy pet rocks as status symbols. I understand this drawing your ire, but I hope now, or at least after reading Packy’s piece, that you understand people’s motivations.

And then, in the middle, you have brilliant investors like Chris Dixon who swear that this is web 3.0.

Blair duQuesnay is a triple threat: She is a CFA who sits on our investment committee, an advisor/CFP, and she also manages RWM’s UHNW practice. A recent discussion reveals her curiosity and insight:

Pluto is a Planet

I find myself rebelling against this change like a cranky old man. Back in my day, Pluto was a planet! I refuse to call it a silly dwarf planet. Bah humbug! I’ll probably get angry again when my kids start learning the solar system in school.

I notice this tendency among professional investors. The sands of time shift the way the world of money works, if only ever so slightly. What worked in investing 40 years ago, may not work today. We cling to the groundbreaking academic papers of yonder days – mean-variance optimization, the small-cap premium, the value premium, and book value. We read the masters – Ben Graham, Modigliani, Miller, Fama, French, and Merton – and we deem their work Gospel.

Has anyone pursued the financial well-being of teachers more than Tony Isola? That is what he and Dina Isola do for RWM. This is first-rate:

How To Escape Your Financial Cocoon

Self-deception is a raging epidemic.

A myriad of factors influences our point of view. Genes, family life, friends, experiences, and other items determine perceptions.

Why do we believe our experiences are reality?

James Low reinforces this concept.

These stories have a tilt or bias. This generates a selectivity in our attention which blocks many of the other possibilities we might entertain.

Delusion becomes fact. The worst part- We aren’t aware.

Neither is anyone else. Nobody wants to rock the U.S.S. Delusion.

Everyone’s wearing tinted sunglasses. Viewing reality in different shades turns fantasies into reality.

Nick Maggiulli is our resident quant/data wonk/COO. This post is classic “Nickie Numbers” – take generally accepted wisdom, crunch the numbers, prove it is bullshit:

Why Buying the Dip is a Terrible Investment Strategy

But today, I’m going to change all that. Because today I’m going to give Buy the Dip the proper burial that it deserves and demonstrate without a reasonable doubt why it is a terrible investment strategy.

Ben Carlson may be the best financial writer today who regularly uses data to demonstrate points on investing strategies. He works with our institutional clients. I could show you countless examples but let me simply go his most recent:

The Worst Stock and Bond Returns Ever

The U.S. stock market is up 13.5% per year since 2009.

Valuations have been well above historical averages this entire time and moving ever higher.

Interest rates are about as low as they’ve ever been.

Add all this up and it’s hard to argue with the idea that investors should lower their return expectations going forward.

The problem with this equation is you could have said this very same thing in 2012, 2013, 2014, 2015 and so on yet it hasn’t happened. The low return environment that seemed like a sure thing has been nothing but high returns.

There are few people in the world who can identify connections between disparate ideas like my partner and RWM co-founder Josh Brown does. His ability to see what everyone else misses is unprecedented. And his writing is so sincerely beautiful. Like this piece:

I Collect Cashflows
I collect shares of businesses. Been doing it since my late teens. Not always successfully. I use a certain type of non fungible token called a stock certificate for this. I never lay hands on the certificate, it’s in digital form, living somewhere in the multiverse. A company called DTC makes sure the shares I’ve bought are the shares I get. And then I hold them. Sometimes I will trade them for digital dollars that I also don’t ever see or touch, but then soon after I am trading those dollars for another pile of virtual stock certificates. People will say “You’re crazy, why would you want to buy a fraction of a company you will never touch and hold in your hands?” And I’m like “You just don’t understand.”

When ideas come together in a way that is informative, entertaining, and educational it is a thing of joy.

Beautiful, just beautiful.

 

The post Finding Value via Writing appeared first on The Big Picture.

My mid-week morning train WFH reads:

• The best- and worst-case scenarios for Covid-19 this winter Last year, almost nobody was vaccinated against Covid-19. 56% of the US population is fully vaccinated as of October 7. That includes 84% of people over 65, who are generally the most vulnerable to dying from the virus. FDA will soon consider whether to authorize a vaccine for children as young as 5, which would push vaccination rates higher. More than half the population being vaccinated is the primary reason for optimism about the coming months. (Vox)

• Why Airports Hold Promise for Asset Allocators Investments in airports are increasingly popular among American institutional investors—less on US soil than overseas. “Privatizing airports is common outside the US.” The allure: Absent a global scourge, airports’ annual returns can be in the high single digits, or, using leverage, in the low teens. Despite US constraints and pandemic headwinds, odds are they’ll spring back to their old growth level, analysts say. (CIO)

• Nadig: The Problem With a Bitcoin Futures ETF Lost in the mix here is the fact that, for most folks, Bitcoin futures are honestly a pretty second-rate way to get exposure to crypto. The biggest issue with any Bitcoin futures ETF — indeed, with any futures-based ETF at all — is that buying the ETF does not mean that you’re buying the actual headline asset. With a Bitcoin futures ETF, you’d no more be buying bitcoin than you would be buying barrels of oil by owning the United States Oil Fund (USO). Instead, you’re buying exposure to derivatives based on that asset — I’ve listed a few of their drawbacks. (ETF Trends)

• Al Gore’s $36 Billion Fund Sees New Urgency to Cut Off Oil Money Five years. That’s roughly how much time the investment universe has left to stop feeding capital to greenhouse-gas emitters before it’s too late. “The urgency of the challenge will require us to think differently around capital allocation,” Blood said in an interview. “And we don’t have 15 years or 18 years to get there. We have probably five years.” (Bloomberg Green)

• There Is Shadow Inflation Taking Place All Around Us Some companies haven’t been raising prices. Instead, they’ve been cutting back customer services and conveniences, but how should that be measured?(Upshot)

• Nations agree to 15% minimum corporate tax rate Most of the world’s nations have signed up to a historic deal to ensure big companies pay a fairer share of tax. Some 136 countries agreed to enforce a corporate tax rate of at least 15%, as well a fairer system of taxing profits where they are earned. It follows concern that multinational companies are re-routing their profits through low tax jurisdictions. (BBC) see also The Rich Have Found Another Way to Pay Less Tax Most of the world’s nations have signed up to a historic deal to ensure big companies pay a fairer share of tax. Some 136 countries agreed to enforce a corporate tax rate of at least 15%, as well a fairer system of taxing profits where they are earned. It follows concern that multinational companies are re-routing their profits through low tax jurisdictions. apparently failed to appreciate the cleverness and aggressiveness of lawyers, accountants and money managers employed by the wealthy. They found myriad ways to exploit opportunity zones to reduce clients’ tax bills without much attention to those who live in the zones. (New York Times)

• Want to add healthy years to your life? Here’s what new longevity research says. Death comes for us all. But recent research points to interventions in diet, exercise and mental outlook that could slow down aging and age-related diseases — without risky biohacks such as unproven gene therapies. A multidisciplinary approach involving these evidence-based strategies “could get it all right,” said Valter Longo, a biochemist who runs the Longevity Institute at the University of Southern California’s Leonard Davis School of Gerontology. (Washington Post)

• What Does Frances Haugen Want From Facebook? I don’t think she loves the product in the current form. I think she considers it to be a threat to democracy and human life. But in terms of the general idea that this technology doesn’t have to be this way and that a company that is committed to Facebook’s stated mission of connecting the world and bringing people closer together, that that is a possible thing. If people just ended up being angrier at Facebook as a result of what she’d done, it was kind of a waste. (Slate)

• 85% of the world’s population has been affected by human-induced climate change Researchers used machine learning to analyze more than 100,000 studies of weather events and found four-fifths of the world’s land area has suffered impacts linked to global warming. (Washington Post)

• An Umpire Took One Too Many Foul Balls to the Face. He Invented a Solution. A former minor-league ump has created a new mask that is designed to minimize the risk of concussion and other head injuries. It’s winning over MLB catchers. (Wall Street Journal)

Be sure to check out our Masters in Business interview this weekend with Chamath Palihapitiya, founder of Social Capital. He began his career as an engineer and team leader at AOL, Facebook, and Slack, but soon moved into Venture Capital. He earned the nickname “SPAC King” for numerous successful deals he has done, and today is a part-owner of the Golden State Warriors.

 

Ever-rising expectations for 2021/2022 US corporate earnings have been the primary driver of S&P 500 returns this year

Source: DataTrek Research

 

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The post 10 Wednesday AM Reads appeared first on The Big Picture.

My Two-for-Tuesday morning train WFH reads:

• America’s unemployed are sending a message: They’ll go back to work when they feel safe – and well-compensated September marked the weakest hiring this year, and an alarming number of women had to stop working again to deal with unstable school and child-care situations (Washington Post) see also The Delta Jobs Slowdown? Four quick thoughts on what looks like unpleasant news (The Overshoot)

• Fund Managers Start Axing ESG Buzzword as Greenwash Rules Bite Some of Europe’s biggest asset managers are starting to drop a once-ubiquitous ESG label from their company filings amid concern that regulators will no longer tolerate vague descriptions of environmental, social and governance investing. (Bloomberg Green)

• Pandora Papers: Stop the enablers that help billionaires dodge taxes While we should hold the billionaire tax dodgers to account, not enough scrutiny is focused on the enablers, what social scientists describe as “the wealth defense industry.” These are the tax attorneys, accountants, wealth managers and family-office staffers that are paid millions to help billionaires sequester trillions. (The Hill) see also Is the Income-Tax Rate on the Rich 8%, or 23%? Depends on Whose Math You Use Figuring out your tax rate—or Elon Musk’s—requires assumptions about what counts as income and what counts as taxes  (Wall Street Journal)

• The fiscal policy elephant in the room: The global macro debate is focussed on monetary policy. Fiscal policy will play a bigger role in the coming 12-18 months. (Value Added)

• Nature Shows How This All Works The real magic of evolution is that it’s been selecting traits for 3.8 billion years. The time, not the little changes, is what moves the needle. Take minuscule changes and compound them by 3.8 billion years and you get results that are indistinguishable from magic. (Collaborative Fund) see also Gradually, Then Suddenly Changes compound, just as surely as dollars do. A mathematical sleight of hand that also occurs at a near geologic pace. But miraculous all of these changes are. This is how the world changes. (The Big Picture)

• Mauboussin: Categorizing for Clarity: Cash Flow Statement Adjustments to Improve Insight Today’s accounting creates a huge gap between financial statements and what an investor needs to understand a business. This is despite the conceptual match between categories on the statement of cash flows and how businesses work. (Morgan Stanley)

• Commuting is psychological torture: Not doing that commute gave me 15 hours per week of my life back “I am never going back to that commute five days a week every single week again,” a friend told me recently. Before Covid he was spending about three hours a day in his car driving back and forth. When things started to shut down last year his employer was staunchly against people working from home at first, but before long it became unavoidable. (Welcome to Hell World) see also Seven Ways to Ease Your Fears About Commuting Again Dreading going back and forth to the office? Rethink the time you spend getting from Point A to Point B. (Businessweek)

• How the ultra-rich are traveling during covid, according to their travel advisers Forget about renting private yachts and jets. They’re just buying them now. (Washington Post)

• Trump True Believers Have Their Reasons Compared to the overall voting-age population, they are disproportionately white, Republican, older, less educated, more conservative and more religious (particularly more Protestant and more likely to describe themselves as born again). (New York Times) but see ‘Life Is Simple’ Review: A Blade to Shave Away Error A 14th-century friar challenged the idea that archetypal forms lay behind material things. That led to trouble. (Wall Street Journal)

• Collectors Who Caught the Bug Volkswagen’s original Beetle, cute and petite, still thrills aficionados. (New York Times)

Be sure to check out our Masters in Business interview this weekend with Chamath Palihapitiya, founder of Social Capital. He began his career as an engineer and team leader at AOL, Facebook, and Slack, but soon moved into Venture Capital. He earned the nickname “SPAC King” for numerous successful deals he has done, and today is a part-owner of the Golden State Warriors.

 

Debunking the market-cap-to-GDP ratio

Source: @TimmerFidelity

 

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Chamath is Massively Risk On
The engineer turned VC wants more than IRR, he wants to dent the universe, and explain why life is like poke.
TBP, October 14, 2021

 

 

 

There are lots of reasons why some investors become venture capitalists: Money, fame, the lure of technology’s magic. But very few are unabashedly utopian about what venture investing could accomplish if it tried.

Chamath Palihapitiya is. The engineer-turned start-up investor wants to do more than generate an IRR – he believes venture capital “when properly deployed, can solve the world’s biggest problems and fill up the void of what he believes are shrinking scientific ambitions worldwide.”1

He rattles off a long list of problems that need fixing: Climate change, water crisis, an impending food crisis, homelessness, crime. Governments, according to him, have shown they are no longer up to the task: “It’s no longer as much about laws necessarily, but it’s about technology, it’s about code, it’s about very specific inventions of science.”

When it comes to the potential good this technology could accomplish for society, Chamath is all in. Other than a small pool of emergency capital, the technologist and social critic has put 99% of his wealth to work into various moonshots – investments of much higher risk and much longer duration than the typical venture fund tolerates. So much so that nearly all of Social+Capital is now his own cash. This was a conscious choice, to give him the freedom to focus on high-risk, long-duration investments of his own choosing.

“When you’re a successful investor, you’ll get to a fork in the road at a certain level of assets where you have to go on the path, well-traveled or the path less traveled.” The well-traveled path was to become an “AUM Machine” – the fate of many successful venture funds: “Syndicate the risk, let returns decay, build an AUM machine, monetize the fee income, sell a percentage, and then eventually sell the GP to somebody and you’re done.” For many organizations, this conundrum is all but unavoidable. Limited Partners (LPs) that invest in venture firms are typically endowments, foundations or pension funds that are looking for something other than denting the universe – they want a return on capital.

He criticizes the “insidious problem” of human capital inside alternative investing, where everyone comes out of the educational factory the exact same way. There is a “very specific and very rigid hierarchy” where everyone in a firm went to the same handful of schools and were educated in exactly the same way, leading to the exact same kind of risk tolerance:

“The entire financial infrastructure of the world is in part merit and in part historical artifact and in part establishment and prestige: I go to a good school. I play lacrosse. I’m a three-letter athlete, I get into an Ivy, then I go work at a bulge bracket firm. Then maybe I get an MBA at one of these set Ivies. Then I go back to said, bulge bracket firm. Then I go to the buy-side. I work at a blue-chip hedge fund. Maybe I start my own.”

The result, he says is a homogenous mindset and a lack of diversity. “I don’t mean diversity in like skin color and religion and sexual orientation. I mean, diversity in your mind.” The intellectual sameness leads to a very rote playbook and a “mono class” of investors.

Many of Palihapitiya’s views are controversial making him a lightning rod for criticism (his take on stock buybacks is an example). His critique of the structure of investment funds is just another example. He doesn’t seem to mind, going out of his way to troll the haters on Twitter. “People just lose it. It’s so delicious.”

His approach to venture investing helps to explain Palihapitiya’s love of Poker, which he sees as a metaphor for life:

“You start poker with a stack of chips in life. You could be born to the richest man in the world. You could be born in poverty. Your stack is different, right? There’ll always be somebody at the table who can buy in for more than you in life. You then have to make bets. You have to take some shots. Who do I trust? Who do I fall in love with? Who do I work with? Who do I go to school with? Where do I go to school? What job do I take in poker? You make bets, which pot do I play? When do I raise? When do I call? How much do I risk in life? You sometimes make all the right decisions, horrible outcome, sometimes all the wrong decisions, great outcome. Poker is a chance for you to see that past. Take a step back and realize how much of is really in your control and how much of it is not.”

Early in his career, Palihapitiya embraced risky bets – and they have paid off handsomely. At 45-years old, he could kick back and take it easy. That is decidedly not the path he has chosen.

Whatever the next decade of start-up investing brings us, Chamath is all in.

 

 

 

 

Previously:
MiB: Chamath Palihapitiya on Venture Investing (October 9, 2021)

Transcript: Chamath Palihapitiya

MIB: The Venture Capitalists (July 15, 2019)

 

 

_____________

1. Page 126, “The Business of Venture Capital,” by Mahendra Ramsinghani, 2nd edition (2014)

 

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My back to work morning train WFH reads:

• The New Jobs Numbers Are Pretty Good, Actually They fell far short of analyst expectations, but they reflect a steady expansion that is more rapid than other recent recoveries. (New York Times) see also The Radically Changing Labor Market These days, the labor market is even more unusually dynamic than typical. It is not an exaggeration to suggest it is in the midst of a radical transformation. (The Big Picture)

• Zillow Isn’t Buying All Of The Homes on Your Block The dangerous allure of using easy anecdotes to explain complex problems (Medium)

• Climate Change Is the New Dot-Com Bubble: The free market has plenty of grandiose ideas about how to fix our broken planet. There’s just one problem: We can’t afford another bust. (Wired)

• New York’s Real Estate Tax Breaks Are Now a Rich-Kid Loophole If you have a modest income but access to lots and lots of cash, New York City has an apartment ownership program that’s right up your alley. Even if it wasn’t meant for you at all. (Businessweek)

• An SEC Rule Was Meant to Protect Individual Investors. Chaos Ensued. Thousands of stocks and bonds in the over-the-counter market are now out of reach for small investors. Professionals are still trading. (Wall Street Journal)

• What Critics of Economics Get Wrong Bashing the field is commonplace — but few are doing it for the right reasons. (Chronicle of Higher Education)

• How Evergrande Grew and Grew, Despite Years of Red Flags Chinese property company’s path to crisis came with issues underestimated by investors (Wall Street Journal)

• How a high-powered lawyer became a TikTok superstar: Meet the Korean Vegan So how did a super-busy law partner become a vegan icon and social justice champion whose debut cookbook is one of the most anticipated releases of the fall? She says she decided to give veganism a try, but she refused to give up her childhood favorites. Instead, she set out to veganize them all.  (Washington Post)

• The Math of the Amazing Sandpile To understand self-organization in nature, behold the sandpile. (Nautilus)

• Here’s Why Leaf Blowers Are Evil Incarnate Lawn mowers, garbage trucks and generators all make plenty of noise in the suburbs. But nothing compares to this amplified, gas-powered mosquito. (Wall Street Journal)

Be sure to check out our Masters in Business interview this weekend with Chamath Palihapitiya, founder of Social Capital. He began his career as an engineer and team leader at AOL, Facebook, and Slack, but soon moved into Venture Capital. He earned the nickname “SPAC King” for numerous successful deals he has done, and today is a part-owner of the Golden State Warriors.

 

September Employment Report: 194 Thousand Jobs, 4.8% Unemployment Rate

Source: Calculated Risk

 

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The post 10 Monday AM Reads appeared first on The Big Picture.

 

 

Now that’s a rock star.

You remember rock stars, don’t you? Probably not if you’re a millennial or younger. Rock stars were musicians who channeled the truth, who stood up to corporations and bad behavior around the world. They were explicit, not complicit. And they and their messages were so powerful that money rained down upon them.

But it hasn’t been that way for a very long time.

First we had MTV. Which soon made looks more important than the music. Good luck getting signed if you weren’t beautiful. They had whole teams of people to help write your songs, to groom you, because there was big money at stake, and the executives wanted it. That big money was based on technology, i.e. the CD, which sold for two times viny and cassettes, yet to “help the format” artists halved their royalties, with promises they would be raised once the CD got traction, and this never happened. It was a game, the major labels, MTV, radio and print media were in cahoots. They built beautiful stars, who became more and more vapid.

And then came the internet. The paradigm was blown apart. But within the last decade a new order has been established, akin to the old one, but this time on steroids. Now the major labels sign very few acts, and don’t release any music from said acts until they’re sure they’re going to be hits. Furthermore, they have untold power at the streaming services, because they provide the lion’s share of their product, not only new music, but catalog, which represents in excess of 50% of streaming by everybody’s calculation. So every major label priority gets priority at the streaming service. It’s put on banners, it’s put on playlists, it’s given a chance. Good luck with your indie record. And as was proven in the movie business over the last forty-odd years, if you don’t have a library/catalog you can’t pay the bills, you end up selling or going out of business, because it’s the already paid-for assets that generate reliable income at essentially no cost while you do your best to make new hits. And now it’s even easier, it used to be impossible to get all your catalog in the retail store, you’d be lucky to get a greatest hits package, but today every one of the label’s owned songs appears on streaming services, and a lot of the past is better than what we’ve got today, but no one on the inside will say so. And don’t expect a whistleblower in the music business, where loyalty is everything.

So “The Wall Street Journal” did a series on Facebook based on documents received from a whistleblower. But not only were the lengthy, detailed articles behind a paywall, they were in print, and most people don’t read, at least not beyond the headlines and captions on news or social media sites. It was big news amongst the intelligentsia, but that leaves out most Americans. But today the whistleblower went on “60 Minutes”:

Facebook Whistleblower Frances Haugen: The 60 Minutes Interview.

It’s less than fifteen minutes, you can afford the time, and it’s fascinating.

First and foremost Ms. Haugen. She’s a 37 year old woman. She’s the antithesis of Elizabeth Holmes. She’s the antithesis of today’s social media influencers, the Paris Hilton/Kim Kardashian paradigm, where it’s only the exterior that counts and money trumps everything. Haugen went to the not even 25 year old Olin College, an engineering specialty school, and ultimately got an MBA at Harvard. Should you listen to the uneducated nitwit in your neighborhood or Ms. Haugen? It’s no contest.

“Ms. Haugen was initially asked to build tools to study the potentially malicious targeting of information at specific communities.”

That’s from the one hour old “Wall Street Journal” article on Frances Haugen, now that she’s revealed herself, they’re detailing her history. You can read about it here:

“The Facebook Whistleblower, Frances Haugen, Says She Wants to Fix the Company, Not Harm It – The former Facebook employee says her goal is to help prompt change at the social-media giant”

But that’s behind a paywall. It took twenty five years, but that’s where the internet is going, I point you to this article centered around Patreon in “Bloomberg Businessweek”:

“Patreon Battles for Creators by Investing in Original Content – Ahead of a potential IPO, the $4 billion startup is transforming itself as competition from tech giants intensifies”

It used to just be Patreon. Then came Substack. Now all the usual suspect platforms want to be gateways for content provided by citizens that sits behind paywalls so the creators can get paid. So what we’ll end up with is a bunch of niche creative providers, forget whether they get paid or not, who will reach tiny slivers of the public as the big outlets get bigger, then again will the big outlets gain dominance? This is still up in the air. Sure, the “New York Times” has just under 10 million subscribers, but we live in a country of 330 million, and those subscribers aren’t all Americans. Ditto music, the big acts might be bigger than the indies, but in the aggregate, the indies are quite large. Never mind that there’s only so much money to go around. Everybody wants to get paid, they’re sick of giving it away for free, they’re going behind paywalls. And if you don’t pay, soon you’ll be in the dark.

But not on Facebook or Instagram, because there you’re paying with your attention, the time you’re logged-on, during which they can serve you advertising.

That’s right, Facebook changed the algorithm a couple of years back such that content that delivered a reaction was favored. Because you’d interact with said content and you’d stay on longer, it was a win for Facebook, but a loss for society.

Haugen says that Facebook turned on safety systems before the 2020 election, but once the contest was over, they turned them off, end result being the 1/6 insurrection.

That’s what everybody was saying on Workplace, the Facebook intranet where everything was available to everybody.

