Introduction

Patrick: [00:01:21] I am drawn to a group of investors that I call practitioner philosophers. These are people who have gotten their hands dirty in their respective fields, but despite being doers, they still often sit back and ponder the big questions. My guest this week is one such practitioner philosopher, New York City-based venture capitalist Jerry Neumann. I came across Jerry's essays a year ago. And he is on a very short list of writers whose work I read without fail and almost always more than once. You can think about this conversation on business investing and venture capital as a big funnel, we start very broadly discussing where we might be in a large 70-year economic cycle. We then break down the so-called power law, which seems to govern venture capital returns and business outcomes, then we get even more specific discussing Jerry's process for evaluating early-stage companies and the particulars of what might make a good venture capitalist. I say might, because as Jerry explains often, nothing is certain and luck may always play a huge role. I just love this conversation.

It is the type that without the podcast as an excuse, would be a very odd and intense one if I were just meeting Jerry, for the first time. You'll find no small talk or even medium talk here. This is a meaty discussion with one of the smartest and most straightforward people I've come across. Let's dive in.

We have a lot to talk about today in the world of venture capital investing, and I thought we would start pretty broad, which is with an essay you wrote talking about a theory of another person who I'll let you explain, called the deployment age. And we'll use this as the jump-off point because it's like the big theory of where we are in a very big cycle in terms of financial capital and investing in the economy. So we'll start there, I'll just open it up to you to explain this idea of the deployment Age and kind of what it means for where we sit today looking forward as investors.

Jerry: [00:03:59] All right. Thanks, Patrick. It's an honor to be here and listen to your podcast quite a bit. And I'm intimidated. I teach and what you find out when you start teaching that if you don't really understand something, you can't explain it to somebody else. So you read a book, you're like, "Okay, I get it. Yeah, it makes sense." And then you try to explain to somebody else, "I don't really get this at all." So I went back and I started reading it. And I read it and I was skeptical of the theory. And the theory itself is pretty old. It's based on pretty old research, it's based on the contrariety of waves. The idea that the business cycle has this really long wave that 60, 70 years, there are smaller waves inside of it, but there's this long wave. And people have seen evidence of that. Of course, you can find evidence of anything if you have enough data. So there's always been a bit of back and forth on whether or not that's true or not.

But Perez is, I think one of the first people to come up with a convincing explanation for why this would be so. On the face of it, you said to yourself, "Well, there might be a 70-year wave, but why 70 years? Why not 50 years, why not 200 years?" The economy doesn't have some sort of ticking clock that says, "Oh, it's 70 years, it's time to change cycles." So there has to be some convincing explanation that would say why does this happen. And she did come up with a convincing explanation. So what the theory says is, it's not just capital-driven, it's driven by both capital and social cycles, the longwave. What happens is, there comes a time where there's not a lot of good investment opportunities in the established markets, and financiers come around and say, "Where can I make more money?" And they start finding these little innovations that seem pretty interesting.

And at some point, they find that there is a constellation of innovations, a technological system, she calls it. Innovations that are interlinked and together they can change the economy, or that people believe they could change the economy. So if you think about it, I like to use older examples, rather than current examples, just because there's more data about them. You think about the age of iron and steel, the age of railroads, steam engines, and railroads. So the second industrial age, first one being the water driven industrial age. Yeah, water-driven looms and whatnot. So the steam engine and railroad, the innovations that you had to have to create a railroad, were not just a steam engine. You also needed innovation, metallurgy to create rails that were strong enough to hold these extremely heavy engines, you needed innovations in standardization machine parts, you needed innovation in corporate form. So you needed limited liability companies, joint-stock companies, you need the stock market, all of these things had to come together to build a railroad. So they were all there, they weren't all invented at the same time, but they were invented at different times, but at some point, they were all jailed together into this whole system that you could use to build a railroad and people started building them. And the first railroads are really to bring coal from the mine to the ship. So you want to bring just out of the mine to a shipload it on the ship, the ship will take it wherever it's going because ships were obviously much cheaper than railroads. But once they had them, people started using them for other things.

They started using them to transport mail from place to place. So this is the first half of this cycle as people... There are innovations, financiers start pouring money into it, people are pretty excited because there are these obvious uses where you can make a lot of money. And at some point, all of that money pouring in becomes a bubble. There was obviously the railroad bubble in the UK, in... What year was it? 1830s, 1840s. And people were buying railroad stocks for inflated prices and then there was a crash. And during the crash, there was a lot of readjustment, there was government regulation. After the crash, it became a much more sober market and the market was driven instead of by these financial capitalists, by production capitalists, people inside the railroad companies thinking, "How do we invest to make money? We don't want to take a ton of risk, we're not doing anything crazy. We just want to invest in things where we can make money and grow our companies." And that became a much more predictable market. And that second half is called the deployment age.

So her theory was, you have this kind of S-curve, at the beginning, the innovations are pretty slow, people putting money into them. As they start to accelerate, people pour more and more money into them until it becomes a bubble. And then when it becomes a bubble, eventually you have a crash, after the crash, things start to calm down. It's driven by production capital, who doesn't like to take risks. And because they don't like to take huge risks, the innovation starts to slow down, it becomes more sustaining innovation, that radical innovation. And so the S-curve starts to flatten out again. And then once the S-curve gets flat enough, capitalists starts looking for somewhere else to put their money so that the next cycle starts.

So this is her theory. The interesting thing about is if you take the last five waves since the first Industrial Revolution, they all follow this pattern of technological system, technological revolution, this new constellation of innovations that can change the economy and then money pouring into them, a bubble, a bust, and then production capital taking over and regulation coming in and the innovations becoming more integrated into society. When you start looking at it that way, the similarities between each of these waves are kind of eerie, because I described that and people would say, "Well, that sounds a lot like what just happened with the .com bubble, the .com bust." Yeah, it does. But it also is exactly what happened with the age of mass manufacturing in automobiles and then the crash in 1929 and then the much more stable era after World War Two, what happened with the railroads. It's eerie. So in some sense, it seems explanatory. In another sense obviously, you could fit any theory to data you already have. Is it true? It might be true, it's a theory. I think really if it's predictive if what happens over the next 20 years is what she predicts then you have to get a lot more credence.

...if you take the last five waves since the first Industrial Revolution, they all follow this pattern of technological system, technological revolution, this new constellation of innovations that can change the economy and then money pouring into them, a bubble, a bust, and then production capital taking over and regulation coming in and the innovations becoming more integrated into society.

Characteristics of the Deployment Age

Patrick: [00:09:27] There are tons of what I call big history books, books that try to explain cycles in history through some, I'll use the word formula. Like this, that seem to repeat themselves. So you've got like Oswald Spangler, other people that have done this, and it's always fascinating because often it is quite eerie. And what's amazing about this theory and these four and a half observations in the last 250 years is how much else has changed during and in between these different cycles. But one has World War Two in it, others are more relatively peaceful, social norms, life expectancy, all these different variables have changed a lot. But the cycle seems to look very similar. So the next question is, if it's true and we are... I can't remember what you call it, I think the ICT revolution is the one that we're in. So the information technology.

If we are in the second half of that, meaning we've had our constellation of innovations, we've had our major bubble and bust, and now we're in this deployment age, what does that mean? What's an analog for what that might look like, relative to something in history, people might understand? How should it make us think about investing our own capital? Is there the chance that we could short circuit this kind of long cycle that seems to be inexorable? All of these are interesting questions. So maybe we'll start with what does this mean for where we are now? If this is right? If this is happening again, what does it mean the next 10, 20, 30 years are going to look like?

Jerry: [00:10:54] So that was the question I asked myself. And what I did was I went back and I said, "All right, well, if the last deployment age started after World War Two, then what was it like after World War Two in the innovation community?" Because that's what I'm in. And that's what's interesting to me. So you read people like Kenneth Galbraith and about the organization man, you think about Mad Man, right? Mad Man and the Man in the Gray Flannel Suit. That kind of business is what the deployment age looks like. It's much more locked down, it's not the kind of wild embrace of... Or the wild pursuit of strange ideas that has really characterized most of our lives. So it is pretty different. I think... Let's take an example. When Steve Jobs took Apple public, he had no idea what people would use the computer for. One of the first Apple TV ads was... The marketing people said, "Well, what are people going to use this personal computer for aside from games?" Which is what they really use it for. And they said, "Well, it's a home computer.

What do people do in the home? Well, they cook. So they'll happen in the kitchen, they'll put the recipes on it." So this advertisement showed a woman obviously in the kitchen, looking up a recipe on her Apple computer. I don't think anybody ever did that, until the internet where you could look up recipes you didn't type in yourself. But that was what they could think of. They had no idea what people were going to use it for until a spreadsheet came out, really nobody had any idea besides games, what people were going to use the personal computer for. But that company still went public before that. People were willing to embrace these ideas that were kind of crazy because they had this belief that the future was going to be some amazing thing that you just can't predict. And the contrast that was during the previous wave, so in 1949 or so, the Eckert-Mauchly Computer Company was started. And this was... Eckert and Mauchly were from university Pennsylvania, I believe, they started marketing the first commercial computer, the ENIAC. So they started in I think 1949 or so, maybe 1947. They had done their work during World War Two, and they were to commercialize it. So they started this company, they went out in the market, they tried to raise money, they could not raise money. They just couldn't raise money. And they ended up having to sell the company in 1950 for next to nothing because they couldn't raise money from anybody. Nobody's willing to put money into this risky idea. And when you think about that computer, the ENIAC was far less risky than Apple. The government was buying them. They were using them for real problems. They knew what they would use them for. But they still couldn't raise money. And then in the 1950s, when Kenneth Olsen started Digital Equipment Corporation, he raised money from one of the first venture capital firms ARD, he sold 70% of his company for $70,000.