So Haugen wanted to move to Puerto Rico. Facebook said she couldn’t work there. So Haugen decided to quit. But during the month she transferred her projects to new people, she downloaded as much information as she could from Workplace. She was stunned what she could see and she was stunned that no one saw her looking, especially in areas outside her purview. Bottom line, Facebook commissioned internal studies that detailed over and over again the negative effects of the service. Instagram’s negative influence on teenage girls. The trade of drugs and human beings in plain sight. How people who posted frequently or were famous were whitelisted and could say anything with impunity.

And then she contacted the SEC and provided this information to “The Wall Street Journal.”

Now what happens?

Well, even Haugen says that breaking up Facebook wouldn’t work. She says there must be governmental regulations because the company prioritizes profits over safety.

But it’s worse than that. Facebook is not a manufacturer of physical goods. Half of the world is on Facebook, and the bottom line is the service is now out of the control of the company. As bad as it is in America, it’s a free-for-all in most countries. And, once again, it’s Europe cracking down on the service, saying it’s interfering with government, not the U.S.

“a betrayal of democracy.”

That’s what Haugen says about Facebook turning off its restrictions after the election. And democracy does hang in the balance. It’s been three and a half years since the Cambridge Analytica story broke, but now the anti-Facebook movement is gaining momentum.

But don’t expect Workplace to be available to all Facebook employees in the future, they’re gonna close that loophole posthaste, never mind already shutting down internal operations that deliver information the brass doesn’t want to hear. If you don’t hear it, it doesn’t exist, right?

Wrong!

But you knew that.

But you also thought the power resided in the public. Like yesterday’s inane anti-abortion/women’s rights marches. I sympathize with the sentiment, but not the method. We marched all the way through Trump’s term, did it make a difference? Of course not. It’s the twenty first century, not the twentieth. Battles are fought online. That’s where you make your statements and organize, a person behind a computer is much more powerful than a person at an evanescent rally.

But really, we need the big players, the government, the investors to get involved or no change happens. I wish it were otherwise, but it’s not. That’s what voting rights are all about. At least you get a say in theory, but if the rules make it too hard for many to vote, and a partisan legislature is in charge of the results, irrelevant of the public’s will, look out.

This is what is happening right now.

And what is everybody doing?

Looking to make a buck for themselves. Everybody’s deep in their hole, trying to elbow out others to get ahead. They’ve got contempt for others, there is no common good. That’s what “Squid Game,” the most popular show in the world, is all about. It’s not a revelation, it’s reality. People will do anything to survive, to keep the world running how they want it to.

Meanwhile, people are addicted to social media. At least there are alternatives to Amazon, but no boycott of the operation has ever worked. But California has instituted warehouse workplace rules targeting Amazon. Good luck working in another state. Where odds are you’re going to get hurt, with repetitive stress injuries if nothing else. Oh, Amazon provides aspirin and band-aids, but the truth is you’re just a cog in the system, disposable, while the company and Wall Street make ever more money. That’s another message of “Squid Game.”

So one individual has already had a huge impact. What are the odds other major tech companies will be reaching out to hire her? NADA! She’s white hot, untouchable, let’s hope she gets a big whistleblower settlement, but even if she does, that takes years.

Meanwhile, our nation, our world, is being run by a college dropout with tunnel vision. And his number two is leaning into him, not the public at large, screw the public, it’s all about money, isn’t that the essence of Elizabeth Holmes and Theranos?

But there’s a lot more truth in “Squid Game” than any of today’s music. And the goal of “musicians” today is to sell out to the corporation, or become a corporation, to sell crap to brain dead listeners. That’s to be lauded?

No, Frances Haugen is to be lauded. She will be remembered, the Spotify Top 50 will not. Because Haugen did something important, took a stand, risking her career, her future. Who else is doing this?

And if this were the pre-internet era, this “60 Minutes” story would be known by essentially every citizen, if they didn’t see it, they’d hear about it, but “60 Minutes” no longer has that kind of reach, nothing on network TV does anymore. Then again, Facebook hate knows no political boundaries, it can appeal to both right and left.

But not really.

Did you see that YouTube shut out anti-vaxxers? Trump wants back on Twitter. Trump had more reach than anybody in the world, now it’s been scaled back, but he’s already convinced his troops that Democrats are socialists who will ruin society and they must fight to protect their way of life, however bogus it might be. That’s what 1/6 was about. And the word was spread on Facebook. And despite all the doublespeak of Nick Clegg and the rest of the Facebook press team, we know it’s true.

In reality, Mark Zuckerberg needs to lose his job. He can keep his money, but he can’t have his hands on the steering wheel of Facebook anymore. But that would require the board to have balls, which it doesn’t possess. Unlike Uber, where Travis Kalanick was exiled for bad behavior, Facebook throws off a ton of money, and since profits are everything, there is no change unless the government insists. But you can’t get agreement on anything in D.C. And not only is there no longer any trust in Congress, there’s no trust in the Supreme Court. And Ted Cruz is single-handedly holding up the appointment of 59 ambassadors, how does that help us exactly?

But welcome to the modern world.

Where what happens online supersedes everything else. And it happens so fast that elected officials cannot keep up with it. And the internet itself is fluid, so you end up playing a game of Whac-A-Mole.

Meanwhile, China is clamping down.

But Evergrande has revealed the country’s economic underpinnings are shaky. But Xi is trying to minimize the bad influences of the internet, he’s trying to tamp down celebrity culture, he’s trying to return China to the past, and ultimately that will never work. What did the Rascals say? “People everywhere just want to be free”?

But things have to get really bad before they react.

They’re really bad at Facebook. This is the first shoe dropping.

What’s next?

~~~

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The post Frances Haugen: The Facebook Whistleblower appeared first on The Big Picture.



 

 

The transcript from this week’s, MiB: Chamath Palihapitiya on Venture Investing, is below.

You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Google, Bloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here.

~~~

RITHOLTZ: This week on the podcast, man, strap yourself in. This is really one of the old-time greats. Chamath Palihapitiya, Founder of Social Capital, very successful venture capitalist, part-owner of the Golden State Warriors, and all-around insightful investor social critic, and tech wonk.

If you’re interested in anything from technology to social media, to venture investing, startups, entrepreneurship, I don’t know what else to say other than strap yourself in. This is a great one.

With no further ado, my conversation with Chamath Palihapitiya.

VOICE-OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

RITHOLTZ: I’m Barry Ritholtz. You’re listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Chamath Palihapitiya. He is the Founder of Social Capital, one of the more interesting and successful venture capitalist out in Palo Alto. He is also an Engineer and Team Leader working at places like AOL, Facebook, and Slack. He has been known as the SPAC King for his numerous successful deals in that space. And he is also a 10 percent owner of the Golden State Warriors.

Chamath Palihapitiya, welcome to Bloomberg.

PALIHAPITIYA: Barry, thanks.

RITHOLTZ: I’ve been looking forward to having this conversation for a while. Let’s — normally, I start with people’s backgrounds and we go chronologically, but you have some quotes that I love, and I want to ask you about them and let you run wild with them, “Starting with venture capital properly deployed can solve the biggest problems filling the void left by the shrinking scientific ambitions of governments, foundations, and international organizations. Explain.

PALIHAPITIYA: Well, if you look at what’s happening in California or what’s happening at the federal level of the United States currently, there’s a really interesting thing that’s happened, which is we have effectively single-party rule. You have a, you know, elected leader that’s of one party. You have a Senate that’s of that same party, a House and then, you know, in the case of California, mayors as well, all democratic in this case.

And what’s interesting is it also happens to be a moment in time where the societal problems that we’ve been facing are the worst they’ve ever been. Climate change is worse than it’s ever been. We have a water crisis. We have an impending food crisis, homelessness, crime. And you have to ask yourself, well, if a single party like — you know, when you have a typical normal, you know, political set-up, you have these two opposing forces and you have to find common ground. And each party says the exact thing, which is, well, if we had complete control, this would all be fixed. And it turns out that two examples where you have complete control, in fact, nothing gets fixed, even less gets fixed than what got fixed before. So why is that?

It’s that the toolkit of policy and the toolkit of societies has changed. It’s no longer as much about laws necessarily, but it’s about technology. It’s about code. It’s about very specific inventions of science. And the problem with that then, well, then you would say, “Well, great. Well, that’s the solution to all of our problems. If we go in and figure out how to actually, you know, just have more of all of that stuff, everything will be solved.” OK, well, then — then you go in and you decompose that problem to first principles. And what you find is, for example, in places like core scientific research, people care more about citations, and papers, and research, and it’s also highly politicized and infested with all kinds of infighting.

And so, foundations can’t fund the work that they used to. Universities aren’t nearly as good and actually promoting massive breakthroughs. So more and more of this responsibility gets put on for-profit enterprises, but to be very specific, they have to be for profit and they have to be technical.

And when you see it that way, the venture capitalist all of a sudden has this critical role in society that they didn’t have before because they are a translator. They are, you know, in a technical meeting the smartest business person, but in a business meeting the smartest technical person. And they’re able to put these things together to solve problems. And so, that’s what I was trying to get across, which is we need more people building for-profit technical businesses, organizing resources against problems.

RITHOLTZ: So — so let’s stay with the concept of — of venture capital being organized to solve problem and talk a little bit about Social Capital. Tell us about your first couple of venture investments and who were your first limited partners.

PALIHAPITIYA: So, I was a Facebook at the time, and I had been doing a bunch of angel investing. And this is maybe 2008 or ’09, but I was the first solo G.P., I think, in many ways. I was putting some money to work of my own money, small checks, Barry, $10,000, $15,000.

RITHOLTZ: Early seed round, right?

PALIHAPITIYA: Early seed rounds in, you know, 2007 and ’08, basically all the money that I had. And I had to win.

I met a guy named Rick Thompson, an amazing entrepreneur, who started a gaming company. And I jumped in with two feet. I invested my money. I spent a little bit of time there helping him, you know, sort of — I mean, as a — as a part-timer, obviously, because I was working at Facebook at the time. And the company gets bought by Disney for like 750 million bucks and I made a few million bucks. And I thought, “This is it.” I have my — I have my escape velocity.

And at the time at Facebook, they were all these people that were trying to invest in the company. And Zuck basically said to me, “Hey, can you help sort out whose money we should take?” I mean, I was running Facebook platform, I was building Facebook Mobile, I was doing all of these products so — but I was like, “Yeah, sure, I guess.”

And I met the guys at Tiger Global, Chase Coleman specifically, and we built a relationship and then, you know, Tiger ended up investing in the business. And along the way, you know, I said, “Hey, I’m thinking of, you know, investing a little bit of capital on the side.” And he goes, “Well, if you organize a little LLC, you know, I’m happy to kick in a, you know, a few shovels.”

And so, all of a sudden, I had this little group of me and my friends, and I just organized about 11 million bucks, you know, and I was like three or four of it and like, you know, other couple of folks jumped in for 50K there, 500K there, a million there, whatever. And so, while I was a full-time employee at Facebook, I was a part-time investor.

And that’s how I started and so those are my first LPs, wonderful guys, Reid Hoffman, you know, a whole list of kind of like …

RITHOLTZ: Who — who’s the rest of that list because already I am loving this group?

PALIHAPITIYA: The list was pretty impressive. I want to say it was like Peter Thiel, Reid Hoffman, Chase Coleman. I’d have to look at the slides, I can’t …

RITHOLTZ: But it’s a murderous row pretty much.

PALIHAPITIYA: Yeah, Dave Goldberg, you know, Zander Lurie who is the CEO of Momentum A.I., so a bunch of really great entrepreneurs, and CEOs, and investors.

Anyways, I put the money to work and, you know, it was non-obvious that that fund was good. I was learning. And most of the investments I made were way too ambitious, and I was deeply undercapitalized, right? So, you — in 2008 and ’09, in hindsight, it was really dumb to make a bunch of deep tech investments.

Now, some of them have come home to roost, and that fund has now (inaudible), but we got very lucky and it did very well, but it took an enormously long period of time. So, I put the money to work and I learned. I learned, hey, portfolio construction is important. I didn’t get that right. I was way undercapitalized, like, hey, wait a minute, like I needed way more reserves to defend these companies. And I had to think about duration, meaning I can’t solve 20 of your problems in a 10-year fund. I need to solve five of your problems in a 10-year fund if I want to be in the fund business. And, you know, that obviously changed in 2016 and ’17 when I just basically consolidated with my own money.

But so – then I left Facebook in 2011 and I went back to these same folks. And I said, “Guys, let’s go much bigger. I think I know what I’m doing.” And we created — my first fund was 250 or 60 million bucks. I put up 60, and then it was really like, you know, John Doerr, Peter Thiel, Reid Hoffman, Li Ka-shing, you know, just — I ran the table of Jorge Paulo Lemann like incredible people. And a handful of really great institutions, Mayo Clinic, you know, folks that I was really proud to make money for.

And I said, “This is like a great intersection of entrepreneurs and, you know, investors, and philanthropists, and foundations.” And, you know, I’m going to go and try to find great businesses, and that’s how it started.

RITHOLTZ: So, from there, what was the subsequent funds that came out of that because that, you know, funds that run a seven or a 10-year lifespan. And some companies, some VCs will just do Fund 2, Fund 3, Fund 4, you didn’t exactly go in that direction.

PALIHAPITIYA: You know, I can tell you — so like the returns as of this last quarter because I just — I had a — I had a little advisory board meeting, you know, I put about a billion one in the ground. That is worth today just a little under $5 billion.

RITHOLTZ: And this was the 2016?

PALIHAPITIYA: No. So, yeah, this was …

RITHOLTZ: Or 2011?

PALIHAPITIYA: I — I raised about $1 billion over four funds — over five funds, sorry, in the first five years basically, so a $260 million fund, another $260 million, a $500 million, and then I had a small $100 million fund and then a $30 million opportunities fund kind of — so about $1.1 billion.

And, you know, so far, we’ve returned a little — almost a little under 2X of capital, so cash-on-cash, we’ve returned about two some odd billion. The curing value is a little under $5 billion. And I think that, you know, when I look in the next — in the next few years that will turn one more time. So basically, you know, one billion will turn into $10 billion and the returns are, you know, probably — well, right now they’re in the high 20’s nets.

RITHOLTZ: That’s great.

PALIHAPITIYA: And it’ll be in the — probably the low 30’s. That’s when it’s all …

RITHOLTZ: So, as all that comes up, are you just going to roll that over into another fund or …

PALIHAPITIYA: So …

RITHOLTZ: … are you looking to spread this into different spaces because I am aware you are a man of many interests. You’re not just — I — I find the world …

PALIHAPITIYA: Right.

RITHOLTZ: … really fascinating and curious. And — and looking at what you invest in, I can tell you approach the universe the same way.

PALIHAPITIYA: Right. So, along the way, I think in 2016 what I realized was running funds doesn’t accomplish my goal. And it took me some number of years to figure that out. I loved working inside of these companies. I loved trying to make some of these businesses work. I loved taking really big moon shots on technical problems that I wanted to solve.

I didn’t like the constraints of a fund. I didn’t like managing L.P. relations because by that point, you know, as you know, Barry, when you’re in the fund to business, then it’s all about quantity of LPs. And so, the LPs had grown beyond my cohort of people, right, because it’s not as if their money is infinite either.

RITHOLTZ: Right.

PALIHAPITIYA: Right? And so, then we have fund of funds and other organizations who are in the business of, you know, being investors in these organizations. And it became very administrative. And a lot of my time was spent fundraising and managing those relationships as opposed to investing or starting companies. And so, that was one big error of judgment that I felt I needed to fix.

The other one was I was looking at myself thinking like, well, am I going to be able to defend the ownership of these best companies? And think about what happens in a fund. If you make an investment and it’s working, you have all this pressure to double down. But when there’s something smaller and more technical where there’s way more asymmetric risk, it’s much harder to convince others that you should continue to invest in that as well.

RITHOLTZ: So, let’s stay with that a second because that’s — there’s some really interesting things. When I hear someone like you say double down, what I’m usually thinking of is, hey, we made a small investment in the seed round and now it’s the A or the B round, and we’re going to have to step-up. And $500,000 is now a $50 million or $2 million becomes $100 million. Is that what you mean by double down versus …

PALIHAPITIYA: No, I mean, the following decision, which is very hard. So, let’s just say — and — and we use explicit examples because it’s easier. So, let’s just say we invested in the crypto business and the software-as-a-service start up on the same day. $10 million in each.

The SaaS business has a much higher probability of short-term progress. I sold, you know, X amount of software, here’s my bookings, here’s my revenue.

RITHOLTZ: High probability of modest success.

PALIHAPITIYA: High probability of modest success. Most people are, you know, enraptured with that.

RITHOLTZ: That’s what — well, that’s what the S&P 500 is for. If you want a high probability amount of success, go by the spiders. But I …

PALIHAPITIYA: Sure.

RITHOLTZ: … imagine people come to venture because — hey, I have all my …

PALIHAPITIYA: No.

RITHOLTZ: … conservative stuffs.

PALIHAPITIYA: No, not true.

RITHOLTZ: I’m looking for you to …

PALIHAPITIYA: Not true.

RITHOLTZ: … hit me the 100X.

PALIHAPITIYA: It’s not true. It …

RITHOLTZ: Really?

PALIHAPITIYA: … it may be — listen. So there — there are two conundrums here. The conundrum number one is if you’re a limited partner. If you’re a limited partner right now sitting inside of a foundation or a pension fund and you have to return capital, and you have to get over your hurdle, you need an allocation into venture, but those allocations are minuscule. Nobody is getting, you know, huge allocations into Sequoia, right?

RITHOLTZ: Because the capacity is that’s limited as it is.

PALIHAPITIYA: Nobody — nobody is getting huge allocations in the benchmark. You know, these are $500 million funds, you know. And I — you know, in my example, I was 30 percent of all the capital, so there’s just not a lot of room for other.

RITHOLTZ: Right.

PALIHAPITIYA: Number one. And then the more insidious problem is actually the human capital inside the funds themselves. And what I mean by that is not that they’re bad people, they are wonderful people, but they are products of a very specific and very rigid hierarchy. You know, they typically went to a handful of schools.

RITHOLTZ: Right.

PALIHAPITIYA: They typically are educated in exactly the same way. They typically, you know, have the exact same kind of risk tolerance as a result of all those things. And so, when the rubber meets the road, this Harvard MBA or the Stanford MBA, they want to treat the venture capital organization as their version of the S&P 500. Very predictable, Steady Eddie. Let me make, you know, a good salary. Don’t rock the boat. So, what happens?

Crypto stuff gets underfunded until it’s obvious. You know, hard tech and — and, you know, life sciences get underfunded until it’s obvious. SaaS gets overfunded until it’s obvious. And that’s the whipsaw that you face now.

Now, there are a handful of organizations that have fought against that and have done it brilliantly. So, when you look, for example, like Founders Fund, I’ll pick an example. Incredible set of investors who are iconoclasts to the one. Atypical in every dimension. There’s not a single drop of real pedigree amongst them, except they are all incredible entrepreneurs.

If you look at Coastal Ventures, same situation. Incredibly atypical in their intellectual makeup, and the way they think, and what they value. And to a one, they’re generally great entrepreneurs, so you see this recurring theme. So, you know, for me, what I’ve tried to do is recalibrate my time around that realization.

I have a fixed amount of capital. If I surround myself with these good — they’re good people, it will lead me astray because I will get risk off. And the whole goal of this business, as you exactly well put it, is to be 100 percent massively risk on. And so, that’s how I live my life. I have a small allocation of capital in case all of this goes to zero, but otherwise 99 percent of my net worth and wealth is massive risk on.

RITHOLTZ: That’s quite, quite fascinating. I — I keep wanting to go to some of my questions, but you keep saying things that make me have to respond. I’m still kind of struck by your LPs, meaning management. And what I mean by that is someone runs a successful fund. There’s a very limited amount of slots for money to come in.

I just imagine it’s like here’s the deal. I have a slot for 100 for you. I’ll send you the annual updates, we’ll have an annual meeting, and I don’t want to hear from you the rest of the year.

PALIHAPITIYA: You can’t take — it’s not …

RITHOLTZ: It’s the approach. It doesn’t work that way?

PALIHAPITIYA: … it’s not that — well, it’s not that easy even for the best organizations. You know, when you’re dealing with these large pools of capital, they are large bureaucracies. And in fairness to these bureaucracies, there’s — there’s really important guardrails of risk management, right, and legal and operational due diligence that they have to do because again, it’s the fireman’s pension, it’s the teachers’ pension, it’s the …

RITHOLTZ: Right.

PALIHAPITIYA: … you know, it’s the foundation. It’s the — they’re all doing good work, right? So, it’s not like, you know, they have a right to be cavalier, but it creates an infrastructure of folks that approach their job in a very specific way that, for me, didn’t make sense.

For others, I think it does make a ton of sense because, you know, they — look, there’s a tradeoff. Today, that tradeoff, by the way, has rewarded them more than me. And what is the tradeoff?

When you’re a successful investor, you’ll get to a fork in the road at a certain level of assets where you have to go on the path well-traveled or the path less traveled. The path less traveled is what I’ve taken. You’re alone …

RITHOLTZ: Meaning …by yourself, more risk …

PALIHAPITIYA:  you’re by yourself … all your own money, all risk gone. The path well-traveled says syndicate the risk, let the — let the returns decay, build an AUM machine, monetize the fee income, sell a percentage to dial or to whomever, and then eventually sell the G.P. to somebody and you’re done.

And, you know, if you have enough capital at some point, you’re like, well, what do I need any more money? This is a safer route to take.

RITHOLTZ: Right.

PALIHAPITIYA: I am of this different view, which is I want very specific kinds of progress that will not happen unless I am a tip of the spear on a bunch of things that I want to change. And I’m using my money as a mechanism of showing the change that I want to see in the world with the idea that if free markets are ultimately efficient, other money will follow. And it will unlock and create change. SPACs are a perfect example.

RITHOLTZ: We’re going to talk about SPACs in a little bit. I’m fascinated by the path less traveled. And I — I’m kind of reminded of an old joke a friend used to say, what’s the difference between having $1 billion or having $2 billion? And the answer is really nothing.

PALIHAPITIYA: Nothing.

RITHOLTZ: Right, there’s not — what is the difference?

PALIHAPITIYA: Nothing.

RITHOLTZ: So — so once you wrap your head around that, why build an AUM machine? Why take a G.P. and do all the things you don’t want to do just so you can sell it in the road?

PALIHAPITIYA: Well, look, I mean — I think there’s something very valiant in building a company of any kind. I don’t care what it is because you end up hiring people, you end up creating your own little economy. You know, by hiring good people and paying them, you’re giving them a path. You’re giving them, you know, some amount of purpose in their lives. So, you know, any form of company building, I think, is heroic, the person that uses to build a company.

I don’t care what it is. It could be a garbage business, an AUM business. You know, they’re all to me where I look at the founders of those things like you, and you’re in a class of hero for me.

Everybody may not be with the same, you know, sometimes now founders, unfortunately, sometimes can get vilified for being an entrepreneur. But in general, I think they’re heroic. But again, that’s not what I was trying to do.

My returns in society, I wanted to be expressed by a different kind of change and a different kind of purpose, which was a practical problem solved. You know, I want reforestation to be, you know, done differently. I want a gene editing solution to be so cheap and so fast the available we can eradicate, you know, the 32,000 inherited Mendelian diseases. You know, I want to figure out how to get, you know, sub $100 solar on everybody’s roof and to build a massive distributed energy utility in America. It turns out I’m doing all those things.