He basically gave... This is the best offer he would get. He had a $30,000 loan as well. Sorry, I think it was a $100,000 loan as well, which is probably considered equity. When ARD liquidated their stake, it was worth some $400 million. So Ken Olson ended up who knows how much money he made, but it wasn't that much. He made maybe 25 or 30 million dollars, it's hard to know exactly. But certainly, he wasn't Sergey Brin, right? But that's what he could get in the 1950s because nobody else was willing to put any risk money into this crazy idea, which wasn't that crazy. He was competing with IBM, which was an established company. So during the deployment age, people back away from risk. Financial capital, the people who are willing to take, I think Perez calls it a one-point, casino capitalism. People who are willing to say, "I'm going to make 10 bets, none of them are going to fail, but the 10th one's going to give me 12X." That's a good bet. You take that edge every day, but people aren't willing to do that. They go towards, "I don't want to ever lose money, I'm going to have a plan, it's going to be a 10-year plan, a 20-year plan, and it's going to be very low risk, it's going to be hedged. I'm not going to lose money." Because if your production capital, if you're an executive inside of the corporation, and you start this new project, and you invest some of the company's money, and the project fails, you get fired. So there's no incentive for you to do that. And that's I think, what the deployment age looks like. People aren't willing to take those risks of failing. And that's obviously worrying. Now that the 1950s were a bad time in this country, socially there were a little strange from our point of view, but economically, there was a time of actually sort of a leveling, there was a much larger middle class, there was a lot less inequality. So people weren't complaining about the lack of innovations so much, not until the late 60s. But it wasn't a bad time. I think from the point of view of larger markets, I read somewhere that the 50 biggest stocks going into the 1950s, were pretty much the exact same biggest 50 stocks coming out of the 1950s. And that's, I think, probably another feature of people not taking big risks, not doing this kind of disruptive stuff. So if you think about how that affects us today, you'd look at Amazon, or Alphabet, or Facebook and say, "These are probably going to be the biggest companies 10 years from now, they're not going to get knocked out of the box by some upstart."

Patrick: [00:15:37] There's a component of all this, which I found interesting in the deployment age, which is the world catching up with the technology systems and then becoming... It's almost also a period of integration where there's a diffusion of this technology. And you wrote somewhere that said, it's not that basically, every company is going to need to be a tech company. The deployment of these various technologies is going to be a requirement in any business, not just that the Microsofts and the Amazons and the Apples of the world. So, that's an interesting angle too. I wonder how much pushback you got when exploring this idea in public because it seems to run so contrary to the ethos of Silicon Valley, even of kind of venture here in New York, which is kind of a burgeoning interesting scene now with a lot of excitement and even some new technologies. We were talking about cryptocurrencies before we started taping. So what's the pushback been like and how have since you first started exploring the idea, how have your views evolved if any, and how do you square the idea or the characteristics of the deployment age like the 1950s with what still seems like a fairly frothy, exciting, optimistic time for venture investing?

Jerry: [00:16:46] Well, I think like most venture capitalists, I really hope that Perez is wrong. Because I was really in pretty happy ignorance, make my investments trying to invest in things that are going to make the world better, and then I read the book and I'm like, "Wow, what she says is that the time for financial capitalism has passed, and production capital is going to take the helm." I think she said that literally. That's a quote, and I'm financial capital. That's what I do. And the people who read my blog are primarily financial capital. And that's what they do. And I did get pushback. I think the biggest pushback I got, which was interesting was, well, if this wave is over if the ICT revolution has started to be controlled by production capital, which is somewhat inarguable, actually, then we'll just go on to the next one. We'll go on to the next big technological evolution and fund that. But Perez says that that's not what happens. If that was what happened, then that would have happened, people would do that already. Financial capitalists in the past have not done that.

So the speculators of the 1920s didn't go into the 1950s and say, "Hey, let's start speculating again." Right? That didn't happen. And the reason it didn't happen is because if you have a technological revolution, where you have a bunch of technologies in this constellation, making that move forward, making it progress is actually really difficult. You need a lot of weight behind it to push it forward. So there's this idea from Thomas Hughes, the academic, he wrote this book called Systems of Power, it was about electrification in the United States. Then what he said was, you have this whole constellation of technologies, they're linked together in a system, which means that no one technology can move too far ahead of the rest. And if one technology is lagging, it holds all the rest back, because they are linked together in a system. They call this one lagging, reverse salient, which is probably something that people relate to more at the time. But you need to push the whole system forward. And to do that, you need a lot of money. It's just expensive.

When you think about how much it costs to build the internet, it seems from our point of view as just users of the internet, it was pretty cheap. But when you think about all of the fiber optic lines across the entire country, around the entire world, every single router, all of this equipment everywhere, all the research that went into making this work, all the different software, the browsers, everything, it's a lot of money. It was a huge amount of money. L3 back in the 90s, right? How much money did they spend on putting fiber-optic lines in? And to do that, you really need to have a societal alignment behind pushing this one set of technologies forward, which means that other technologies don't get pushed forward. So when venture capitalists say, "Oh, we'll just invest in some other technological revolution," it's kind of funny. Venture capitalists are a really small sector. When you think about how much money there is in venture capital, compared to any other money management sector, it's minuscule.

So they're not moving society in a different direction, they don't have that kind of leverage. They have the leverage to introduce really cool new ideas which might inspire others. People introducing... When the web browser was introduced, it inspired people like L3 to put a lot of fiber optic cables in the ground because they said, "Well, people are going to use this, they're going to need fiber optic cables, they're going to... We're providing the shovels, whatever the analogy is there, and we can just make money doing it." Which I don't think they did, they lost a lot of money actually. Which is actually also a part of Perez's theory. So, that's the thing. So during... When Henry Ford started producing the automobile in mass quantities, people would drive along these dirt roads or really bad roads, gravel roads. And until the US government came in and said, "Hey, we're going to invest a ton of money in building this interstate highway system, you didn't have the society changing aspects of the automobile. And the government stepped in there and funded that. But until they did, you didn't have motels and diners and all of the other things that came along with changing the society to revolve around the automobile. So you need to have a lot more weight than just what venture capitalists can bring. You can't just come along and say, "Great, now we're doing X, now we're doing cryptocurrency and that's going to be the next second technological revolution." You can't do it by yourself, you need to get society behind you.

Patrick: [00:20:41] What does this mean do you think for the... One of the troubling things about these big cycle theories that last 70 years is that pretty much most people only live within one of them. So they view kind of, let's say the history of venture capital back to... How do you pronounce his name? George Doriot, or something like that?

Jerry: [00:20:55] Doriot.

Patrick: [00:20:56] Doriot, yeah. So you go back through the entire history of venture capitalism and that's all kind of within this one cycle. So we look to history often to inform us about where we should put our money or where things are going. But most of the relevant history here might just be within the one cycle and therefore be misleading. So many people, especially the leading venture firms have generated exceptional returns. And there's a spirit still, I see it in New York all the time of entrepreneurialism, and people want to be founders and start businesses. And it's great. I love that spirit. But I wonder if all of this means that people should... If you think it means people should temper their expectations, or change their strategies for their invested capital entirely. So what do you think? Do you think that LPs out there should heed this as a warning and become more focused on investing in big public markets where the production capital is going to earn the returns over the next couple of decades?

Jerry: [00:21:50] No, I don't think that people should back away from venture capital. There was venture capital before Doriot and before. Doriot was an outlier back then. But Pan Am was funded by venture capital. Henry Ford was funded by venture capital, in a sense, he was funded by people with money. Westinghouse was funded by a bunch of Pittsburgh angel investors. Thomas Edison was funded by JP Morgan. People have always put money into promising ventures and made money doing so. So, that I think will continue. I think the easy money is gone, which is take it how you want. But I think I started venture investing in the 90s. So I started in 1997 venture investing, and I made a ton of money between 97 to 2001. Even though I had absolutely no idea what I was doing, it's just I don't know. I had like 45% IRR for that fund. And that actually wasn't even top quintile.

And I was lucky, but it also was just an easier time to make money. Anybody could make money. So I think that's not true anymore. It's not true that anybody can make money. I think you actually have to know what you're doing. If you know what you're doing, then you can make money like anything else. I think it has become more of a normal investing, and not normal in the sense that it's similar in process to other types of investing, every type of investing is a different process, but normal in the sense that you can't expect outsized returns without actually knowing what you're doing. So if I was an LP, you want to find people and know what they're doing not put money with people who are just smart.

Patrick: [00:23:17] In my framework, it would be more alpha, less beta. So if you were the late 90s venture capitalist, beta in that world was just enormous returns.

Jerry: [00:23:26] Yeah.

Patrick: [00:23:26] And the top quintile was probably 60% IRR, or whatever the case may be. And it's interesting that in this era, when beta has become so cheap in the public sense, that alpha arguably is more and more dear, just harder and harder to find. So another interesting dynamic is, "Okay, you want to find good people, but will they even take your money?" The top venture firms are oversubscribed. A person listening to this, myself, that want money with Benchmark or want money with Sequoia or Greylock or something, I can't get my money in there. So it's a really interesting problem for LPs.

Jerry: [00:24:02] It's also I think... The interesting thing that's behind that problem itself is that when you look at the really successful venture funds, the Union Square Ventures, the Founders Groups, the Sequoias, people don't replicate their strategies, they think they're replicating their strategies, but people look at this venture capital generally as being something that's about picking. Like, "I'm going to find a good company that's definitely going to make money and put money into it." As if they're investing in a stock or something much more predictable. Not that stocks are predictable, but they're more predictable. And nobody goes behind and says, "Wait, why did those venture firms make so much more money than the regular average venture firm? What can I do to be more like that?" Because the strategy that they're employing is terrifying to most people. They're investing in things where there's uncertainty, there's Knightian uncertainty. It's not a risk at all. I love to look at founder groups' portfolio.