Now, I can do that with my capital and that’s really great. That capital may go to zero …

RITHOLTZ: But you’re saying …

PALIHAPITIYA: … but it may not …

RITHOLTZ: … you couldn’t do that if you had these institutional endowments and other …

PALIHAPITIYA: Maybe not.

RITHOLTZ: … large more conservative investors who are more concerned about IRR than moving the needle.

PALIHAPITIYA: Short-term IRR because, you know, again they have a job to do. They have pension obligations to make. They have, you know, other things that they’re funding. They have the lifestyle they want to pay for. They have their own annual reviews and bonuses and things. So, you know, it’s not to debate the validity of it, it just exists, and I’m not willing to sign up for that because duration.

And, by the way, you can see that certain funds have realized that that durational limitation doesn’t work in tech anymore, right, so now you’re seeing these 15-year funds, right? Some of these climate funds are really long-dated so that they can take huge long risk with very sticky money.

I think that’s moving in the right direction. You know, what I raise a — you know, a 20-year fund …

RITHOLTZ: You’re how old, 45? Forty-five.

PALIHAPITIYA: Yes. No.

RITHOLTZ: All right, so you could do a …

PALIHAPITIYA: Maybe.

RITHOLTZ: … 20-year funds if you want …

PALIHAPITIYA: Yeah.

RITHOLTZ: … to move the needle.

PALIHAPITIYA: Yeah. But a 10-year fund, that will never do. But never say never, but I — I — I — you know, it’d be — it’d be a very, very high bar.

RITHOLTZ: Quite fascinating. Let’s talk a little bit about Social Capital social media. And being a lightning rod, I kind of get the sense that you like mixing things up and getting people upset by saying things that are contrary to commonly accepted beliefs.

PALIHAPITIYA: Well, I mean, look, here’s what I’ll say. I really like saying what’s on my mind. I think it’s really important. It’s sort of one of the advantages of being — being free, right, and living in a free society. And so, I really take that to heart and I love that. And, you know, in a lot of ways sometimes I do get a, you know, some — some giggles out of like trolling some folks on Twitter, which is fun.

RITHOLTZ: So, let’s talk about trolling. You mentioned you’re one-quarter, 3.6 percent compared to the S&P, which was only up 2.3 percent. And you said, “Hey, I’m doing 56 percent better than the index,” which is technically true …

PALIHAPITIYA: Yeah.

RITHOLTZ: … but the enumerates on Twitter lost their mind. Tell us, was that an example …

PALIHAPITIYA: So …

RITHOLTZ: … of trolling or what were you doing?

PALIHAPITIYA: … absolutely, absolutely. I got such a kick out of that. It was …

RITHOLTZ: People just lose it.

PALIHAPITIYA: It’s so delicious. You know, I — I — I think what’s important is that a lot of those things are probably saying more about them than they are about me, and their own in securities, and whatever they’re dealing with. I think there are a lot of people, in fairness to them, that are trying really hard and treading water. And I think one thing in FinTwit that you’ll see a lot is folks that are out there, you know, in the arena as Roosevelt used to say “with the dust on his face,” guys like me can be viewed as polarizing. And it’s not because of what we do or our success, but it’s the actual act of doing because that’s what other people are constrained by. And I think that tilts folks’ times.

RITHOLTZ: So — so let me turn this away from them to you for a second and pardon me if I’m projecting at all. So, the — the 20-something, 30-something, Chamath, who’s an engineering, and a team leader, and is a confidante of Zuck, that’s a different person than the 45-year-olds venture capital and someone looking to make a dent in the world.

PALIHAPITIYA: Yeah.

RITHOLTZ: Have you found you had a sort of change your ammo based on who you are, and where you sit, and how that’s changed your outlook, and job, and …

PALIHAPITIYA: Completely.

RITHOLTZ: … reputation. How has that morphed over the years?

PALIHAPITIYA: I think the — the best way to say it, Barry, is that in the — in the absence of a very few people, most of us bring into adulthood a ton of baggage. And a lot of folks are dealing with baggage from how they grew up. And I am sort of Exhibit A of that. You know, you leave a country because of a civil war. You know, you settle in a different country where in Canada — in this case, where, you know, you come as refugees. You know, you live above a laundromat. You take — you know, used to hand-me-down clothes. You live on welfare. You know, your dad has, you know, issues with alcohol, depression, employment. Those are not unique to me, those are unique to so many people in the — in the United States and in Canada.

What happens though is that then it creates these very subtle loops of self-sabotage. So, when you’re young, you can overcome that by sheer brute force. And when I was young, I was, you know, more mathematical than other people, more technical than other people, just more clever than other people in the jobs that I did so I could overcome my tendency to give myself a hard time and make my life more difficult than it needed to be.

Then you slowly become — then I slowly started to become successful. And for whatever reason, the biggest thing was I said I got to go and fix those holes because that baggage is becoming way too heavy for me.

RITHOLTZ: How did you come to that realization? Because most people — present company included — meandered through life oblivious, leaving a wake of death and destruction behind them and …

PALIHAPITIYA: Through distress.

RITHOLTZ: Really?

PALIHAPITIYA: Through distress.

RITHOLTZ: What was the distress that led you to that insight?

PALIHAPITIYA: I had a six-month period where my father died, so he was — he died at 72. But — and at the time, you know, I was already very successful, and so I had all this money, but my dad had been a lifelong diabetic, no credible path to a kidney transplant. He had a cardiac arrest. He was end — he was an end-stage renal failure, and he died October.

And then six months later, May, my best friend died. We were all on vacation together in Mexico when he died. And so, it was just this gut punch, this one-two gut punch, one person who is this very complicated figure in my life and another person who is my bigger brother and very much my protector. And without these two, I was a little listless, to be honest. And that’s when I said, “I have to figure out what’s going on and get to the bottom of this.”

And I don’t know to this day why because the other — you know, the other modality, when you’re — like if you ask anybody, you look at a really performing — you know, anybody who’s really good at anything who grew up in a really shitty environment, sorry.

RITHOLTZ: You could say that. We’ll — we’ll just beep it.

PALIHAPITIYA: The reaction is to suppress and compartmentalize. That is the most powerful coping mechanism you have. And for whatever reason in my mid-30’s, I finally stopped trying to do that as much. And then I found people in my life who became these outlets that just started pulling stuff out of me. You know, this sounds really soft, but it goes to when you look at the future or when you look at your — like when I look at my heroes, one of the things that I see is the common through line is that they have all become exceptionally comfortable with themselves. They’re not necessarily palatable to other people. It means — you know it means nothing.

But they …

RITHOLTZ: That’s great.

PALIHAPITIYA: … they have done that work, and that’s what allows them to be highly functional. And when you look at folks like Buffett or you look at folks like Mike Bloomberg, how are you functional, and competent, and so on point through so many decades and changes is because they know who they are. They’re not asking you to like who they are, they like who they are.

And so, I embraced that process, and so it’s a journey. So, I am seven years into a journey. And these last seven years have been very powerful because of that. I feel like I’ve been unshackled. But those were — those were — those were handcuffs that I had made for myself.

RITHOLTZ: But that’s still pretty young to be that enlightened and self-aware. Those of us who have found that — and — and a lot of people eventually find that, but it’s not at 37, it’s usually a little later in life. So first, kudos to you for — for picking that up so early. But second, do you look around and see other peers and other colleagues, and say, “That guy would be great if or that one would be fantastic if only he was a little more self-aware of the — the …

PALIHAPITIYA: It’s less — it’s judgmental than not because that — that is like if — the if-only part, no, but I have now become hyper-attuned to the things that used to hold me back when it manifests in other people. And I see it everywhere.

RITHOLTZ: Right.

PALIHAPITIYA: But I have a lot of empathy for that now. So as whereas before, I think I would have been much more judgmental. I’m a lot calmer about it, and I — and I — and I am more empathetic. And where it helps very practically speaking is I’m still, you know, big shareholders in many companies. And the people that get the benefit of that training for whatever it’s worth to them are all my CEOs.

RITHOLTZ: All the founders.

PALIHAPITIYA: All the founders.

RITHOLTZ: Yeah.

PALIHAPITIYA: They get it. And — and I think on the edges, on the margins, I think some of them really appreciate it. I don’t know, I don’t ask them, but not …

RITHOLTZ: Everybody is that Zen when real money is involved. Is that — well, well, it’s going to be what it’s going to be. I could share my wisdom or not.

PALIHAPITIYA: Money is the biggest distraction you can create for yourself if you want to do something useful.

RITHOLTZ: Isn’t that fascinating?

PALIHAPITIYA: Go and read the obituary of Steve Jobs that his sister wrote in “The New York Times,” and I’ve said this a couple times and I’ll just repeat it because it’s so powerful. “When he’s on his deathbed, he’s not saying I invented the iPhone. He has his family around, and — and he’s saying, ‘oh, wow’ repeatedly. ‘Oh, wow, oh, wow, oh, wow.’”

My interpretation of that is that he is talking about something that is so much more important than money and accomplishments. It’s a journey, it’s an evolution, it’s basically feeling like you’ve had these great beautiful relationships, right, and accounting — a real life accounting of your progress. And I want to be on that journey so that 50 years from now, 60 years from now, 70 years from now, you know, touch wood as — as far away as it takes, I want to be able to do that. And so, it allows me to not care one scintilla.

Like I said, I have a little bit of money that I put away to protect myself, but I don’t need the house I live in, I don’t need the plane I have. I don’t need any of that crap. I use it to make my life efficient, but I don’t need any of it. It doesn’t define me. I don’t let how other people view me and let it impact me, and that’s really powerful.

RITHOLTZ: So, let’s stay with the concept of money as getting in the way of accomplishing things or doing things …

PALIHAPITIYA: Of good decisions.

RITHOLTZ: … of decision-making, right. I’m fond of saying money is a tool, and all — a hammer could be used to build a house or to break a window. Its tools can be used (inaudible) used, but I want to talk about this within the context of what you’ve described as activist capitalism. And then we’ll — we’ll get into crypto shortly after that. Tell us what is activist capitalism.

PALIHAPITIYA: If you want to make enormous amounts of returns, you have to go where there is the most risk. So meaning, if — if you — if I said to you, “Hey, Barry, can you become a trillionaire investing in bonds?” You would say, “Chamath, not in a trillion years.” Right? There is zero risk in that market. The returns are meager.

But if I said to you, “Barry, could you make $1 trillion in crypto?” You would say, “Absolutely.” I don’t know how, but it’s possible.

But now think of what it really means. It doesn’t mean that you’re taking massive huge bets of capital. In fact, you could make enormous returns, you know — I mean, I have, I’ve made billions of dollars in crypto investing millions of dollars, so you don’t need to have billions of dollars. What did you need? You needed to have an extremely different point of view. And in many ways, that point of view isolates you, and so you become a little bit of an activist. You have to believe something that everybody else doesn’t, that in that moment is a little bit counter cultural or counterintuitive and you have to hold the line. That’s what activist capitalism is. It’s the ability to have these non-consensus ideas and perspectives, and hold on for dear life.

RITHOLTZ: So, let me push back on that a touch only by saying you’re located in Palo Alto. All the other venture capitalists out in California are mostly there on Sand Hill Road and — and around it. Wouldn’t the more contrarian perspective be, “Let me get out of California and go somewhere else where I’m not part of the same crowd looking at the same deals.”

PALIHAPITIYA: I think that’s — I think where you live is irrelevant. You know, I live where I live because I like it and I like my backyard. And, you know, I have a, you know, nice house and …

RITHOLTZ: Climate is great.

PALIHAPITIYA: … my friends are around.

RITHOLTZ: Right.

PALIHAPITIYA: Climate is great. My friends are around. That’s why I live where I live.

The ideas that I find in our backyard oftentimes are really countercultural to what the orthodox perspective is in that moment. I don’t need to move to Austin or Miami to find that. I can find that where I live. It comes down to, are you willing to buck the establishment and how the establishment measures you to be an activist?

RITHOLTZ: So, let’s stay with that, and there’s another quote of — of yours that I have to bring up, “Crypto destroys capitalism and that’s better for the world.” Explain that because that’s quite a nuance perspective.

PALIHAPITIYA: We’re replacing what capitalism is. There are small pockets of how it will work in the future. I think venture capital is an embodiment of that. But the overwhelming amount of capitalism today is inefficient and it’s supported by decision-making and constructs that are artificial. So, let me be specific.

Today, the entire financial infrastructure of the world is, in part, merit and, in part, historical artifact and, in part, establishment and prestige. I go to a good school. I play lacrosse, some with three letter athlete. I get into an Ivy. I go through Ivy, then I go work at a bulge bracket firm, then maybe I go and get an MBA at one of these said Ivys, then I go back to said bulge bracket firm, then I go to the buy-side, I work at a blue chip hedge fund, maybe I start my own. I know all of my buddies, my buddies of the same things.

And eventually what happens is there’s not enough diversity. And I don’t mean diversity in like skin color, and religion, land sexual orientation. I mean, diversity in your mind, you know, which is you have been playing by a very real playbook. And if everybody else that’s also at the top echelons of a pecking order playing by that same playbook, you all become a mono class. You’re predictable.

RITHOLTZ: The same factory is producing the same …

PALIHAPITIYA: Same thing. You could be …

RITHOLTZ: … same output.

PALIHAPITIYA: … you could be brown, yellow, black, white. You could be …

RITHOLTZ: You went through the system, you’re going to be the same.

PALIHAPITIYA: … small, short. You could be male, female. It doesn’t matter. You went through same things. You are rewarded by the same mechanisms. You are taught Pavlovian — like a Pavlovian dog, to behave in one way.

And then you arm people with money and say, “Go do what you think is right and — and view the market’s force into the world.”

RITHOLTZ: And they’re all going to do the same thing.

PALIHAPITIYA: They’re all going to do the same thing. That’s why capitalism isn’t working. It’s not working for enough people because we have a mono class of people that control the money.

RITHOLTZ: So, what’s the solution to that?

PALIHAPITIYA: So, when you look at de-fi, and when you look a bitcoin, and when you look at Ethereum, and Solana, and all of these projects, there are three principles that rip that industry, and entitlement, and establishment apart. Number one is that it’s completely decentralized. So instead of having these centers of power, you have loose affiliations.

Why is that so disruptive? It’s because you can’t go and get a gold star from working at XYZ organization, right? There’s no more hierarchy. There’s no ladder to climb.

RITHOLTZ: No middle man charging a fee in between everybody.

PALIHAPITIYA: No different. There’s no place where you can say, “I work at XYZ, so I am, as a result, smarter than you.”

RITHOLTZ: Gotcha.

PALIHAPITIYA: Right? If you work at a bulge bracket firm, you look at people that haven’t worked there has lesser than you. That’s what people do. But in a world of decentralization where there’s all these projects and, you know, there’s — there are no companies anymore, you have completely different ways in which organizations get built. You have completely different ways in which regulations have to adapt because you can’t control these projects. And as a result of all of these things, you have very different outcomes. And the outcomes are now you have diversity.

All kinds of crazy random people thinking all kinds of crazy random things are now acting through these tools to rebuild capitalism the way they want. I want, you know, checking accounts to work this way. I want mortgages to work that way. I want credit scoring to work the other way. I want insurance to work this way.

By the way, it’s not finance, I want art to work in the other way. That’s how NFTs are, right? I want music to work in this way. I want social networks to work in the other way.

There are thousands and thousands of these projects being built that are completely decentralized, completely democratic, you know, completely API-fied (ph). It’s hugely disruptive for capitalism because it introduces massive heterogeneity, right, massive diversity in the people that control the allocation of the money, number one.

And then number two, the reason why it’s super disruptive is all of this either damage or progress, depending on which side of the ledger you want to …

RITHOLTZ: Yeah.

PALIHAPITIYA: … can get started with a few thousand — $10,000, $100,000, and so now you don’t need $500 million. You don’t need to go to four growth funds to raise $0.5 billion because you’re $1,000 — your — you know, your $1,000 investment can literally become $0.5 billion.

So now you democratize who can play the game. You can democratize the capital allocation, so now there’s a diversity of ideas. There’s a diversity of people putting money to work. It’s a Brave New World.

RITHOLTZ: What’s the third bullet point you had — you had referenced? You said …

PALIHAPITIYA: So, it’s democratization, it’s decentralization, and then it’s what I call decomposability, meaning, the beautiful thing about this Brave New World as well is without companies and without — without, you know, hierarchy, there is enormous amounts of cooperation. And the basic way to think about this Brave New World of crypto is using legos. I have an idea, I build something with all the legos that have come before me.

But there’s only one rule, Barry. If you use the legos, you yourself have to be a lego to somebody else.

RITHOLTZ: Right.

PALIHAPITIYA: And that’s what composability and decomposability means. Those are the three pillars of this Brave New World, and it’s going to rewrite capitalism. I build an organization that doesn’t have a company around it. I make everything hyper transparent. It takes small amounts of money to completely blow up entrenched interests. And then all of that value, I must make available to anybody else and I cannot say no to them.

Think of how the world today works. That’s not how it works. If you wanted to build an app on the Apple App Store, they can say no.

RITHOLTZ: Right, you got to get their approval. And if — and even if you get their approval, there’s nothing that prevents them as Epic Games have learned of saying, “We’re going to pull back. We don’t like what you’re doing.”

PALIHAPITIYA: Righ.

RITHOLTZ: So — so let me ask what I think is an obvious question. Capitalism has proven itself extremely adept at co-opting challenges to itself. The old-line capitalism would — capitalists would sell you the rope to hang himself, but it turns out not to be all that true …

PALIHAPITIYA: Right.

RITHOLTZ: … because the capitalist is also going to be selling tickets to the crowd and building hotels. And before you know it, what was going to be a single event becomes a giant economic engine. What’s going to prevent those existing bulge bracket firms, ivy league schools, endowments, the usual capitalist from plowing into crypto, and blockchain, and all the fun stuff that’s going on …

PALIHAPITIYA: Nothing and they should. And …

RITHOLTZ: … but co-opting it so it becomes just part of the …

PALIHAPITIYA: It’s not.

RITHOLTZ: … capital firm (inaudible).

PALIHAPITIYA: … it’s not …

RITHOLTZ: You’re saying it’s impervious to that.

PALIHAPITIYA: It’s — it’s not — it’s not co-optable (ph).

RITHOLTZ: It’s not.

PALIHAPITIYA: But I think that they should be a part of it. I — I don’t like exclusion. I am like a inclusion maximalist like, you know, what is the — like the mission of Social Capital, right, or vision. I had a vision at our firm. We write — we talk about it all the time, which is even the starting line.

Now, imagine you had a world where you could find the smartest rocket scientist, the smartest mathematician, the smartest biochemist, the smartest materials engineer, the smartest A.I. person, the smartest artist, the best seamstress, whatever it is, the world today doesn’t allow us to find the best human capital as expressed in any of the things we need to move the world forward.

Why? If you’re a woman in the wrong country, you’re screwed. If you’re a colored man in the wrong country, you’re screwed. If you’re, you know, Jewish or not Jewish in a certain country, you’re screwed. If you’re, you know, gay in this country or that country, you’re screwed. If you’re in the wrong caste in this other country — I mean, like the amount of limitations we put on maximizing human potential is insane.

RITHOLTZ: Half the world doesn’t allow people to reach their potential.

PALIHAPITIYA: It’s probably more. And it’s all by design. We choose to let these inefficiencies compound. And so, you know, I believe that we are way better off where there’s a race, right? My — my vision is like there’s a starting line, the gun goes off, everybody on the earth is on an even playing field to start not to end, but to start. And some people will take the offramp and become, you know, a fashion designer, and you would say, “How did this guy come out of nowhere to become — you know, or some people go off and do music in a way that you never thought was possible?” And there’ll be such a renaissance of possibilities.

So, I’m an inclusion maximalist, which is let’s get everybody into the party, give everybody the same tools, and then let’s see what happens. It’s so fair and just for people. And what I don’t like is because I went to XYZ school or because my last name is XYZ or because, you know, I worked at XYZ place, I should have some advantage. And I don’t think that’s right.

RITHOLTZ: So, am — am I being overly optimistic in saying that world you’ve described bulge bracket firms, big banks, Ivy League schools, it’s a very 20th century construct, and it was pretty clear early in the 21st century that that was losing its grip on — on the economy, on the government, and on capitalism itself or am I just being to Pollyannaish with that?

PALIHAPITIYA: I think you’re — I would not include like — you know, look, I think the financial organizations have enormous potential to adapt and be an incredible participant in the future. And I think that there are so many good people inside these banks and organizations that I think will thrive. So, I’m kind of convinced they’re — they’re on the side of history going to be judged wrong.

I have much more of an issue with universities.

RITHOLTZ: Really?

PALIHAPITIYA: I think they’re fundamentally on the wrong side of history, and I think that they have done an enormous disservice to so many of our kids and parents because, basically, in the — look, if you take the cost of a university education and you graph it as this function of time, and you put one single dot on it as a trigger for price inflation, I would annotate that dot as the 1982 U.S. News and World Report that started to create university rankings in …

RITHOLTZ: Right.

PALIHAPITIYA: … America. It — literally you can see that costs were contained until that stupid magazine tried to create this insert to sell ads, by the way.

RITHOLTZ: Right.

PALIHAPITIYA: So, what were they motivated by? They were motivated by, you know, selling CPM inventory to like R.G. Reynolds and Ford, right? Paper ads in a magazine has all of a sudden tricked university administrators to think that this is a luxury good that should be meted out like a reservation line to get an Hermes purse. That is insanity. And especially in a world where we can have, you know, pervasive Internet connectivity where we can find the best grade five science teacher, you know, the best, you know, A.P. calculus teacher that we’re not letting all of humanity benefit from that, to me, is insanity.

So — and then on top of that, there’s just moral overlay now inside of universities where they will also then now make judgments about what you can be taught. And so, what that effectively does is rob people from the ability to learn from first principles, right, to attack an idea down to the basics and build it back up, which is a toolkit. It’s a process thing.

So, I — I — I’m very negative on universities and what they’ve done culturally, and academically, and institutionally, and societally in America. Less so about like, you know, I think financial firms, in general, will be great participants of this new capitalist ecosystem, but I — I think the universities have completely failed.

RITHOLTZ: That’s quite an interesting take. And I know a few people who share versions of that perspectives on both the left and the right. The criticism of the — of the U.S. college and university system is — is pretty robust.

Let’s stick with one more criticism. We’ll talk about zombie companies. You had criticized the pandemic bailout of companies by the U.S. S government. Tell us what you specifically were unhappy with when it came to entities like airlines.

PALIHAPITIYA: I have no issue I want to be clear with airlines. And quite honestly, I have — you know, look when a company — I just want to set the table stakes. When a company goes through bankruptcy — any company — you know, it can happen in a way that preserves employment for all of the employees. It can happen in a way that preserves pensions.

Now, you know, rapacious people who take over companies and force them into bankruptcy can do all kinds of bad things, but it’s also possible that you can do it in this other way as well.

What I was reacting to in that moment was that we were about to reward a behavior. So, I had no issue with airlines, but I had — I had an issue with the following behavior, Barry. We have seen R&D investment inside of America’s companies effectively go to zero over the last 20 years. We’ve seen instead buybacks replace R&D investment in that same period of time. We’ve seen compensation plans get written by boards that completely reward a manipulation of earnings per share. And then we see CEOs optimizing earnings per share by pilfering all of this money that should go into R&D into buybacks.

And the airlines, to be very honest, were one of the worst offenders of that. The airlines knew climate change was coming. Did they invest in a fuel stock that was basically more carbon-efficient over the last 20 — 25 years? No. Did we figure out a way to do more efficient plane routing? No. Did we influence how Boeing and Airbus really build those airplanes to be — you know, to have better wing designs? No. They optimized for massive free cash flow, and they optimized for share buybacks, and they optimized for massive compensation plans to the CEOs of those companies.

Now, in fairness to the airlines, it wasn’t just them, it was entire industries. And then the idea that you go and you bail them out before you bail out individual folks on main street, to me, seemed very unfair. And I thought what would be better would be to show people that actually we want to reward R&D. You know, we want to make buybacks harder.

And, by the way, if you look at what’s proposed in the current, you know, plans that are in front of Congress, there are elements of what I proposed, right? Folks are being forced to — basically, they will be taxed on buybacks. Great idea, I think the tax should be much higher. And then they should be — there — and there are some incentives for R&D. And I wish those incentives were higher.

Now, put all these things together. Why is that idea so powerful today sitting here in 2021? Yeah, we’re in September ’21.

RITHOLTZ: Right.

PALIHAPITIYA: We’re seeing China unravel, right? We’re seeing the great vertical integration of the second largest economy in the world. And what that’s going to create is a national security interest for us to be reliant on ourselves and to be diversified in who we work with around the world. That requires an enormous amount of R&D so you cannot keep doing share buybacks and compensation schemes to CEOs. The right CEO’s in the S&P 500 should be plowing 20, 30, 40, 50 percent of free cash flow to solve these problems because these are of national interest and national security.

RITHOLTZ: That’s a really interesting place to take it. I was not expecting you to go there. We think of China as both a — I’m not going to use the word that everybody uses and it’s terrible, but both a industrial ally and an economic competitor. You’re taking this to the whole next level. National security requires us to bring back a lot of the manufacturing that we’ve outsourced to China, whether it’s semiconductors or something less sophisticated.

PALIHAPITIYA: China is a frenemy.

RITHOLTZ: That’s what I was trying to avoid.

PALIHAPITIYA: They’re — they’re an exceptionally intelligent brilliant frenemy. And so, we have to be extremely thoughtful and strategic in how we engage in them — with them. But here are a couple things that I think will come to pass.

Xi is the new Mao. There is only one economy, then that’s China Inc., and China will have to deal with their — you know, a lot of — all of this, by the way, is motivated — is — is motivated by demographics. China is a demographic time bomb.

RITHOLTZ: Right.

PALIHAPITIYA: And it’s probably already gone off. And this is why I think Xi is acting much more aggressively than he has. He has a huge …

RITHOLTZ: When — when you say demographic time bomb, that was the single-child policy.

PALIHAPITIYA: Single-child policy for far too long.

RITHOLTZ: Right?

PALIHAPITIYA: There’s not enough girl, there’s too many men. And they’re — they’re an aging population. I mean, all of those boundary conditions, you know, young, capable men were great fodder for industrial manufacturing, and — and automation, and exports during the 90’s and 2000’s. But now these men are 40 and 50, there’s not enough women, there’s not enough kids, and so it’s a huge problem for China.

And, you know, right now I think the forecast is, you know, again the outside-in projections are China is going to shrink by half by the end of 2100. It’s probably worse than that …

RITHOLTZ: Wow.

PALIHAPITIYA: … based on my observation of how Xi is acting now because if you can vertically integrate the economy, you control outcomes better, and then you can basically have a softer landing for the people that are there. That’s — but as that’s happening, it is beyond a shadow of a doubt that China, at some point, will engage in some sort of foreign adventure.

The only foreign adventure that makes sense for them is Taiwan.

RITHOLTZ: Taiwan, sure.

PALIHAPITIYA: And so, we will be pulled into an enormous decision. What do we have to do today? We have to invest, but not just in semiconductors. It’s an example of a problem where China controls the overwhelming majority of the rare-earths. So, to the extent that we believe in electrification, you know, we have to do stuff there. To the — to the extent we believe in solar panels even, a lot of the, you know, poly — silicon carbonate …

RITHOLTZ: Right.

PALIHAPITIYA: … is made in China. Why, by the way? Because China has coal, and you need enormous heat and enormous energy to produce solar panels.

RITHOLTZ: So that raises a — a pretty obvious question. How do you compete with a country that thinks in terms of decades when we — we’re recording this a few days before the debt ceiling vote takes place. We can’t even think in terms of hours and days. How do you compete against a country that thinks in terms of decades and centuries?

PALIHAPITIYA: It’s an elegant — I would go back. It’s an elegant way to tie back to the beginning. The venture capitalist, and the engineer, and the entrepreneur are the most important that they have ever been. And when you marry that cohort of people with a more decentralized form of capitalism, what I think eventually you will have is a lot more bets, a lot more ambitious bets, and some bets that are frankly more duration-weighted, 20-year bets.

You know, and you see some folks right now that have done this, the work that Breakthrough Energy Ventures, Bill Gates organization, has done to fund nuclear. You know, I don’t want to hear people’s opinions on nuclear because most people’s opinions are uninformed. The real thing about nuclear is that if you strip away perceptional issues, this is a real technical solution to climate change in decarbonization. It just is, but it required, you know, a centibillionaire to basically plow billions of dollars of his own money over 20 — tens and 20 years of the time. So, I think that we are solving the problem, but we just need to accelerate it.

The risk that we have is actually one of ideology, which is what you said, which is that we’ve actually, unfortunately, demoralized capitalists. We’ve demoralized entrepreneurs. We’ve demoralized engineers. We’ve demoralized moderates. And that is what we need to fix because sometimes I don’t know if you feel this way, I wonder to myself, “Should I feel guilty for being a business person?” You know, because it’s like — it’s like there’s a — a level of vilification and vitriol that I think is — it’s — it’s — it’s misplaced.

RITHOLTZ: Well, there’s this general frustration and anger, and we’ll talk a little bit about social media that does such a wonderful job amplifying and misinforming people. But there’s a sense that, you know, Apple and Amazon don’t pay their fair share of taxes.

PALIHAPITIYA: They don’t.

RITHOLTZ: And that the system has been rigged by the money class who lobby Congress to get rules that passed for themselves.

PALIHAPITIYA: It has been.

RITHOLTZ: And that — that the level playing field that you so eloquently described has been precluded by the haves wanting to maintain what they have and not allow anybody else to even get a hand on the …

PALIHAPITIYA: Absolutely right.

RITHOLTZ: … lowest rung on the ladder.

PALIHAPITIYA: Absolutely right. All those things are right.

RITHOLTZ: So, what — the — the next question is what can we do about it if we’re not centibillionaires with the ability to bring thorium reactors or whatever Bill Gates is working on to the fore? What can the average person due to accelerate the change that we all know is so needed?

PALIHAPITIYA: A great — it is a — that’s a really beautiful question and well said. People can vote with their time. And in order to do that properly, you need places to allocate that time that give you this kind of purpose.

And so, there should be more nuclear reactor companies that exists so that more people can choose to work there. You don’t need to be a nuclear scientist. They need accountants. They need lawyers. They need, you know, all kinds of different people — I.T. people. You know, they need facilities people. So, there’s these breakthroughs in science. There should be more of these.

The first part is really the critical part of what you said. We need to reframe the legislation. We shouldn’t be preventing people from trying. We should take or fix the laws that make trying hard. I’ll give you an example.

One of the most important things that we could do for society in the United States is to fix chronic kidney disease, hypertension, and heart disease. We all know people …

RITHOLTZ: The three biggest killers in the U.S.

PALIHAPITIYA: … we either all have it or we all know people with it. We are all taking some form of medication for it, OK?

There has not been nearly as much progress in these things over the last few years because, unfortunately, we have some legislation that says that if you want to go and, you know, invest in diabetes — Type 2 diabetes solutions or, you know, heart disease or whatnot, you have to also — after all of that work is done, which we already know cost billions of dollars, spend another couple billion dollars and have a $10,000 person longitudinal trial on cardiac safety as well. That’s just kind of like a — a double-standard.

RITHOLTZ: FDA standard operating procedure.

PALIHAPITIYA: You know what that does? Well, if you take $1 billion of cost and lay on another $1 billion of cost, what you basically say is like, well, maybe the available number of companies that could fix this problem are 100, you reduce them to 10.

RITHOLTZ: Right.

PALIHAPITIYA: And they’re all public, and they’re all beholden to public shareholders. And none of them are going to come out and put out a press release that says, “No, we’re just going to torch earnings for the next two years while we go off on this.” You know, they’re not going to do it.

RITHOLTZ: Right.

PALIHAPITIYA: So, we need to change and refactor some of these laws. But we — so I think — I think the solution is to not demoralize the people who earnestly want to be on in the arena. You know, again, the Roosevelt quote is so good, it’s like you want to be the person that’s in the arena with the dust on your face. You’re going to have some wins, you’re going to have some losses, but you’re not on the sideline. And you just got to give those folks a chance to try. And I think if we can fix some of these laws and regulations, there’ll be less entrenched interest, and there’ll be more entrepreneurship.

RITHOLTZ: Quite, quite fascinatin. You know, I’ve had people tell me, “Yeah, Chamath, you got lucky.” You’ve had far too many successes for me to think that this is the result of random luck, including you tried to buy the Sacramento Kings.

PALIHAPITIYA: Yeah.

RITHOLTZ: It didn’t work out.

PALIHAPITIYA: Yeah.

RITHOLTZ: But a friend said, “Hey, you know,” this is back before the age of Curry, before the Warriors were …

PALIHAPITIYA: Yeah, 2011.

RITHOLTZ: … up and tender.

PALIHAPITIYA: Yeah.

RITHOLTZ: Hey, you know, I’m looking to pick up the Golden State Warriors. Would — would you like 10 percent of it?

PALIHAPITIYA: Yeah.

RITHOLTZ: You’re like, wow, OK. You put $25 million into it. Last year, I think that $25 million was worth $0.5 billion. What’s it worth now? Is it …

PALIHAPITIYA: That’s about $0.5 billion, $600 million.

RITHOLTZ: All right. So — so that’s what 25X?

PALIHAPITIYA: 25, yeah.

RITHOLTZ: That’s a lot of — so anybody who says the guy just got lucky, you can’t get that lucky that frequently and recognize opportunity when it comes along. So first I have to ask, what’s it like being a team owner or a partial owner.

PALIHAPITIYA: Yeah, it’s incredible.

RITHOLTZ: Fun, right?

PALIHAPITIYA: Oh, it’s incredible. You know that I — I built some deep relationships with a — a bunch of the players, past and presen. You know, we’ve had a lot of really great moments together, friendships. You know, I found a lot of kinship in these players because they’re — they’re a lot like me as well, like it’s like you get committed to a craft, you get committed to excellence. We all had very similar backgrounds as well growing up, so there’s a lot of, you know, shared empathy and just having, you know, tough childhood circumstances and fighting through it.

They’re — they’re great. I mean, there — there — there are — there are three of all of the guys I’ve — that I’ve become unbelievably close to who I would say are my — are my dear friends, you know …

RITHOLTZ: So overall the whole experience sounds like it’s just …

PALIHAPITIYA: Absolute blast, absolute blast.

RITHOLTZ: … everything you could’ve — could’ve.

Let’s talk a little about SPACs. You’ve done really well with SPACs, including talk about 20-year time horizon, Virgin Galactic, I mean, that is not a — let’s make next quarter’s numbers, that’s a decade long process. What attracted you to that company?

PALIHAPITIYA: When I got under the hood of Virgin, I was attracted to how complicated the solution was and how many things they had to put together because — so I had a different business at the time, which I still own a large piece of, I’m the largest investor of, but it’s the second most valuable private space company after SpaceX. It’s called Relativity Space.

And Relativity had decided to try to 3D print the whole shebang, the engines, the rocket, everything. And — and — and it was an incredibly ambitious project, and it’s — you know, now it’s a multibillion-dollar 0 company and, you know, touch wood that it’s successful. But in all of that, I had learned how technically complicated space was, and I fell in love with it. But I had also learned how building for space allows you to build for the earth.

So then when I encountered, you know, Virgin and Branson, you know, I was like, “I can’t believe, Richard, you have spent so much time and dedicated so much money to this endeavor.” These guys had created a revolutionary design for a plane. And I say planes specifically because most rockets go up and down vertically.

RITHOLTZ: Right.

PALIHAPITIYA: And Richard’s, you know, engineering was for a horizontal takeoff and landing. And when I explored that further, you know, his vision was not just to be able to go to space, but then to also go to different points on the earth and to use that same rocket. They had — had to build their own hybrid rocket engine. They had to design fuel. They had to — all this incredible stuff. And to me, what I saw were a lot of embedded option value. And so, I was really proud to be a part of that. What they’re doing, I think, is very special.

RITHOLTZ: So you’ve also been very successful in the SPAC space, the Special …

PALIHAPITIYA: Yeah.

RITHOLTZ: … Purpose Acquisition vehicle company. Tell us a little bit what attracted you to SPACs. They have a long history. I don’t think the average investor realizes SPACs have been around for decades. They just seem to find the new popularity over the past couple of years.

PALIHAPITIYA: So yeah, I’ll tell you my motivations. There are two. One is very selfish, which is I want to own pieces of great businesses for as long as possible, and there are businesses that I’ve known in Silicon Valley being, you know, birth and growing up over the years where — for whatever set of reasons I wasn’t an investor in in the private markets, but I was like, wow, this could be really great businesses and, you know, I wanted to get to know them.

And in that process, SPACs were a great way for me to compound my capital. Why? Because I am an enormously large investor in these things, right? So, you know, SPACs work is that you put up a little bit of money for the potential of a huge return, and that’s where most people start and stop.

I do something additional, which is then I lead a pipe, and I put a lot of my own money. The smallest pot I’ve ever written is $100 million, and the biggest, I think, is closer to $150 million. I can’t remember the exact number. But the point is that I love the process of putting my own money to work in a way where I have to really pay attention and make a really good decision. It’s an incredible process, so that’s my part.

But then the second part back to what we talked about before, I do think this is a way of creating more an even playing field. I think that, you know, typically IPOs of hot shot tech companies are reserved to folks like me. Rich guys with lots of assets who have great relationships with the banks, and you just get fed these deals. And again, I think it’s better where there’s an even playing field and everybody has a shot to find these — to find these gems.

And the SPAC is really clever because you can bet on the person who can find the company. You can also then, if you don’t like the company, redeem and get all your money back.

RITHOLTZ: Right.

PALIHAPITIYA: So, there’s this downside protection. You can buy it in so many different points in time in the cycle, you know, before you find a target, once you found the target, after the target has been, you know, bought and de-SPAC’d. I think that embedded optionality is actually really beneficial for retail individuals because they have many bites at the apple to make a good decision. And that’s very different from when, you know, you typically buy a stock where you’re now really wedded to that decision. But the redemption features of the SPAC, I think, are very powerful and — and — and not — not talked about enough.

RITHOLTZ: So — so let’s stick with the concept of the level playing field and — and not seeing deals only flow to folks like you. Let’s talk about angel list and influencers and others that are — or have — have great deal flow.

PALIHAPITIYA: I love — I love all of that.

RITHOLTZ: You do? So — so …

PALIHAPITIYA: I love all of that.

RITHOLTZ: … it’s not just — so the first question is, A, does this create competition for deal flow …

PALIHAPITIYA: Yes.

RITHOLTZ: … with folks like you?

PALIHAPITIYA: Yes, and I — and I think that that’s right and good.

RITHOLTZ: And — and B, what is the result of that competition going to be? Are — are we going to see venture capital eventually decentralized?

PALIHAPITIYA: Yes, and I think that that’s incredible.

RITHOLTZ: Really?

PALIHAPITIYA: Yeah.

RITHOLTZ: So — so what does that look like? What does DeFi V.C. look like 10 years hence?

PALIHAPITIYA: So, phase one was things like angel list, which was building the infrastructure so that smaller funds and SPVs, like single-purpose vehicles or special purpose vehicles, could get created in an automated way.

Step two is happening right now, which is that individuals are taking the leap and saying, “I don’t need to be a part of my, you know, an infrastructure. I’m going to be — I’m going to hang a shingle and I’m going to do it my own.” And there’s an incredible solo GPs, some of them are some of the most successful investors in the world. And I’m really fascinated by that, so now what’s happening is sort of what I did back in the day., You know, in 2010, I called Embarcadero Ventures because, at the time, I lived on Embarcadero Road in Palo Alto. But to see that to go from that to, you know, folks like Elad Gil, Oren Zeev, Lachy Groom, you know, Brigette Lau, these people are crushing. They are crushing. And I am like, “God, that’s incredible.” So that’s the second phase. You’re going from groups of people to individuals.

And then the third phase after this is I suspect that you’ll do a little bit more automated so that it’s less biased and that, you know, for example, like, you know, a company like if you think about a company today, Barry, you’re going to build it on top of Stripe, on top of QuickBooks, on top of all of the software.

RITHOLTZ: Right.

PALIHAPITIYA: Why can’t you just submit all of that data into some API and the next generation of, you know, venture firms will just look at all that data and say, “This is good. Here’s your check and be done with it.” You know, no pitch meetings, you know, none of that stuff. That just seemed so inefficient, so I think that’s the next iteration.

RITHOLTZ: It’s inefficient, but it gives people places to go, excuses to maintain their authority, power, and wealth.

PALIHAPITIYA: Wealth.

RITHOLTZ: And who wants to give that up? It’s very challenging to disrupt that.

PALIHAPITIYA: No, nobody that has it wants to give it up. I’m probably the only one that speaks about it all the time and it probably, you know, sometimes ticks off my peers. But it’s better, it’s like change. Change is good. Let’s just see what the other side looks like.

RITHOLTZ: So, let — one last question about giving up power. You — you worked shoulder-to-shoulder with Zuck at — at Facebook, but you’ve been somewhat critical about what Facebook has turned into. What sort of advice would you give Zuck today in terms of putting Facebook back on a more positive path?

PALIHAPITIYA: Well, they are now operating from an enormous trust deficit. I’ve worked with a lot of people there. A lot of those folks that are in the senior ranks worked for me when I was there. I really love the people.

I think that the best path forward is to go to the regulators and figure out how to write a legislative framework that allows them to implement some rules that are scalable. You know, I think the fig leaf is now pretty much gone about …

RITHOLTZ: Right.

PALIHAPITIYA: … about Section 23. You know, I think that they’re a publisher. That’s pretty much clear, so it’s about — it’s about — but ultimately honestly, here’s the thing, Barry. You have an almost trillion-dollar company. It’s getting attacked by Apple who is trying to literally eviscerate the Facebook business model and lift the value of the rest of the Internet and the inventory on the Internet.

You have all these decentralized projects now that are trying to reconstruct social hierarchy in a way that’s more measurable and transparent. You have regulators all around the world that are clamoring for something to happen, and then you have these mental health issues now for — for a parent with a child that you — that we all have now a responsibility to deal with.

I think if folks were willing to let that company be one-quarter of its market cap, you can probably implement a bunch of rules. It would just mean that, you know, a small number of people would be much less rich, but then I think the rest of society wouldn’t care that much, and they will continue to use Facebook.

RITHOLTZ: Interesting. And before we get to our favorite questions we ask all our guests, I got to throw you a curveball. You were pretty successful at the World Series of Poker events. You — you — you won — you placed 101st, which is no …

PALIHAPITIYA: In the main event out of 7,000, yeah.

RITHOLTZ: In the main event, that — that’s out of like …

PALIHAPITIYA: … and almost 8,000.

RITHOLTZ: All right. That — that’s a substantial number. What …

PALIHAPITIYA: I’m totally card dead, by the way. I mean, if I got — if I got even a few cards, I could’ve made an even deeper run.

RITHOLTZ: So — so here’s the question. What are the parallels between Hold’em — No Limit Texas Hold’em …

PALIHAPITIYA: Everything.

RITHOLTZ: … and — and venture in investing?

PALIHAPITIYA: Everything.

RITHOLTZ: That’s the question I wanted to get to.

PALIHAPITIYA: And life. Everything.

RITHOLTZ: Explain.

PALIHAPITIYA: You start life in some situation. You start poker with a stock of chips. In life, you could be born to the richest man in the world. You could be born in poverty. You could be born with a disability, right? So your — your stack is different, right? Some people have a huge stack, some people have no stack. Poker, same thing. There’ll always be somebody at the table who can buy in from more than you.

In life, you then have to make bets. You have to take some shots. Who do I trust? Who do I fall in love with? Who do I work with? Who do I go to school with? Where do I go to school? What job do I take?

In poker, you make bets. Which pot do I play? When do I raise? When do I call? How much do I risk?

In life, you sometimes make all the right decisions, horrible outcome. Sometimes all the wrong decisions, great outcome. Sometimes all the right decisions, right outcomes. Poker, same thing.

Poker is a chance for you to see that pattern, take a step back, and realize how much of it is really in your control and how much of it is not. And if you really pay attention, poker teaches you that the process is in your control and your reaction to the outcome is in your control, and everything else is luck.

RITHOLTZ: Right. The outcome is not within your control, just how you approach it …

PALIHAPITIYA: How you approach it …

RITHOLTZ: … and how you respond to it.

PALIHAPITIYA: … and then how you respond to it. And so, you know, I played poker for 20 years. There’s games where I have won literally millions of dollars playing poker. At the highest stakes, the highest levels, I have played them and I have crushed them, and they have also crushed and destroyed me. And I have had to learn to bounce back.

I’ve also played at the lowest stakes, and it built incredible relationships and bonds, and learned things about people, and my tolerance for loss and risk. I would — I would tell everybody in the world to learn to play that game, but view it as a small microcosm of your life and the chance to learn about who you are as a person.

RITHOLTZ: I love that metaphor, I think that that’s great. Before your people like the control room on fire and drag you out of here kicking and screaming, let’s jump to our favorite questions we ask all of our guests, starting with what’s keeping you entertained during lockdown. What do you either streaming on Netflix or listening to in podcast. Tell us what — what’s entertaining you.

PALIHAPITIYA: I have been watching an enormous amount of Dave Chapelle, enormous.

RITHOLTZ: So great.

PALIHAPITIYA: I think that he …

RITHOLTZ: His standup or the Dave Chapelle Show or both?

PALIHAPITIYA: Mostly stand up. I just want to say that I think he is one of the most important figures in society currently today.

RITHOLTZ: As a social critic or a comic or both?

PALIHAPITIYA: I think that he is also a philosopher. I think that he is a social critic more than he is a comedian. And he’s one of the most important voices in America right now because he combines this — I — I really look up to him. He’s a hero of mine. This elegant combination of intellect, empathy, but then fearlessness and courage. And he fights for ideas and free speech in a way that I — I really deeply respect. And so, I’ve been addicted to Dave — I mean, addicted.

I probably — I’ve just watched now things over and over again.

RITHOLTZ: Right.

PALIHAPITIYA: (Inaudible).

RITHOLTZ: Have you spent much time with the original Dave Chapelle Show?

PALIHAPITIYA: I have, but I haven’t — I’ve made an explicit decision to not go back to it …

RITHOLTZ: Really?

PALIHAPITIYA: … because I’ve seen his evolution. And I just get so much joy and I find myself still unpacking so — because I don’t — I don’t listen to him anymore to laugh. I kind of listen to him to think, like, you know, he has a thing right now called Redemption Song, which is a small little clip on — on — on YouTube. And what he talks about — just at the very beginning of this, I mean, the whole story is about him going to Comedy Central to get back the rights to the Chapelle Show, but the thing that he says up at the front about cowards and heroes, I would encourage everybody to listen to and just think about how that plays out in real life, in social media. It’s really powerful stuff.