So I go online, I'll look at their portfolio page and I'll look at the companies and you just laugh. You're like, "What are they doing? Why are they investing in these companies? This is crazy. These don't make any sense." And then they come up with their IRRs now, but I think the last published number was like 65% per annum for the last fund, it's incredible returns. So there's this disconnect between, these are not the companies I would pick and they're doing astoundingly well. And I think it's that disconnect itself that is their strategy in a sense. I know that sounds odd, but when you think about it... Also, Frank Knight... People always talk about uncertainty in Frank Knight, his 1921 book. They say, "Oh, this uncertainty and risk." Risk is predictable, it's insurable. Uncertainty you can insure because you actually don't know what the probability distribution looks like. And what Knight said, which I think people overlook is that... He said this is at the core of entrepreneurs making money. They're going after uncertain prospects, because if they weren't uncertain, then some incumbent would...He didn't say incumbent, but whatever the word he used was, some larger company would have come in and snapped it up. And this I think is true. Apple can compete with any startup if it wants to, but most big companies choose not to go after uncertain opportunities, they really would prefer this five-year plan. It's production capital. But there're always these uncertain opportunities, things where you can't know what's going to happen, that big companies just won't go for. You can't walk into your boss's office at a big company and he says, "Well, what's the expected value here?" And you say, "I don't know." "How big is the market going to be?" "I don't know." You just can't do that. Right? Nobody in the right mind would do that. I have friends who are executives at big companies, and you suggest, "Well, you just go in and tell them that they should invest in blockchain." They're like, "I can't do that. What kind of case can I make for that?" You can't. You don't know what's going to happen. So I think these uncertain prospects are where the alpha is. And if you embrace uncertainty, then you can get alpha. But it's a scary thing, right? People hate uncertainty. This is the Ellsberg paradox. People really shy away from uncertainty.

So I think these uncertain prospects are where the alpha is. And if you embrace uncertainty, then you can get alpha. But it's a scary thing, right? People hate uncertainty. This is the Ellsberg paradox. People really shy away from uncertainty.

The Power Laws

Patrick: [00:26:49] The guest I had on literally today, as we're recording is Andy Rachleff from Benchmark, and we talked a lot about the Howard Marks two by two matrix of the only way to make money is to be right and non-consensus, which is another way of saying uncertain. And that is a perfect bridge into the second topic, which is this idea of power laws explaining the distribution of outcomes in businesses, but in venture capital returns as well. There's a lot of nuance here, but I think it's such an interesting and important thing to understand because we just don't intuit power laws, we intuit normal distributions because it governs most of our world, how tall are people, whatever the case may be, tend to follow a very normal bell curve, normal distribution, whereas the outcomes to venture capital investors tend to follow this power-law distribution. So I'll let you start by just explaining what that even means and then we'll get into some of the particulars about as you put it, how VCs can almost choose the alpha in their power law. And we'll get into some of the details. But let's start big picture. What does that even mean that power laws govern return outcomes for venture capital?

Jerry: [00:27:57] Yeah. So nine years ago, when I started angel investing, I said, "All right, I'm going to put my money into... I'm going to believe in myself and invest my own money in this. But I'm going to do it as if I was a professional." So I decided to make a plan on how much money I'm going to put out per year, then what's my strategy And I also tried to do the thing... When I go on to my portfolio online, they had this little graph of how your portfolio is going to grow with these error bars, somewhere between here and here, based on how much risk you're taking. I'm like, "Actually, I need to do that. I need to know how much money I'm going to get back because it's my money and I'm recycling it." At the end of my tenure period in which I can invest the money I have, I need to have more money to invest.

Otherwise, I have to get a job. So I tried to do that. I'm like, "All right, so how do I predict how much money I'm going to make?" And I realized that I just couldn't. I couldn't, I had no way of... It was a power law. People say it's a power law. So I just put a power law in there. And I just couldn't operationalize that. So years later, I'm still thinking about this, "How do I operationalize this?" And finally, I said, "All right, I'm going to actually read about power laws." So, I'm going to go read in the literature, because everybody says it's a power law, it's a power law, it's always a power law. And all they really mean by that is, there are a few really large outcomes and most of them aren't, which is not especially useful explanation of anything. This is sort of a throwaway line to explain. So basically people say, "Why is venture capital like this?" Oh, it's a power-law go away." So I'm going to look into power law. So I started looking into power laws, learning the math.

One of the things I discovered, which was interesting was that most venture funds have a power law with an alpha of pretty close to two. So a power law is really determined by a single constant, it's the alpha, which is the shape of the curve. The other interesting thing I noticed, which was maybe a coincidence, is that when you take the mean of a power-law distribution, so the mean of a normal distribution is the peak of the bell shape, right? The very top there. That's the mean. When you take the mean of a power-law distribution, the formula for it, when alpha goes below two, it goes to infinity. So the mean of a power-law distribution with an alpha below two is infinite, whatever that means. So it seems like a curious thing to me that all these venture firms were just below two, their alphas were just below two as far as I could determine. And this was both from my own calculations of various venture returns, as well as academic literature that study this. Is it a coincidence or is it something that's actually going on purpose? I don't want to be metaphysical about it. But-

Patrick: [00:30:21] Please do.

Jerry: [00:30:22] Well, the argument that I make in the post is it can't be a coincidence. It's too regular across time that the alphas are just below two. Is it that most normal people, people who are actually managing money for a living who need to have some sort of predictability won't go there. Because it's sort of a chaotic border. Below that, when the average goes to infinity, it has to do with something with not being able to predict what's going to happen. There has to be some connection there. Although that's the metaphysical part, I don't know what that connection is. If that's so, then venture firms are going to the place where they're not competing with private equity firms. They're saying, "All right, private equity firms are doing this, we have to go downstream to where the companies are less predictable and we don't want to go too far downstream, because they become less and less predictable. But we're going to go just past the boundary where the private equity firms won't go and that's where we're going to stick." Because you have venture firms where the alpha is 1.98. It's right there. And so if that's true, it's an interesting implication. Right? So what I would say is... I think when I first looked at this, I said, "Well, that would mean that every once in a while, extremely rarely, you would have some outcome that was just ridiculously large." And I think six months later, WhatsApp got bought for $18 billion and it was like 10 people. And I'm like, "Okay, all right."

Patrick: [00:31:33] Pretty ridiculous.

Jerry: [00:31:34] That's more evidence, I believe it a little bit more now. But that's what it says, right? Is that there are going to be these outcomes, which are really world-changing extremely rarely, which is, it's an interesting thing. Hard to know if it's true or not. One of the earthquakes follow a power law. But obviously, you can't have an infinitely powerful earthquake, because there's only so much energy in the Earth itself with the deformation energy in the crust, or whatever they said. So they have this kind of tail off at the end of the power-law to say, "Well, that's it. Can you get that far and no further?" Is that true in venture capital as well? Could be, I suppose there is in some sense a finite amount of value that could be created, or maybe there isn't. I don't know. If you invent free energy, is that a fundamental value or an infinite amount of value?

Patrick: [00:32:18] I want to put some examples in here that will serve as points of reference for people trying to understand this because I ran and read your posts six times.

Jerry: [00:32:28] I actually had 10s of thousands of people who read that post, which was kind of odd, because they always say, for every equation you add, you have your readership.

Patrick: [00:32:34] Yeah.

Jerry: [00:32:34] So I think my initial readership must have been in the trillions.

Patrick: [00:32:39] It's a lot of equations. So this concept of an alpha and what that number means, the lower the alpha gets, just forget what the alpha really means. It's just something that scales-

Jerry: [00:32:49] It's how long the tail is.

Patrick: [00:32:50] Yeah, it's how long or fat the tail is. So a fatter tail, people that have read Nassim Taleb or something like that, Black Swan, will be familiar with this idea that fatter tails, which is what we actually observe in a lot of financial and business outcomes versus what you would expect, which is a normal distribution, just mean that a lower alpha means more like crazy outlier results. And I think your point... And I want to get into the implications for venture funds, is that if you're a super low alpha, you probably can't raise money from LPs consistently, because you might have one fund that is 1000X or something and the next one doesn't hit one of those long tail and it also might take too long. So talk about that. So talk about venture firms are sort of optimizing for high returns, but also some degree of predictability so that they can actually raise money with some regularity because these firms want to continue to exist. What is the time component? How does that feature into all this?

Jerry: [00:33:46] Yeah, so two things first, I think. So the other interesting thing about power laws is if the alpha is between two and three, you have an infinite standard deviation, and if it goes below two, you also have an infinite mean. I think a lot of what Taleb talks about is the between two and three, where the standard deviation becomes extremely large and you start having these events that you think should be rare that just end up not being as rare as you think they should be. And then you go down one step further, you go down into venture capital, where you have both that and the infinite mean. I felt that I had to propose some explanation of why this happens. And you write these posts, you always hope that somebody smarter than you will read them and they'd be like, "Okay, I can take this and actually do something real with it, as opposed to me just writing stuff." Unfortunately, nobody has as far as I know.

But the mechanism I proposed was the simplest possible mechanism, which really said one of the ways you can generate a power law is through two exponential distributions interacting. So I said, "Well, what if you had an exponential distribution of time to exit and an exponential growth of value over that time?" And if you combine those two things, you come up with a very simple power-law that says that the alpha is a function of both the growth you expect, the growth rate, and time, which is okay. Interestingly, when you plug in sort of the venture capital rule of thumb, you end up with alphas that are very close to what the alphas actually are. So the model's not completely crazy, it's obviously over-simplistic, it doesn't account for nearly all of the strange things that go on in the venture capital world. So we can't be the right model, but sometimes really simple models work. They work better than really complicated models, they account for 90% of the behavior that a much more realistic model might account for.

So this is too simple. It's not the right model, but it seems to work. But one of the things it says is when you look at a portfolio of patents, the alpha on a portfolio of patents is more like 1.68. It's much lower than most venture capital funds. And I think what that saying is that they can grow very rapidly, but it takes a really long time to get from the patent to actual some sort of exit on the patent. You're selling that patent or turn that patent into a commercial product that creates money. So if you want to go lower on the alpha, you have to have a much longer timeframe. And venture capitalists have talked about that, venture capitalists have talked about having-

Patrick: [00:36:02] A 20 year fund...

Jerry: [00:36:03] Yeah. Like, how much could they do with a 20-year fund? I think that's hard to manage. It's hard to manage the uncertainty for that long mechanically. I think it's hard to get people to invest in that sort of thing. It's hard enough already to tell if a venture capitalist is any good. If you invest for five years, you have two really successful outcomes, are you good or are you lucky? How can you tell? How can you distinguish between a good venture capitalist and a lucky venture capitalist? This would just compound the problem. More than compound it. So I don't know if people would go for that. Fred Wilson used to talk about raising a longer-term fund. And if anybody on Earth could raise a longer-term fund, at least on the East Coast, it would be Fred Wilson, but he didn't do it. So is it because he couldn't or because... Who wants to invest for 20 years? I don't know.

Patrick: [00:36:46] The kind of limits on earthquakes, there are just limits and things, right? And human patience, taking longer than 20 years, you're talking about a big chunk of a career, or you'd have to have someone raise that when they're really young to be really invested in the outcomes for the whole period. And there's probably just some upper bound on how long term we actually can think and the kind of unpredictability that we're willing to take on as an investor?

Jerry: [00:37:10] Or you have to have an institution that wants to be around longer than any of its individuals. So most venture firms-

Patrick: [00:37:18] But there are still people making decisions within these institutions.

Jerry: [00:37:20] Yeah. Venture capital is kind of weird, right? Because you always have the same person who... They find the deal, they do the deal, they manage the deal, they exit the deal, it's always one person. It's usually one person. Everything has to happen inside one brain. And that's efficient in some way because it's easier not to have to move the information from one brain to another. But it does limit what you can do. And I think there's certainly a possibility that somebody could build a firm that doesn't do it that way. Venture capitalist still in some sense, it's really a cottage industry of five guys hanging out together because they like each other, it's an old boys club, and they do deals and they make money. Is there a better way to manage the venture capital firms so that you can have longer-term funds and make longer-term investments or not? I teach at the Columbia, one of my students had this idea last year for bringing water back in the asteroid belt to fuel rockets, a staple of science fiction, but it's actually feasible.

It's feasible and he did the math. He said, "Well if you can bring newer payloads to low Earth orbit instead of high Earth orbit, and then bring the fuel to bring from low Earth orbit to high Earth orbit from the asteroid belt, it's more efficient than bringing all that fuel from Earth." So I did the math, I'm like, "Yeah, all right, that actually makes sense. It's actually a viable company, it's going to take you 50 years to build this company." Just is, right? So he's like, "Well, do you think somebody would fund me?" "No. No, I don't." I don't think nobody, there's nobody except governments and potentially really large companies, who would fund you for a 50-year outcome because there's unpredictable in between, even though that company might be incredibly valuable, right? They might be a positive expected value investment or a positive net present value of that investment, but they still won't do it. So he ended up... I introduced him to a lot of people, he got a ton of job offers because he was so forward-thinking and he's now working on the idea for, I think one of the space agencies. So who's willing just to fund it just because they think it's a neat idea, right?

On Concentrated Portfolios

Patrick: [00:39:17] Perfect story. So to bring this into more tangible terms, let's talk about portfolio concentration as it pertains to this idea of power laws. So if you buy that, a lot of the return, or most or all of the return is going to be generated by some of these fat tail outcomes in any given venture fund. And you've got 100 million dollars to invest, how many bets should you make? And I've seen Peter Thiel, for example, who says that you should have a very concentrated portfolio. But maybe there's an argument on the other side. So what does it mean from your perspective? If we have these kinds of power laws with an alpha of two and this embracing of uncertainty, like you mentioned, a lot of the best venture firms that drives their returns, what does that mean optimally for portfolio concentration?

Jerry: [00:40:02] So I did see that argument online a few times. The opposite end of that spectrum is Dave McClure, 500 Startups who invests in hundreds of startups. What the power-law post said, and what the math says, is if the mean is actually infinite of the distribution, then the more picks you make from that distribution, the higher your maximum return is going to be. The highest returning multiple for that distribution. And there's a formula for that. So the more picks you make, the higher your maximum return is going to be. So you should make more picks, the more picks you make the better. And that's the thing. What McClure says is, "The more picks I make, I have this chance of having some huge outcome."

Patrick: [00:40:41] Facebook.

Jerry: [00:40:43] Or WhatsApp, where you have essentially like 1000X. But if I don't make enough picks, then I may not be in that one. And that one will make up for all the picks that I make that didn't do that because it's a power law. What Thiel says... So I think that's true with the one caveat. So what Thiel says is, you can't pick that many companies and retain quality. So if you're in some unconscious sense, picking companies that fit this alpha of 1.95 say, so you're saying, "I'm going to have an alpha of 1.95." And companies that have this alpha have come out of this distribution, have this certain look about them. And I don't think any venture capitalists are actually somehow calculating the alpha of their investments like-

Patrick: [00:41:21] They're intuiting it or something.

Jerry: [00:41:22] Yeah, I think they know what it looks like from experience. It's really just tacit knowledge. Is that this is what a company that has that sort of alpha looks like. So I'm going to invest in companies that look like that. So Thiel's saying there aren't enough companies that look like that to make that many investments. You should only invest in companies that fit into this low alpha distribution and there aren't that many of them. And McClure's saying, "I think there are a lot of them and I'm investing only in those." So the question is, can you maintain a low alpha? Or if you make 500 picks, do you end up having an alpha of 2.5?

Patrick: [00:41:53] Dilute.

Jerry: [00:41:53] Yeah, you sort of work your way out of where you want to be because there aren't enough companies. And I do think that I've known investors who invest and put small amounts of money in a lot of companies, some of the companies, you look and say, "There's no way this company can be big, it can't. It's just impossible for services companies." There are no scaling factors, professional services companies. So I think they are moving themselves out of that alpha distinction. It doesn't mean they're bad investments, it just means that they have the same math it doesn't apply. So on the one hand, your portfolio should be as big as you can get it without pushing yourself out of the venture capital realm. On the other hand, so I wrote this post yesterday on the Kelly criterion, actually, after listening to your podcast and hearing people talk about the Kelly criterion and I'm like, "That's a good idea. How does that apply in venture?" And I was talking more about taking your pro-rata allocation for future rounds and I've had this argument with a lot of venture capitalists.

Should you follow on after the seat or not? Some people believe you shouldn't, I think you should. The reasons I think you should have nothing to do with Kelly criterion, or they haven't, they've been more along the lines of informational advantage. I understand what this company is worth better than the person who's coming in after me because I've been involved for the past year and a half working next to the founder trying to figure out what's going on here. So, if they come in... And they usually come in with a price that's lower than what I think it should be, they're coming from the outside, they have less information. So they're priced below where I think it should be. So, "All right, it's a bargain, I'm getting this price that's lower than what the real price should be." So I've almost always taken my follow ons. Other people say, "Well, if you take your follow on, then you're diluting your multiple." If your first bet is going to be 100X, then your second bet, if the price is twice as high as long as it will be 50X, because whatever the eventual exit is, it's the same exit price for both rounds. So now you have-

Patrick: [00:43:42] It's like a vanity metric.

Jerry: [00:43:44] Well, yes, it is for me. Because if I can get 3X every year or whatever, that's yeah, of course, I would do at 2X, it's my money, right? I want my money to increase, I'm taking positive expectation bets, limited by how much money I actually have to invest. But if you're a venture capitalist and you're raising money from LPs, LPs want to invest in top quintile. And if you walk into an LP and say, "I've got 100X multiple," they go, "Wow, that's great." If you walk in and say, "I've got a 50X multiple," "Well, that's great."

Patrick: [00:44:15] It's still pretty good.

Jerry: [00:44:16] Still pretty good, right? But it's less and that's not on every company obviously, that's on your best performing company. But I think it's a lot less because it's a lot harder to sell yourself LPs. And especially if you're on your first or second fund and you don't have any real outcomes, yet you only have these sort of markups, how do you convince somebody to give you more money? And they need to do that. So maybe it makes sense for them. I don't know. I'm not them.

Jerry's Investment Process and History

Patrick: [00:44:34] We've talked a lot about some big theories, big ideas around cycles and distribution of returns, and things like that. Let's turn now to how you've actually done this. So you are a venture investor for better or worse, and I think will continue to be as far as I know. So what does your process look like? What has been your history? How concentrated are you? Are there places that you are focus? And then I want to get into a really neat framework that you put out there for who profits from innovation. And using that as a kind of a lens through which to view a potential investment or seed investment or an early-stage investment. So what does your portfolio look like? What has been the distribution of outcomes in your own experience? Let's dive into some of the tangibles.