RITHOLTZ: Really good stuff. Let’s talk a little bit about mentors. Who — who helped shape your career?

PALIHAPITIYA: I had a couple of people that I — so in all my phases I’ve been very lucky when I worked at a bank, I had these two guys that I worked for Mike Fisher (ph), Joe Pruski (ph), who are just incredible human beings to me. Well, Joe (ph) was a bit of a jerk but, you know, I’m just saying that to make — wonderful people.

Then when I went to AOL I had a person I worked for Kevin Conroy who made me basically like all that — my toolbox comes from him. You know, I — I — and then I just picked up a lot along the way. David Goldberg — Dave Goldberg who was, you know, sort of my big brother who passed away. And then honestly my father, you know, again very complicated figure in my life, but in — in hindsight really gave me a toolkit, and I’m very thankful to him for that.

RITHOLTZ: Let’s talk about books. What are some of your favorites and what have you been reading recently?

PALIHAPITIYA: So, I’m reading the “Narrative of the Life of Frederick Douglass,” who — who …

RITHOLTZ: Not the autobiography, somebody else is the author of that?

PALIHAPITIYA: No, I think that’s the title of the book …

RITHOLTZ: OK.

PALIHAPITIYA: … by him. And it’s really a pretty powerful moving book. I’ve read a lot in religion recently just because I’ve been very curious. I was raised a Buddhist, so I don’t really understand Judeo-Christian. I just think all you people are crazy, and so I’ve wanted to really understand it and unpack it. So, I — I started with, you know, pre-Christianity sort of like paganism, I guess, just understanding it. And then I’ve moved on to read about Christianity, and Islam, and — and Judaism, and I found it all very kind of very interesting because it’s about like society and, you know, the formation of ideas and governance. And — and — and so I think there’s a lot to be learned there.

I — I — and then I — I just — I — I’ve read this book. I’ve said many times it’s worth reading, it’s called Americana, which is like a …

RITHOLTZ: Love it.

PALIHAPITIYA: … 400-year history of capitalism.

RITHOLTZ: Yeah, spectacular.

PALIHAPITIYA: Bhu Srinivasan, just the …

RITHOLTZ: Yeah.

PALIHAPITIYA: … the book — book for the ages.

RITHOLTZ: It — it shows what happens when government and the private sector …

PALIHAPITIYA: Work together.

RITHOLTZ: … partner. And it — it — I think it’s a tremendous book and wildly underrated.

PALIHAPITIYA: It’s — it’s a — it’s a tour de force. That’s a — that’s a top 10 book, you know. And then some blast from the past if you’re interested, there’s a great book called “Fermat’s Enigma” by this guy Simon Singh, which is talking about, you know, Fermat has this theorem, which is X to the N plus Y to the N equal Z to the N. And it’s this basically following the story of trying to prove it. Fabulously written book, completely accessible to the general public, superb to the extent you think mathematical — you know, nonfiction can be.

RITHOLTZ: Well, the history of trigonometry is — is — is …

PALIHAPITIYA: Yeah.

RITHOLTZ: … right there. You know, that is …

PALIHAPITIYA: And then “Liar’s Poker” from Michael Lewis, love that. I really like — I mythologize like Lewis Ranieri and all these guys when I read it. Those are some books I think are great.

RITHOLTZ: Lewis said that that book surprised him because it was supposed to be a cautionary tale, and instead he got …

PALIHAPITIYA: No, (inaudible) that …

RITHOLTZ: … he got endless letters saying, “How do I get a gig on Wall Street?”

PALIHAPITIYA: No, I had these pictures of Lewis Ranieri that was like, you know, I want to become this big dude with suspenders and a cigar and …

RITHOLTZ: Let’s talk about advice. What sort of advice would you give to a recent college grad who is interested in either technology, investing, venture capital or entrepreneurship? What advice would you share with them?

PALIHAPITIYA: I think that there’s a really terrible pernicious trick that’s being played on you, so I’m speaking to this person. There is nothing wrong with putting in the hours and doing your time. And somewhere along the way, we were told and you — we told you that life is a democracy, it’s not. It’s an autocracy. And you need to learn that, at some point, your big leaps will come from the benefit of learning from others. And I think that I see so many young people quit too soon, leave things when things get hard. They go after labels, just the labels have changed. To be a founder means something, and I think it means nothing.

I was an employee until my early 30’s and I learned a ton. So, I would just tell you, chill out, take a deep breath, get a decent job, work in an interesting place, and then grind and put in the hours. Prove you can be there for three to four years before you go off. You can’t quit every six months to a year. That’s not how you build a career. That’s now how you learn anything.

RITHOLTZ: Quite, quite interesting. And — and our final question is a little bit philosophical. What do you know about the world of technology and — and venture investing in startups today that you wish you knew 20, 25 years ago when you were really just getting your feet wet in the space?

PALIHAPITIYA: I wish I knew — well, gosh, I really didn’t — I don’t — I’m going to — I’m going to say something different, which is I have had major phases of ignorance in my life, and I’m really thankful for all of them because I have made enough mistakes to learn from them, to learn that mistakes don’t matter. And so, if I had been robbed of those mistakes, I’d probably be exceedingly arrogant, a complete douche right now. And so, — so I’ll take the fact that says it’s all been pretty good, man, like, you know, I’ve had some real blow-ups. It’s OK. You know, you live to fight another day.

I’m in the arena. You know what I mean?

RITHOLTZ: You’re covered in dust bleeding and …

PALIHAPITIYA: I’m covered in dust.

RITHOLTZ: … fighting a good fight.

PALIHAPITIYA: And anybody that does that is a hero. You’re all heroes.

RITHOLTZ: Love it. Chamath, thank you so much for being so generous with your time. This was really quite fascinating.

And I’m going to tell you, my best conversations where I don’t bother with most of the questions …

PALIHAPITIYA: I appreciate that.

RITHOLTZ: … you really gave the listeners something to think about. And thank you so much, I really appreciate it.

PALIHAPITIYA: Thank you.

RITHOLTZ: Thank you, Chamath, for being so generous with your time.

We have been speaking with Chamath Palihapitiya, Founder of Social Capital, AOL, Facebook, Slack, just really filled with so much insight into technology, venture, and the change that is taking place within capitalism.

If you enjoy this conversation, well, be sure and check out any of our previous 387 conversations we’ve had before. You can find those at iTunes or Spotify or wherever you get your podcast fix.

We love your comments, feedback, and suggestions. Write to us at mibpodcast@bloomberg.net. You can sign up for my daily reading list at ritholtz.com. Follow me on Twitter @ritholtz. Check out my weekly column at bloomberg.com/opinion.

I would be remiss if I did not thank the crack team that helps us put these conversations together each week. Michael Batnick is my Head of Research. Mohammed (ph) is my Audio Engineer. Paris Wald is our Producer. Atika Valbrun is our Project Manager.

I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.