Jerry: [00:45:17] Okay, I've been in venture investing for 20 years. Well, I started venture investing 20 years ago. My first seven years or so were for a corporate venture capital fund here in New York, I came in, I had no idea what I was doing, they had no idea what they were doing. We all learned together, we made money, it was the 90s. So, that was good. And I educated myself on their dime. And then I left and decided to go back into the operating world and started my own company and did that for about four or five years when you consider the beginning to be. When I left that company, I kicked around and I said, "I'm going to start another company because I'm an engineer by training, I like building things. I'm going to build another company, I'm going to do something real." One of my... After I left the company, a bunch of our early employees also left, they didn't like the new management. And they started their own companies. And one of them said to me, he said, "I was watching you and Seth, my co-founder do this." I said, "Jeez if they can do it, I can do it." Which I'm pretty sure it isn't a compliment. I took it as a compliment. But I think a lot of people do this. They see a company being built and they realize it's not nearly as mysterious as it seems from the outside. So a bunch of the people, I think I've backed seven people from my company at this point. And our first two employees, both started companies, one of them came in said, "Hey, I've got this great idea. Apple, they're releasing an SDK for their iPhone, where outside developers can build apps.

People are going to need analytics in their apps, I've built this analytics framework that they can embed in their apps, so they can see how people are using them, what they're using them, when they're using them so they can improve their product." I said, "Oh, that's a great idea. I'll put some money into your company, just a little bit of money." It's great. "And then where else can I raise money?" I said, "Well, I'll introduce you to the people who invested in our company..." And this was in 2008. So nobody was... All the venture investors were sitting on their hands waiting to see what was going to happen. So I brought him around to a bunch of the people who invested in my company. And in the end, Union Square Ventures and First Round Capital invested, which was all-star roster. And he was kind enough to put out a press release saying, "We raised money from Union Square Ventures, First Round Capital, and Jerry Neumann." And all of a sudden, I started seeing a lot of deals, I think mainly because people said, "There's nobody investing except for this guy. He's the only one writing early stage checks. Union Square, First Round, and Jerry Neumann are writing checks." And that's it. In the United States. This isn't entirely true, but it was a much thinner market then. So I started seeing a lot of other companies, some really interesting stuff, some stuff that pertained to the company that I had started. So I knew the market-

Patrick: [00:47:50] What was the company that you had started?

Jerry: [00:47:51] The company I started was... This an idea that everybody loves this idea. It's a really stupid idea though. Although I didn't realize that until afterwards. We were providing a way for people to monetize their own data. So there's all this data about you being collected online by third parties and then being sold to target advertising to target offers online, all this stuff. So we said, "Well, why wouldn't you keep your own data in this lockbox and release it to people when you want with your permission and would get paid for it?" They would have to pay you for your data?

Patrick: [00:48:18] That sounds great. It does sound great.

Jerry: [00:48:20] Right? And people come to you with this idea like at least every three months, I see this idea. And it's actually an awful idea. And I wrote a blog post about why. There's just not enough money in this. Well, there's not enough money in your data, it's maybe seven dollars a year you could actually get from that which isn't enough to motivate anybody. And also people seem to think... There's this asymmetrical way that people look at it, where they say, "Well, how much will you pay for people to not collect your data?" Well, obviously nothing. That's why they allow it to happen and they watch ads instead, so they can get media for free instead of paying for media. On the other hand, "How much will you charge if you do sell your data?" And they're like, "Well, I need $100 a year." It's like, "Well, okay, so you won't pay $100 a year to not have your data collected, but if it is collected, you want to get paid $100 a year. It doesn't make any sense. It's irrational." But people think that way. So there are these two problems.

It started out well, it was going all right, we ended up moving more into the advertising sector and being one of the early programmatic companies. So there's this whole programmatic advertising move where people have moved from when you buy advertising media, you used to pick up the phone and you'd call Yahoo or CNN online and say, "Hey, we want to buy two million ads on your front page over the next six months." And CNN would say, "Great, send us a purchase order, we'll figure out... Send us the creative and we'll get it all online." That's how it used to be done and still is done in some places. And people came along and said, "Well, gosh, why don't we just do this all by a computer? Why wouldn't you just bid on it in real-time? We'll have this..." The phrase. The time we were bringing Madison Avenue and Wall Street together. We were going to create a market for advertising. So we were one of the first companies in that market. We were way too early but I met a ton of people who were doing that. That has now become, I think it's probably the dominant way of advertising online is through these marketplaces or through this kind of bidding for ads in real-time. And people bid for ads, single ads. It used to be, you'd buy two million dollars worth of ads and at a two-dollar cost per a thousand, that means that's a billion impressions, right? A billion ads. Now people will buy single ads, they'll buy a single impression to put in front of this soccer mom in Iowa. And it's interesting because it's more targeted. So it's more interesting for the advertiser, the publisher should in theory make more money, although that's just now starting to happen.

But it's a huge problem because instead of putting in one order for a billion ads, you're buying a billion ads one by one. So you actually have more trading in some of these exchanges than you have on the New York Stock Exchange. The volume of orders per day is higher. So the computational problem is pretty intense, especially for the startups that came into it. So I started investing in these companies. And I had theories about where the world was going to go and this tends to be my strategy. I said, "Right here is an opportunity." A new technology has come around that has provided a solution to this problem that exists. How could this turn out? What are the possible scenarios? So I do a lot of scenario planning. And in this case, there are seven scenarios that I think are possible. So invested in seven companies, one for each of these scenarios. I don't know if that really makes sense or not, but it turns out that one of them has hit it big, they went public last year at the trade desk. And that's my 100X in my portfolio.

But that was my first sector. And it was mainly because I had the network there. So at one point, I think I saw probably every programmatic advertising startup in the country. Everybody would email me because they knew that I invest in that sector. So when you see all this stuff, you have a ton of information, you can see what everybody's doing, you can see what prices people are paying. Somebody will come and say, "Look, nobody else is doing this, we have no competition, nobody else is even close." And you can say to yourself, "Well, I've seen five of those in the past month." So you can use this information to actually make better decisions. And then from there, I was pretty involved with these companies early on the first couple of years, sitting on boards talking to the founders every week, and you start to learn about the technologies they are using. So they were using a lot of big data technologies. They had to, there was so much data. So I started investing in big data, I started investing in machine learning, I've now progressed I've done some deep learning stuff, what people are calling AI. So I tend to be somewhat opportunistic, I try really hard not to pretend that I know what's going to happen, which is really hard actually. People tend to have an idea about what the future is going to look like. They'll hear a pitch and a lot of these founders are great at pitching. They will convince you of what they are selling, that this is going to be the future. And maybe that's... I have that kind of personality, I'm an optimist. So somebody comes in and pitches me, I'm like, "Well, this is a freaking amazing idea. I love this idea. This is awesome." So I have this rule where I never make a decision on the spot, I always have to sleep on it. Because the next day, you've calmed down and be like, "Well, it's not that great an idea." Or, "I still love this idea." And if you still love the idea, then it's worth pursuing.

So I tend to be optimistic, people come to me. I don't try to predict the future. If I had some great idea about what a company should be built, I would go build it, you make a lot more money building companies than investing in companies. You look at the Forbes 400, there's a lot of entrepreneurs, there's not a lot of venture capitalists. So I don't build companies. People come to me with great ideas. If they're great ideas, I give them money to help them start. I do invest really early, I try to be the first money in. I'm investing my own money, so I can't compete with any $3.3 billion fund, I need to be the first institutional money in to get the kind of price that I need and then I try to be very involved for certainly the first year, probably the first couple of years, one of the place I can really add value is helping people raise their next round of capital. So I've been doing this a long time, I know a lot of people, I can introduce you to venture capitalists. And I think venture capitalists will take my intros because I'm not an idiot. So I'm not introducing them to companies that just suck, the companies that I introduce them to are... They usually don't invest, because they usually don't invest in anything, but they're interested, they're intrigued, at least. So at least, maybe I'm just entertaining to them. I don't know.

Patrick: [00:53:59] So there's this progression from the proverbial friends and family round, the angel round, maybe the seed round, and then on up. So I'm curious about each of these, but we'll start with friends and family. Are there any circumstances under which it is wise? Or would you recommend that individuals, sort of those friends and family make venture investments? So that happens a lot. I've participated in those sorts of things. I think a lot of people in our world have done something like that. Usually, it's a friend or it's a good enough idea, or whatever the case may be. But if you were just giving kind of cold hard, sparkle advice to people out there, what would be the minimum conditions for doing something like that? Is it a set of connections like what got you into the business and programmed ads? Is it a certain number that you have to make so that you have at least some diversification? What are the circumstances that people should consider doing that are kind of friends and family type investments?

Jerry: [00:54:52] Never. It's funny, my parents come from a different era. And they always asked me, "Hey, do you think we should invest in Apple." And I say, "No, I think you should invest in index funds. What do you know about Apple?" They're like, "Well, we really like their new products." I'm like, "Hey, who are you buying the stock from? You're buying the stock from somebody who's living this day in day out, right. They know what it's worth and they're selling it. Why are you buying it? You can't do the work to figure out what that's worth, you shouldn't. So you should be a passive investor." But they come from an era where active investing is the thing, you pick stocks. I think people look at venture capital and they want to pick stocks. They say, "Hey, I looked at this idea and I think it's a really good idea. I would definitely be a customer here."

And that's sort of the kiss of death. Like, "I'm going to be the customer." Well, okay, you who else? You are not a market. You need to have 10s of thousands of people to be the market. And I think people have really bad instincts. So remember, this is probably like six years ago, somebody came up to me at some function. He was like, "Oh, yeah. Oh, so you invest in startups? And I think Facebook is totally not going to work. Facebook, nobody's going to use it, it's going to be awful." I was like, "Well, how long have you been saying this because millions of people are using it?" This is reality and people, have really bad instincts about what other people are going to use, or what things are going to actually work. And I think that's fine. Nobody has good instincts about things that you can't predict.