END

 

~~~

 

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Avert your eyes! My Sunday morning look at incompetency, corruption and policy failures:

• Billions hidden beyond reach: Trove of secret files details opaque financial universe where global elite shield riches from taxes, probes and accountability (Washington Post)

• Self-driving cars: The 21st-century trolley problem Autonomous tech could lead to deaths at the hands of robots. But is continuing to let humans drive even worse? (Vox) see also The Problem With Electric Trucks: Despite their potential to curb emissions, many of the most-hyped electric vehicles will exacerbate another safety crisis: traffic deaths. (Bloomberg)

• Covid cases in kids are soaring. In Tennessee, most remain unmasked and unvaccinated. August, for the first time in the pandemic, the rate of coronavirus infections among children topped those for adults ages 18 to 64 and seniors, driven by the highly contagious delta variant. (Washington Post)

• How AT&T fuels right-wing extremists One America News (OAN), a right-wing propaganda network that promotes unhinged conspiracy theories about the 2020 election, COVID, and other topics, relies almost exclusively on funding from AT&T. Court records first obtained by Reuters reveal that AT&T is responsible for 90% of OAN’s revenue.(Popular Information)

• ‘Stalkerware’ Apps Are Proliferating. Protect Yourself. These spyware apps record your conversations, location and everything you type, all while camouflaged as a calculator or calendar. (New York Times)

• Anti-vaccine chiropractors rising force of misinformation At a time when the surgeon general says misinformation has become an urgent threat to public health, an investigation found a vocal and influential group of chiropractors has been capitalizing on the pandemic by sowing fear and mistrust of vaccines. (AP) see also This tech millionaire went from covid trial funder to misinformation superspreader After boosting unproven covid drugs and campaigning against vaccines, Steve Kirsch was abandoned by his team of scientific advisers—and left out of a job. (MIT Technology Review)

• Surprise! Postal service is about to get slower — and more expensive Increasing the time you have to wait to receive a letter isn’t an improvement in reliability or efficiency, but just the opposite. As for “consistency,” the service’s strategy is perfectly analogous to what airlines do when their on-time flight performance deteriorates: They increase the standard for “on time,” and presto! Every flight is on time again.(Los Angeles Times)

• What We Lost When Gannett Came to Town. We don’t often talk about how a paper’s collapse makes people feel: less connected, more alone. (The Atlantic)

• It’s Not Misinformation. It’s Amplified Propaganda. You don’t need fake accounts to spread ampliganda online. Real people will happily do it. (The Atlantic)

• They Investigate Police Killings. Their Record Is Wanting. After the murder of George Floyd, some states looked to independent agencies to examine deaths in police custody. But dozens of cases handled by the Texas Rangers show the approach has flaws. (New York Times)

Be sure to check out our Masters in Business interview this weekend with Chamath Palihapitiya, founder of Social Capital. He began his career as an engineer and team leader at AOL, Facebook, and Slack, but soon moved into Venture Capital. He earned the nickname “SPAC King” for numerous successful deals he has done, and today is a part-owner of the Golden State Warriors.

 

FBI: Killings soared nearly 30% in 2020, mostly committed with guns

Source: Washington Post

 

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My back to work morning train WFH reads:

• Most Return-to-Office Plans Unchanged, for Now Delta variant worries notwithstanding, many people report they are already back at their workplace or will be soon. (New York Times)

• Why Gold Bugs, Bond Bears and Amazon Skeptics Think Alike Investors often prefer to stick their heads in the sand rather than confront the evidence in front of them. (Wall Street Journal)

• Here Are the Pitfalls When Allocators Make Direct Deals or Co-Investments Legal experts weigh in on contracts, due diligence, and potential conflicts when pension funds and other investors do deals outside a fund structure. (Institutional Investor)

• You’ve Never Heard of the Biggest Digital Media Company in America: Red Ventures, which started as a digital marketing company, has attracted serious investments from private equity firms. Its location has helped obscure what is perhaps the biggest digital publisher in America, a 4,500-employee juggernaut that says it has roughly $2 billion in annual revenues, a conservative valuation earlier this year of more than $11 billion, and more readers, as measured by Comscore, than any media brand you’ve ever heard of — an average of 751 million visits a month. (New York Times)

• What Are Stores Even Thinking With All These Emails? It feels like every company and organization I’ve ever transacted with sends me email every week. Some every day, even. Some multiple times a day. My mortgage broker emails on my birthday and holidays. So does my dentist. Certain retailers email much more often. (The Atlantic)

• The spectacular implosion of Mike Lindell He has pushed many false, baseless and crazy theories about voter fraud, but the symposium was billed as focusing on one in particular: “irrefutable” proof that hackers backed by China stole the election for Joe Biden. Lindell had the data, and he was going to show it to you over 72 hours. What’s more, his website promised to give $5 million to anybody who could “prove that Mike’s cyber data … is not valid.” (Washington Post)

• Tested: 2021 Ford Bronco First Edition Goes Big, Sticks the Landing The triumphant return of the Ford Bronco has the country agape. The awe is well deserved. (Car & Driver)

• For a Clean Ocean, Just Add Oysters From picturesque Mediterranean isles to New York’s bustling harbor, strategically placed oyster colonies are depolluting the sea with ease. (Reasons to Be Cheerful)

• Unvaccinated America, In 5 Charts So who, exactly, are we talking about? Three in 10 American adults remain unvaccinated, according to the latest survey from the KFF. But they’re not a monolith — their reasons, backgrounds, politics and willingness to eventually get vaccinated all vary. (Fivethirtyeight)

• Peek inside NASA’s starchitect-designed condo for Mars What is it like to live in Mars? NASA is in the midst of recruiting four volunteers to find out during a year-long simulation at the Johnson Space Center in Houston, Texas. The selected crew members will move into Mars Dune Alpha, a starchitect-designed habitat touted to be “the highest-fidelity simulated habitat ever constructed” for living on the red planet. (Quartz)

Be sure to check out our Masters in Business interview this weekend with Greg Becker, CEO of Silicon Valley Bank. The bank has helped fund more than 30,000 start-ups, 50% of venture-backed tech and life science companies in the US, and 69% of U.S. VC-backed tech + life science companies with an IPO banked with SVB.

 

Billion-Dollar Weather and Climate Disasters: Time Series

Source: NOAA

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The transcript from this week’s, MiB: Greg Becker, CEO Silicon Valley Bank, is below.

You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Stitcher, Google, Bloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here.

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RITHOLTZ: This week on the podcast I have an extra special guest. If you were at all interested in startups, entrepreneurism, lending, risk managements, venture capital, strap yourself in, this is a great one. Greg Becker, he’s the CEO of Silicon Valley Bank where he’s worked since 1993 and where he served as President and CEO of SVB Financial Group and Silicon Valley Bank.

Since 2011, this is really a wide-ranging and fascinating conversation for somebody who is right at the nexus of everything from venture capital to life sciences, to FinTech to you name it, but from the perspective of a commercial banker really located at the bullseye of the innovation economy not just in the United States, but for the entire world. I found this conversation to be absolutely fascinating, and I think you will also.

With no further ado, my discussion with Silicon Valley Bank’s CEO Greg Becker.

VOICE-OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

RITHOLTZ: My extra special guest this week is Greg Becker. He is the President and CEO of Silicon Valley Bank where he has worked since 1993. Since 2011, he has been running the place, both as CEO of SVB Financial Group and Silicon Valley Bank. Greg was named to Worth magazine’s “Power 100 Most Influential People in Global Finance.”

Greg Becker, welcome to Bloomberg.

BECKER: Thanks, Barry. Great to be here.

RITHOLTZ: It’s really great to have you here and doing this live in person.

BECKER: Yeah.

RITHOLTZ: So, when I look at Silicon Valley Bank, the question that comes into my head is, is this a bank that does some venture capital or is this a V.C. that offers some banking services?

BECKER: Well, we are a bank, so let’s just be clear about that. We’re a bank that — that caters to a very specific industry and then does a lot of things to support those companies in those industries. So, it’s about innovation companies all around the world. We start with them very early. We support them with commercial banking, private banking, investment banking, and asset management. So, all of those things fit together to help these innovation clients.

RITHOLTZ: So you’ve been with the bank since ’93, what was your first role there? How did you arrive at Silicon Valley Bank?

BECKER: Yeah, so I started out as a loan officer, so lending money to companies. And I just came from another bank that worked with more traditional companies. My manager, at the time, was leaving to join Silicon Valley Bank, and he encouraged me to join him and I did. And it was phenomenal. It’s been an incredible — incredible career, but I started out lending money to early-stage technology companies at Silicon Valley Bank in 1993.

RITHOLTZ: Now that sounds like a very high-risk sort of loan that typical banks don’t make. How do you go about vetting alone to a company that is brand new, is a startup, doesn’t have a long financial history? How does that process differ than traditional bank lending?

BECKER: Yeah, well, it’s changed a lot in 28 years. So, when you think about it way back when when I first started, the loans were much smaller. There were — you know, there’s not many choices for these companies, it was really lending money in a very — I’ll call it — more conservative way than we do today in venture capital. Those are the two ways that companies were — were financed.

And then today, when you think about it, it’s all about capital, debt, lending money. It’s about venture capital from all different sources. And so, how you go about lending money to these companies is it’s really about pattern recognition. It’s about understanding who the investors are. It’s understanding what market they’re in. There’s a whole series of things that we do, but we’ve been doing it for so long and adapting this lending capability that we’ve learned to do it really well and both safely, but also in a way that it’s hard for other people doing.

RITHOLTZ: So you’re there in the 90’s? That was quite an exciting period when everything was just going up, up, up. How did you handle the other side of that? When — when the dot coms imploded, what was the bank doing? How bad were losses and how did you manage them?

BECKER: Yes. So, when I think back at that ’99, 2000, 2001 time period, it was such an interesting time, and I’ll describe it as the highest of highs and the lowest of lows. In ’99, in the beginning of 2000, everything was going well. Everything was going well with our companies. They were growing so fast. They we’re getting started and going public within a few years. There was just such a euphoria at that time period. And then very quickly, kind of March of that year, there that was the Barron’s article that came out, and all of a sudden everything changed. And it went from everything was going well to everything was going poorly.

And what was fascinating about that time, you know, it’s actually my view. It’s the time when you built the best relationships. Going through difficult times with venture capitalists and with companies, you found out who you were as an institution. And so, as much as I don’t want to ever go back to that time period, there were a lot of good lessons learned at that — at that time period.

But yeah, we took losses. It was a challenging time for us. It took us a few years to get back into what I’ll call a nice growth mode back in that 2003-2004. But I look back at it. Finally, I learned — I learned a lot about the institution, I learned a lot about how to lend money, and I learned — learned a lot about how to build relationships at that time period.

RITHOLTZ: And — and if I remember correctly, the — the Barron’s article featured Howard Marks and was titled “Amazon.bomb.” Is that the — like January 2000.

BECKER: Yeah, I thought it — I couldn’t remember what month it was. It was either — I thought it was March, but it may be …

RITHOLTZ: Well, March was when the pre-announcements began. I don’t remember if it was Intel or Dell. Y2K pulled a lot of tech purchases forward.

BECKER: Forward.

RITHOLTZ: So, the first quarter was not surprisingly very light, and at those high levels didn’t take a lot to send that boulder down the — the hill. So — so that turned out as difficult a period as it was. That turned out to be very formative. I don’t know if that’s the right word, but certainly valuable for the bank and its relationships with all the various players in Silicon Valley. It’s the entrepreneurs. It’s the VCs. Who else is in that ecology that — that you had to deal with?

BECKER: Yeah, it’s all the professional service providers in the innovation business, so it’s the lawyers, it’s the accountants. And it’s — it’s really — during the difficult times is when you build your reputation. And that reputation that is what’s going to carry you through that next leg of growth.

I don’t want to go back to it. I can’t say during the middle of it, it was enjoyable, but again I do look back and say, we learned so much. And the relationships, still to this day, are still — I look back and some of my best relationships in the venture capital community were formed back in that time period, working through difficult situations because you had to. You had to work together to solve these problems. And it ended up, you know, being great for my career. It ended up being great for the institution.

RITHOLTZ: When did you see optimism start to return to early-stage investment post dot com crash?

BECKER: It took a while, it took a while. I would say in 2003, 2004, 2005, it was not one thing, it was really a gradual year by year it kind of picked up. And I — I can trust that versus the financial crisis in ’08-’09. In the innovation space, there was really only a couple of quarters where it — it — it took a pretty steep drop, and then it basically rapidly increased. So, 2010, 2011, it was a much more steeper acceleration …

RITHOLTZ: Right.

BECKER: … than it was back in 2002 and 2003. So, I don’t think people realize that they look back at that time period that it was actually a better time to be investing, and so people invested more aggressively in the innovation space back in again 2010 or 2011, and I think that was a good lesson.

RITHOLTZ: So, you mentioned the financial crisis of ’08-’09, obviously, from — let’s call it March 2000 to either October ’02 or March ’03 that was very focused on technology and telecom, the financial crisis obviously was financially focused, but everything froze. Credit markets froze, capital flows froze. How did you guys manage through that? What was the impact of the financial crisis on the environment in Silicon Valley relatively soon after the dot com crash seven years later?

BECKER: Yeah, in the financial crisis and what I think about what happened, you know, we were impacted by it, and so we really were worried about how deep this was going to be and how long it was going to last, and so we started that we raise capital. We did a lot of things to be as protected as we could if this was going to last quite a long period of time. But again, what we were surprised by – I was surprised by how fast investing in the innovation market picked up, how fast venture capital came back and so we were bottoming out venture capital on the annual basis. It was done in that kind of $20 billion, $25 billion per year, dropped pretty significantly to that level.

RITHOLTZ: From — from what, how high was it before?

BECKER: Well, the highest amount historically up until the last couple of years was $100 billion invested in 2000. It dropped off dramatically and then it kind of worked its way back up and then dropped again in the financial crisis. And since the financial crisis it’s gone, you know, went from the $25 billion in the U.S. and it has been on a steady increase, and the last few years has been truly incredible in comparison.

Last year was $160 billion, $170 billion.

RITHOLTZ: Right.

BECKER: And this year already, the first half of the year has been $180 billion in the first half. So, this year …

RITHOLTZ: The first half …

BECKER: First half …

RITHOLTZ: Wow.

BECKER: … of 2021 …

RITHOLTZ: Wow.

BECKER: … so it’s been an incredible first half the year.

RITHOLTZ: So I’ve seen people make the claim that there’s too much money floating around, that all this capital sloshing around, finds its way to companies and ends up overpaying, and you end up with things like we work last year and all the craziness with SoftBank, how do you look at the vast amount of investable capital in the system? Have people become too focused on — on early-stage startups or — or even pre-IPO companies?

BECKER: I’m not one of those people, Barry.

(LAUGHTER)

And it says that there’s too much — too much liquidity out there. And — and let me explain why. There’s a few reasons. One is people look back to 2000. I get that question a fair amount. Why it — help me understand why this isn’t just a repeat of 2000?

When you go back and think about 2000, I would first argue the size of the market that companies are going after is probably — I would historically say 10 times bigger. I would actually say it’s more like 50, 60, 70 times bigger than the market was back then.

RITHOLTZ: Wow.

BECKER: And technology is in every part of what our daily lives are all about. I would argue, when you think about the pandemic and our ability to get through this pandemic is a function of technology. And so, the Zoom of the world and our ability to work remotely and all the different technologies that supported that, but it’s also think about the health care, the vaccines, and how rapidly they came to market …

RITHOLTZ: Right.

BECKER: … with Moderna and others is because money was put into these companies in prior years. So, the size of the market is much, much, much bigger. That’s number — number one.

Number two, the markets these companies are going after is — are so much larger in scale, right? It would be companies who will building software for industries or for companies to sell to industries, and now they’re building software to attack and completely disrupt entire industries. And you can see that in hotels, in taxis, and all the different industries. So, the size of the market is much bigger, so I look at this and say $180 billion in the first half of the year is a big number. I want to mistake that.

But in the whole scheme of global money, it’s still pretty small. So, my view is there’s — the liquidity is — is actually OK given the size of the market.

RITHOLTZ: Let’s start right with those two. What is the difference between SVB Financial Group and Silicon Valley Bank?

BECKER: Not much of a difference overall as we have a holding company and that’s the Financial Group. And then you said the holding company, we have activities such as investment banking and some of the investing that we do in venture capital firms and in technology and life science companies. It’s (inaudible) holding company. And then the bank itself, Silicon Valley Bank, is 90 percent of what we do as far as the publicly-traded company. So, they’re very similar. It’s just what activities spit in which business.

RITHOLTZ: And you say Silicon Valley bank, but you’re not like a traditional bank. We were just talking about branches, and tellers, and things like that. That’s not the sort of storefront you operate, is it?

BECKER: No, we are a commercial bank predominately. And that means that we work with companies. So, companies again, you know, it’s the startups that are being funded by families and friends, you know, people have ideas, and they’re raising $50,000, $100,000, and they’re starting a business. But they’re starting a business that is in software or the Internet or in e-commerce. It’s in those industries that we — we support, and that’s the business side of it. And we grow with them as they get larger and larger and, hopefully, they go public. They get larger, listed on a Nasdaq or they get listed on the New York Stock Exchange. That’s our model.

So, we don’t have tellers, we don’t have branches because so much of this can be done virtually. And so, when – again it helps when – you know, when you have a tragedy like the pandemic occurring, you know, we could still operate exactly as we had operated historically.

RITHOLTZ: So, I — I notice you sort of fund companies and bank with companies at different phases of their lifespan, startup banking, venture-funded, late-stage. Let’s start up with what is SVB startup banking.

BECKER: Yeah, so I’ll weave it into our strategy overall because I think it’s helpful in context. Our strategy is we want to bring companies in that are just getting started, so think about it like the top of the funnel. You want to bring in thousands of new companies each year, new companies that are being formed. And we’re talking about 6,000, 7,000, 8,000, 9,000 new companies per year.

We support them with banking services, getting them off the ground, giving them advice, making connections to investors, making connection to other service providers. And then we tailor our products to them as they raise their first round of venture capital financing or second round of venture capital financing. We’re lending the money in unique ways, venture debt. It could be acquisition financing, all different products and services deep in the F.X. capabilities as they go international. And then we support them with even greater capabilities as they go international, and they go public, and they’re doing hundreds of millions of dollars of revenue.

And so, our — our strategy is bring them in early and support them all throughout their lifecycle as they get larger and larger. That’s in a — in a nutshell, that’s what our — our strategy is. And to do it not just in the U.S., but to do it globally, to do it in the U.K., to do it in Europe, to do it in China, to do it in Canada. And that’s what we got to do, work with the most innovative, the coolest companies in the entire world.

RITHOLTZ: So, let — let’s put some numbers on that. Fifty percent of venture-backed tech and life sciences company in the U.S. bank with you, that’s a tremendous number. And then if we talk about those same sort of companies that have gone IPO, 69 percent of them in 2019 bank with you. So – so you guys really seem to have cornered this market. What are you doing to protect that giant lead?

BECKER: Yeah. I — I definitely don’t like the description cornered because that implies, in some ways, that there is a competition and you don’t have to wake up every day and kind of Andy Grove’s quite, “only the paranoid survive,” which is …

RITHOLTZ: Right.

BECKER: … something we certainly adhere to. You know, it starts with really being relentlessly focused on helping these companies at all stages, figuring out what are the keys to their success. What I always talk to our team about, it’s that one piece of advice, it’s that one connection, it’s that one piece of help that can make the difference between a company being successful and not being successful. And you have to think about that every single day as you engage with and you work with our clients.

And it makes sense that when you have teams of people at SVB that this is all they do, work with companies that are in the healthcare industry, biotech companies or medical devices or software or cyber software that if they do that all day long and the next cybersecurity software walks in the door, their ability to point them in the right direction, to make interactions or engagements or connections, that makes such a huge difference. And so, we just have to keep thinking about that every single day. And that’s, you know, differentiating and it’s also what’s really a lot of fun.

If you believe you have helped the company, you go home at night, you feel pretty darn good that you’ve made a difference in a company that’s changing something significant in the world.

RITHOLTZ: Very impressive. Let’s talk about later-stage companies and — and public companies. Do you offer a similar suite of services? And — and how different is that from the very early-stage company?

BECKER: Yeah, it is — it is very different, but it is still again in that same commentary about helping them be successful. That’s what the product set is. That’s what the solutions are. That’s where all the advice and connection. So, we may bring some CFOs together or CEOs together. If the company is thinking about going public, well, let’s connect them with other CEOs who have gone through that process so they can get the advice about how to do that. Do you raise money before you go public or do you raise kind of all the money you need when you go public or after you go public?

Giving that feedback and that experience to other people going to that same thing, those connections are really, really, really valuable. But other things that are different, how much money you lend to them, the type of money, its acquisition financing. It could be large acquisition financing, it could be making interactions to P.E. firms who may want to take them private if they’re public already. So, it’s a whole suite of solutions that we give to these companies.

And again, I’ll go back to what I said, that’s the most important that’s the most fun part when you really do believe they’ve made a difference in that company.

RITHOLTZ: Very interesting. Tell us a little bit about open door. I — I love the story that everybody passed on them. What did you guys see in them that was so unique?

BECKER: Part of companies like an open door and — and there’s such a long list of companies that you put it, you know, put on that list that I think the biggest challenge for individuals to look at these companies and to really believe in them is to understand what they’re going after. And it’s very easy to say no. It’s very easy to list all the challenges and the reason that something may not work.

It is much more difficult to be that optimistic point of view and to say what if, what if they’re successful? What if they’re right? What if they actually go after this market, how big could this be? And then understanding, again, who the investors are, understanding the management team and their — and their drive for success.

All those things are ingredients. That really gives you that view of the potential for that business. And that — that’s what — I mean, honestly that’s the most inspiring part of what I get to do as a CEO, to see these companies, to understand where they’re going, to listen to the CEOs and the C-suites in these companies to see where they want to go — where they want to go and what they want to build is truly incredible. And that’s — that’s incredibly motivating to me, and I know it’s incredibly motivating to our team.

RITHOLTZ: So — so let’s stick with that, and before we describe how the open-door investment worked out, people should be aware that the vast majority of venture investments don’t pan out. This is a space where somewhere between 60 and 90 percent of the companies never really get off the ground in — in appreciable way. How do you manage that risk and how do you make sure that whatever that relationship is you’re not just burning through cash at a — a horrifying rate?

BECKER: So, there’s the investment piece of these companies, and then there’s the lending money to these companies. So, the investing piece is you — you have to have a few winners to make up for all the companies where they don’t. They don’t either realize their full potential or they outright fail. So, equity is very different than lending money.

Lending money, you don’t have to have as many winners to make up for the — for the ones you lose money on. You do have a higher loss rate, but because we, as a senior lender in these loans, we get repaid first. When you — when a company goes out of business, we get repaid as the company is winding down. That has certain protections to us. So, loss rates are still higher, but you can still underwrite them in a way that is different than the equity investors do. We don’t have the same upside and we don’t have the same downside.

RITHOLTZ: Right. So …

BECKER: So that’s a big distinction.

RITHOLTZ: … on the — on the lending side, if something doesn’t work out and you’re recapturing 80 or 90 percent of the loan, that’s a loss, but it’s not a total write-down.

BECKER: You’re not — you’re not writing everything off, right, correct.

RITHOLTZ: Right. On the equity side, if it doesn’t work out, that’s take it down to zero.

BECKER: It usually means that you’re going to take it down to zero, you’re going to take a complete loss, yes.

RITHOLTZ: And at the end of the open-door investment, you guys were the only ones who were willing to make that equity investment in open-door and ultimately, they end up going public with a SPAC. It’s a giant winner for everybody involved. That has to give you a lot of confidence that, hey, our due diligence process and our ability to both lend and make equity investments seems to be finding the right companies.

BECKER: So, the equity investors in that deal, we weren’t the only equity …

RITHOLTZ: Sure.

BECKER: … (inaudible) we’re the only investor. In fact, we were lending money to them, but the equity investors did very well in that.

RITHOLTZ: Don’t you get warrants on a lot of these small companies when you’re one of the early investors as well?

BECKER: Yeah, but it’s — Barry, it’s that really interesting distinction between equity investing where you get — you’re putting in tens of millions of dollars.

RITHOLTZ: Right.

BECKER: You’re getting …

RITHOLTZ: Twenty, 30 percent (inaudible), right.

BECKER: … 20, 30 percent, right? When you’re lending money, think about it almost like getting a few stock options …

RITHOLTZ: Right.

BECKER: … so for the upside. It offsets some of the losses that you will take overtime in the portfolio, but it’s — it’s — mainly, it’s a small amount of — of stock. When a company is really successful though, it can still add up to a lot of — a lot of money, and so we’ve seen that. Especially last year and this year, the warrant gains that we’ve had have been substantial, but the reason it’s more challenging is that when things are going really well, you have really low credit losses …

RITHOLTZ: Right.

BECKER: … and your warrant gains were also doing really well.

RITHOLTZ: Right.

BECKER: It looks really easy. When the market is more challenging, your warrant gains are nonexistent. You could be even losing money on your warrants, right? And you could be having a higher write-off rate. So it is — it is more cyclical up and down than people would believe. So, you — you really have to think about this under a long-term strategy.

RITHOLTZ: Companies these days are staying private for much longer. Tell us a little bit about your partnership with Nasdaq to help bring some liquidity to pre-IPO startups.

BECKER: Let me give you a little more context to be able to answer the question better. So, the big difference between private companies and public companies is access to information. They are — they are very, very, very, very different as far as what is known about a private company and what’s known about a public company. Public companies, you know, all the information. It’s all — you know, we all have access to the same information and knowledge. It’s, you know, very small margins on trading and all those things. Private companies, by definition, it’s more opaque, it’s more unknown about their financials and what’s going on, so buying and selling private stock if you could even find some has been a historical challenge.

What happens is as a company stay private longer, right, the issue for investors, the issues for the employees that are part of that company, you may have made on paper a lot of money, but you may not be able to get any of the liquidity. And so, you have to figure out a way, how can you keep these companies private longer to build additional wealth and still provide liquidity to the investors and still provide liquidity to the employees?

One way to do it is to create an exchange, an exchange for private company shares. And that’s what Nasdaq private market has been doing historically. They’ve done more than $3 billion of trading in private shares. And what we wanted to do pulling together this group, so it’s Nasdaq, it’s ourselves, it’s Goldman, Morgan Stanley and City is basically a consortium that comes together that all brings something valuable to create in a private exchange that is bigger, bolder, is more accessible to investors on the issuer side and on the investor side. That’s really what this is about. That’s why we’re excited to be working together.

RITHOLTZ: So, obviously, it’s a private exchange. It’s not open to the public. How big of a market is this? How big can it get? And who are the buyers and sellers in this private market?

BECKER: The sellers or the issuers are really the vast majority of private companies that have raised — maybe it’s a series C round, D around, so they’re — they’re more mature. They may be doing $50 million, $100 million, $200 million in revenue, right? And so, they may be two, three, four years away from going public.

And those companies — one is — you know, maybe they’ve been around for eight years, nine years, 10 years, so they want to provide liquidity for early investors or for employees. So, there’s the issuer side of it, so it’s a big market. The issuer side is a big market.

On the other side is the — the buyers, right, so the investors. It’ll mostly be the institution, mostly be the ones who are maybe coming into invest in these businesses once they become public and they want to participate two or three years earlier while they’re still private. So, a lot of the investors will be the same investors, but you could see family offices. You could see some accredited investors participating in that. And so, it is a big market on — on both sides, and that’s why we were excited to participate in this new joint venture with Nasdaq and the other investment banks.

RITHOLTZ: And the assumption is when you’re buying pre-IPO shares, you’re getting a discount from not only a couple of years of growth, but what the IPO evaluation might be.

BECKER: It depends, sometimes you’ll be getting a discount and sometimes the valuation may go the other way, right? It’s just — when people ask me the question about, it almost makes it seem like you’re guaranteed to make money because you’re investing before a company goes public. And obviously …

RITHOLTZ: That word “guarantee” is always so loaded, right?

BECKER: … yeah, it’s so loaded. It just doesn’t work that way, right? It’s — but it’s like when you buy a public stock. When you buy a public stock, you make an assumption about that stock. You believe it has upside and it will go up. Every stock that you invest in, Barry, does it always go up as every single time?

RITHOLTZ: Well, for me, yes but not for …

BECKER: For you, it does, but not for the average person?

RITHOLTZ: Well, actually — actually for everybody for the past couple of years.

BECKER: It’s gone up, yeah.

RITHOLTZ: It yields that way.

BECKER: It’s probably a bad — a bad time period.

RITHOLTZ: But — but that’s not what happens …

BECKER: Right, no.

RITHOLTZ: … in the real world over longer periods of time. And look, it was only a year ago we watched WeWork implode after a pretty rich up-round. So maybe it’s not that extreme of an example, but there’s no reason to think that a successful C-round or D-round company can have things go off the rails and the next round is appreciably lower.

BECKER: You asked me a question earlier in the discussion about, you know, how do we deal with this high loss rate. Remember — I mean, even if they get to a — a later-stage, a series C or D round and they — they are doing $50 million, $100 million on revenue, it doesn’t mean they may struggle. It doesn’t mean that they’re — they may not go out of business. They still may go out of business. So, it’s still — it’s a higher risk. You just want to give information and accessibility to these private companies so people can participate in it, the institutions and individuals. And that’s what’s unique about it, and that’s what we’re excited about.

RITHOLTZ: So — so you mentioned how much information is available for public companies. How do you go about doing your due diligence on private companies where you can’t just sit at a Bloomberg terminal or punch something into Google and find everything there is to find out about a company? What is that process like and — and how much energy, and time, and capital do you invest in it?

BECKER: Yeah. Well, it is a function of a couple things, right? One, it has to be the private company and what they’re willing to share. And then the buyer takes that information and they merry it with any comparables that you can make in the public market, and then you make assumptions, right? That’s why it’s — it is more difficult, right? It will not be ever be as transparent, as clear, and with information accessible the way a public market is, that’s why it’s still a private market. But you should be able to make certain assumptions.

So, let’s say if it’s a SaaS — a SaaS enterprise software company, well, even if it’s private, you have public comps that you then can apply based on the industry, the market, where it’s going, growth rates, all those things. So, you know, yeah, you have to do work as an investor, but it’s not — you know, it’s not as if there won’t be comparisons out there that you can make any judgment, that you can make — in order to make your assessment whether it’s a good investment or not.

RITHOLTZ: So, I’m doing my research preparing for this conversation, and I start working my way back through some of Silicon Valley Bank’s early relationships. They were Cisco’s first bank. I know the relationships with Apple, Intel. Tell us about some of the history and some of the companies SVB has worked with.

BECKER: Well, I’ll give you some of the history. I — I was not here at the time, but I’ll — I’ll tell you the — the — the — the story that goes along with it. One of our co-founders, a gentleman named Bill Biggerstaff, the story goes that when the two individuals that form Cisco started the company that he had given them a loan and he actually went to their house to actually give them a very, very small loan to help them, so the capital plus that loan got them started. So that’s — that’s one of — of many stories. It kind of — on our — in our history books that we like to certainly reference.

And — and I’ll give you another story is that one of the first acquisitions, if not the first acquisitions of Cisco did was one of my first clients when I was a — a junior banker at — at SVB called Crescendo. And John Chambers and I who know each other, we were talking about that — that story, and it was a great acquisition for them. It was a great client of mine. And it — it just — again, it’s one of the great things about the institution where you can go back and look at history about these amazing iconic companies that we were part of at the beginning. And that’s — it’s just a — it’s a great thrill to look back at that.

RITHOLTZ: So — so given that amazing history and — and all these now giant names, SVB has been kind of low key and I don’t know if media-shy is the right word because you’re here doing this, but certainly, you guys don’t advertise, you’re not in the paper all the time, you tend to be pretty low key. What’s the thinking behind that?

BECKER: Yeah. Well, from an advertising perspective, I mean, when I think of advertising, it’s mostly for consumers, consumer brands, and — and that’s not who we are. We are — we work with companies, we work with venture capitalists, we work at — with, you know, the healthcare space, the life science, and where we spend time. And it’s — really it’s about relationships and making sure we’re top of mind with them.

We’re spending time with those individuals. We’re spending time with the venture capitalists. We’re spending time with the entrepreneurs. That’s where our teams of people are. And we’ll sponsor things. We’ll host events. We’ll create events around that, but it’s not — it’s not in — in mainstream. It’s becoming more popular, it’s becoming more top of mind for individuals. But historically, it has been more low key to use your — your word.

RITHOLTZ: So — so let’s — let’s stay with the organization. You guys are publicly traded. You’re the CEO. How did you manage the organization? How did you run things during the pandemic when everyone was forced to work from home?

BECKER: Well, I — the simple way to describe it is make sure if you’re going to go through something like that, you get a really good team of people, and it starts with that. And no CEO is making all the calls. No CEO is, you know, using just their own thinking, their own decision-making process.
And so, number one, start with a great team, which we — we had.

So, as we started to assess the situation, it was thinking about our employees first and thinking about our clients. And shareholders, while important — always important, I want to make that not — you got to focus on the first two things. And so, when we thought about employees, it was how fast we can make sure that we’re taking care of them and protecting them. So, we went very quickly from a remote perspective, making sure we were supporting them with home office, home technology, capabilities so they could do what they needed to do and also take care of their families. That was first and foremost.

The second thing was taking care of our clients. So, when you see a shock like that, they’re worried about I don’t know what’s going to happen next. My crystal ball becomes very cloudy. I — what I don’t want to have to deal with is my banking partner kind of ringing up the phone or calling or emailing me saying, hey, your loan, pay back your loan or we’re worried about this. So, we gave our clients a lot of flexibility. And we’re paying our loans, holding off on making payments because we said we’re in this together. This isn’t your fault, you didn’t do this …

RITHOLTZ: Right.

BECKER: … and so we should be working together to solve this problem to get through this.

And I — I look back at that and, A, it was absolutely right call. And B, we got a lot of great feedback from our clients and how supportive we were for them and how important that was to them. And as the CEO, you know, there’s no better feeling than getting those positive comments from your clients that you really took care of them and the same thing is true with the employees. So, I think we weathered the storm really well. And — and again, our target market — this innovation economy bounced back so quickly that we were fortunate to be in the right space as well.

RITHOLTZ: So here in New York, there is drumbeat from a lot of big companies. We want to see their staffers back in the office, but there’s a little resistance. Some of it is by sector, some of it is generational. What are your plans for — let’s talk in the fall, does everybody come back to the office? Is it a little more of a hybrid situation? What — what is the plan for Silicon Valley Bank post-pandemic if I can dare use that phrase?

BECKER: Yeah, they — first, it goes back to what I just said, which is you got to take care of your employees first, right? Safety is the most important thing. And as much as we want to get back together, we want to socialize, we want to connect, we want to make sure that people are safe. And there isn’t, you know, enough impact on their — on their families as well. And so, we — we need to be first sensitive to that. So, what we’re doing right now is we’re doing some trials, testing things out, bringing some people back and seeing how it operates, seeing what technology we need to adapt to in this new flexible environment, which we’re going to, so we would’ve make sure that, first and foremost, our employees are safe.

Second part is that they’re taking care of our clients, and they’ve done a great job during the pandemic. No reason to think that it’s going to slow down or they won’t continue do a great job for our clients, but it’s really the combination of those two things. And so, we’re doing a lot of surveys, listening to our employees. And what our employees want is they want flexibility. And so, the future work at SVB will be to provide a more flexible work environment.

We’re redoing a lot of our offices to create more flexibility. We’re allowing more support to have them build their home offices so they can work from home. So, I think we’re going to have a lot of people that are going to be coming in a few days a week, but the vast majority will not be coming in five days a week. We think it’s better for employees, and we think it’s better for our clients.

RITHOLTZ: That’s interesting. I’m — I’m kind of fascinated by let’s talk sector by sector. A lot of finance was able to work remotely, a lot of technology was able to work remotely. There are certain businesses, travel, entertainment, hospitality that physically have to be — be there. You’re doing a little bit of business travel. You’re here in New York from California. What do you see as you travel around the country? Is California, because of the tech heaviness, more open to a hybrid model? What — what are you seeing from your perspective?

BECKER: Yeah, I think technology companies are definitely more open to high-bred. They’re much more open to working remotely. They’re more open to being flexible. Part of it is — is that, you know, you have a skill, a contribution that can be made. And if it’s computer programmers or sales support or whatever you want to call it, that you can be more — more remote.

The more a business or industry has an apprentice model, the more being in person like that’s going to be even more important. So, it — it — it depends upon what the needs are of the — of the business. So, technology companies by definition are going to be more, more flexible.

We’re — we’re somewhere in — in between. We’re not — we’re somewhat of an apprentice model, we’re not a full apprentice model, so we can be in that middle ground of not requiring everyone to be back, but also not having everybody be flexible wherever they want to work. And I think that’s going to be the right balance.

RITHOLTZ: So, I think of Silicon Valley as a place, but if you have a lot of people working remote, well, there’s really no latency difference between Colorado and Palo Alto. Do you run the risk of losing that nexus of intellectual capital all in — in one place if people are scattered to — to the four winds and don’t have to be in on a regular basis?

BECKER: So, I’ll break that apart to two answers. One is the technology in the life science industry, and then I’ll just speak for — for our business. On the tech and life science area, Silicon Valley has been there for years, the people have said is Silicon Valley going to fall apart? It’s expensive, it’s all these things are going to be more of a challenge, and other markets are going to pick up the pace and be more competitive.

And — and in my view is while other markets are going to do better than they have historically, right, New York, and Atlanta, and Chicago, and Denver, and — and Austin, and Seattle are going to continue to do better, it’s not going to be at the expense of Silicon Valley. Silicon Valley from my standpoint will continue to thrive. It will still be, at least from my lifetime, I believe, the innovation capital of the world. But innovation is everywhere. And so, it makes sense that these other markets are going to still do really well. They’re still going to get more innovation jobs, innovation companies in those markets. And so, I believe kind of all boats will rise not — there’s not going to be a zero-sum game the way I think too many people think about.

For our business, we do have a lot of interaction. We do have offices all over the country, and so we want to make sure our people are close to those hubs, so when they do come in that they have access to engaging with our other teammates that allow them to learn and develop and build relationships, and all those things, so that’s one thing.

The second thing is if you’re a client-facing individual, you obviously have to be in the market or your clients are. And so, that — that isn’t going to change. If your — if your clients are in Northern California, you can’t live in Nashville. You can’t live in, you know, Austin, Texas if your clients are in the Bay Area. So that obviously is one important, important function. But we believe it’s a — it’s a balance of apprenticeship, as well as you can do things remote as well.

RITHOLTZ: Let’s talk a little bit about fintech since that covers a little bit of both the areas that you guys play in. It’s obviously been a huge area of growth over the past decade. What are you doing to stay ahead of the curve? How do you make sure after helping all these disruptive companies that you yourself don’t get disrupted?

BECKER: Yeah, I’d say it’s — it’s both a — a blessing and I wouldn’t call it a curse, but I would say a blessing and a challenge to be so close to the innovation market in these FinTech companies because you see how fast they grow. You see how fast the adapt. And so, there’s a — there’s a paranoid part about that, but I think that helps us, as an institution, realize that we have to keep pressing ahead, that we have to be bold, that we can’t wait for things to happen, that we need to try new things.

We have an innovation team. We’re investing in new businesses. Maybe it can’t be part of our core competency inside SVB, but we can invest in those businesses and provide those solutions to our clients. So, I — I believe it’s actually we can benefit from it and we can benefit from a — in a business, but we can also benefit it in supporting our clients because we know we have to innovate.

So yeah, we spent a lot of time. We have a national FinTech practice, and so we work with many, many, many FinTech companies and support them in payments. We support them in warehouse lending when they’re trying to do loans themselves to consumers or loans to small business, so we support them in a variety of different ways. And kind of every day that goes by, we’re forgetting about what’s the next thing we can do to support them.

RITHOLTZ: Let me throw a curve ball at you a little bit. Wine, you mean wine business, why is Silicon Valley Bank? I know you work with life science and clean tech, and venture capital, how does wine fit into that business other than the proximity of Napa and Sonoma to — to where you guys are?

BECKER: Yeah, maybe I could claim it’s a life science connection because (inaudible) …

RITHOLTZ: Sure, right, exactly.

BECKER: … the health benefits. It’s actually historical in — in the sense. When the bank was first formed back in the early 80’s, we did some innovation, so whatever technology was back then in the — in the 80’s, semiconductor companies and some networking companies, and then we did general commercial industries in real estate. And then we also did some, you know, private banking back at that time as well.

And so, over time, when we were doing commercial industries, we’re doing commercial real estate, what we realized is that maybe we weren’t as good as we thought we were at it, and so the real estate crisis in the late 80’s, in the early 90’s …

RITHOLTZ: Sure.

BECKER: … we said maybe that’s not something we should be doing, but we’re pretty good at this technology stuff.

So, what happened is we kept whittling down what we are really good at until we ended up in the late 90’s of technology and life sciences. And we had this one business, premium wines in Napa and Sonoma. And it was a really good business. But — well, there’s a benefit to it. It’s actually it’s great marketing and it’s great connectivity. And if relationship building is so important …

RITHOLTZ: Right.

BECKER: … as it is, you can leverage those clients, those winemakers and those relationships. And you can create connectivity across your client base in a really unique way. So, we said it’s a great business, it makes the rest of the business better, so let’s keep it. And it’s been — it’s been really nice to have. And we host events up in Napa and Sonoma, and we help those winery clients sell more of their product to our technology and innovation clients. So, there’s a really good match between the two.

RITHOLTZ: That makes a whole lot of sense. And I am a giant fan of Napa Valley Cabs. They — they …

BECKER: Come visit (inaudible) come out and stop by.

RITHOLTZ: … I’m — now that traveling is reopening, it’s absolutely on my — a list of things to do. As much as everybody claims to hate business travel, you miss occasionally getting out on a — on a trip like that. The last conference I was in, in San Francisco, ended with a bunch of us heading up to Napa for a couple of days. Ad, you know, after three days of panels and that sort of stuff, it was a great break. It’s a little bit too long of a flight to just go for a conference for a couple of days, so it became something fun. I could see how having Sonoma, Napa Valley in your backyard is a great multiplier for all the other businesses, how that connection can really work.

BECKER: It is. And — and much like we have in healthcare, and — and technology, and software, and all those industries, we have experts that this is what they do kind of 24/7. Our wine group, they’re experts in this industry. They really are — are viewed as being the smartest people in understanding these industries. And — and that’s the way we approach investment banking. That’s the way we approach private banking. We want to be the best — the best people, the most knowledgeable people in giving advice in the industries that we serve. And I think the wine group is just another example of that.

RITHOLTZ: SVB’s reputation is that it understands startups like very few banking institutions. Those relationships are a giant advantage that — that you’ve had for a while. How long can you maintain this lead? Is this something that’s specific to you? What are you doing to stay competitive as more and more financial institutions look at Silicon Valley and say we want to muscle our ways into that space?

BECKER: I look at it this way, Barry. You can take a defensive posture or you can take an offensive posture. We are taking an offensive posture, meaning, the way we keep our relationships, the way we continue to do what we’re doing is you don’t look back and say what can we hold back from our clients, what can we — how do we create more of a moat around them.

It is actually you end up doing a better job of providing one-stop-shopping, all the products and services. So, you go — it’s like the reason we did the acquisition of — of Leerink Partners and we’re building out our investment bank is to add more value to our clients. The reason we acquired Boston Private was to add more private banking and wealth management capabilities. The reason we acquired West River Group is to make sure we can lend even greater sums of money and higher risk type of lending to them.

All those things are — my view is you could say it’s being defensive. I don’t view it as being defensive, I view it as — view it as being on the offense to take care of our clients no matter how big they get, no matter whatever they need from a financial solutions perspective. We want to be there for them. And I think we have to think about that every single day.

We can’t take our relationships for granted. We have to win those relationships back every single day. And if every employee thinks that way, that’s where I think we’re to continue to be the winning solution for these companies.

RITHOLTZ: That sounds really like — like the right strategy. I know I only have you for a few more moments, so let’s jump to our favorite questions that we ask all of our guests, starting with tell us what you’re streaming these days. Give us your favorite Netflix or Amazon Prime, whatever is keeping you entertained.

BECKER: Two things. One, Ted Lasso. Love that show. I’m glad it came back for Season 2. It’s just — it’s such a great story line, and it’s so funny. It’s — that’s awesome.

The second one, during COVID, my wife and I and family, we watched a ton of anything David Attenborough, anything David Attenborough about, you know, the earth and climate and, you know, it’s the oceans. I mean, it’s — the — the visual part and the — just how fortunate we are to have the earth that we have and how we all need to do a better job of protecting it. Those are the two biggest things that we — we stream.

RITHOLTZ: I’m trying to — I’m googling while we speak, trying to look up the name of the newest show that he just came out with. And I’m drawing a blank on it. Was it Life on Earth again? Life on Our Planet.

BECKER: Phenomenal.

RITHOLTZ: He has like the perfect voice for narrating that sort of stuff. I’m — I’m a big fan as well. So, tell us about your early mentors, who helped to shape your career.

BECKER: Yeah, it’s — you know, being in — in financial services as long as I have been and being at SVB for 28 years, a lot of my mentors have been here at — at SVB. And actually, one that was even before that — so Marc Verissimo was an individual that I managed — I worked with at another bank before I joined Silicon Valley Bank, and he’s the individual that brought me over.

You know, Mark was great about, you know, basically inspiring you to think differently, inspiring you to — to just kind of trying new things, and giving you the autonomy, giving you the responsibility to fail. It’s OK if you fail, what did you learn from your failure? And so, Marc was one.

My predecessor, Ken Wilcox, would definitely be a — a second mentor in addition to giving me incredible opportunities, which I greatly appreciate. He was so — what was so important him was leadership principles, and he taught leadership principles to meet leadership principles to the rest of the executive team about casting your shadow on how important that is about decision-making process. All these things that even to this day I think about, maybe not on a daily basis, but I think about on a regular basis, and so clearly, he was inspirational.

And the last person was a gentleman named Bob Samuels who was an executive coach of mine for a number of years. I learned a lot from Bob. But the one thing, in particular, was how important empathy is, how important empathy is to understand clients, how important empathy is to understand the people you work with, understand kind of everyone else and, you know, not faulting people when they have one of a certain point of view because that’s how they feel. And you can’t take away how people feel about something. That’s what they own. And understanding that and being empathetic to that really allows you to connect with people and, in my view, is in a very different way. So those are a few of the many mentors that I — I have had over the years that have really helped shape my career.

RITHOLTZ: Let’s talk about everybody’s favorite question, books. Tell us some of your favorites and what are you reading right now?

BECKER: Yeah, the — the one I described to our team at the bank for many, many years is this book called “The Boys in the Boat,” and it’s actually timely because of the Olympics being around and it’s set back in the — I don’t want to say the 30’s and the 40’s. And there was a team up in Seattle. There was this individual who came from nowhere, and working together as a team in the eight-person scull up to win in the Olympics in — in Germany. And it’s about team work. It is about the feeling when you’re part of a great team, how important that is and how impactful it can be. So that — that’s a great — that’s a great book.

The other books that I have — I have read recently, “The Pacific War 1941 to 1945” and the most recent one, which kind of fits in that same genre is a book called “2034.” And it’s about a future war between the U.S. and China, and how bad decisions — small bad decisions can create something very significant. You know, to me, the — the war books are about strategy. It’s about tactics, it’s about human nature and — and lessons that we can all learn from them. So those are a few of the things that I’ve been — I have read that I like and I’ve been read — read recently.

RITHOLTZ: Quite interesting. What sort of advice would you give to a recent college grad who is interested in a career in either banking or lending or venture investing?

BECKER: Yeah, I would just advice in general, and I’ll just — I’ll talk about advice in banking and finance. And first of all, I think it’s an incredible career. I think any time you can really understand how businesses operate and get exposed to a variety of different businesses, the way, you know, commercial bankers do the way investment bankers do, I think that’s an incredible skill, it’s incredible knowledge to be gained, and it will allow you to be successful, in my view, no matter what you’re doing. If you want to stay at it as a career or if you want to leave that as a career and then going to a business where maybe you’re a CFO or you’re a finance person, I think all those things are — are great to learn. So, I wouldn’t — I wouldn’t say less about lessons on that part, I would say it is a great career. So, if you get a chance, you know, go for it, do it. I don’t think you’ll be disappointed.

Advice in general that I give to college grads, and I’ve got — I’ve got two kids that have just graduated from college the last couple of years, and I have three kids in college. And so, I do spend a lot of time thinking about — about this and — and — and talking about it. Whether they take my advice or not, I don’t know, but I certainly am happy to share.

So, one is I think too many college kids, when they graduate, think that they’re going from this place of happiness and joy in college to I’m going to work for the rest of my life and it’s going to be miserable. My biggest piece of advice is if you don’t find joy in what you do in your career, right, you got to change your mind around.

There — I — I know when I first got out, I loved doing what I did because the people I got to meet and the lessons that I learned and understanding how different businesses work and, to me, that was incredibly exciting and stimulating, so the first thing is find joy in what you do. You may do it for a long period of time, but it’s not forever and you’re going to learn things are going to be great, stimulating, motivating. And so, that’s number — that’s number one.

The second thing is to realize that it’s not supposed to be easy. If you got — took a job and it’s easy, you’re probably, A, not working hard enough or, B, well, that’s probably the main — the main — the main thing or you’re setting your bar too low, right? You should be thinking about something that’s going to stimulate you and challenge — challenge you more. So, it’s not supposed to be easy, so get over it and go back to point number one. Still find joy in what you do.

The third one fits into that same vein as well, which is be curious. Again, the most frustrating thing that I see with — with — with people when they don’t want to understand, when they don’t ask questions, but they don’t want to find out kind of things of like how things operate and how things work.

And the last part I would say is — advice I would give is be part of a great team. I know when I look back in the best parts of my career, it has always been being part of a team of people that are not competing with each other, but that are working together to compete externally to drive the business forward. That has always been incredibly motivating, stimulating, and inspiring to me. And so, I encourage college grads to find that team where they’re going to be inspired.

RITHOLTZ: Quite, quite interesting. And our final question what do you know about the world of banking, and startups, and investing today that you wish you knew back in ’93 when you first joined Silicon Valley Bank?

BECKER: Yeah, probably the biggest thing — and I think it’s hard until you’ve gone through cycles is to realize that the challenges they will come up, you’ll learn from those challenges, but they’re going to be over a lot faster than you think. You get so caught up in how challenging or how big of an issue it is. You’ll get past it, so don’t stress that as much as you do when those challenges occur. You will get — you will get through it, you’ll be better off, and things will be OKAY.

RITHOLTZ: That’s terrific stuff. Thank you, Greg, for being so generous with your time.

We have been speaking with Greg Becker. He is the CEO of Silicon Valley Bank. If you enjoy this conversation, well, be sure and check out our podcast extras where we keep the tape rolling and continue discussing all things venture and banking-related. You can find those at iTunes, Spotify, wherever you find your favorite podcasts.

We love your comments, feedback and suggestions. Write to us at mibpodcast@bloomberg.net. Sign up for my daily reads at ritholtz.com. Check out my weekly column on Bloomberg at bloomberg.com/opinion. Follow me on Twitter @ritholtz.

I would be remiss if I did not thank the crack team that helps put these conversations together each week. My Audio Engineer is Maruful. Paris Wald is my Producer. Michael Batnick is my Researcher.

I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.

 

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23a U.N. Monetary Conference 763×600

 

The Day That Richard Nixon Changed U.S. Economic Policy Forever
Fifty years ago, in response to rising inflation, he rejected several long-standing practices. His Keynesian turn holds lessons for today’s economy.
Bruce Bartlett, July 9, 2021

 

 

August 15, 1971, was a fateful day in the history of American economic policy: President Richard Nixon imposed far-ranging wage and price controls on the U.S. economy, abolished the fixed exchange rate system that had been in place since 1945, and took other significant actions to deal with inflation, which had become the economy’s overarching problem. In many ways, we are still dealing with the consequences of those actions.

From 1945 until 1971, the economy of the Western world was governed by a system established at a conference in Bretton Woods, New Hampshire, where the victorious powers from World War II (minus the Soviet Union) created rules and institutions designed, above all, to prevent a repeat of the Great Depression. Two principles in particular governed the system. First, there would be widespread free trade (further ensured by the Marshall Plan and the Organization for European Economic Cooperation, now known as the Organization for Economic Cooperation and Development). That is because the Smoot-Hawley Tariff and subsequent beggar-thy-neighbor policies were viewed as a root cause of the depression.

Second, the world monetary system was based on fixed exchange rates to prevent devaluations from being a substitute for protectionist trade policies. (When a currency falls in value, imports become more expensive and exports become cheaper in terms of other currencies.) Major nations fixed their currencies to the dollar, and the dollar was fixed to gold at $35 per ounce to provide an anchor for the system. The International Monetary Fund was established to manage this system and deal with fluctuations in currency values resulting from the balance of payments problems.

One of the keys to maintaining this system was capital controls. Major nations did not permit the free flow of capital internationally because it could easily destabilize exchange rates. Businesses and individuals had to get permission to import or export capital, and access to foreign exchange by domestic investors or domestic currency by foreign investors was controlled by the central bank. As a consequence, investors were denied the opportunity to seek higher returns in other countries and were forced to invest domestically.

Free-market economists such as Milton Friedman decried the Bretton Woods system because capital controls conferred enormous power on national governments and imposed great inefficiencies on businesses, forcing them to engage in uneconomic transactions to evade the controls. For example, a domestic business could sell goods to a foreign subsidiary at a loss, recouping its losses when those goods were resold in the foreign market, thus obtaining foreign exchange. (This is known as under-invoicing; the same techniques continue to be used by corporations to evade taxes.)

As early as 1953, Friedman advocated floating, whereby market forces would set exchange rates. However, it was feared that this would lead to economic instability that would ultimately reduce international trade and economic growth, and that fixed exchange rates were a brake on the ability of governments to run trade, current account, and budget deficits, as well as central banks’ ability to finance them with money creation. Elimination of these constraints would be inflationary, it was believed.

The emergence of persistent inflation in the 1960s put enormous pressure on the Bretton Woods system as exchange rates diverged from fundamental values. Efforts by Federal Reserve Board Chairman William McChesney Martin to dampen inflation and strengthen the dollar by raising short-term interest rates were strenuously resisted by President Lyndon Johnson. The Great Society and the Vietnam War—dubbed guns and butter—were greatly increasing federal spending and borrowing, and he feared that unless the Fed accommodated this it would result in a recession. Conventional economic theory recommended a tax increase to dampen consumer demand to reduce inflationary pressure, but Johnson resisted this idea.

Finally, in 1968, Johnson supported a one-year surtax of 10 percent on all income tax payments. (You multiplied your regular tax liability by 10 percent to calculate your additional tax payment.) The Revenue and Expenditure Control Act of 1968 took effect from April 1, 1968, through July 1, 1969.

Friedman, an adviser to Republican presidential nominee Richard Nixon, and other so-called monetarists argued that the tax surcharge would fail to curb inflation because the root problem was excessive growth of the money supply. On September 27, 1968, The Wall Street Journal reported that the surcharge “shows many signs of being a flop.” Inflation for the year came in at 4.7 percent versus 3 percent in 1967—an increase of more than 50 percent in the inflation rate.

Despite having promised during the campaign to end the surtax, Nixon was persuaded by his economic advisers to support an extension of it. This was coordinated with Johnson and announced in his last State of the Union Address. In the Tax Reform Act of 1969, the 10 percent rate was extended through the end of the year and at a 5 percent rate through July 1, 1970.

Nixon’s unwillingness to follow a strict Friedmanite/monetarist policy on inflation and to support a tax increase was the first sign that he was moving toward a Keynesian view of the economy. The economist John Maynard Keynes, who died in 1946, was the bête noire of all conservative economists because he believed that an active government fiscal policy (taxing and spending) was the most powerful tool government had to steer the economy. Conservatives universally believed that this led government to become ever larger and was, in any event, ineffective at either stimulating growth or taming inflation.

In early 1971, Nixon admitted publicly that he was indeed a Keynesian.

In early 1971, Nixon admitted publicly that he was indeed a Keynesian: On January 4, he told ABC commentator Howard K. Smith, off camera, that he was “now a Keynesian in economics.” According to The New York Times, Smith was astonished by Nixon’s admission, likening it to a Christian saying, “All things considered, I think Mohammad [the founder of Islam] was right.”

The Times’ principal economic analyst, Leonard Silk (a Ph.D. economist), said that anyone paying close attention to Nixon’s economic policies could have seen that he had been moving in a Keynesian direction for some time. Silk attributed this primarily to Nixon’s intense desire to stimulate the economy through the 1972 election. In his book, Six Crises, Nixon lamented that an ill-timed recession in 1960 torpedoed his presidential race against John F. Kennedy. (Another recession began in December 1969 and ran through November 1970, which gave Nixon an uncomfortable feeling of déjà vu.)

One problem with free-market policy is that it has nothing to offer when there is an economic downturn or any means to stimulate economic growth except do-nothing—the free market always delivers the best growth that is possible, its advocates continually say. Whatever the economic virtues of this philosophy, it is politically untenable; politicians must be able to do something in an economic downturn.

On October 17, 1970, Nixon announced his intention to nominate the prominent economist Arthur F. Burns, who had been serving him on the White House staff, as chairman of the Federal Reserve Board when Martin’s term expired in January. Nixon was very familiar with Burns’s thinking from the Eisenhower administration, in which Burns served as chairman of the Council of Economic Advisers and Nixon was vice president. Therefore, Nixon knew that Burns did not see inflation as primarily a monetary phenomenon.

Just days before the events of August 15, Burns testified before the Joint Economic Committee that he had grown pessimistic that inflation could be contained using traditional monetary and fiscal tools. “Additional governmental actions involving wages and prices” were needed, he said. While decrying price controls as “drastic,” Burns said he would support a Wage and Price Review Board or Anti-Inflation Board to bring pressure on wage and price increases viewed as excessive and inflationary. (This was often called “jawboning.”)

At the ceremony swearing Burns in as Fed chairman, Nixon made it clear that he was being sent there to implement policies that would benefit him. “I have some very strong views on some of these economic matters and I can assure you that I will convey them privately and strongly to Dr. Burns,” Nixon said. “I respect his independence. However, I hope that independently he will conclude that my views are the ones that should be followed.” (Burns’s diary reveals that Nixon called him frequently to offer advice.)

Inflation continued to be a problem in 1971, with forecasts showing an acceleration into 1972, which presented a growing political problem for Nixon.

Inflation continued to be a problem in 1971, with forecasts showing an acceleration into 1972, which presented a growing political problem for Nixon. Although inflation was unpopular, so were actions such as higher interest rates to moderate it. Those on the left had a simple answer: wage and price controls. On July 20, 1971, Harvard economist John Kenneth Galbraith, who had helped administer wage and price controls during World War II, testified before the Joint Economic Committee that there was really no choice in the matter because there was no combination of monetary or fiscal policies that could curb inflation without sharply raising the unemployment rate. Continuing, Galbraith said:

There is only one way to have an effective economic policy. That is to leave the monetarists and fiscalists to continue their academic quarrel and recognize that adequate employment and reasonably stable prices can only be reconciled by coming to grips with the wage-price spiral. That requires controls.… The first step in getting an effective economic policy must be a general freeze.

Ironically, Galbraith, who was widely known for being a supporter of Keynesian economics, added that “Mr. Nixon has proclaimed himself a Keynesian at the moment in history when Keynes has become obsolete.” Galbraith thought that big corporations could now charge monopoly prices, which negated Keynesian policies.

Nixon’s CEA chairman Paul W. McCracken was alarmed by Galbraith’s testimony and penned an attack on it in a Washington Post op-ed article on July 28. Wage and price controls would seriously erode personal freedom, McCracken said, and quickly collapse unless the underlying monetary and fiscal sources of inflation were restricted. He was also dubious about the government’s ability to administer an all-encompassing set of wage and price controls.

What really set in motion the actions of August 15 was a demand by Britain to exchange $3 billion of U.S. dollars it held from running a trade surplus for gold. Although American citizens were prohibited from owning gold, the Bretton Woods system permitted governments to do exactly what Britain wanted to do. The problem was that the U.S. had only about $10 billion of gold at that time and had no intention of giving such a large chunk of it to the British. Every other country holding dollars would have instantly demanded gold as well and there wasn’t enough to go around—a classic run on the bank.

Another impetus for action on the dollar was pressure from Congress for devaluation. A report from the Joint Economic Committee advocating it had been leaked to the New York Times on August 8 and gotten a great deal of attention at the Treasury Department.

The Treasury Department had primary responsibility for international monetary policy, and Treasury Secretary John Connally, who had no training in economics and had recently been governor of Texas as a Democrat, took the lead in setting up a meeting at Camp David to deal with the gold crisis. According to recently published research by economists James L. Butkiewicz and Scott Ohlmacher, Connally’s plan had been drawn up by Paul Volcker and proposed that the dollar be allowed to float temporarily until exchange rates stabilized. Since this would constitute a de facto devaluation of the dollar, which was widely viewed as overvalued, it would quickly raise prices of imports and inflation throughout the economy. Thus Volcker advocated a three-month wage-price freeze until a new international monetary regime could be reestablished. Additionally, Connally advocated a 10 percent surcharge on foreign imports to improve the balance of trade.

Secrecy regarding the Camp David meeting was very high. Even the slightest hint of an impending revaluation of the dollar would have sent financial markets into a tailspin. Indeed, the dollar was already under speculative attack just as the meeting began on August 13, intensifying the crisis atmosphere.

McCracken’s top assistant at that time was an economist named Sid Jones. I worked for Jones at the Treasury Department during the George H. W. Bush administration. He told me that he had no inkling of what was happening until McCracken came to him just before leaving for Camp David with a document appointing Jones as acting chairman of the CEA until Monday. Not only had McCracken never done such a thing before; it was highly suspect since Jones wasn’t even a member of the CEA, but only a staffer. Jones speculated that McCracken wanted to be able to say he technically wasn’t chairman of the CEA when the new economic policy was announced.

I am also reminded that I met John Connally in 1980, when he was running for president as a Republican. He gave a speech largely devoted to attacking wage and price controls. I said his points were well taken, so why did he advocate controls in 1971? Oddly flustered by my question, he said there was one unique moment in all of human history when they might have worked and that was in 1971. Connally may not have known anything about economics, but he sure knew the political virtues of appearing bold during a crisis.

At 9 p.m. on August 15, Nixon addressed the nation from the Oval Office, announcing the program of wage and price controls, closing the gold window, and new tariffs on imports. Simultaneously, he issued Executive Order 11615 implementing these policies immediately. Congressional reaction was mixed, but the stock market soared, rising almost 4 percent on August 16. (Businesses thought that the controls on wages would be beneficial, while the constraints on prices were easily evaded; for example through rebates on automobile purchases, which originated during this time and continue today.)

With the inflation problem temporarily under control, Nixon felt free to push Burns to keep interest rates low and continue to provide monetary stimulus, so that the economy would be strong through the 1972 election. Tapes Nixon made of his Oval Office conversations document this pressure.

As everyone involved knew, the controls couldn’t be maintained for long. For one thing, prices on imports and farm commodities couldn’t be controlled. This was especially important regarding the price of oil. Although it was denominated in dollars, the prices of everything the oil producers bought in other currencies rose sharply after the dollar fell. Thus the devaluation led directly to the spike in oil prices by the Organization of Petroleum Exporting Countries in October 1973.

Globalization destroyed the private sector labor unions and allowed businesses to exploit workers throughout the world, creating a race to the bottom in terms of wages.

Space prevents a fuller discussion of the consequences of the actions of August 15, 1971. However, I do not think it is a coincidence that the long-term divergence between economic output and worker compensation began almost exactly on that date. Once businesses were free to invest abroad by the abolition of capital controls, which followed from the elimination of fixed exchange rates, workers lost enormous leverage. Globalization destroyed the private sector labor unions and allowed businesses to exploit workers throughout the world, creating a race to the bottom in terms of wages.

Contrary to popular belief on the left, Ronald Reagan’s policies had almost nothing to do with it, and the trend continued through Bill Clinton’s and Barack Obama’s administrations. (Of course, both supported the “neoliberal” consensus that globalization is largely beneficial to the U.S., as does Joe Biden.)

Unfortunately, the option of continuing the Bretton Woods system was not an option, although perhaps it could have been replaced by something better than what we got. The toothpaste cannot now be put back in the tube, and those who say we should return to fixed rates or a gold standard are simply cranks. (Milton Friedman was among those who thought so.) The important thing to remember is that the long stagnation of wages was set in motion by deep international macroeconomic forces that are tied to foreign trade and exchange rates. Those forces changed fundamentally on August 15, 1971, and we are still living with the consequences, which were never envisioned by those who met at Camp David 50 years ago. They believed in their hearts that they were just tinkering, but in fact, were opening Pandora’s Box.