I think that you have to have the discipline to be able to invest in things that you can't predict, to say, "I don't know what's going to happen here." I said this, I think in one of those posts that you can divide startup pitches into two categories. There are the bad ideas and then there are the ideas which you just don't know if they're good or bad. And if you can actually make a decent distinction and sort out the ideas which are clearly bad, the perpetual motion machines and whatnot, and say, "All right, these ones might work. I don't know, but they might work." Then you're doing a good job. If you can actually embrace the fact that you don't know, then you're doing a great job. The people who really think that they know, the people who are investing in ICOs because they're absolutely certain that cryptocurrency is going to be the hugest thing ever, who simply won't brook any doubt whatsoever, those are people that are losing all their money, not because cryptocurrencies are a bad idea, but because they have this irrational belief in their own ability to predict the future.

If you can actually embrace the fact that you don't know, then you're doing a great job. The people who really think that they know, the people who are investing in ICOs because they're absolutely certain that cryptocurrency is going to be the hugest thing ever, who simply won't brook any doubt whatsoever, those are people that are losing all their money, not because cryptocurrencies are a bad idea, but because they have this irrational belief in their own ability to predict the future.

Nobody predicts the future, especially not when you're going into these markets. So should you go into a friends and family round? I have done friends and family rounds in things which are not tech, things that I don't understand and I've lost money on them. But the point was, I was supporting a friend. It was a friend of mine starting a business, I have more money than she does, I'm helping her start the business. That's what friends do. I didn't do it because I was going to make some amazing return. So that's fine. And then like a lot of people also, I have friends in the hedge fund world who invest in venture capital, because their day jobs are really boring at this point. They're like, "Yeah, I'm buying distressed debt, which I know how to do. And I've been doing it for 30 years and I could use a little excitement in my life. So I'm going invest some money in this thing and-

Patrick: [00:57:51] I see this so often, that's why I'm laughing.

Jerry: [00:57:54] Yeah, which is fine, right? It's a hobby. It's probably on average, cheaper than skiing, I don't know. Sorry, I've got five kids, so skiing gets expensive. And there's nothing wrong with that. But if you're really doing it to maximize your return, this is how I pay my rent, I need to maximize my return. If you're doing that there's a different process. And I think that's not something that you're going to simply intuit or just come by, because you just tend to be smart in some other topic.

Who Profits from Innovations?

Patrick: [00:58:20] There's the idea or framework that you put together, which I can't stop thinking about because I just think it's such a neat way of thinking about both investment opportunities, but also anyone's own business, even if you're part of a large corporation like the segment you're responsible for, or work within. Which is this idea or the question of who profits from innovation? And there's a sort of two-part framework where you talk about complementary assets and how easy it is to replicate something as sort of creating a matrix for different types of companies. So I'd love it if you could flesh that out, maybe with some big company examples, so that people can really get their arms around this idea because I think it's such an interesting and powerful one. So what is this idea of who profits from innovations?

Jerry: [00:59:06] Yeah, so first, this is not my idea. This was from a paper by a guy named DJ Teece, called Who Profits From Innovation. So it was a complete rip-off of his idea. So if you want to actually get a great explanation, you should go back and read his paper. What I did was I adapted it to my world. So it was written 30, 40 years ago. So it was a different era. But I was looking and said, "This is true." People throughout my career in technology have been saying, "Well, how are you going to compete with first Microsoft?" And I'm sure before that, they were saying IBM. Then how are you going to compete with Google? Now it's how are you going to compete with Amazon, or how are you going to compete with Facebook? How can you compete with these large organizations? And this is I think... I think about this a lot. So at the moment, I'm on the whole Knightian uncertainty kick, that's how you compete with them.

But there are other ways to compete, how do you build moats, that kind of thing. What kind of moats can you have? And the idea that if you're a startup, you're going to need complementary assets, meaning you have to rely on other parts of the technological system to make your innovation functional. And your innovation is either easy or hard to replicate. Teece basically said, well, you can use those two things to say, "All right, who's going to actually make the money?" And it's a bit of the sort of Porter's Five Forces framework, who has the power in this relationship to extract the most profit from the value chain? So it's interesting, I think people start companies where some venture capitalists say, "Well, how are you going to compete with Amazon? Or how are you going to compete with Google on that? And that was my company, it was people said, "How are you going to compete with Google? And I said, "Well, we're in a place where they don't want to be." Partly was this market is too small at the moment for them to look at and we're hoping it'll grow rapidly and we'll have an advantage. But in the end, it was, who do we need to partner with to do this? You need to partner with people they don't want to partner with. How easy is it to replicate? Well, depending on what you're building, it could be hard to replicate because you're building this whole, a network of various participants, a marketplace. And then you have other companies where they build things which pretty clearly if they're successful, somebody is simply going to copy. So I think about Pebble the smartwatch company. They did the Kickstarter, they raised a bunch of money, they built a smartwatch, great innovation. And then Apple said, "Yeah, that's pretty cool."

Patrick: [01:01:13] "We'll do that."

Jerry: [01:01:14] I don't know if Apple actually just copied them, but it's certainly not unheard of for people... There's a great quote I found in the Harvard Business Review from one of the former CEOs of Pepsi. And the article he wrote was something like, How to Innovate in Large Companies. And what he said was, what you do is you find people who've done really cool things and you just totally rip them off and do that. I'm like, "All right, I don't get that innovation, but..."

Patrick: [01:01:35] It's honestly, anyway.

Jerry: [01:01:35] It's honest. And that was the funniest thing about it. It was actually, you know they do that, but he just came out and said it. And people in the startup are always complaining, "They just copied me. How did they sleep at night? They just copied my idea." I was like, "I think they sleep fine. That doesn't worry them." So how do you do something where they're not going to copy you. And either it's you have these complementary assets, where you have some sort of control over how that process works, or here's something that's really hard to replicate. And in this case with Pebble, they didn't have either of those things. Apple had complementary assets and they could replicate the innovation quite easily because that's what they do. They're a hardware company. So I think it's an interesting framework. It's an interesting exercise to go through. I don't think that's the only way to do it, I do think the uncertainty at this point is maybe a bigger aspect, as we come into a place where innovations aren't that hard to replicate.

You look at something like Blue Apron. Blue Apron is going public today for three billion dollars. You say, "Well, why didn't Amazon do that?" It's not that hard to replicate. And it's a good question. That's the question I don't have the answer to that question actually. But I often wonder why. What is it about Blue Apron that allows them to be a standalone company that has $800 million in revenue that somebody else just doesn't come in and say, "We have a better distribution network, we can do this at a lower cost than you can. We're just going to compete with you." What is it? I don't know the answer.

Patrick: [01:02:57] Can you explain whether or not something's easy to replicate is I think, fairly straightforward? Maybe not straightforward in terms of implementation but conceptually. Can you explain the complementary assets piece? So you define it as either generic or non-generic. And I think the distinction is if it's generic anyone can access it without having to ask permission, so to speak, like the internet or something like that. The internet is a complementary asset, meaning lots of businesses rely on the internet to do their own business, even though they're not controlling the internet. So it's some kind of separate asset. And then a non-generic one would be something like apartments for Airbnb. Is that kind of a clean distinction between those two things?

Jerry: [01:03:34] Yeah. Well, are apartments non-generic? I guess they're non-generic. Yeah, I think the internet is obviously generic, anybody can use it. Everybody has equal access, at least they do at the moment, we'll see what happens with net neutrality. And I think that's why net neutrality is such a big deal among startup people is because if you get rid of net neutrality, it may be a non-generic asset where the supplier of that asset can extract more rent. But yeah, so the non-generic assets are... One of the examples I use, which I think is a good example is Twitter when they used to have third-party Twitter clients. So there were these third-party Twitter clients, which were better than Twitter's Twitter client, which is a pretty low bar. And they would sit on Twitter, and they would pull your tweets off, they would allow you to tweet into it, allow you to do lots of different things. And they were becoming a pretty big business. And Scott was actually starting to buy up all of them so that he could create his own network.

Twitter said, "No, that's it. We don't want those anymore at all. We're just getting rid of them, we're going to create our own Twitter client, everybody's going to use it." So this was an example of who profits? Well, clearly the incumbent profit there. The person who owned the complementary assets because the innovation was not hard to replicate. So they needed the complimentary asset, there was a very strong non-generic complementary asset in Twitter itself, that was necessary. The people who had the third party clients couldn't switch, but it wasn't hard to replicate, so Twitter said, "You know what? We have the more important piece of this relationship, we should make most of the money, so we can just get rid of you." And I think that's... If you're relying on some non-generic complementary asset, then... It is the same thing that Porter says in the five forces, the supplier power. If your supplier has more power than you, this is a problem. They can extract-

Patrick: [01:05:11] The value.

Jerry: [01:05:12] ... more of the value from the value chain than you can, they can basically say, "Oh, it looks like you're making money that's ours." And this is what happens in the tech world as well. And I think it's something you should probably think about in some sense, either through five forces or through this Teece framework to say, "If we start this company, can we make money or is somebody that we're relying on going to take that money?" In programmatic advertising, the question was always as companies would go public, the advertising agencies who were buying the advertising for the clients would say, "Oh, look at all that money you're making, maybe you should be charging us less." And programmatic companies would say, "Well, no." And the agencies say, "Well, there are other people we can go to, we'll go somewhere else because you're making this 50% margin, we think you should be making less. In fact, we don't think you should make any money." So who has the bargaining power? When they built those companies, people didn't think about that, right? And people don't tend to not think about the end game here. Most startups don't have some sort of long term strategy, they're really more of a bundle of tactics. But the long term strategy is important in figuring out whether or not you can eventually extract value from this company.

Patrick: [01:06:13] Do you think that as an investor, you should focus on the one corner of that kind of four-part framework where it's hard to replicate and only relies on generic third party assets? Is that the sweet spot for finding or building or starting a great company? Obviously, there are exceptions to everything, but if you're trying to apply this framework to an investing strategy, or business strategy, is that the corner that people should focus on, or am I thinking about that wrong?