~~~

Bruce Bartlett @BruceBartlett

Bruce Bartlett is a longtime observer and commenter on economic and political affairs in Washington, D.C., who has written for The New York Times, The Washington Post, The Wall Street Journal, USA Today, Politico, and many others. A bestselling author, his latest book is The Truth Matters: A Citizen’s Guide to Separating Facts From Lies and Stopping Fake News in Its Tracks.

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Avert your eyes! My Sunday morning look at incompetency, corruption and policy failures:

• The Lucrative Business of Stoking Vaccine Skepticism How misinformation peddlers are using crowdfunding sites to bankroll their work. (Slate)

• Acres of Money Laundering: Why U.S. Real Estate is a Kleptocrat’s Dream What do the Iranian government, a fugitive international jeweler, and a disgraced Harvard University fencing coach have in common? Kleptocrats, criminals, sanctions evaders, and corrupt government officials choose the U.S. real estate market as their preferred destination to hide and launder proceeds from illicit activities. They have all used U.S. real estate to launder their ill-gotten gains. (Global Financial Integrity) see also Notes on NFTs, the high-art trade, and money laundering NFTs create new opportunities for bad guys to move money without attribution. (Amy Castor)

• Weak Oversight Plagues Audits of Billions in Private Assets Self-regulatory audit system fails to safeguard charities, pension funds and private companies, a WSJ analysis finds (Wall Street Journal)

• Deceptions and lies: What really happened in Afghanistan. U.S. hid the truth about an attack targeting Cheney, amid fears of losing war By lying about how close the insurgents had come to harming Cheney, the U.S. military sank deeper into a pattern of deceiving the public about many facets of the war, from discrete events to the big picture. What began as selective, self-serving disclosures after the 2001 invasion gradually hardened into willful distortions and, eventually, flat-out fabrications. (Washington Post)

• An inconvenient truth (about weed) Federal laws bar cannabis from crossing state lines, driving up the cost — and the emissions — of an industry using indoor grow operations. (Politico)

• ‘Warrior mindset’ police training proliferated. Then, high-profile deaths put it under scrutiny. “What is the highest priority in policing?” said Stoughton. “One of the things that bothers me is the way that the policing industry has evolved to treat courage under combat conditions as the highest form of police professionalism.” (Washington Post)

• Secret IRS Files Reveal How Much the Ultrawealthy Gained by Shaping Trump’s “Big, Beautiful Tax Cut” Billionaire business owners deployed lobbyists to make sure Trump’s 2017 tax bill was tailored to their benefit. Confidential IRS records show the windfall that followed. (ProPublica)

• Judge asks why Capitol rioters are paying just $1.5 million for attack, while U.S. taxpayers will pay more than $500 million Chief U.S. District Judge Beryl A. Howell of Washington challenged the toughness of the Justice Department’s stance in a plea hearing for a Colorado Springs man who admitted to one of four nonviolent misdemeanor counts of picketing in the U.S. Capitol. (Washington Post)

• “All Roads Lead to Mar-a-Lago”: Inside the Fury and Fantasy of Donald Trump’s Florida Roger Stone, Tucker Carlson, Sean Hannity, Ben Shapiro—they’ve all made their way to the Sunshine State, fueling and profiting from a tabloid culture that turns politics into spectacle, arguably Florida’s greatest export. (Vanity Fair) see also Donald’s Plot Against America: Now, he and his GOP enablers are peddling the Second Big Lie: that January 6 was just legitimate protest. It’s the crucial ingredient in convincing America to return them—and him—to power. (New Republic)

• Farm Supply Stores Are Running Short on a Horse Dewormer/Pseudoscience COVID Cure “The hardship comes when you run to your farm supply store and they don’t have [ivermectin] on the shelves anymore because of all of this.” (Slate)

Be sure to check out our Masters in Business interview this weekend with Greg Becker, CEO of Silicon Valley Bank. The bank has helped fund more than 30,000 start-ups, 50% of venture-backed tech and life science companies in the US, and 69% of U.S. VC-backed tech + life science companies with an IPO banked with SVB.

 

Confidence in Big Business, Big Tech Wanes Among Republicans

Source: Gallup

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This week, we speak with Greg Becker, who is the chief executive officer of Silicon Valley Bank — the only bank dedicated to the global innovation sector — and CEO of SVB Financial Group. Becker joined SVB in 1993 and has served as CEO since 2011; he previously held various senior positions including co-founder and managing director of SVB Capital, chief banking officer, and president of Silicon Valley Bank.

He explains how SVB brings nearly 10,000 companies in who are just getting started. They tailor their products to them from venture financing, lending, and banking services. Clients of SVB startup-banking make up 50% of venture-backed tech and life science companies in the US; 69% of U.S. VC-backed tech + life science companies with an IPO banked with SVB in 2019.

The firm has been active in the FinTech area, with both clients and deploying tech on their platform. It helps them as an institution to press ahead and be bold. SDVB is now global, operating in Asia, the UK, and Europe, China, and elsewhere around the world.

A list of his favorite books is here; A transcript of our conversation is available here Monday.

You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Stitcher, Google, Bloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here.

Be sure to check out our Masters in Business next week with Fran Kinniry, who is a principal in the Vanguard Investment Strategy Group, and became Global Head of Private Investments at investing giant Vanguard Group in 2019.

 

 

Greg Becker’s Favorite Books

The Boys in the Boat: Nine Americans and Their Epic Quest for Gold at the 1936 Berlin Olympics by Daniel James Brown

The Pacific War: 1941-1945 by John Costello

2034: A Novel of the Next World War by Elliot Ackerman and Admiral James Stavridis

 

 

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The weekend is here! Pour yourself a mug of Mocha Java coffee, grab a seat by the pool, and get ready for our longer-form weekend reads:

• Dear Earthlings: Please stop obsessing about UFOs My strong suspicion is that the number of UFO sightings that involve actual alien beings, from deep space, with the tentacles and the antennae and so on, is zero. I would put the likelihood at 0.0000 and then add some more zeros, before eventually, begrudgingly — because I’m so intellectually flexible — putting in a little 1 out there somewhere to the right, a lonely sentinel, because who knows? (Yes, I’m saying there’s a chance.) Sorry to disappoint you, this science writer says, but there’s zero evidence of aliens. (Washington Post)

• How the explosive growth in satellites could impact life on Earth Satellites are set to grow by 1,000%+ in the next decade. They might help us predict pandemics and save the planet.  (The Hustle)

• Why A Secretive Chinese Billionaire Bought 140,000 Acres Of Land In Texas Sun’s decision to invest in Texas also highlights the difficult situation facing China’s moguls. Over the past few years, the Chinese Communist Party appears to have grown more antagonistic toward private enterprise and wealthy business people. In recent months Chinese authorities reined in globetrotting billionaire Jack Ma, moved to restrict overseas listings and ordered educational companies to become non-profits. Tycoons like Sun, who thrived under Chinese state-backed capitalism, may be feeling pressure to move capital abroad as they grapple with the shift in political winds. (Forbes)

• Status Monkeys Analyzing NFTs as Social Networks Before the full Metaverse arrives, there’s already something happening that’s bigger than jpegs. NFTs are starting to feel a lot like a new kind of social network that sits above other social networks and communities — something of a Superverse — and there’s no better framework to evaluate a social network than the one Wei put forth in Status-as-a-Service (StaaS). (Not Boring)

• The Way the Senate Melted Down Over Crypto Is Very Revealing I want to explain why crypto matters, even if you think Bitcoin is just goldbuggery for nerds. The technology is evolving to be much more than a digital currency, and Silicon Valley sees it as the digital infrastructure atop which the next internet will be built. Then I want to trace the fight that consumed the final days of the bill, because this was just an early skirmish in what will be a much longer campaign. (New York Times) but see also Beyond the Bitcoin Bubble Yes, it’s driven by greed — but the mania for cryptocurrency could wind up building something much more important than wealth. (New York Times)

• Animals Can Count and Use Zero. How Far Does Their Number Sense Go? Crows recently demonstrated an understanding of the concept of zero. It’s only the latest evidence of animals’ talents for numerical abstraction — which may still differ from our own grasp of numbers. (Quanta Magazine)

• If Einstein Had The Internet: An Interview With Balaji Srinivasan Technology as determinant of historical cycles in market and government influence, why culture has stagnated despite advances in the tools that make it, how wokism will lose, and more! (Time Well Spent)

• It’s hard to be a moral person. Technology is making it harder. Digital distractions such as social media and smartphones wreak havoc on our attention spans. Could they also be making us less ethical? (Vox)

• “The Segway Is Going to Change the World” As the new millennium dawned, a mysterious invention from a charismatic millionaire became a viral sensation—then went down in flames. Ever since, I’ve wondered: Was it all my fault? (Slate)

• Still Unsure About Getting The COVID-19 Vaccine? Start Here. We’ve collected some of the most common concerns with vaccination mentioned by people who are vaccine hesitant, and we’ve provided evidence-based responses to each one. If you or someone you know share any of these concerns, click through to see what information is out there to help you make this important decision. (FiveThirtyEight)

Be sure to check out our Masters in Business interview this weekend with Greg Becker, CEO of Silicon Valley Bank. The bank has helped fund more than 30,000 start-ups, 50% of venture-backed tech and life science companies in the US, and 69% of U.S. VC-backed tech + life science companies with an IPO banked with SVB.

 

Since the Gold Standard ended 50 Years ago, the S&P 500’s total return = 20,000% this week, while gold returned = 4,200%

Source: Dave Wilson’s Chart of the Day

 

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People, people, people: What must I do to get your attention?

Let’s try this:

If we do not radically improve our Vaxx rates ASAP, the entire economic recovery and precariously positioned, somewhat expensive market is put at risk of a 20-30% crash. This one will not have the trillion-dollar stimulus and rapid recovery of the 2020 edition, but rather, will be long, slow, and painful.

Are you paying attention yet?

The threat has been apparent for a while now and I have to admit being perplexed by the soft response from the Biden Admin, and the milquetoast leadership from the Corporate sector.

Are we really going to just ignore the worst Consumer Sentiment numbers in a decade?

 

 

We solved for Covid in a record time, and we are about to use artificial antibodies to beat malaria. Can we please do everything possible to use our scientific expertise to get past this pandemic?

~~~

Since the market crash in 2020, I have been steadfastly bullish on, well, everything: The economy, the vaccines, and of course the markets. The pandemic was an externality that caused markets to wobble but it did not end the secular bull market.

But I was at DEFCON 5 in 2006, DEFCON 3 most of 2007, and I went to DEFCON 1 Jan 1, 2008.

Are we going to risk this entire hard-won progress? Are we going to allow millions more to get infected, 1,000s of children die? When the economy returns to its fetal position, when the market gets punched in the throat, do not, under any circumstances, make the claim that “No one could see it coming.”

We are now at DEFCON 3. When a true and new market risk is identified, it is in your self-interest to pay attention.

 

 

Previously:
The Economic Risks from Anti-Vaxxers (July 15, 2021)

Missing: Corporate Leadership on Vaccines (August 12, 2021)

End of the Secular Bull? Not So Fast (April 3, 2020)

How Externalities Affect Systems (August 14, 2020)

 

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My end of week morning train WFH reads:

• MacKenzie Scott’s Money Bombs Are Single Handedly Reshaping America With almost $8.6 billion in gifts announced in just 12 months, Scott has vaulted to the tippy top of philanthropic giving, outspending the behemoth Gates and Ford Foundations’ annual grants — combined. But, for someone who is single handedly reshaping nonprofits, Scott, who declined to comment for this story, has only given the public glimpses into the thinking driving her decisions. (Bloomberg)

• Who Wants To Return To The Office? the question isn’t whether working from home will stick — it’s whether executives will take into account the findings of this widespread work-from-home experiment to reevaluate who the system is working for. (FiveThirtyEight)

• The Ultimate Diversifier: What Real Assets Are Gaining in Allocator Portfolios Infrastructure such as bridges and tunnels, plus farmland and other natural resources, is winning new favor. (Chief Investment Officer)

• Let’s Make A Deal: Who’s For Sale In Hollywood And For How Much? Studios behind hits like Godzilla Vs. Kong, La La Land and 8 Mile are ready to be gobbled up — and their price-tags are surprising. (Forbes)

• U.S. Inflation Is Normalizing: The temporary inflation spike associated with reopening is already beginning to fade as prices that were depressed during the pandemic continue to normalize and as consumer demand for motor vehicles continues to moderate.. (The Overshoot)

• This Is a Terrible Time for Savers In an upside-down world of financial markets, expected returns after inflation are at record lows. (New York Times)

• Smart Cities, Bad Metaphors, and a Better Urban Future Shannon Mattern’s new book, A City Is Not a Computer, digs into the data, dashboards, and language that keep people from building better, safer communities. (Wired)

• Reiki Can’t Possibly Work. So Why Does It? The energy therapy is now available in many hospitals. What its ascendance says about shifts in how American patients and doctors think about health care. We were putting adaptogens in our coffee, collagen in our smoothies, jade eggs in our vaginas. We were microdosing, supplementing, biohacking, juicing, cleansing, and generally trying to make ourselves immaculate from the inside out. (The Atlantic)

• America has a long history of vaccination mandates. Why should the worst plague in a century be any different? Ever since George Washington forced his troops to be inoculated against smallpox in 1777, Americans have routinely complied with vaccination mandates. Such mandates are, in fact, as American as apple pie. As Scientific American noted: “Every state and Washington, D.C., requires routine vaccinations, such as for measles, mumps and rubella, as a condition of school attendance.” (Washington Post) see also What Is Biden Waiting For? The Delta variant is making clear what the Administration should have done back in January: mandate vaccines, mandate passports and crack down on the denialists. Now time is running short. (Medium)

• This Boy Band Is the Joy That Hong Kong Needs Right Now The popularity of the group, called Mirror, has offered the city a rare burst of unity and pleasure after years of political upheaval. (New York Times)

Be sure to check out our Masters in Business interview this weekend with Greg Becker, CEO of Silicon Valley Bank. The bank has helped fund more than 30,000 start-ups, 50% of venture-backed tech and life science companies in the US, and 69% of U.S. VC-backed tech + life science companies with an IPO banked with SVB.

 

There’s a big shift happening in the housing market

Source: Fortune

 

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Cars from the pre-war era are not where most of my automotive interests lays. But even I can appreciate the mechanical excellence and beauty of this giant Packard Twelve Convertible. It is an important milestone in America’s automobile history.

The car below was purchased new by Colonel Robert R. McCormick, owner of the Chicago Cubs and the Chicago Tribune. MSRP in 1939 was a heady $5,400. It was a chauffeur-driven model, and McCormick’s told his driver to get him from downtown Chicago to his home in Wheaton, Illinois in 45 minutes, which the big V12 was more than capable of.

Powered by a 473ci L-head V12 paired with a column-shifted three-speed manual transmission with overdrive, it made a big 175HP. The massive upright chromed grill, topped by the crystal eagle hood ornament, defines the elegant look of the car. This was the final year for Packard Twelve, the top-of-the-line production body style.

Only 446 were built in 1939, there are a dozen known left of the aptly named Twelve, making this a rare and desirable automobile.

These go for $100-200k, including recent sales og $170,500, $160,600, and $106,400. The version below was bid to $112,200, but RNM and was not sold. You can pick it up for $199k here.

 

Source: Bring A Trailer

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“In every well-ordered society charged with the duty of conserving the safety of its members, the rights of the individual in respect of his liberty may at times, under the pressure of great dangers, be subjected to such restraint, to be enforced by reasonable regulations, as the safety of the general public may demand.”

-Justice John Marshall Harlan, Jacobson v. Massachusetts (1905)

 

I noted back in February that America’s CEOs were “Having a Good Year.” Not just in their response to a deadly pandemic, or to the logistical challenges of remote work or feeding a nation stuck at home, but even their response to the January 6th attempted coup (Let’s stop pussyfooting around with equivocal words like “insurrection”).

The CEO crew congratulated the legitimate victor, dismissed nonsensical conspiracy theories, froze contributions to elected Capitol rioters, and generally behaved like responsible citizens facing a credible crisis of Democracy. Of course, there was some backsliding – I crossed Toyota off of my list never to be purchased or recommended again – but generally speaking, the corporate sector behaved rather well.

The Vaccine hesitancy that has been stoked by bad actors – an unseemly mix of malicious, opportunistic, and plain old stupid – has presented another chance for the corporate sector to demonstrate leadership. The track record is at best mixed.

If for no other reason than self-interest, it’s time for Corporate America to step up its Vax game – and fast. More than their new hires, companies need to get their customers, aka the public, vaccinated. Otherwise, we are going to be living through an echo of 2020, with Covid as an ongoing and perhaps even long-term drag on the economy. This will affect revenue and earnings at all companies.

Even better, as an exercise, let’s name names. Consider these 10 companies as well-situated to effect real social change relative to Vaccines. But really, any company can show leadership.

Here are the ~10 names I picked.

10 Companies That Can Improve National Vaccination Rates
1. McDonald’s
2. Uber/Lyft
3. Walmart/Target
4. Live Nation/TicketMaster
5. AirBnB
6. Disney
7. American Express
8. Delta
9. Apple
10. USPS

The list above includes companies that interact with the public on a regular basis. They are authoritative in their space, trusted, and above all have some leverage that can be used. It should go without saying that they should require all employees to get vaccinated or stay out of the office (Some jobs warrant firing the unvaxxed, like health care workers, but let’s save that discussion for another day).

What can these individual companies do? Here are some suggestions:

McDonald’s: Already under inflationary price pressures with a clientele that tends to be less well off and less vaccinated, a solution beckons: McDs should use allow inflation concerns to raise their prices across the board by 10% — but then offer a 15% discount for customers providing proof of vaccination. Other retail food establishments like Starbucks (whose upscale customers skew more vaxxed) can also do so. It is a win-win for everybody.

Uber/Lyft: Both ride-hailing services are public, which means there are no more VC subsidized rides. But the App is a great public interactive device, and it should show whether drivers are vaccinated or not. Customers can cancel a non-Vaxxed driver without cost. It is safer, sends a message, and gets drivers vaxxed sooner.

Walmart/Target: It is not fair to turn our frontline retail workers into enforcers; instead, companies can create an innovative program to reward the vaccinated. Proof of vaxx gets you additional bonus points on the company’s points/loyalty program. This works for all loyalty programs, from Credit Cards to Lowes/Home Depot.

Live Nation/TicketMaster: The company originally implied that vaccines were going to be required to buy tickets + attend events, but they have since moved away from this: LISTEN TO ME YOU IDIOTS WHAT ARE YOU GOING TO DO WHEN CONCERTS GET CANCELLED FOR ANOTHER YEAR? It’s so much in your own self-interest to take a leadership role here it’s practically malpractice they have yet to act. Use your mono0ploy power for good for a change.

AirBnB: This one is easy: Get vaxxed if you want to rent one of our homes. The disgusting filthy boorish behavior of AirBnBN guests is bad enough; must you leave your disease-ridden aerosolized virus in the air to boot? Another good use of an app that can provide info for consumers to make safer choices.

Disney: One of the few companies with tremendous ownership of their clients/audience. More than 400 children have died of Covid, it’s easy to position this as protecting the most vulnerable at their parks. They can bonus a free download of a first-run movie to new Disney+ subscribers who provide proof of vaxx.

American Express: A leader in corporate travel, there is an opportunity to provide advice, exhort in email or written communications, and generally advise users it’s much safer to travel if Vaxxed. Alternatively, JPM Chase’s Jamie Dimon can do it, continuing his streak of eating Amex’ lunch at every opportunity.

Delta: I flew Delta last week, and while the experience was good, it felt like a missed opportunity to require vaccines. The airline industry council should discuss and get everyone on board (sorry). It should be an industry-wide issue.

Apple: Long a leader in social issues, the tech giant can use their platform of Apple stores to hasten more vaccinations of their locked-in user base. And it’s the sort of thing that Apple and Google can agree to publicly — maybe even the entire FAANMG contingent.

USPS/Fed Ex/UPS.: The Postal service is not a private company, but it might as well be. It’s an opportunity to use their platform to encourage vaccinations — require all delivery people to be vaxxed and wear some patch or button along the lines of “I’m Vaxxed for your protection.”

 

Trip cancellation will affect Airlines, Hotels, Credit Cards, Theme Parks 

Via Paul Kedrosky

~~~

This is obviously a short-list, and there are lots of other company CEOs who can step up. Leadership requires people of good-will to do the right thing for the greater good.

But there are also issues of self-interest to corporate America. If we don’t get this right, you can expect this economic recovery to be short-lived. Is that enough incentive for you corporate chieftains?

 

 

UPDATE  August 13, 2021

The usually conservative The Hill writes that the costs for being “choosing not to be vaccinated” should fall on those making that decision:

Health insurance is pooled risk. If people opt-out of getting vaccinated, they are willingly exposing themselves to risks that those vaccinated are not assuming. As such, should they be paying the same health insurance premiums for their coverage? There is a precedent for differential health insurance costs, which exists between smokers and nonsmokers.

One way to manage this in the short term is to have unvaccinated people immediately be required to pay a higher deductible for any care that is primarily due to COVID-19. Cruel? Perhaps. But COVID-19 is cruel, and anyone who does not take precautions to protect themselves and others is being cruel — even unintentionally.

I missed health insurers, but it is another potential solution.

 

Previously:
America’s CEOs Are Having a Good Year (February 19, 2021)

The Economic Risks from Anti-Vaxxers (July 15, 2021)

 

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