Jerry: [01:06:38] So there's a difference between being an investor and being a founder. Founders are in their companies for the long term, they want to build viable, long term, sustainable high growth businesses. Investors need businesses that they can exit. So this is maybe a cynical take on it, but the truth is, when you look at Apple Computer, they did not have an innovation that was hard to replicate in the end, anybody could take the Apple Computer apart and see how it was built, anybody could disassemble the software and see how it worked. The Apple was a phenomenal technological achievement. Steve Wozniak, was an amazing engineer. He did a lot with a little, but pretty much immediately, they had several large competitors and they were not... I don't think they were ever the largest company.

I think, Tandy Radio Shack with the TRS-80, was bigger than they were at the beginning. Not long afterward, IBM got into the market. So they did not have an innovation that was hard to replicate. There were no non-generic complementary assets at the time, there were software and a lot of the software was produced by Apple itself, and then there was software produced by other people. But they hadn't gotten to the point where there was a non-generic complementary asset like when IBM and its PC came up against Microsoft, which they probably should have anticipated that by allowing Microsoft to provide the operating system, this non-generic complementary asset, that Microsoft would end up taking most of the value in that value chain, they didn't, which is kind of an odd failure of strategic thinking at a company that was known for strategic thinking at the time. But investors still made a ton of money in Apple in that brief period between when they started and when they went public.

So as an investor, I personally like to invest in companies, which I think can be long-term value creators. But I think that's a really conservative strategy. And I do it because I think it's just right and also because it is a conservative strategy. No matter what happens with the exit market, this business is going to be worth something. And I think over the last nine years, it's been a good strategy because there has been no IPO market for the most part. If there's an IPO market, it looks like the IPO market may be opening up again, shorter-term strategies might make sense. Venture capitalists have made more money in companies which went bust two years after they went public or were acquired than they've made in companies that were long term. No, that's an exaggeration. But there's been a ton of companies, Tumblr, Union Square Ventures made a ton of money on Tumblr, got bought by Yahoo for a billion dollars. Was it a good acquisition for Yahoo? I don't know, I don't work for Yahoo. Maybe it was. But it's hard to see how long term that company would have turned to profit. But it was still a great investment. That's the kind of investment that it's hard to make that kind of investment, where you don't know where the revenues coming from. And they were willing to take that risk and they made a lot of money doing it. But it is not symmetrical between... Investors and founders don't face the same problem. Founders have to think longer-term, investors have to think about how they exit.

Investors and founders don't face the same problem. Founders have to think longer-term, investors have to think about how they exit.

Virtual and Augmented Reality Opportunities for Venture Capitalists

Patrick: [01:09:23] The value chain idea makes me think about your expertise in media and you thinking about virtual reality and augmented reality as two avenues for venture capital that are sexy and interesting for people to think about. So could you use kind of this framework that we just talked about, who captures the value, media, all these topics we've been exploring to describe whether or not you think one or both of those are interesting areas for venture investing and why?

Jerry: [01:09:49] Yeah, this is... I argue with people. I have a good friend who's a venture capitalist who loves virtual reality. He is really focused on it. He thinks it's the next big media. Venture capitalists are always looking for the next platform because you can build a lot of value on a platform and the ancillary companies around a platform you can build a lot of value in as well. The internet is one of the ultimate platforms. People made a ton of money in the internet itself, Cisco. And then they made a ton of money on companies which used the internet to create their own businesses. So not just Netscape at the time or Amazon and Google. So venture capitalists are always looking for the next platform. And there's no obvious one out there, since smartphones, people have been looking around saying, "What's next?" And nothing has really popped up to really... Nothing has popped up in the way that you can say, "That's definitely going to happen the way smartphones did." So people look at virtual reality and say, "All right, maybe virtual reality is the next platform."

Virtual reality is really cool. People love it. All right, fair enough, maybe, maybe not. I'm sure that my 14-year-old son will love to play Call of Duty in virtual reality. But are there larger applications? Are there applications in the rest of the world? I don't know. The question becomes then, even if that's true, even if there is a market for virtual reality, who's going to make the money? And if you look back at the history of media, so look at Radio. The innovation here was the radio itself, you had this way of transmitting voice magically through the air, the people who made the money were not the people who made radios. In fact, because they had this platform, which had to be a standard platform, a commodity platform that everybody had, every radio had to be pretty much the same. If you're going to have a mass audience, then they wanted to sell these radios at the cheapest possible cost, so that everybody would buy them. And this was true of TVs as well.

You needed to have a TV in every home if you wanted to have a viable commercial industry. And those TVs all had to be the same, so you couldn't have 20 different radios that all operated on 20 different frequencies, they all had to operate in the same band of frequencies, or they wouldn't be a viable industry. So they made those really cheap, and the value was created inside the content industry. So the radio stations that people created content for radio, were the ones who made the money. So these are complementary assets. The radio itself and the content creating companies. But the radio companies, the RCAs of the world, didn't make that much money. And they didn't try to make that much money. But they did own... RCA owned a bunch of radio stations. So this was their strategy. Now, I think virtual reality is somewhat similar in that, virtual reality is going to have some standard for virtual reality content. The virtual reality content is in some sort of standard format that can be displayed across virtual reality devices.

To do that, you probably need to get those virtual reality devices into as many hands as possible, which means you going to have to price them fairly cheaply and only have one standard set, which means virtual reality devices themselves will be cheap and standard. Nobody's going to make a ton of money in that business. And the money would be made in the virtual reality content. The problem is I think the virtual reality content will be made by incumbents because that in itself is not that innovative. It's creative, there's always a lot of sustaining type innovation there, but it's not the sort of radical innovation, the uncertainty that would allow an opening for startups. If you're Disney and there are 100 million virtual reality goggles that people are using, are you going to say to yourself, "That's too risky for me to go out and make content for virtual reality goggles?" Of course, you're going to make the content, right?

Patrick: [01:13:16] Right.

Jerry: [01:13:16] And then as a startup, how do you compete with Disney? So I don't see a lot of opportunities there for startups. I think augmented reality is different. In augmented reality you're not actually being entertained, you're overlaying something over the world and people always think of Pokémon GO as being this augmented reality app. All right, fine. It was a game, it was entertaining. But I think the real uses for augmented reality are much more ad hoc. So you're a machinists working on something on the factory floor and you have your augmented reality glasses on and it says, "Turn this bolt." Right? The bolt flashes. With this wrench, and the wrench flashes. Instead of having some kind of huge manual to tell you how to fix things, your augmented reality glasses are telling you, "Do this, do that." And makes you much more efficient. I don't know if you've ever worked on any... I have a motorcycle, I like to take it apart and put it back together, I have this 10-year-old manual that tells you exactly how to take it apart and how to put it back together. And without the manual, I would be a little loss at a certain time. So you're flipping through the manuals all covered with grease, and you're like, "Okay, all right, find the right tool." If you had the augmented reality glasses, that manual would be in the software. And it'd just say, "Okay, you're taking the top off a cylinder, here's what you do."

Patrick: [01:14:22] And the idea is that that is much more niche.

Jerry: [01:14:25] Right.

Patrick: [01:14:25] So the development of the AR glasses for fixing some class of machinery is going to be very different than tech for gardening or something like that.

Jerry: [01:14:32] Yeah.

Patrick: [01:14:33] So you can profit in the hardware portion of it or in the software portion of it versus content.

Jerry: [01:14:38] Right. So you could have a company which is specializing and taking all those manuals, they're all made by one company, Chilton I think. I don't even know if this is an industry anymore. But nobody fixes their own car anymore, do they? There's one big solid-state block. But you take all those manuals and you put them into a piece of software and you sell that software. Okay, that's one niche. Right?

Patrick: [01:14:56] Yeah.

Jerry: [01:14:57] You have another niche that is something else that uses augmented reality, you have a whole bunch of niches and each one is ad hoc. There is still potential for big companies like the company that translates whatever content that is into what the augmented reality glasses do. But you don't have to have the same format for each thing. Because the person who's buying augmented reality glasses to fix cars is not the same person who's buying them to look at data on a trading floor, they can be completely different glasses. They don't have to be standardized. You're not looking for volume at any of these niches, each niche is more high value.

What Makes for a Successful Venture Capitalist

Patrick: [01:15:28] Yeah, that's a fascinating way of thinking about the value chain. Last couple of questions, one of which is this idea of puzzle-solving and what makes a successful investor venture capitalist? Every asset manager of any stripes gets the same question, which is what makes you special? What's your edge? Why might it last? And your answer was so honest and refreshing. So I guess I'll just ask you that question. What is it that makes you or anyone else special in this space?

Jerry: [01:15:54] So the whole post was about saying how I'm not. So now you're asking me again how I am.

Patrick: [01:15:58] I had to frame it somehow.

Jerry: [01:16:01] So the puzzle-solving came from Khun. Right? So Thomas Kuhn talked about how scientists solve puzzles. He said, "You have this puzzle, why is there this anomaly that doesn't go... It's a puzzle you have to solve." And it kind of goes back to, Popper would call them problems, Kuhn puzzles, which is a diminutive of problems. But then Feyerabend came along and said, "Hey, there is no process by which people solve these problems. They do whatever they do. Puzzle-solving is not a recipe, there's no recipe for solving problems like this, you just solve them, you have to use your brains and come up with a creative way of finding a solution." And that's clearly true. If there was a recipe for building successful billion-dollar companies, as some of the startup gurus now purport to have found, then you'd have just factories churning out billion-dollar companies. And this is clearly an impossibility. There can't be a recipe. It's logically impossible for there to be a deterministic way to build a big company.

If there was a recipe for building successful billion-dollar companies, as some of the startup gurus now purport to have found, then you'd have just factories churning out billion-dollar companies. And this is clearly an impossibility. There can't be a recipe. It's logically impossible for there to be a deterministic way to build a big company.

So if anybody says, "Here's my framework, here's my thesis, these are going to be the billion-dollar companies, they look like this, they act like this, here's how I find them." They're selling you something. And every money manager is selling their LP or something, you have to. As I said in the post when I've said this to LPs, they have been nonplussed at best. Maybe this is why I am still an angel investor and not running my own VC fund, but I don't believe in thesis, I don't believe in recipes, I don't believe that there is an archetype for founders or an archetype for companies, I think that opportunities are ad hoc. Somebody comes to you and says, "I'm building this company, it's going to do this, here's how the world is going to look 10 years from now and how we're going to fit into it. And here's where the value is." And you can look at that and say, "Is this true?" Which you really can't know.

But you can say, "Is this possible? Is this is a possible state of the world in the future?" And to figure out if that is a possible state of the world in the future, you have to go through this process of saying, "Well, if this happens, then how does the world bite back? How does everybody else in society respond? How do other companies respond? How does the government respond? What are all the system's obstacles to this actually happening? And can this company wend its way through these obstacles to get to this goal?" And the answer is never, yes, the answer is maybe. Maybe. But the answer is not no. So we talked a little bit of Bitcoin before we started, to me when you do that analysis, the answer is, no. The society will not allow Bitcoin to be the default store of value or currency. I think that's just true. I could be wrong, I've been wrong before, about two-thirds of the time. But I think that the answer is no. And that is system analysis. In other cases, you say when the guys who started Bank simple came to me and said, "We're going to build this bank, which is actually customer-centric, not asset-centric, so we're actually going to flip the relationship from the customers of the bank being the people who borrow money to the customers of the bank really being the people who deposit money." Which when you think about your bank right now, their customers are... You're not the customer, right?

Patrick: [01:19:08] Right.

Jerry: [01:19:09] You're just the supplier of money. So they treat you like Walmart treats their suppliers. That's why banks treat you so badly. So they said, "We're going to flip that, we're going to make the customer be the people who deposit the money." "Okay, is this possible? Is there a possible scenario in the future where this is actually a very large company?" And the answer to me was, "Unlikely, but it's possible." So there's a 1% chance of this being 1000X. All right. It's a positive expectation bet, right? And obviously, those numbers aren't precise in any sense. But that was my thinking. And so I invested and that company actually did pretty well, it didn't become one of the largest banks in America, but the investment was a good investment. So this is how I think about things. I have totally forgotten what the original question was.

Patrick: [01:19:52] We're talking about puzzles and how the answer to the question is basically, the only way to get good at solving puzzles is just to solve a lot of them.

Jerry: [01:20:00] Yeah.

Patrick: [01:20:01] And everyone is going to be different, there's no one way of doing it and so the answer to what makes you special, isn't some holy grail formula that you apply and no one else knows about, it's just that you do the job. You just keep doing it and learn from experience and apply probably subconscious heuristics to... We talked earlier about Thiel recognizing the companies that have this in them just look a certain way. And I can't tell you the 10 checklist items that... Maybe I can tell you two, but there are 10, I don't know what the other eight are. And maybe I just intuit those from experience having solved a lot of puzzles.

Jerry: [01:20:32] For me, it was... So after my first goal of venture capital, where we made a lot of money, but it was at a time where it wasn't that hard to make money. And I would talk to people and I think I might have actually even been trying to get a job in a venture capital firm, and they would say things like, well, anybody could make money then. And that's kind of put a little chip on my shoulder. I said, "All right, you know what? I can make money and I'm going to show you how I can make money." And I've been trying to bring the unconscious things to consciousness. So a lot of my writing is this advice. I have these questions about I've been successful doing it, why am I successful? What am I doing? What is it that you do? So I have a lot of the unconscious heuristics I've tried to make conscious, the things like uncertainty aware.

I'm trying to find uncertainty, everybody is trying to find uncertainty, but I'm actually going to consciously look for markets that don't yet exist. Because there's that uncertainty. And then there are other types of uncertainty like technological uncertainty that I won't take. So I've tried to think these things through to make a conscious, I've also tried really hard to be rational. So I think most people don't. Most of us satisfy and... I said, "All right, I'm an engineer, I'm going to try to be rational. And when I can't be rational, because there's not enough data to be rational, I'm going to admit to myself that there's not enough data to be rational." So I look at a company, I'll make a checklist of like, "Here are the risks, which of these risks can I mitigate through due diligence? Which of them can't I mitigate ever? Because they're just this really deep-seated uncertainty. And is it is the market going to be this big or that big?

Is there going to be a market at all? And which of these uncertainties can I mitigate over time as we learn?" So you can make this list and start checking things off. And so if I mitigate these three uncertainties, then I can get the next round done. So the next year is going to be spent experimenting, exploring, trying to figure out if these things are... These hypotheses they made are true or not. And then once we've gotten those checked off, we'll still have some uncertainties, we can go to the next round and say, "Look, this company is a great company, we should invest." And I've tried to do that consciously, not by applying unconscious archetypes. And I think, if there's anything special about me, is that, that I'm trying to be conscious about what I'm doing. And not just... There's a venture capitalist on the West Coast who raised a pretty decent sized fund recently. And I asked one of their LPs, I said, "I don't get it, this person's had one success, their entire thesis is based on the fact that that company was successful and they're going to do more like that, even though that one success seems to be a bit of luck. Right place, right time, maybe not replicable. Why are LPs giving that person money? Why has he been able to raise this fund?" And the answer was interesting. The LP said they like his swagger. And I don't think of myself as a person having a lot of swagger. I'm pretty earnest. I'm an engineer, I may be incredibly analytical and opportunistic, and that's what I do. I look for opportunities, I analyze them, I decide whether they make me nervous enough that they could be a good bet and then I make the investment. And then one of my partners lying there in bed next to me says, "Why did you invest in that company?" And I say something like, "I don't know." I try to maintain my manly pride and know what I'm doing. And I think I do know what I'm doing. I think that's what you have to do. So I actually think that what makes me special is that I have a certain humility in how I do it.

Patrick: [01:23:43] What is the most memorable individual day of your career in venture? Good to pinpoint one day and what happened that day.

Jerry: [01:23:50] Well, it would have to be the day the stock market crashed in 2000. I realized that my portfolio, which previously had been worth more than a billion dollars, was now worth maybe a couple of 100 million dollars. But I don't want to talk about that.

Patrick: [01:24:07] What about the most memorable good day.

Jerry: [01:24:10] The most memorable, this company Bank Simple. The second employee at my startup started at this company. And I've known him forever as smart as hell. Great guy, I knew that he had a problem that he was not going to let go. So he was going to be able to stick with it through the hard times, which they're definitely going to be with that company. But I remember one day, probably... So I invested in December, and then in March, he came to me and said, "Look, you're the only person who's invested," which I never do. I always syndicate because I don't have enough money to back a company for a year. I can't do it. He said, "You're the only person who's invested. We can't raise more money, I don't know what we're going to do." I said, "Look, you're making good progress, I will put more money in." He said, "I can't ask you to do that." He said, "I don't know if we'll ever be able to raise more money if anybody else will ever believe it." I said, "Let's just keep going and see what happens."

And then a couple of weeks later, Alex Payne who was the third engineer at Twitter, cold-called them and said, "Hey, I love what you're doing, I want to come work there." And I think it was because they're trying to change something that was really broken. And Alex is like, "This means something and I want to do this." So he came. And then two weeks later, I got a call from the CEO, Josh. He says, "Hey, I just got an email from Ron Conway." Ron Conway is this legendary angel investor on the West Coast. He invested in Google. And I said, "What did it say?" It said, "Where do I send the check?" I was like, "Wow, that's amazing." "So what did you say?" He is like, "I don't know what to say. What should I tell him?" I said, "I think you should tell him your address. Just tell them where to send the check." Jesus. And Ron Conway invested, then after Ron Conway invested, we had a bunch of venture firms who were suddenly like, "Wait a minute, this is actually pretty interesting." I've raised some money from some great venture capitalists. I have ventures here in New York, in First Round Capital and the company went on to be a successful investment for all of us. So I think that was probably my most memorable, was him calling me and saying, "I got this email from Ron Conway."

Patrick: [01:26:02] That's great. My closing question for everyone is to ask what the kindest thing that anyone's ever done for is?

Jerry: [01:26:07] How can anybody not say something about their parents, right? But here's the kindest thing anybody has ever done for me in reality. This is maybe... I should probably say something more interesting. But when I was a kid, my parents thought I was bored. And I was bored. I get bored easily. And they said... I must have been 13. "You know what? We're going to buy you a computer." And they bought me a TRS-80, which at the time was incredibly expensive. It was $800 and that that day's money, which is probably several thousand dollars now. Nobody had computers. So them saying, "We're actually going to... We don't know much about computers, he seems to think they're interesting, he's bored, he seems smart, let's buy him something that'll keep him occupied." They bought me a computer and two years later I was programming professionally, I went to college to learn how to build computers. I built a smaller computer, not a full-fledged TRS-80, but I built my own computer when I was 16. Really, that was the beginning of this career that has made me successful. And I think it's one of those things where one of my kids walked to me and said, "Hey, I need a $5,000 thing, that seems kind of cool. Can you do that?" I think my parents made a bet on me. That was a good bet, but there's no way to know that at the time. That's got to be probably the... I don't know if kind is the right word, but-

Patrick: [01:27:21] Certainly most impactful.

Jerry: [01:27:23] Yeah.

Patrick: [01:27:23] That's a great place to close. This has been a blast full of conceptual interesting frameworks, ways of thinking about companies and investing, and where we sit in a big cycle. So thank you for all the time. Can we talk more?

Jerry: [01:27:35] Thank you. I appreciate you having me on.

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